10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended on June 30, 2007

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission file number 000-26749

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	11-2581812
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employee Identification No.)
26 Harbor Park Drive, Port Washington, NY (Address of principal executive offices)	11050 (Zip Code)

Registrant’s telephone number, including area code: (516) 605-6625

Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.001 par value per share

Securities registered pursuant to Section 12(g) of the Exchange Act:
None
(Title of class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o.      No þ.

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yes o.      No þ

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One): Large Accelerated Filer o      Accelerated Filer þ       Non-Accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

     The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, as quoted on the NASDAQ National Market on December 31, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $64,449,453.

     Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 5,518,321 shares of common stock outstanding as of September 7, 2007.

DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant’s definitive proxy statement for its 2007 Annual Meeting of Stockholders is incorporated by reference into Part III of this Annual Report on Form 10-K, which will be filed no later than October 29, 2007.

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INDEX

	Page No.
Forward Looking Statements		4
PART I
Item 1. Business		4
Item 1A. Risk Factors		27
Item 1B. Unresolved Staff Comments		36
Item 2. Properties		36
Item 3. Legal Proceedings		37
Item 4. Submission of Matters to a Vote of Security Holders		37
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		38
Item 6. Selected Financial Data		40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		56
Item 8. Financial Statements and Supplementary Data		56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56
Item 9A. Controls and Procedures		56
Item 9B. Other Information		59
PART III
Item 10. Directors, Executive Officers and Corporate Governance		60
Item 11. Executive Compensation		60
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
Item 13. Certain Relationships and Related Transactions, and Director Independence		60
Item 14. Principal Accountant Fees and Services		60
PART IV
Item 15. Exhibits and Financial Statement Schedules		61
Signatures		66
Ex-4.1 Specimen of Common Stock Certificate
Ex-4.2 Specimen of Series A 7% Convertible Preferred Stock Certificate
Ex-4.5 Registration Rights Agreement dated March 19, 2004
Ex-10.2 Amendment No.1 to Credit Agreement
Ex-10.3 Amendment No.2 to Credit Agreement
Ex-10.9 Health Card Sublease Agreement
Ex-10.25 Consulting Agreement and Departure Agreement
Ex-10.26 Departure Agreement and General Release between NMHC and Mr. Tery Baskin
Ex-10.29 Departure Agreement and General Release between NMHC and Mr. James F. Smith
Ex-10.30 National Medical Health Card Corporate Incentive Plan
Ex-10.31 Form of Severance Agreement with executive officers
Ex-10.33 Management Rights Letter dated March 19, 2004
Ex-10.35 General Release dated June 28, 2007
Ex-10.36 Stock Option Agreement dated October 27, 2003
Ex-10.37 Stock Option Agreement dated May 6, 2005
Ex-10.39 Stock Option Agreement dated September 17, 2004
Ex-21.1 List of Subsidiaries
Ex-23.1 Consent of Ernst & Young LLP
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

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Forward Looking Statements

This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. No forward-looking statement can be guaranteed, and we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the Company, its business, future financial results of the pharmacy benefit management (“PBM”) and specialty pharmacy industries and other legal, regulatory and economic developments. We use words such as “may,” “could,” “estimate,” “believe,” “anticipate,” “intend,” “expect” and similar expressions to identify these forward-looking statements. Forward-looking statements include all statements other than those made solely with respect to historical fact. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in Item 1A, “Risk Factors”, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Annual Report on Form 10-K.

PART I

Item 1. BUSINESS.

The following description of our business should be read in conjunction with the information contained elsewhere in this Form 10-K. References in this Form 10-K to “we,” “our,” “us,” the “Company,” or “NMHC” refer to National Medical Health Card Systems, Inc.

General

We provide comprehensive PBM services to our customers, which include managed care organizations, local governments, unions, corporations, health maintenance organizations (“HMO”), employers, workers’ compensation plans, third party health care plan administrators, and federal and state government programs through our network of licensed pharmacies throughout the United States. Our PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail service pharmacy claims management, specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access, and reporting and information analysis. We own a mail service pharmacy (“Mail Service”) and a specialty service pharmacy (“Specialty Service” or “Ascend”). In addition, we are a national provider of drug benefits to our customers under the federal government’s Medicare Part D program.

Our business requires collaboration with retail pharmacies, physicians, pharmaceutical manufacturers, Medicare, Medicaid and commercial payors. We were incorporated in the State of New York in 1981 and reincorporated in the State of Delaware in February of 2002. Our executive offices are located in Port Washington, New York.

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OVERVIEW

Recent Developments

In May 2007, we took steps to execute a series of management changes which included terminating the employment of our Chief Executive Officer, James F. Smith; Chief Information Officer, Bill Masters; Chief Marketing Officer, Tery Baskin; and Chief Legal Officer, Jonathan Friedman. Our Chairman, Thomas W. Erickson, assumed the role of President and Chief Executive Officer on an interim basis. Marty Magill, our then current Senior Vice President of Sales became our Chief Marketing Officer. In addition, we appointed George McGinn as General Counsel and Patrick Moroney as interim Chief Information Officer. In June 2007, our Chief Services Officer resigned and Mary Ellen Mitchell, our then current Vice President of Provider Relations, assumed the role of Chief Services Officer. We incurred a charge of $1.9 million as of June 30, 2007 in connection with these and other management changes.

Furthermore, we have retained a consulting firm to help determine our strategic focus. As part of this process, the consulting firm and NMHC will evaluate all NMHC customers as well as the services provided to them. Based upon the results of this review, we may change our service offerings.

We were approved by the Centers for Medicare & Medicaid Services (“CMS”) to operate as a national prescription drug plan (“PDP”) sponsor under Part D of the Medicare program through our wholly-owned subsidiary, NMHC Group Solutions Insurance, Inc. (“NMHC Group Solutions”) (aka NMHC Medicare PDP Gold) commencing on January 1, 2007. As an approved PDP sponsor, we are able to provide the PDP Medicare benefits to both individual enrollees and employer groups wishing to contract indirectly with Part D of the Medicare program to offer a PDP to eligible members. In addition, as an approved PDP sponsor, we are able to operate as a risk-bearing entity for individual enrollees and employer groups. Currently, NMHC Group Solutions is acting as a risk-bearing entity only for individual enrollees in our PDP and not employer groups.

We do not intend to continue to provide our PDP to individual Medicare Part D enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1, 2008, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to risk.

We have entered into a risk contract with an unrelated third party for PBM services. To date, there are no customers associated with this risk contract.

Industry Background

In response to escalating health care costs, efforts in the health care industry have led to rapid growth in managed care and other cost containment programs. Despite these efforts, continued advances in medical technology, new drug development, increased drug utilization, and a dramatic increase in the number of elderly patients have led to significant increases in health care costs. This created a need for more efficient, cost-effective delivery and management of pharmacy services. PBM companies have evolved to address this need. PBMs seek to provide the means for customers to deliver prescription drug benefits to their plan participants in a cost-effective manner.

Company Overview

Our customers are located throughout the United States and several of its territories, and include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third party health care plan administrators and federal and state government programs. Customers retain us to manage the prescription plans that they maintain for the benefit of their plan participants. We provide customers with a comprehensive PBM plan through four integrated services programs:

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• PBM Services: Management of prescription drug programs for customers.

• Mail Service: Mail Service pharmacy for chronic therapy medications.

• Specialty Service: Management of specialty pharmacy programs include infertility, transplant, growth hormone, Respiratory Syncytial Virus (“RSV”), hepatitis C, rheumatoid arthritis, Gaucher’s disease, multiple sclerosis and oncology.

• Medicare Part D Program: Medicare Part D benefits delivered to our customers.

THE COMPANY

PBM Services

We provide management of prescription drug programs to our customers through a wide variety of services including:

• Claims Management;

• Pharmacy Network Management;

• Benefit Design Consultation;

• Drug Review and Analysis;

• Formulary Design;

• Data Access, Reporting and Information Analysis; and

• Medicare Part D infrastructure and support services.

Our PBM services are delivered under the name NMHCRx™.

Claims Management

Claims Processing. Each of our customers’ plan participants is issued an identification card that identifies the plan participant and the customer. The card may be utilized at any one of the pharmacies participating in our national pharmacy network and the customer’s plan. We allow the plan participant to purchase approved prescription drugs and the other physician-prescribed items, with the plan participant paying a deductible and/or co-payment amount, if any, to the pharmacy.

In the ordinary case, plan participants present their identification card together with a physician’s prescription to a participating pharmacy. The pharmacist, using software conforming to industry standards, enters each claim into the pharmacy’s computer and the claim is electronically communicated to us for on-line, real-time processing. If the prescription is for a drug listed on the customer’s approved drug list, our on-line claims management system will confirm that the plan participant is eligible for benefits and that the submitted claim is in conformity with the plan’s terms and conditions, and the pharmacist is advised of the appropriate co-payment and deductible, if any, to be collected from the plan participant. The on-line claims management system will also advise the pharmacist of the payment the pharmacy will receive from us. In addition, our on-line claims management system sends appropriate messages regarding preferred drugs, contraindications, or any number of other potential interventions, based upon the plan participant’s existing claims history with us. The prescription is then dispensed by the pharmacist to the plan participant, who pays the appropriate co-payment and/or deductible amount and signs a signature log maintained by the participating pharmacy. Plan participants are provided with a list of pharmacies participating in our pharmacy network. Plan participants may alternatively choose to fill prescriptions at a non-participating pharmacy and will then have to submit a paper claim to us for reimbursement. Occasionally a plan participant’s claim is rejected or a prior authorization is required based on plan parameters, in which case the participant may be referred to the customer directly or to our customer service department.

Invoicing and Payments. Customers are generally charged (i) an administration fee for each prescription claim processed by us, (ii) an amount for the drug dispensed, and (iii) a dispensing fee for filling such prescription. Customers pay us such amounts and we pay a separately negotiated amount to the pharmacies, which amount may be at a discount to the amount charged to the customers. This discount, if any, results in

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additional gross profit for the Company. Plan participants filing for direct payment receive an allowable payment which is usually specified by the customer. See “The Company — Pharmacy Network.”

Rebate Administration. Drug manufacturers may issue rebates in connection with the use of certain prescription drugs. We have entered into agreements with drug manufacturers to collect rebates for our customers. We enter into a separate set of agreements with drug manufacturers for our customers receiving rebates under the Medicare Part D program. The terms of each agreement between us and the drug manufacturers are unique, but the basic concept is the same. These agreements generally provide that we must list the specified products of each of the drug manufacturers on our approved formularies with the specified customers. Our independent Pharmacy & Therapeutics (“P&T”) Committee determines and approves the inclusion of such drugs on our formularies prior to listing the products on any approved formularies. For a discussion of the P&T Committee, see “The Company - - Formulary Design.” The contracted drug manufacturers are obligated to pay rebates within a specified period of time after we submit our claims, based upon certain contractual criteria. We are required to submit claims for rebates on a timely basis, otherwise, the manufacturers are not obligated to pay rebates. The manufacturer contracts provide for either (i) a fixed percentage rebate with or without market share based enhanced opportunities or (ii) a market share based rebate. In the latter case, rebates may not be earned in the event that a minimum market share threshold is not achieved. We are typically paid an administrative fee by the manufacturers for our services in administering these contracts. All, part, or none of the rebates and administrative fees received by us may be remitted to our customers, depending upon the terms of our agreements with each customer. In addition, our wholly-owned subsidiary, Specialty Pharmacy Care, Inc., performs many of the rebate administrative functions for which it is paid an administrative fee.

We also contract with a third party rebate administrator (the “Rebate Administrator”) to administer a portion of our rebates. The Rebate Administrator is obligated to pay us a per claim rebate amount and retains a portion of the total rebates as an administrative fee.

Pharmacy Network

We maintain a pharmacy network that includes both retail and mail service options. Both the retail and mail service components of the pharmacy network, including our own mail service facility, are managed through our on-line claims management system. Certain of our customers require us to maintain a pharmacy network with specified numbers of pharmacies in various locations to serve plan participants. Our retail pharmacy network consists of over 55,000 pharmacies. In addition, we have contracted Medicare Part D provider networks that are intended to comply with or exceed CMS access requirements for the Medicare Part D prescription drug program.

Benefit Design Consultation

We assist customers in defining their financial and employee-benefit objectives for their prescription drug benefit plans and in developing a program to meet such objectives. Our staff analyzes and provides recommendations to customers regarding how to improve their plan performance based upon the customer’s objectives. General areas of focus include:

• Participant cost — sharing levels (i.e., deductibles and co-pays);

• Covered and excluded drugs;

• Generic drug usage;

• Clinical and utilization management strategies;

• Alternate programs and services;

• Maintenance medication programs; and

• Medicare Part D services.

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

Drug Review and Analysis

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

• drug interactions;

• premature refills of prescriptions;

• duration and duplication of therapy;

• pregnancy and breast feeding precautions;

• geriatric or pediatric precautions;

• compliance with prescriptions; and

• other contraindications.

We transmit such information to the dispensing pharmacist for information purposes only — not to replace the prescribing physician’s or the dispensing pharmacist’s professional judgment. We may then recommend changes in the customer’s plan design or preferred drug management initiatives to further optimize spending, minimize unintended clinical risk, and/or re-orient the plan’s management tactics to better conform to the customer’s plan performance goals.

Formulary Design

We have established a P&T Committee currently comprised of physicians and pharmacists, with independent representation from across the country. The P&T Committee’s primary responsibility is to assist customers in designing a well managed, therapeutically appropriate, cost-effective preferred drug listing or “formulary.” The goal of the P&T Committee is to enable customers to optimize plan participant care through drug policy development and education. The P&T Committee typically meets quarterly and performs the following functions:

• provides information to customers to ensure that the covered drugs of each plan reflect the current standard of medical practice and pharmacology;

• evaluates drugs for clinical efficacy prior to cost considerations for inclusion in a plan as a preferred drug;

• analyzes current literature for safety, efficacy and cost-effectiveness of covered drugs;

• provides recommendations on drug therapy and utilization;

• evaluates drug review and analysis programs and criteria;

• recommends those drugs which require prior authorization from the customer; and

• reviews the associated guidelines for those drugs’ proper use.

The P&T Committee currently consists of ten members, each with expertise in specific practice areas. In addition, consultants may be called upon to participate on an ad-hoc basis. We believe that the P&T Committee is organized and operates in a manner that ensures the objectivity and credibility of its recommendations.

Data Access, Reporting and Information Analysis

Our on-line claims management system enables us to efficiently provide customers with:

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• On-line system access whereby the customer is able to update and maintain certain plan components such as participant eligibility;

• Periodic utilization and financial reports, which our representatives utilize to assist customers regarding benefit design, cost containment initiatives, disease information initiatives, generic equivalents programs and formulary management; and

• Plan performance indicators and ad-hoc reporting through our proprietary decision support tools.

Mail Service

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

We opened our Mail Service pharmacy on July 1, 2003. Plan participants submit prescriptions, primarily for maintenance medications, to Mail Service via mail. Refill requests may be submitted via mail, telephone, fax or the internet. The operations of Mail Service are automated, featuring bar code and scanning technology to route and track orders, computerized dispensing of medications and computer-generated mailing labels. To ensure quality control of the dispensation of prescriptions, Mail Service is equipped with automated quality control features and a licensed pharmacist who inspects each prescription. Claims submitted by Mail Service are managed using our on-line claims management system and are subject to the same review and verification as those claims submitted by retail pharmacies.

Specialty Service

Specialty Service manages high-cost, self-injectable medications and compounded prescriptions requiring special handling. Recently, this class of medications has become a more significant percentage of our customers’ pharmacy budget. This growth is a function of increased utilization as well as an increase in the number of available treatment agents. Diseases treated by our Specialty Service pharmacy medications include: Hepatitis-C, Hemophilia, Growth Deficiency, RSV, Multiple Sclerosis, HIV, Immune Deficiency, Crohn’s Disease, Pompe’s Disease, Gaucher’s Disease, Psoriasis, Infertility, Cancer, Rheumatoid Arthritis, Osteoporosis, Cystic Fibrosis, Osteoarthritis and Macular Degeneration.

Specialty Service manages utilization of agents on two levels: first, at a macro level, by identifying trends in utilization patterns, recommending protocols based on nationally accepted guidelines, and monitoring compliance; second, on a micro level, by managing guidelines for patients to ensure appropriate dispensing and ongoing compliance.

In addition, we aid customers in identifying patients for our specialty program either through medical claims information provided by the customer or in conjunction with existing drug profiles. Once identified, patients may receive some, or all, of the following services:

• Delivery to a location of the patient’s choice (home delivery or delivery to the patient’s primary care physician or specialist);

• Educational materials about therapies and disease states;

• Refill management and compliance monitoring;

• Pharmacist hotline;

• Assignment of benefits; and

• Study protocols and financial assistance program information.

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Along with providing the above services, Specialty Service has relationships with biotech and drug manufacturers to be a part of their dispensing network of pharmacies.

Medicare Part D Program

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”) created the federal Voluntary Prescription Drug Benefit Program under “Part D” of the Social Security Act. As of January 1, 2006, eligible Medicare beneficiaries are able to obtain prescription drug coverage under Part D by enrolling in a PDP or a “Medicare Advantage” plan that offers prescription drug coverage (a “MA-PD”). Employers and unions offering eligible prescription drug coverage for their Medicare-eligible members can receive a number of subsidy payments under Part D for a portion of the costs associated with providing such coverage to beneficiaries who do not enroll in a PDP or MA-PD. These subsidies can be obtained by the employer group by contracting directly or indirectly with CMS to offer PDP Medicare benefits to Medicare-eligible members, or the employer group can apply for a retiree drug subsidy without contracting with a PDP sponsor.

We participate in the administration of the Medicare drug benefit programs (i) through the provision of PBM services to our customers that have qualified as a PDP or a MA-PD, and (ii) by assisting employers, unions and other customers that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS for them in order to obtain the subsidy. We also provide Part D functions to these customers that include managing member true out of pocket costs (TrOOP), creating the prescription data event (PDE) files, providing medication therapy management (MTM) services, and providing various reporting required by CMS.

In addition, our prescription drug plan subsidiary, NMHC Group Solutions, was approved by CMS to operate as a national PDP sponsor under Part D commencing on January 1, 2007. As an approved PDP sponsor, we are able to provide the PDP Medicare benefits to both individual enrollees and employer groups wishing to contract indirectly with Part D to offer a PDP to eligible members. In addition, as an approved PDP sponsor, we are able to operate as a risk-bearing entity for individual enrollees and employer groups. Currently, NMHC Group Solutions is only acting as a risk-bearing entity for individual enrollees in our PDP and not employer groups.

We do not intend to continue to provide our PDP to individual Medicare Part D enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1, 2008, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to risk.

Customers

For the fiscal year ended June 30, 2007, 14% of our revenue was from Mohawk Valley Physicians’ Health Plan, Inc. (“MVP”), a former customer administering multiple plans, which is reported within the PBM segment. Our contract with MVP expired on December 31, 2006 and was not renewed.

For the fiscal year ended June 30, 2007, 16% of our revenue was from Boston Medical Center Health Plan, Inc. a current customer, which is reported within the PBM segment.

Our Business Strategy

Our business strategy currently is focused on organic growth. We plan to grow by leveraging our core strengths to meet specific, unmet needs within defined market segments, resulting in added PBM lives and increased utilization of our Mail Service and Specialty Service pharmacies.

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Target Markets

Our business strategy is focused on further penetrating the following five market segments:

State and Local Governments: Public sector enterprises provide pharmacy benefits to both employees and retirees and as a result are attracted to the complete suite of our offerings. Our results-oriented approach to clinical programs remains important to a customer base that must often face public scrutiny. Legislation, as well as political trends requiring pass-through pricing and transparent contracting, favors our strength and experience, while at the same time many other PBMs are unwilling or unable to offer such terms. We see many opportunities to capitalize on these market dynamics.

Unions/Taft-Hartley Trust Funds: With large active and retiree populations, this market segment requires the services that comprise our complete suite of core offerings, including PBM services, Mail Service, Specialty Service and Medicare Part D. As healthcare costs continue to rise, local and international unions are becoming increasingly attracted to our brand of innovative, results-oriented clinical programs. In addition, our history of offering pass-through pricing and transparency remains extremely important to retaining our current clientele as well as winning new business.

Employer Groups: Self insured companies are challenged by cost containment pressures on the one hand and the need to offer attractive benefit packages that attract and retain employees on the other. This calls for increased sophistication on the part of PBMs, which we are ideally positioned to offer, relative to smaller PBMs. In addition, our ability to offer the PDP Medicare benefits places us in a unique position in our peer group and relative to smaller PBMs. We believe this market is under-serviced by the three largest PBMs and is attracted to our flexibility, dedication and service levels and our strong clinical programs. We see strong opportunities for growth and expansion in this market as employers continue to search for solutions to their rising healthcare costs.

Third Party Administrators (TPAs): The TPA market is consolidating under the constant pressure of large health insurance companies. These potential customers, who process claims for employers and Taft Hartley trust funds, seek partnerships with PBMs that can help them offer a competitive advantage.

Managed Care Organizations (MCOs): We believe we are positioned to service the needs of mid-sized, regional MCOs with 25,000 to 400,000 lives. These firms are large enough to demand the services of an integrated, technically sophisticated PBM like NMHC, but not large enough to bring PBM services in-house. To compete in their service areas, these firms must be able to offer unique and flexible offerings, coupled with outstanding clinical and financial results from intervention programs. They demand high levels of service, support for their own P&T committees, locally tailored retail networks, and other levels of customization that are going unmet by larger PBMs that service larger MCOs.

Company Operations

Sales and Marketing

We market our services through a sales and marketing department led by a direct sales force of Regional Vice Presidents and external brokerage and consultant relationships. Our Regional Vice Presidents target customers throughout the United States and several of its territories. In addition, we contract with brokers and consultants who are retained to market our services to prospective customers for agreed upon fees. We also attend trade shows and use advertising, public relations and marketing literature for sales support. These efforts are expected to create access to new customers in major marketing areas.

Furthermore, we continue to expand our web presence (www.nmhc.com) as both a functional tool for customers to conduct the many value-added services provided by us, and as a portal for eligible plan participants to make inquiries and refill mail service prescriptions. The web site offers a page dedicated to online services which allow plan participants to fill out customer service surveys, to obtain direct payment

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claim forms, to access formulary listings, to access the pharmacy network listings and to access claims history. In addition, we provide secure web access to make available specific resources to customers who have unique reporting and data management requests. All plan participant information is subject to security measures available in the industry, protecting patient confidentiality and meeting the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) compliance standards.

Information Systems

Information systems play a critical role in our business. Claims adjudication software is one of our most critical systems and directly supports our core business operations. Our systems provide a wide range of functionality including online claims processing, formulary and clinical management, pharmacy network management and are the basis for much of our reporting and analytical capabilities. A significant part of our claims platform capabilities is operated on software licensed from unaffiliated third parties.

We maintain preventative measures to protect against disaster, including resiliency in processing, telecommunications and power sources.

For a discussion of the risks relating to our information systems, see “Item 1A. Risk Factors— We rely on third parties for our point of sale information system and transaction processing system, and any disruption in these services would materially disrupt our business and results of operations” and “Item 1A. Risk Factors— We are in the process of consolidating all customers to a single third party adjudication vendor, one of two that we are currently operating. Any severe interruption during the transition could materially disrupt our business.”

Competition

We compete with numerous companies that provide the same or similar services as ours. Some of our competitors have been in existence for longer periods of time and are better established than we are. Some of them also have broader public recognition, substantially greater financial and marketing resources than us, and more experienced management. In addition, some of our customers and potential customers may find it desirable to perform for themselves those services now being rendered by us. Furthermore, consolidation and alliances within the industry could adversely impact the operations and prospects for independent PBM companies such as NMHC.

Our ability to attract and retain customers is substantially dependent on our capability to provide competitive pricing, efficient and accurate claims management, utilization review services and related reporting, and auditing and consulting services. We believe that the following factors help us successfully compete:

• a successful record of delivering services at lower annual costs for our customers than national trends;

• a broad base of experience in the information technology and PBM industries;

• flexible and sophisticated on-line information systems, which integrate all of the data input, reporting, analysis, and access functions provided by NMHC;

• wholly-owned and operated mail service and specialty pharmacies;

• an integrated Medicare Part D prescription drug program;

• effective and measurable clinical management programs;

• a focus on customer service; and

• transparency to customers.

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Employees

As of September 10, 2007, we had 465 employees. Of the 465 total employees, 450 are full-time and 15 are part-time employees. We are not a party to any collective bargaining agreement and we consider our relationships with our employees to be satisfactory.

Government Regulation

The activities of PBMs such as NMHC are subject to regulation at the federal and state levels. We believe that our operations, as currently conducted, substantially comply with the laws and regulations material to the operation of our business. However, the application of complex standards to the detailed operations of our business creates areas of uncertainty.

Regulatory authorities have very broad discretion to interpret and enforce these laws and to promulgate corresponding rules and regulations. Violations of these laws and regulations may result in criminal and/or civil fines and penalties, injunctive relief to prevent future violations, other sanctions, loss of professional licensure and exclusion from participation in federal and state health care programs, including Medicare and Medicaid. There can be no assurance that we have interpreted the applicable laws and regulations in the same way as regulatory or judicial authorities, or that the laws and regulations and/or the interpretation thereof will not change.

Moreover, the states and federal government continue to propose new legislation that may, if enacted, have a material adverse effect on our business, profitability or growth prospects. A more detailed analysis of certain laws and regulations and proposed legislation affecting the business, operations and relationships of NMHC is set forth below.

Anti-Kickback Statutes

The federal Anti-Kickback Statute prohibits knowingly offering, soliciting, paying or receiving remuneration in return for referring an individual for the furnishing of an item or service, or for the purchasing, ordering or arranging for any item or service, for which payment may be made in whole or in part under a federally funded health care program, including Medicare, Medicaid and the Civilian Health and Medical Program of the Uniformed Services (“CHAMPUS/Tricare”). Regulations have been adopted under the federal Anti-Kickback Statute which provide safe harbors for certain remuneration arrangements that might otherwise violate the statute, such as properly reported discounts (including certain rebates) received from vendors and properly disclosed payments made by vendors to group purchasing organizations. The failure to fall within a safe harbor does not automatically mean that an arrangement is unlawful, although it may result in heightened scrutiny or challenge. Many states, including several in which we do business, have adopted laws similar in scope to the federal Anti-Kickback Statute (sometimes including similar safe harbors), and these state laws often are applicable to services for which payment may be made by anyone, including commercial insurers and private pay patients, not just payments made under a federal or state health care program. Violation of these anti-kickback laws may result in criminal and civil penalties as well as exclusion from the Medicare and Medicaid programs.

The federal Anti-Kickback Statute has been broadly interpreted by the courts, the Office of Inspector General (the “OIG”) of the Department of Health and Human Services (“HHS”), and pertinent administrative bodies. Courts have ruled that a violation of the statute exists even if only one purpose of the remuneration was to induce patient referrals or purchases. Also, the OIG has identified as possibly improper under the statute so-called “product conversion” programs, pursuant to which pharmaceutical manufacturers provide incentives to physicians and pharmacies to change a prescription to a drug made by the pharmaceutical manufacturer, or recommend such a change. We are not aware of any instance in which the federal Anti-Kickback Statute has been applied (i) to prohibit independent PBMs, such as NMHC, from receiving rebates from drug manufacturers based on drug sales by pharmacies to plan

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participants, or (ii) to properly structure contractual relationships between independent PBMs and their customers and participating pharmacies.

The federal Anti-Kickback Statute has also been cited as a partial basis for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies in connection with product conversion programs. Additionally, certain governmental entities have commenced investigations of companies in the pharmaceutical services industry and have identified issues concerning development of preferred drugs lists, therapeutic substitution programs, pricing of pharmaceutical products and discounts from prescription drug manufacturers. Several pharmaceutical manufacturers have entered into settlement agreements with the federal government concerning marketing and pricing practices. For example, in October 2006, Medco Health Solutions (“Medco”), a PBM, entered into a $155 million civil settlement of claims that Medco destroyed and canceled valid patient prescriptions, solicited kickbacks from pharmaceutical manufacturers to favor their drugs, and paid kickbacks to health plans to obtain business. Similarly, in September 2005, CVS Caremark Corporation (f/k/a Caremark Rx, Inc.), (“Caremark”) a PBM, entered into a $137 million civil settlement of claims that its subsidiary, AdvancePCS, allegedly solicited and received kickbacks from pharmaceutical manufacturers in the form of excessive administrative fees, over-priced services agreements as a reward for favorable formulary treatment, and improper “flat fee” rebates, and that AdvancePCS allegedly paid kickbacks to customers and potential customers to induce them to contract with AdvancePCS. In both cases, although the case settled under the False Claims Act, as discussed below, a majority of the allegations pertained to anti-kickback violations.

We believe that we are in compliance with the federal Anti-Kickback Statute and similar state laws and to date, we have not been the subject of any suit or investigation concerning these laws. There can be no assurance, however, that we will not be subject to challenge or a proceeding under the federal Anti-Kickback Statute, the regulations there under or any similar state laws. Any such challenge or proceeding could have a material adverse effect on our business, results of operations or financial condition, regardless of whether we are found to have violated such statutes or regulations.

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

Additionally, it is a crime under the federal Anti-Kickback Statute, for any person to knowingly and willfully offer or provide any remuneration to a prime contractor to the United States, including a contractor servicing federally funded health programs, in order to obtain favorable treatment in a subcontract. Violators of this law may also be subject to civil monetary penalties.

Medicare Part D Prescription Drug Program Reforms

The MMA, which was enacted in 2003, creates a new voluntary prescription drug benefit under the Social Security Act.

As of January 2006, Medicare beneficiaries entitled to Part A or enrolled in Part B, as well as certain other Medicare enrollees, are eligible for outpatient prescription drug benefits under the MMA Medicare Part D drug program. CMS has issued final rules implementing the portions of the MMA relating to

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PDPs and MA-PDs, including the “Part D Program to Control Fraud, Waste, and Abuse” guidance. The MMA imposes various requirements on PDP sponsors and MA-PDs that offer drug coverage, including requirements relating to the prescription drug benefits offered, the disclosure of negotiated price concessions made available by drug manufacturers, pharmacy access and participation, and the development and application of formularies. To the extent that we serve as a PDP sponsor or provide services to PDP sponsors and MA-PDs, we are required to comply with the applicable provisions of the MMA and CMS regulations. We have developed the appropriate compliance program to support the detailed requirements of the Medicare laws and regulations, including designating a Medicare Compliance Officer who oversees Medicare Part D compliance, creating a Medicare Compliance Committee who assists the Medicare Compliance Officer in the implementation of the Medicare Compliance Program and implementing procedures to prevent and detect fraud, waste and abuse. Although we are continuing to assess the impact that Medicare Part D will have on our customers’ decisions to continue to offer a prescription drug benefit to their Medicare-eligible members, our customers have a variety of options to consider for providing drug coverage to their retirees. We currently participate in the administration of Medicare Part D: (i) through the provision of PBM services to our health plans and other customers that have qualified as a PDP or a MA-PD, and (ii) by assisting employers, unions and other health plan customers that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS for them in order to obtain the subsidy.

In addition, our subsidiary, NMHC Group Solutions, which has been approved by CMS to operate as a PDP sponsor under Medicare Part D, began offering Medicare Part D pharmacy benefits to employer groups and individual enrollees in January 2007. This is the first time we are a direct contractor to the federal government and subject to the rules, regulations and enforcement authority of the federal government over its contractors. In all cases, we will be required to comply with the extensive, detailed requirements of the Medicare laws and regulations which could have a significant impact on our operations, products and services.

Stark Law

The federal physician self-referral law, known as the “Stark Law,” prohibits physicians from referring Medicare or Medicaid beneficiaries for “designated health services,” which includes outpatient prescription drugs, to any entity with which the physician or an immediate family member of the physician has a financial relationship. The law also prohibits the entity receiving a prohibited referral from presenting a claim to Medicare or Medicaid for the designated health service furnished under the prohibited referral. In addition, the Stark Law contains certain statutory and regulatory exceptions for physician referrals and physician financial relationships. CMS published final regulations under the Stark Law which provides guidance on interpretation of the scope and exceptions of the Stark Law. Possible penalties for violation of the Stark Law include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties, criminal penalties and Medicare and Medicaid program exclusion. Our provision of Medicare Part D services and our Specialty Service and Mail Service pharmacies dispensation of certain outpatient prescription drugs that are directly or indirectly reimbursed by the Medicare or Medicaid programs, potentially make them subject to the Stark Law’s requirements. However, we do not believe that we receive any physician referrals that would violate the Stark Law.

State Self-Referral Laws

Our Mail Service, Specialty Service and Medicare Part D operations may also be subject to state statutes and regulations that prohibit payments for referral of individuals from or by physicians to health care providers with whom the physicians have a financial relationship. These state laws and their exceptions may vary from the federal Stark Law and vary significantly from state to state. Some of these state statutes and regulations apply to items and services reimbursed by private payors. Violation of these laws may result in prohibition of payment for items or services provided, loss of pharmacy or health care provider licenses, fines and criminal penalties. State self-referral laws are often vague, and, in many

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cases, have not been widely interpreted by courts or regulatory agencies. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with such laws.

Statutes Prohibiting False Claims and Fraudulent Billing Activities

A range of federal and state civil and criminal laws target false claims and fraudulent billing activities. One of the most significant of these laws is the Federal False Claims Act, which imposes civil penalties for knowingly making a false claim or the making of a false record or statement in order to secure reimbursement from a government sponsored program, such as Medicare and Medicaid, for services rendered or covered by the relevant program. A few federal district courts have recently interpreted the False Claims Act as applying to claims for reimbursement that violate the federal Anti-Kickback Statute or the Stark Law under certain circumstances. In recent years, the federal government has launched several initiatives aimed at uncovering practices that violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government through a qui tam or “whistleblower” action. Several whistleblower actions have been filed under the False Claims Act alleging, among other things, that PBMs improperly favored the products of certain pharmaceutical manufacturers over less expensive products and engaged in improper mail order pharmacy practices. Because such actions are filed under seal and may remain secret for years, there can be no assurance that neither we nor any of our subsidiaries are named in a material action.

The False Claims Act and other related or similar laws generally provide for the imposition of civil penalties and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims as well as potential criminal penalties. The federal government has entered into settlement agreements with several companies in the pharmaceutical services industry following claims by the federal government that such parties violated the Federal False Claims Act by: (i) improperly marketing and pricing drugs; (ii) overstating the average wholesale prices (“AWP”) of products; (iii) paying illegal remuneration to induce the purchase of drugs; and/or (iv) failing to accurately report “best price” under the Medicaid program. For example, in October 2006, Medco, a PBM, entered into a $155 million civil settlement of claims under the False Claims Act. Similarly, in September 2005, Caremark entered into a $137 million civil settlement of claims under these same statutes. In addition, both companies agreed to enter into a 5-year corporate integrity agreement with the federal government. To the best of our knowledge, we have not been named in any actions filed under the False Claims Act. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with such laws.

Regulations Regarding Privacy and Confidentiality

Many of our activities involve the receipt, use and disclosure by us of personally identifiable health information, including disclosing this information to a patient’s health benefit plan. In addition, we may use de-identified health information for research and analytical purposes. In order to protect the privacy and security of personally identifiable health information, we have adopted the standards of telecommunication for the PBM industry established by the National Council for Prescription Drug Programs and perform risk assessments, employee training with respect to patient confidentiality, and evaluations of business practices.

The use, disclosure, and secure handling of personally identifiable health information is regulated at the federal and state levels, including the privacy and security regulations issued pursuant to HIPAA. These state and federal requirements vary and change frequently as a result of legislation, regulations and judicial or administrative interpretation. Further, the HIPAA privacy requirements do not preempt state laws regarding health information privacy that are more restrictive than HIPAA.

In some areas of our business, such as Mail Service, Specialty Service and operations as a PDP sponsor under Medicare Part D, we are directly subject to these statutory and regulatory requirements. Other

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areas, such as our PBM operations, are not directly subject to these statutes and regulations but are indirectly impacted as a result of regulatory requirements for our customers to have confidentiality agreements in place with us, known as “business associate agreements.” When required, we have business associate agreements in place with our customers that contractually require us to protect the confidentiality and security of the personally identifiable health information that we create or receive on their behalf. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with such privacy and security laws and regulations that apply directly to us and with our business associate obligations.

In addition, state and federal authorities are increasingly focused on the importance of protecting individuals from identity theft, with a significant number of states enacting laws requiring businesses to notify individuals of security breaches involving personal information and Congress considering similar or additional measures. These state laws generally require businesses to notify individuals when their personal information has been, or is reasonably believed to have been, acquired by an unauthorized person. Many state laws also require notification to government agencies, such as the state attorney general, or consumer protection agencies in the event of a breach or misuse of personal data.

HIPAA includes administrative requirements directed at simplifying electronic data interchange through standardizing transactions and establishing uniform health care provider, payer and employer identifiers. The standard transactions regulations require the use of national, uniform standards when a healthcare provider or health plan conducts certain electronic transactions with another healthcare provider or health plan. These regulations also mandate the use of certain code sets in connection with the standard transactions. We have made the necessary arrangements to provide electronic transactions that are in compliance with these regulations. Beginning in May 2007, the national provider identifier (“NPI”) rule became effective. This rule requires all health care providers that conduct standard transactions to obtain an NPI and use the NPI in any standard transaction in which the provider’s identifier is required. The NPI rule has had an operational impact on our business in that all electronic pharmacy claims must reflect the pharmacy’s NPI. To the extent that any pharmacies do not have an NPI, this rule may result in rejected claims at the pharmacy counter.

Varying requirements and enforcement approaches in the different states may adversely affect our ability to standardize our products and services across state lines. Failure to comply with any of the statutory and regulatory HIPAA requirements, state privacy and security requirements and other similar federal requirements could subject us to significant criminal and civil penalties. Further, if we fail to protect the privacy and security of the individually identifiable health information we handle on behalf of our customers as required by our business associate agreements, our customers could be subject to significant civil and criminal penalties, and we could be found to have breached our contracts with our customers.

It is possible that new laws or regulations further restricting the use or disclosure of personally identifiable health information could be adopted or that existing laws or regulations will be interpreted to further restrict our ability to obtain and use individually identifiable health information. New requirements or interpretations could have a material adverse effect on our business, results of operations or financial condition.

ERISA

We provide services to a number of customers which are self-funded health plans. These plans are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), which imposes certain obligations on those deemed fiduciaries of the health plans. We administer pharmacy benefit plans according to the plan design choices made by the health plan customer. With the exception of our activities as a PDP sponsor under the Medicare Part D program, we believe that our business activities are sufficiently limited that we do not assume any of the fiduciary responsibilities of the customer and thus would not be regulated as a fiduciary under ERISA. In addition, our agreements with customers specifically identify the scope of our services and provide that we are not a fiduciary of the plan. However, there can be no

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assurance that the U.S. Department of Labor (the “DOL”), which is the agency that enforces ERISA, would not assert that the fiduciary obligations imposed by ERISA apply to certain aspects of our operations or that courts in private ERISA litigation would not so rule. Although courts have declined to extend ERISA fiduciary obligations to managed care companies, the DOL alleged that prior to acquisition by NMHC, Pharmaceutical Care Network (“PCN”), was acting as an ERISA fiduciary in providing certain administrative services to its ERISA plan clients. PCN vigorously disagreed with the allegations, but settled the dispute with the DOL in May 2006 to avoid the costs of protracted litigation. If, in the future, we are deemed to be a fiduciary, we could potentially be subject to claims regarding breach of fiduciary duties in connection with our provision of services.

On May 25, 2004, the United States District Court for the Southern District of New York accepted a class action settlement proposed by Medco in a lawsuit that alleged that Medco was a functional fiduciary under ERISA and violated its fiduciary obligations by, among other things, failing to make adequate disclosures regarding certain rebates from pharmaceutical manufacturers and steering clients toward more expensive pharmaceuticals with higher rebates benefiting Medco and its parent company at the time, Merck & Co., Inc. Pursuant to the settlement, Medco paid $42.5 million into a settlement fund to be distributed to plan participants. In addition, Medco agreed to implement and continue certain business practices aimed at increasing transparency around formulary decisions and therapeutic interchanges. Medco did not admit, and the settlement did not require Medco to admit, any wrongdoing under ERISA or otherwise.

Similarly, on July 26, 2004, private litigants filed suit against Caremark in the United States District Court for the Middle District of Tennessee alleging that Caremark was a fiduciary under ERISA and violated its ERISA fiduciary duties by, among other things, failing to disclose the existence and extent of manufacturer rebates, concealing the “spread” on pharmacy claims to the detriment of ERISA plans and conspiring with pharmaceutical manufacturers to inflate AWP, which is the standard pricing measure used by the pharmaceutical industry and PBMs in calculating drug prices. In August 2005, Caremark was dismissed from the action.

Also, on April 18, 2006, the United States District Court for the District of New Jersey decided a case brought by private litigants against PCS Health Systems, Inc. (“PCS”), a PBM. The plaintiffs alleged that PCS breached its fiduciary duty by taking rebates and kickbacks from drug manufacturers. The court granted PCS’s motion for summary judgment, holding that PCS was not acting as a fiduciary under ERISA since it did not have the type of discretionary authority needed to render PCS an ERISA fiduciary.

In addition to the cases discussed above, numerous other lawsuits have been filed against various PBMs by private litigants, whether a plan participant on behalf of an ERISA plan or by the ERISA plan client, alleging that the PBMs are ERISA fiduciaries and that, in such capacity, they allegedly violated ERISA fiduciary duties in connection with certain business practices related to their respective contracts with retail pharmacy networks and/or pharmaceutical manufacturers.

In addition to its fiduciary provisions, ERISA imposes civil and criminal liability on service providers to health plans and certain other persons if certain forms of illegal remuneration are made or received. These provisions of ERISA are similar, but not identical, to the healthcare anti-kickback statutes discussed elsewhere in this Government Regulation section, and they do not contain the statutory and regulatory “safe harbor” exceptions included in other healthcare statutes. These provisions of ERISA are broadly written, and we cannot be certain of the extent to which they could be deemed applicable to the conduct of our business.

Effective January 2004, the DOL issued claims procedure regulations (“Claims Rules”) that create standards applicable to clients that are regulated under ERISA for initial and appeal level decisions, time frames for decision making, and enhanced disclosure rights for claimants. We have implemented and will continue to implement in the future, changes to our operational processes, as necessary to accommodate our customers’ compliance needs under the Claims Rules.

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FDA Regulation

The United States Food and Drug Administration (the “FDA”) generally has authority to regulate drug promotional materials that are disseminated “by or on behalf” of a pharmaceutical manufacturer. In January 1998, the FDA published a Notice and Draft Guidance for Industry regarding its intent to regulate certain drug promotion and therapeutic substitution activities performed by PBMs that are controlled, directly or indirectly by pharmaceutical manufacturers. The FDA was concerned that pharmaceutical manufacturers might attempt to avoid FDA regulation in connection with the promotion of their drugs by utilizing PBMs to conduct the marketing activity. The FDA effectively withdrew the draft guidance in the fall of 1998. We are not owned or controlled by a pharmaceutical manufacturer, but we do have contractual relationships with them. Although the draft guidance has effectively been withdrawn, there can be no assurance that the FDA will not again attempt to assert jurisdiction over certain aspects of the business of PBMs in the future, which could materially adversely affect our operations.

Consumer Protection Laws

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

Regulations Applicable to Health Care Professionals

All states regulate the practice of medicine, nursing, and other licensed health professions. To our knowledge, no PBM has been found to be engaging in the practice of medicine or nursing by reason of its health management services. Activities deemed by a state’s regulatory authority to constitute the practice of medicine, nursing, or any other licensed health profession without the proper license would subject the non-compliant party to the penalties provided under such state’s laws. We cannot assure that a regulatory authority in a state in which we engage in PBM services would not assert a contrary position and subject us to sanctions for the unauthorized practice of medicine, nursing, or other licensed health profession.

Third Party Administrator, Utilization Review Laws and Preferred Provider Organizations

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

State Insurance Laws

In general, state insurance regulations do not apply to our fee-for-service prescription drug plans and PBM service contracts, including those in which we assume certain risk under performance guarantees or similar arrangements. However, state insurance regulations may be applicable if a PBM offers to provide prescription drugs on a capitated basis or otherwise accepts material financial risk in providing pharmacy

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benefits and may require that the party at risk establish reserves or otherwise demonstrate financial viability. Laws that may apply in such cases include insurance laws and laws governing managed care organizations and limited prepaid health service plans.

In order to participate as a PDP sponsor under the Medicare Part D program, we formed NMHC Group Solutions. Pursuant to the MMA, NMHC Group Solutions must be licensed as a risk-bearing entity under state laws or have obtained a waiver of the licensing requirement from CMS. NMHC Group Solutions has been approved to operate as a risk-bearing entity in its domicile state, Delaware, and has filed applications for licensure in the 49 other states and Washington D.C., and Puerto Rico. Because we demonstrated to CMS that we filed substantially complete licensure applications in these jurisdictions, CMS has granted NMHC Group Solutions a thirty-six month waiver of such licensing requirements effective January 1, 2007. Generally, waivers are not renewable unless CMS determines that the state in question does not have a licensing process in effect with respect to prescription benefit plans. NMHC Group Solutions is in the process of obtaining the appropriate state licenses and is currently licensed in nine states. As a licensed insurance company, NMHC Group Solutions is subject to various state insurance regulations that generally require, among other things, maintenance of capital and surplus requirements, review of certain material transactions and the filing of various financial and operational reports. However, if NMHC Group Solutions is unable to either acquire all necessary insurance licenses or maintain waivers of such licensing requirements, there may be a materially adverse impact on its ability to participate in the Medicare Part D program as a PDP sponsor. Pursuant to the MMA, state insurance licensing, insurance agent/broker licensure and solvency laws and regulations are generally applicable to PDPs, but the application of other state laws to Medicare Part D is preempted by Medicare Part D to the extent that Medicare Part D regulates the issue.

We do not intend to continue to provide our PDP to individual enrollees in 2008. In addition, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. Because we believe that we will no longer engage in any risk-bearing arrangements as a PDP sponsor for 2008, we may not be required to obtain state licensure other than in our domicile state, Delaware. We are currently conducting a 51 state / territory analysis to confirm each individual state / territory requirement.

All states have penalties associated with making false claims to an insurer. These state laws vary, and violation of them may lead to the imposition of civil or criminal penalties. Additionally, several states have laws requiring the prompt payment of claims, which state that health plans and payors must pay claims within certain prescribed time periods or pay specified interest penalties. These laws vary in regard to scope, requirements and application, and it is not clear the extent to which they may apply to our customers or to us. Also, ERISA may preempt the applicability of these laws to certain health plans and payors, but the scope of ERISA preemption is unclear and is subject to conflicting court rulings.

Mail Service Pharmacy Regulation

Our mail service and specialty pharmacies, Mail Service and Specialty Service, respectively, distribute drugs throughout the United States. Our mail service fulfillment center is located in Florida and our Specialty service pharmacy is located in Maine. Mail Service and Specialty Service are each licensed to do business and to deliver controlled substances in their respective state. Some of the states into which Mail Service and Specialty Service deliver pharmaceuticals have laws that require out-of-state mail service pharmacies to register with, or be licensed by, the board of pharmacy or similar regulatory body in such state, in order to mail drugs into that state. Mail Service and Specialty Service have each registered or are in the process of registering in every state that, to our knowledge, requires such registration. Although these states generally permit the home delivery service to follow the laws of the state in which the home delivery service is located, some of these states require out-of-state mail service pharmacies to comply with certain pharmacy laws and regulations of their states, as well as to employ a pharmacist licensed in the state to which the drugs are shipped. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that Mail Service

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and Specialty Service are in compliance with state laws and regulations that apply to their mail service pharmacy operations. In addition, we believe that all of Mail Service’s and Specialty Service’s applications for state registration or licensure will be submitted prior to the delivery of pharmaceuticals into a particular state, but cannot guarantee that we will obtain all of the required state licenses prior to such date.

Mail Service dispenses prescription drugs for refills pursuant to orders received through the mail, telephone, fax or the internet from plan participants. Accordingly, Mail Service will be subject to certain federal and state laws affecting on-line pharmacies. Several states have proposed legislation to regulate on-line pharmacies, and federal regulation by the FDA or other federal agency of on-line pharmacies has been proposed. Mail Service’s pharmacy operations could be materially adversely affected if such legislation is enacted and restricts our ability to offer our services.

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

There are also regulations governing the repacking of drug products, wholesale distribution, dispensing of controlled substances, medical waste disposal and clinical trials. In addition, federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with all such rules and regulations affecting our Mail Service and Specialty Service operations.

Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (the “DRA”) was enacted into law on February 8, 2006. The DRA significantly changes the Medicaid system (a state and federally funded program) with respect to prescription drugs by revising the methodology used to determine Federal Upper Payment limits (the maximum amount a state can reimburse) for generic drugs under Medicaid, permitting stronger cost-sharing requirements applicable to Medicaid prescription drugs, and containing provisions intended to reduce “fraud, waste and abuse” in the Medicaid program. Specifically, as of January 2, 2007, Federal Upper Limits (FULs) for generic drugs are now based on 250 percent of the lowest average manufacturers prices (“AMP”) in a given drug class. The final rule with comment was issued by CMS on July 17, 2007 and is scheduled to become effective October 1, 2007. Among other things, the rule defines AMP and best price, and specifies the items that must be included and excluded in the calculation of each. Under the rule, sales to mail pharmacies are included in the calculation of AMP.

The DRA’s “fraud, waste and abuse” provisions encourage states to enact their own false claims acts, mirrored on the federal False Claims Act, described above, and appropriate federal funding to increase scrutiny on the Medicaid program. The “fraud, waste and abuse” provisions also include a provision intended to strengthen Medicaid’s status as “payer of last resort” relative to private health insurance by specifying that PBMs and self-insured plans may be liable third parties.

Although we do not contract directly with any state Medicaid programs with respect to our PBM business, the provisions in the DRA have the potential to impact the PBM industry by means of increased prosecutorial and private litigant scrutiny on the pharmaceutical industry in general, which may include PBMs. Additionally, the DRA mandates the public availability of pharmaceutical manufacturer AMPs, and creates incentives to states to use AMPs for Medicaid reimbursement, potentially paving the way for a more general market shift in reimbursement mechanisms from AWP-based methodologies to AMP-based

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methodologies, discussed in more detail, below, under “Legislation and Regulation Affecting Drug Prices.” Additionally, the third party recovery provisions in the DRA may lead to greater financial recoveries from third party PBMs in cases where Medicaid was not properly a primary payor on a drug claim, even where a PBM is not financially at risk.

Antitrust

Numerous lawsuits have been filed throughout the United States under various state and federal antitrust laws by retail pharmacies against drug manufacturers, wholesalers and major PBMs, challenging certain brand drug pricing practices. Specifically, these suits allege, in part, that the pharmaceutical manufacturers offered, and certain PBMs knowingly accepted, rebates and discounts on purchases of brand-name prescription drugs in violation of the federal Robinson-Patman Act and federal Sherman Antitrust Act (the Sherman Antitrust Act generally prohibits contracts and combinations that unreasonably restrain trade or facilitate monopolization of any part of interstate commerce, while the Robinson-Patman Act prohibits a variety of conduct relating to the sale of goods, including prohibiting practices the statute defines as price discrimination). An adverse outcome in any of these lawsuits could require defendant drug manufacturers to provide the same types of discounts on pharmaceuticals to retail pharmacies and buying groups as are provided to PBMs and managed care entities to the extent that their respective abilities to influence market share are comparable. This practice, if generally followed in the industry, could increase competition from pharmacy chains and buying groups and reduce or eliminate the availability of certain discounts currently received in connection with our drug purchases. The loss of such discounts could have a material adverse impact on our operations. In addition, to the extent PBMs appear to have actual or potential market power in a relevant market, business arrangements and practices may be subject to heightened scrutiny from an anti-competitive perspective and possible challenge by state or federal regulators or private parties.

Regulation of PBMs

The federal government currently does not directly regulate the activities of PBMs. Several states, however, have introduced legislation in recent years, which, if enacted, would directly regulate the activities of PBMs. To date, a handful of jurisdictions have enacted such statutes, which vary widely in their requirements. This legislation varies in scope and often contains provisions that: (i) impose certain fiduciary duties upon PBMs to customers and plan participants; (ii) require PBMs to remit to customers or their plan participants certain rebates, discounts and other amounts received by PBMs related to the sale of drugs; (iii) regulate product substitution and intervention; and/or (iv) impose broad disclosure obligations upon PBMs to customers and their plan participants. Maine and the District of Columbia have the most regulations in place for PBMs, including extensive disclosure requirements and fiduciary obligations for PBMs similar to those under ERISA. The Pharmaceutical Care Management Association (“PCMA”), a national trade association representing PBMs, filed separate actions in Maine and the District of Columbia questioning the validity of their statutes on various grounds. The Maine district court granted summary judgment in favor of Maine and lifted an injunction obtained by PCMA preventing enforcement of the statute. The First Circuit Court of Appeals affirmed the district court’s holding, but clarified that the law applies only to contracts entered into in Maine with respect to PBM customers, or “covered entities” in Maine, and that PBMs are not ERISA fiduciaries, but rather that their relationship with their customers is contractual. PCMA appealed the Circuit Court decision to the United States Supreme Court, but on June 5, 2006, the Supreme Court denied review. The District of Columbia district court preliminarily enjoined enforcement of the District of Columbia statute, and the District of Columbia appealed the decision to the D.C. Court of Appeals. The D.C. Court of Appeals has remanded the case to the district court for reconsideration in light of the First Circuit’s ruling in the Maine case. The district court held that the PBM’s were barred to litigate the validity of the statute by collateral estoppel and granted the defendants’ motion to vacate the injunction and its supplemental motion for summary judgment. North Dakota, South Dakota, Vermont, Kansas, Mississippi, Tennessee and Washington have also passed legislation regulating PBMs. Georgia has a law in place primarily relating to the practice of pharmacy, and Maryland has PBM specific laws that are less onerous than the Maine and District of

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Columbia laws. Widespread enactment of such statutes could have a material adverse effect upon our financial condition, results of operations and cash flows. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with such laws and requirements where required and continue to monitor legislative and regulatory developments. However, to the extent states in which we do business enact bills that regulate the activities of PBMs in a comprehensive manner, such bills could materially adversely affect our business.

Besides state statutes and regulations, we are also subject to state common laws to the extent applied to PBMs through judicial interpretation or otherwise. Potential common law claims could involve, for example, breach of fiduciary duty, constructive fraud, fraud or unjust enrichment. The application of these common laws to PBMs and/or PBM activities could have an adverse impact on our ability to conduct business on commercially reasonable terms.

In addition, several influential bodies, including the National Association of Insurance Commissioners (“NAIC”), the National Association of Boards of Pharmacy, and the National Committee on Quality Assurance, are considering proposals to regulate PBMs and certain of their activities, such as formulary and utilization management and downstream risk assumption. For example, on October 17, 2006, the American Accreditation Health Care Commission (URAC) issued draft PBM accreditation standards for PBMs serving the commercially insured market. It is expected that these standards will be finalized in 2007. Furthermore, URAC has stated that it intends to develop standards for the Medicare and health plan markets as well. If these or other similar bodies adopt model acts which would regulate the activities of PBMs, states may be influenced to incorporate such model acts into their statutes. Such laws could materially affect our operations.

Legislation and Regulation Affecting Drug Prices

Some states have adopted legislation and regulations requiring that a pharmacy participating in the state Medicaid program provide program patients the best price that the pharmacy makes available to any third party plan (“most favored nation pricing” legislation). Such legislation and regulations may have a material adverse effect on our ability to negotiate discounts in the future from network pharmacies and on the reimbursement we receive from Medicaid programs. Other states have enacted “unitary pricing” legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. A number of states have also recently introduced legislation seeking to control drug prices through various statutory limits, rebates or discounts extending to one or more categories of the state’s population. This legislation, if enacted, could have a material adverse effect on our ability to negotiate discounts on the purchase of prescription drugs from our network pharmacies or manufacturers or otherwise discourage the use of the full range of our services by current or future customers. In addition, some manufacturers may view these laws and policies as a disincentive to provide discounts to private purchasers, such as our customers, which could adversely affect our ability to control plan costs.

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

The federal and state governments have increased their scrutiny on the method used by drug manufacturers in developing pricing information, which in turn is used in setting payments under the Medicare and

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Medicaid programs. The Department of Justice is currently conducting, and the House Commerce Committee has conducted, an investigation into the use of AWP for federal program reimbursement, and whether the use of AWP has inflated drug expenditures by the Medicare and Medicaid programs. Several states have filed lawsuits against pharmaceutical manufacturers alleging that they illegally inflated actual prices for prescriptions drugs. In addition, class action lawsuits have been commenced by private consumers against pharmaceutical manufacturers alleging overstatement of AWP. Furthermore, in October 2006, First DataBank (“FDB”), one of two primary sources of AWP price reporting, announced that it had entered into a settlement agreement relating to its AWP reporting, subject to final court approval. Under the terms of the proposed settlement agreement, FDB has agreed to reduce the reported AWP of certain drugs by four percent and to discontinue the publishing of AWP at a future time as contemplated by the settlement. The proposed settlement has not yet received final court approval.

As a result of the increased scrutiny on AWP, both federal and state proposals have been sought to change the basis for calculating reimbursement of certain drugs by the Medicare and Medicaid programs. Although we are not responsible for calculations, reports or payments of AWP, if the method of calculating AWP is changed by the government, it could adversely affect our ability to effectively negotiate discounts with pharmaceutical manufacturers, pharmacies and customers. In addition, it could affect the reimbursement the Mail Service pharmacy would receive from managed care organizations that contract with government health programs to provide prescription drug benefits.

Under the MMA, AWP no longer serves as the basis for Medicare Part B drug reimbursement, except for certain vaccines, infusion drugs furnished through durable medical equipment and for blood and blood products (other than clotting factors). Rather, with certain exceptions, Part B drugs are reimbursed on an average sales price, (“ASP”), methodology. ASP means a manufacturer’s total dollar sales of a product in the United States to all purchasers (excluding certain sales exempted from Medicaid Best Price reporting and “nominal” sales) divided by the total number of such units of such drug or biological products sold by the manufacturer in such quarter. The ASP methodology may cause some drug manufacturers to reduce the levels of discounts or rebates available to PBMs or their customers with respect to Medicare Part B drugs. Since drugs that are reimbursed on an ASP reimbursement system by Medicare do not represent a significant portion of our business, we do not believe that ASP reimbursement for such drugs will have a material adverse effect on our business, results of operations or financial condition.

The extent to which ASP will be used in pricing outside the Medicare Part B context or changes to how AWP is determined and reported to state and federal programs could alter the calculation of drug prices for federal and/or state programs. We are unable to predict whether any such changes will be adopted, and whether such changes would have a material adverse effect on our business, results of operations and financial condition.

Further, the federal Medicaid rebate program requires participating drug manufacturers to provide rebates on all drugs purchased by state Medicaid programs. Manufacturers of brand name products must provide a rebate equivalent to the greater of (a) 15.1% of the AMP paid by wholesalers for products distributed to the retail pharmacy class of trade and (b) the difference between AMP and the “best price” available to essentially any customer other than the Medicaid program, with certain exceptions. Some drug manufacturers may see these policies as a disincentive to offering rebates or discounts to private purchasers, including the customers that we represent. Investigations have been commenced by certain governmental entities which question whether “best prices” have been properly calculated, reported and paid by the manufacturers to the Medicaid program. Although, we are not responsible for such calculations, reports or payments, such investigations could adversely affect our ability to negotiate rebates with, or sell services to, drug manufacturers.

In addition, certain state Medicaid programs only allow for reimbursement to pharmacies residing in the state or in a border state. While we believe that we can service our current Medicaid customers through our existing pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs.

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Congress has introduced new legislation to permit reimportation of approved drugs, originally manufactured in the United States, back into the United States from other countries where the drugs were sold at a lower price. However, the FDA must certify to Congress that this program will not pose any additional risk to the public’s health and safety and that it will result in a significant cost reduction. This section of the MMA was to be effective only if the FDA gave its certification, and the FDA has refused to provide such a certification when requested to do so in the past. We have no assurance that the FDA will not change its position and permit the importation of drugs from Canada in the future or that new legislation or regulations will not permit the importation of drugs from the European Union or other countries in the future. Whether and how such a policy will be implemented is unclear. Although there has been considerable legislative and political activity seeking to change the FDA requirements to enable drug importation, the ultimate impact of such legislation on our business is not known.

Legislation Affecting Plan Design

Some states have enacted legislation that regulates various aspects of managed care plans, including provisions relating to pharmacy benefits and certain restrictive benefit plan designs. For example, some states have adopted “freedom of choice” legislation, which provides that participants of a plan may not be required to use network providers, but must instead be provided with benefits even if they choose to use non-network providers, or provide that a plan participant may sue his or her health plan if care is denied. Certain states have introduced or enacted legislation regarding plan design mandates, including legislation that prohibits or restricts therapeutic drug substitution, requires coverage of all drugs approved by the FDA or prohibits denial of coverage for non-FDA approved uses. Other states mandate coverage of certain benefits or conditions, and require health plan coverage of specific drugs if deemed medically necessary by the prescribing physician. In addition some states have enacted legislation purporting to prohibit HMOs and other health plans from requiring or offering participants financial incentives for use of mail service pharmacies. Furthermore, legislation has been proposed that would give health plan members the right to sue their health plans for malpractice if they have been denied care and the right to mandate the content of the appeals or grievance process when a health plan member is denied coverage. To date, there have been no formal administrative or judicial efforts to enforce any such laws. Although such legislation does not generally apply to us, it may apply to certain of our customers, HMOs and health insurers. If such legislation were to be enacted on a broad scope, it could have the effect of limiting the economic benefits achievable by our customers through our PBM services.

Additionally, in late 2000, the Equal Employment Opportunity Commission issued a decision holding that two ERISA plans discriminated in violation of Title VII of the Civil Rights Act of 1964 by failing to cover oral contraceptives when other preventive medications were covered. As with legislation imposing plan design mandates, this decision may apply to certain of our customers and could have the effect of limiting the economic benefits achievable through PBM services if it is applied broadly.

Network Access Limitations

A majority of states have adopted legislation restricting the ability of health plan customers to limit participation in their pharmacy provider network or to remove a provider from the network. These laws may require us or our customers to accept for participation in the network any retail pharmacy willing to meet the applicable plan’s price and other terms, and may restrict our ability and our customers’ ability to remove a pharmacy from the network without certain “due process” protections. These laws vary significantly from state to state in regard to scope, requirements and application. ERISA plans and payors have challenged the application of such laws on the basis of ERISA preemption. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings. In addition, the MMA contains an “any willing provider” requirement for pharmacy participation in the Medicare Drug Benefit, which provides that a Medicare Part D PDP must, under certain circumstances, allow participation by any pharmacy that is willing to meet the terms and conditions for participation that the PDP has established. Furthermore, under Medicare Part D, CMS requires that if a Part D plan offers a 90-day supply at mail, it

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must allow retail pharmacies to also offer a 90-day supply on the same terms. To date, these statutes have not had a significant impact on our business because for most of our customers, we administer large networks of retail pharmacies and will admit any licensed pharmacy that meets the network’s terms, conditions and credentialing criteria.

Formulary Restrictions

Many states have also begun to enact laws that regulate the development and use of formularies by insurers, HMOs and other third party payors. These laws have included requirements on the development, review and updating of formularies, the role and composition of pharmacy and therapeutics committees, the disclosure of formulary information to health plan participants and a process for allowing participants to obtain non-preferred drugs without additional cost-sharing where they are medically necessary and the formulary drugs are determined to be inappropriate. Additionally, the NAIC is developing a model drug formulary statute, known as the Health Carrier Prescription Benefit Management Model Act, that, if widely enacted, may eventually provide more uniformity for health plans and PBMs. Among other things, the model act would address the disclosure of formulary information to health plan participants, participants’ access to non-preferred drugs, and the appeals process available to participants when coverage of a non-preferred drug is denied by the health plan or PBM. Increasing regulation of formularies by states could significantly affect our ability to develop and administer formularies on behalf of our customers.

Industry Standards for PBMs

The National Committee on Quality Assurance, URAC, the Joint Commission on Accreditation of Healthcare Organizations and other quasi-regulatory and accrediting bodies have developed standards relating to services performed by PBMs, including mail service, formulary and drug utilization management. These bodies do not have the force of law, but PBMs and many customers for PBM services seek certification from them. In addition, they may influence the federal government or states to adopt requirements or model acts that they promulgate; for example, the federal government and some states incorporate accreditation standards of these bodies, as well as the standards of the NAIC and the National Association of Boards of Pharmacy, into their drug utilization review regulation. Future initiatives of these bodies are uncertain and resulting standards or legislation could impose restrictions on us or our customers in a way that could significantly impact our business.

Future Legislation

We cannot accurately predict what additional federal or state legislation or regulatory initiatives may be enacted in the future relating to our business or the health care industry in general, or the effect any such legislation or regulation may have on it. There can be no assurance that the federal or state governments will not impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on our business operations or profitability.

Company Information

Address and Availability of Information

Our principal executive offices are located at 26 Harbor Park Drive, Port Washington, NY 11050. Our telephone number is (516) 605-6625 and web site is http://www.nmhc.com. We electronically file or furnish our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports (where applicable) and other filings with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934. These filings are available, free of charge, through our web site as soon as reasonably practicable after they are electronically filed with the SEC. In addition, the SEC maintains its web site, www.sec.gov that contains reports, proxy and information statements and other information regarding issuers filing

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electronically, including NMHC. You may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Code of Ethics

The Company’s Code of Ethics is available on our web site at http://www.nmhc.com. Upon request by contacting NMHC at the address or number above, a copy of the code of ethics will be mailed to such person free of charge.

Item 1A. RISK FACTORS.

We face intense competition in the PBM industry.

We and other PBM companies compete primarily on the basis of price, service, reporting capabilities and clinical services. The PBM industry is very competitive and dominated by, in most cases, a few large, profitable and well-established companies with significantly greater financial and marketing resources, purchasing power and other competitive advantages. There are a limited number of national companies, including PBM companies such as Medco, Express Scripts Inc. and Caremark that have a majority of the market share of prescription volume. Furthermore, due to the loss of various customers, we have experienced a 26% decrease in the amount of claims we have processed during fiscal 2007 as compared to fiscal 2006. Our direct competitors, however, are generally the second tier PBMs and virtual PBMs that outsource many of their functions to vendors. Our competitors also include drug retailers, physician practice management companies, and insurance companies/HMOs. Many of our competitors provide lower prices and provide better service than we do. We may also experience competition from new competitors in the future. If we do not compete effectively with our competitors, our business and results of operations may suffer.

Recent changes in our senior management may affect our ability to retain customers, to win new business, to maintain employees and attract new personnel.

We depend to a significant extent on certain key personnel and senior management, in particular those that have long-standing relationships within the PBM industry, which help us to maintain relationships with certain key customers and to obtain new customers. In fiscal 2007, four members of our senior management team were terminated. The loss of these individuals may affect our ability to retain some of our key customers. In addition, potential customers may view this shift in management as an indicator of uncertainty within NMHC and thus affect our ability to secure the business of potential new customers. Furthermore, our Chief Executive Officer and President is here on an interim basis. We are currently searching for a permanent CEO. There can be no assurances that we will find a CEO on a permanent basis.

Accordingly, it is important for us to retain our existing key employees and to attract, hire and retain additional highly skilled and motivated officers, managers and employees. Some of our key employees may voluntarily leave NMHC due to the changes in senior management. The loss of the services of key employees and our inability to attract new personnel could adversely affect our business and results of operations.

If we do not successfully integrate our past acquisitions, our business and results of operations will suffer.

For the past seven years, a substantial portion of our growth resulted from acquisitions, including specialty pharmacy businesses and PBM businesses meeting specific criteria. We have had difficulty integrating many aspects of these acquisitions into our business. Some of the challenges we face include:

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• Integrating the operations, services and products of the acquired company;

• Managing the inconsistencies in standards, controls, procedures and policies among the companies being combined or assimilated which has made it more difficult to implement and harmonize company-wide financial, accounting, billing, information technology and other systems;

• Difficulties maintaining the quality of products and services that acquired companies have historically provided;

• Diversion of management’s attention from other business concerns; and

• Losing key employees and customers of the acquired business.

There are risks associated with integrating and operating newly acquired businesses. If we are unable to overcome the potential problems and inherent risks related to our past acquisitions, our business, results of operations and financial condition could suffer.

We rely on a limited number of key customers for a significant portion of our revenues. The loss of any of these key customers as a result of competitive bidding for contracts, consolidation of customers or otherwise, could adversely affect our business, profitability and growth prospects.

We depend on a limited number of customers for a significant portion of our revenue. Our top ten customers generated 49%, and our top twenty customers generated 60%, of the claims we processed during fiscal 2007. For the fiscal year ended June 30, 2007, 16% of our revenue was from Boston Medical Center Health Plan, Inc. a current customer, which is reported within the PBM segment.

Many of our customers put their contracts out for competitive bidding prior to expiration. Competitive bidding requires costly and time-consuming efforts on our behalf and, even after we have won such bidding processes, we can incur significant expense in proceedings or litigation contesting the adequacy or fairness of these bidding processes. We could lose customers if they cancel their agreements with us, if we fail to win a competitive bid at the time of contract renewal, if the financial condition of any of our customers deteriorates or if our customers are acquired by, or acquire, companies with which we do not have contracts. Over the past several years, self-funded employers, TPAs and other managed care companies have experienced significant consolidation. Consolidations by their very nature reduce the number of customers who may need our services. A customer involved in a merger or acquisition by a company that is not a customer of ours may not renew, and in some instances may terminate its contract with us. Our customers have been, and may continue to be, subject to consolidation pressures. Our business, results of operations and financial condition could be adversely affected if we were to lose one or more of our significant customers.

Due to complex calculations within our customer contracts, we may be required to issue significant credit memos to our customers that could adversely affect our business, profitability and growth prospects.

Contracts with our customers have complex calculations. We have started to, and are in the process of, implementing procedures to improve our monitoring of material contractual obligations. We continue to issue credit memos to customers related to meeting, among other things, pricing performance guarantees. The continued issuance of credit memos could adversely affect our business, profitability and growth prospects.

Due to the complex laws and regulations governing the Medicare program in which we participate, our recorded estimates may materially change in the future, and our failure to fully comply with such laws and regulations may adversely impact our business and financial results.

The Medicare Part D program in which we participate is based upon extremely complex laws and regulations that are subject to interpretation. As a result, there is at least a reasonable possibility that our

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recorded estimates of receivables from CMS may change by a material amount in the near term. Additionally, our noncompliance with such laws and regulations could result in fines, penalties and exclusion from the Medicare program.

Although we are not aware of any allegations of noncompliance that could have a material adverse effect on our consolidated financial statements, we cannot assure you that any instances of noncompliance will not have a material adverse effect on our consolidated financial statements or results of operations.

Changes in industry pricing benchmarks could adversely affect our financial performance.

Contracts in the prescription drug industry, including our contracts with our retail pharmacy networks and with our PBM and Specialty Service customers, generally use certain published benchmarks to establish pricing for prescription drugs. These benchmarks include, but are not limited to, AWP, AMP, Wholesale Acquisition Cost (“WAC”), Actual Acquisition Cost, Alternative Benchmark Price, Direct Price, Federal Upper Limit, Maximum Reimbursable Amount, Net Wholesale Price and Suggested Wholesale Price. Most of our contracts utilize the AWP standard. Recent events have raised uncertainties as to whether payors, pharmacy providers, PBMs and others in the prescription drug industry will continue to utilize AWP as it has previously been calculated or whether other pricing benchmarks will be adopted for establishing prices within the industry. Specifically, in June 2005, a class action lawsuit was commenced in the U.S. District Court for the District of Massachusetts by New England Carpenters Health Benefits Fund against FDB, one of several companies that report data on prescription drug prices, and McKesson Corporation. Plaintiffs allege that defendants conspired to arbitrarily raise AWP. On October 6, 2006, a settlement was proposed between plaintiffs and defendant FDB. The terms of the settlement include FDB agreeing to (i) lower the reported AWP, (ii) cease publishing AWP after a two year notice period, and (iii) work with major participants in the healthcare industry in court approved discussions intended to facilitate the establishment of a sustainable benchmark for drug reimbursement. On June 7, 2007, the court granted preliminary approval of the terms of the proposed settlement. Final approval of the settlement terms are contingent upon the outcome of the fairness hearing scheduled to take place on November 14, 2007. In light of the preliminary approval of the proposed settlement, final approval is imminent. However, we cannot predict the precise timing of any of the proposed AWP changes upon final approval.

In the absence of any mitigating action on our part, the proposed reduction in FDB’s AWP would have a material adverse effect on the margin we earn on home delivery transactions. It may also create disruption in our retail networks due to the adverse impact on AWP-based retail pharmacy pricing. However, most of our contracts with our customers and retail pharmacies contain terms that we believe will enable us to mitigate the adverse effect of this proposed reduction in FDB’s reported AWP.

Whatever the outcome of the FDB case, we believe that payors, pharmacy providers and PBMs will begin to evaluate other pricing benchmarks as the basis for contracting for prescription drugs and benefit management services in the future.

Due to these and other uncertainties, we can give no assurance that the short or long term impact of changes to industry pricing benchmarks will not have a material adverse effect on our financial performance, results of operations and financial condition in future periods.

We rely on third parties for our point of sale information system and transaction processing system, and any disruption in these services would materially disrupt our business and results of operations.

Our operations utilize an electronic network connecting approximately 55,000 retail pharmacies to process third party claims. This system is provided by a third party adjudication vendor. Because claims are adjudicated in real time, systems availability and reliability are key to meeting customers’ service expectations. Any interruption in real time service, either through lack of systems availability or telecommunications disruptions can significantly damage the quality of service we provide. Our PBM services also depend on third party proprietary software to perform automated transaction processing.

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There can be no assurance that our business and results of operations will not be materially harmed by service interruptions or software performance problems.

We are in the process of consolidating all customers to a single third party adjudication vendor, one of two that we are currently operating. Any severe interruption during this consolidation process could materially disrupt our business and results of operations.

All new customers joining us will utilize our new claims adjudication software, and we are in the process of migrating existing customers to this new software. We have encountered some difficulties in transitioning existing customers to the new software. It is possible that we may experience service interruptions in connection with the introduction of the new software, which may cause affected customers to become dissatisfied with us and seek services elsewhere.

Uncertainty regarding the impact of Medicare Part D may adversely impact our business and financial results.

The MMA created a new, voluntary prescription drug benefit for Medicare beneficiaries entitled to Medicare benefits under Part A or enrolled in Medicare Part B effective January 1, 2006. We currently participate in the administration of the Medicare drug benefit: (i) through the provision of PBM services to our health plan customers and other customers that have qualified as a PDP or a MA-PD, and (ii) by assisting employers, unions and other health plan customers that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS for them in order to obtain the subsidy. Our existing PBM business could be adversely affected if our customers decide to discontinue providing prescription drug benefits altogether to their Medicare-eligible members. We are not yet able to assess the impact that Medicare Part D will have on our customers’ decisions to continue to offer a prescription drug benefit to their Medicare-eligible members.

In addition, as an approved PDP sponsor for calendar year 2007, this is the first time we are a direct contractor to the federal government and subject to the rules, regulations and enforcement authority of the federal government over its contractors. In addition, under regulations established by CMS governing participation in the Medicare Part D program, our subsidiary, NMHC Group Solutions, must be a risk-bearing entity regulated under state insurance laws and must obtain licensure as a domestic insurance company. NMHC Group Solutions has been approved to operate as a risk-bearing entity in its domicile state, Delaware, and has filed applications for licensure in the 49 other states, Washington D.C. and Puerto Rico. We are at various stages with these applications in the ancillary states as eight ancillary states have approved our applications, some states are considering our application, others we have not heard back from and others have been withdrawn for failure to meet certain requirements. We expect to operate under a three year waiver granted by CMS for these other states and territories. These applications are in various stages, and we can give no assurance that they will be approved. We do not intend to continue to provide our PDP to individual Medicare Part D enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1, 2008, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to risk. As such, we may be exempt from obtaining risk bearing licensure in the ancillary states and therefore not be subject to the specific state capital, surplus and deposit requirements.

We have invested substantial amounts of time and resources to our Medicare drug benefit program. It is uncertain if we will achieve an acceptable return on these investments.

We have currently committed approximately $5.2 million in a cash account in connection with CMS requirements. The cash is restricted and will not be available to fund our operations. We do not intend to continue to provide our PDP to individual Medicare Part D enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1,

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2008, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to risk. If we do not provide our PDP to individual enrollees and employer groups in instances where we could be subject to risk, we may be exempt from obtaining risk bearing licensure in some or all of the ancillary states and therefore not be subject to the specific state capital, surplus and deposit requirements.

In addition, we may not be able to realize any return on our investments in Medicare initiatives if the cost and complexity of recent changes by and requirements of CMS exceed our expectations or prevent effective program implementation; if the government alters or reduces funding of Medicare programs because of the higher-than-anticipated cost to taxpayers of the MMA or for other reasons; if we fail to become a risk bearing entity prior to the expiration of the CMS waiver for the 49 other states and territories, (we are in the process of obtaining the appropriate state licenses and are currently licensed in nine states.); if we fail to design and maintain programs that are attractive to our customers or individual Medicare participants; if we are not successful in retaining employer groups and their enrollees, or winning contract renewals or new contracts under the MMA’s competitive bidding process; or if the government alters or reduces funding of Medicare programs because of the higher-than-anticipated cost to taxpayers of the MMA or for other reasons. There are many uncertainties about the financial and regulatory risks of participating in the Medicare prescription drug program, and we give no assurance that these risks will not be material to our business in future periods.

We may be liable for damages and other expenses that are not covered by our insurance policies.

Various aspects of our business may subject us to litigation and liability for damages, for example, the performance of PBM services and the operation of our Mail Service and Specialty Service pharmacies. A successful product or professional liability claim in excess of our insurance coverage where we are required to pay damages, incur legal costs or face negative publicity could have a material adverse effect on our business, results of operations and financial condition, our business reputation and our ability to attract and retain customers, network pharmacies and employees. While we intend to maintain professional and general liability insurance coverage at all times, we cannot provide assurances that we will be able to maintain insurance in the future, that insurance will be available on acceptable terms or that insurance will be adequate to cover any or all potential product or professional liability claims.

Specifically, due to the high cost of hurricane-related insurance premiums, we may not always be fully insured against these risks, including hurricane related risks in our Mail Service facility located in Miramar, Florida. While it is our goal to be fully insured against natural disasters at all times, we cannot provide assurances that we will be able to obtain coverage at favorable rates that outweigh the risks.

Demands by our customers for enhanced service levels or possible loss or unfavorable modification of contracts with our customers could negatively affect our profitability.

As our customers face the continued rapid growth in prescription drug costs, they may demand additional services and enhanced service levels to help mitigate the increase in spending. We operate in a very competitive PBM environment, and as a result, we may not be able to increase our fees to compensate for these increased services which could negatively affect our profitability.

Due to the term of our contracts with customers, if we are unable to renew those contracts or replace any lost customers, our future business and results of operation would be adversely affected.

Our contracts with customers generally do not have terms longer than three years and, in some cases, are terminable by the customer on relatively short notice. Our larger customers generally seek bids from other PBM providers in advance of the expiration of their contracts. In addition, we believe the managed care industry is undergoing substantial consolidation, and another party that is not our customer could acquire some of our managed care customers. In such case, the likelihood such customer would renew its

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PBM contract with us could be reduced. We have not been very successful in retaining existing customers. If several of our large customers elect not to extend their relationship with us, and we are not successful in generating sales to replace the lost business, our future business and results of operations would be adversely affected.

Our results of operations could suffer if we lose our pharmacy network affiliations or if our Specialty Service pharmacy is excluded from third party pharmacy networks.

Our PBM operations are dependent to a significant extent on our ability to obtain discounts on prescription purchases from retail pharmacies that can be utilized by our customers and their participants. Our contracts with retail pharmacies, which are non-exclusive, are generally terminable by either party on short notice. If one or more of our top pharmacy chains elects to terminate its relationship with us or if we are only able to continue our relationship on terms less favorable to us, access to retail pharmacies by our customers and their health plan participants, and our business, results of operations and financial condition could suffer. In addition, some large retail pharmacy chains either own or have strategic alliances with PBMs or could attempt to acquire or enter into these kinds of relationships in the future. Ownership of, or alliances with, PBMs by retail pharmacy chains, particularly large pharmacy chains which control a significant amount of retail pharmacy business, could have material adverse effects on our relationships with those retail pharmacy chains, particularly the discounts they are willing to make available, and on our business, results of operations and financial condition.

Specialty Service contracts with third party payors, including other PBMs, Medicaid, Medicare, and insurance companies, to become participants in their networks. We derive 46% of specialty revenues from other third party payors. If Specialty Service is unable to contract with third party payors, our results of operations could be adversely affected.

We may be adversely affected by the loss of our relationships with one or more key pharmaceutical manufacturers or with our rebate administrator, or if rebate payments we receive from pharmaceutical manufacturers or our rebate administrator decline.

We receive rebates from numerous pharmaceutical manufacturers based on the use of selected brand name drugs by participants of health plans sponsored by our customers, as well as fees for other programs and services. We also receive a per claim rebate amount from our rebate administrator. We believe our business, results of operations and financial condition may be adversely affected if:

• we lose relationships with one or more key pharmaceutical manufacturers or with our rebate administrator;

• rebates decline due to the failure of our health plan customers to meet market share or other thresholds;

• legal restrictions are imposed on the ability of pharmaceutical manufacturers to offer rebates or purchase our programs or services; or

• pharmaceutical manufacturers or our rebate administrator choose not to offer rebates or purchase our programs or services.

Over the next few years, as patents expire covering many brand name drugs that currently have substantial market share, generic products will be introduced that may substantially reduce the market share of these brand name drugs. Historically, manufacturers of generic drugs have not offered formulary rebates on their drugs. Our profitability could be more adversely affected if the use of newly approved, brand name drugs added to formularies, does not offset any decline in use of brand name drugs whose patents expire or if rebates are not offered by the manufacturers of such newly approved brand name drugs.

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Failure of our health plan customers to pay for prescription claims or a delay in payment of those claims could have a material adverse effect on our profitability.

Our contracts with retail pharmacies that participate in our network generally obligate us to make payments for prescription claims even if we are not reimbursed by our customers. If our customers delay their reimbursement payments or fail to make payments for prescription claims, it could have a material adverse effect on our profitability.

We could suffer civil and/or criminal penalties, lose customers, be required to pay substantial damages or make significant changes to our operations if we fail to comply with complex and rapidly evolving laws and regulations.

During the past several years, the U.S. health care industry has been subject to an increase in governmental regulation at both the federal and state levels. Numerous state and federal laws and regulations affect our business and operations. The categories include, but are not necessarily limited to:

• health care fraud and abuse laws and regulations, which prohibit certain types of payments and referrals as well as false claims made in connection with health benefit programs;

• privacy and confidentiality laws and regulations, including those under HIPAA;

• ERISA and related regulations, which regulate many health care plans;

• potential regulation of the PBM industry by the FDA;

• the Medicare prescription drug coverage law and CMS regulations;

• consumer protection and unfair trade practice laws and regulations;

• various licensure laws, such as state insurance, managed care and third party administrator licensure laws;

• pharmacy laws and regulations;

• antitrust lawsuits challenging PBM pricing practices;

• state legislation regulating PBMs or imposing fiduciary status on PBMs;

• drug pricing legislation, including “most favored nation” pricing and “unitary pricing” legislation;

• other Medicare and Medicaid reimbursement regulations;

• pending legislation regarding importation of drug products into the United States;

• legislation imposing benefit plan design restrictions, which limit how our customers can design their drug benefit plans;

• network pharmacy access laws, including “any willing provider” and “due process” legislation, that affect aspects of our pharmacy network contracts; and

• formulary development and disclosure laws.

These and other regulatory matters are discussed in more detail under “Business — Government Regulation” above.

If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties. We devote significant operational and managerial resources to comply with these laws and regulations. Although we have not been notified, and are not otherwise aware of any material claim or non-compliance, there can be no assurance that we are in compliance with all existing legal requirements material to our business. Different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure you that we will be able to obtain or maintain the regulatory approvals required to operate our business.

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Government efforts to reduce health care costs and alter health care financing practices could lead to a decreased demand for our services or to reduced rebates from manufacturers.

Efforts to control health care costs, including prescription drug costs, are underway at the federal and state government levels. Congress considers proposals to reform the U.S. health care system on an on-going basis. These proposals may increase governmental involvement in health care and PBM services and may otherwise change the way our customers do business. Our customers and prospective customers may react to these proposals and the uncertainty surrounding them by cutting back or delaying the purchase of our PBM services, and manufacturers may react by reducing rebates or reducing supplies of certain products. These proposals could lead to a decreased demand for our services or to reduced rebates from manufacturers.

In addition, both Congress and state legislatures are expected to consider legislation to increase governmental regulation of managed care plans. Some of these initiatives would, among other things, require that health plan participants have greater access to drugs not included on a plan’s formulary and give health plan participants the right to sue their health plans for malpractice when they have been denied care. The scope of the managed care reform proposals under consideration by Congress and state legislatures and enacted by states to date vary greatly, and we cannot predict the extent of future legislation. However, these initiatives could greatly limit our business practices and impair our ability to serve our customers.

Failure to develop new products, services and delivery channels may adversely affect our business.

We operate in a highly competitive environment. We develop new products and services from time to time to assist our customers in managing their pharmacy benefit. If we are unsuccessful in developing innovative products and services, our ability to attract new customers and retain existing customers may suffer.

Technology is also an important component of our business, as we continue to utilize new and better channels, such as the Internet, to communicate and interact with our customers, participants and business partners. If our competitors are more successful than us in employing this technology, our ability to attract new customers, retain existing customers and operate efficiently may suffer.

Our leverage and debt service obligations could impede our operations and flexibility.

In January 2005, we negotiated a five-year $65 million credit facility with a syndicate of commercial banks led by JPMorgan Chase Bank, N.A. (“JPMorgan credit facility”). As of and for the fiscal year ended June 30, 2007, we had no outstanding borrowings under the JPMorgan credit facility. If and when we borrow funds under the JPMorgan credit facility, we would incur interest expense and future repayment obligations. Depending on the timing and dollar amount of each loan request, we can either borrow at a spread above LIBOR, the overnight Federal Funds rate or JPMorgan’s prime rate. As of June 30, 2007, the spread is 1.50% for LIBOR and Federal Funds loans and 0.50% for prime rate loans.

Borrowings under our debt agreement could have important consequences, including the following:

• we will have to use a portion of our cash flow from operations for debt service rather than for our operations;

• we may from time to time incur indebtedness under our JPMorgan credit facility, which is subject to a variable interest rate, making us vulnerable to increases in interest rates;

• we could be less able to take advantage of significant business opportunities, such as acquisition opportunities, and react to changes in market or industry conditions;

• we could be more vulnerable to general adverse economic and industry conditions; and

• we may be disadvantaged compared to competitors with less leverage.

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Furthermore, our ability to satisfy our obligations, including our debt service requirements, will be dependent upon our future performance. Factors which could affect our future performance include, without limitation, prevailing economic conditions and financial, business and other factors, many of which are beyond our control and which affect our results of operations, financial position and/or cash flow from operations.

Our JPMorgan credit facility is secured by our assets. If we are unable to meet our obligations under the JPMorgan credit facility, these creditors could exercise their rights as secured parties and take possession of our assets. This would materially adversely affect our results of operations and financial condition.

Although we have a $65,000 revolving credit facility, we currently cannot borrow the full amount under this credit facility and we may be limited, or unable, to borrow under this credit facility in the future. As of June 30, 2007, we were able to borrow approximately $39,000 under the credit facility. If we are in compliance with the consolidated fixed charge ratio, we can then borrow up to 2.5 times the Company’s consolidated EBITDA for the preceding twelve months less consolidated debt, as defined in the credit facility. We are currently in the process of exploring alternative financing arrangements so we can fully access any funds as needed.

Risks related to bioterrorism and mail tampering, and mail irradiation and other procedures the government may implement to manage these risks, could adversely affect and limit the growth of our mail and specialty service business.

Many prescription drugs are delivered directly to our consumers through the mail. In particular, our Mail Service and Specialty Service pharmacies send thousands of parcels a week through the USPS and other couriers. A number of our contracts also require us to deliver prescriptions within a designated period of time on average following receipt of an order. We have no control, however, over delays caused by disruptions to the USPS or other courier services. Moreover, should the risks related to bioterrorism or mail tampering increase or mail service experience interruptions or significant delays, we may have difficulty satisfying our contractual performance obligations and consumers may lose confidence in our Mail Service and Specialty Service pharmacies.

Additionally, the use of mail irradiation devices, if implemented, could be harmful to pharmaceutical products shipped via the mail. We understand that this technology is not in general use and the USPS has not announced plans to use irradiation screening on prescription medicines. However, should the federal government implement mail irradiation technology, safe and reliable delivery of prescription drugs through the mail may be difficult. If any of these events occur, we could be forced to temporarily or permanently discontinue our Mail Service and Specialty Service operations and we would lose an important competitive advantage.

Any disruption of or failure in our automated Mail Service pharmacy or our data center could significantly reduce our ability to process and dispense prescriptions and provide products and services to our customers.

Our automated pharmacy and Mail Service delivery system is located in Miramar, Florida. Our main data center, located in Port Washington, New York, provides primary support for all applications and systems required for our business operations, including our claims processing, billing and communications. These facilities depend on the infrastructure in the areas where they are located and on the uninterrupted operation of our computerized dispensing systems and our electronic data processing systems. Significant disruptions at any of these facilities due to failure of our technology or any other failure or disruption to these systems or to the infrastructure due to fire, electrical outage, natural disaster, acts of terrorism or some other catastrophic event could reduce our ability to process and dispense prescriptions and provide products and services to our customers. Although we maintain redundancies and other preventative measures to protect against disruption of these systems, there can be no assurance that redundant systems will in fact operate as intended or with the same effect as the primary systems.

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Product withdrawal from the market and utilization decreases based off of increased safety risk profiles of specific drugs may cause prescription volumes to decline and our net revenues and profitability may be negatively impacted.

Our net revenues and profitability are based on the dispensing of brand-name and generic drugs by our Mail Service and Specialty Service pharmacies and retail pharmacies. Withdrawal of these products by the manufacturers or increased safety risk profiles of specific drugs or classes of drugs may cause physicians to cease writing or reduce the numbers of prescriptions written for these drugs. Also, negative press regarding drugs with higher safety risk profiles may reduce consumer demand for such drugs. In these cases, if there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.

The launch of generic pharmaceuticals into the marketplace may impact our financial results.

A great deal of our earned rebates on drugs comes from drugs whose patents will expire over the next several years. When these patents expire, generic products will be introduced and may substantially reduce the market share of brand-name drugs and the rebates manufacturers provide to us for their brand-name drugs that are included on the formularies we manage. We may also be unable to negotiate rebates for new brand-name drugs comparable to the rebates we are receiving from brand-name drugs with expiring patents. Even though we generally earn higher margins on generic drugs than we earn on brand-name drugs, manufacturers of newly-introduced generic drugs sometimes benefit from an exclusive marketing period, generally six months, during which time we may be unable to earn these higher margins. Therefore, the typically higher margins we earn on generic drugs and rebates from newly-approved, brand-name drugs may not offset any decline in rebates for brand-name drugs with expired patents.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

Our corporate headquarters consists of approximately 37,000 square feet of office space located at 26 Harbor Park Drive in Port Washington, New York (the “Leased Premises”). We sublease the Leased Premises from BFS Realty, LLC, an affiliate of former Chairman Bert E. Brodsky (the “Affiliate”) pursuant to a lease dated November 1, 2001, as amended to date (the “Lease”). The Affiliate leases the Leased Premises from the Nassau County Industrial Development Agency (“NCIDA”) pursuant to a lease that was entered into by NCIDA and the Affiliate in December 2004, which expires in December 2015.

The Lease provides that, effective May 1, 2004, the rent payable by us shall be an aggregate annual rent of $594,678 over a ten year term, plus expenses related to real estate taxes, utilities and maintenance. Annual rent increases will be based upon the Consumer Price Index plus 2.5% subject to a maximum annual cap of 3.5%. The Lease expires ten years from the occupancy date of May 1, 2004. In addition, we have early termination rights which we may exercise by delivery of a notice to the Affiliate 60 days prior to the end of the April 30, 2009 lease year. In consideration of such early termination rights, we would pay to the Affiliate the rent that would otherwise be payable by us to the Affiliate for the succeeding 30 months, and subject to adjustments if the Affiliate is able to lease the Leased Premises to another party during said 30 month period.

We conduct our PBM operations from the following locations: Arkansas, California, Florida, New York and Pennsylvania. Our Specialty Service operation which supports the delivery of certain medications to individuals with chronic or genetic diseases and disorders is located in Maine. The aggregate annual rental payments for our leased PBM and Specialty Service segments approximated $2,091,000 for the fiscal year ended June 30, 2007.

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In addition, we rented two houses from Living In Style, LLC, an entity partially owned by Tery Baskin, a former executive officer of the Company, and a former Chairman of the Board and CEO, which was used for out-of-town employees. Pursuant to leases dated May 1, 2002 which expired April 30, 2007, we paid an aggregate of $128,000 in rent for these two facilities during the fiscal year ended June 30, 2007. Upon their expiration, we did not renew the lease for these two houses.

Item 3. LEGAL PROCEEDINGS.

From time to time we become subject in legal proceedings and claims in the ordinary course of business. Such claims, even if without merit, could result in the significant expenditure of our financial and managerial resources. While the ultimate outcome of those claims and lawsuits which currently are pending cannot be predicted with certainty, we believe, based on our understanding of the facts of these claims and proceedings, that their ultimate resolution will not, in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.

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

The information required by this item is incorporated herein by reference to the information in Item 4 of Part II of the 10-Q for the fiscal quarter ended March 31, 2007 filed on May 10, 2007.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is traded on The Nasdaq National Market System under the symbol “NMHC” (“NASDAQ”). The following table sets forth the range of high and low common stock market prices for fiscal 2007 and 2006.

	Fiscal Years ended June 30,
	2007				2006
	High		Low		High		Low
First Quarter (July - Sept.)	$	15.66	$	12.73	$	28.57	$	23.75
Second Quarter (Oct. - Dec.)	$	15.75	$	8.80	$	28.69	$	25.25
Third Quarter (Jan. - March)	$	15.48	$	11.29	$	32.29	$	27.02
Fourth Quarter (April - June)	$	17.76	$	14.16	$	28.24	$	10.77

Holders

We have been advised by our transfer agent (Continental Stock Transfer & Trust Company) that the approximate number of record holders of our common stock as of September 7, 2007 was 16.

Dividend Policy

We have not declared or paid any cash dividends in the past on our common stock. Our series A redeemable convertible preferred stock (the “series A preferred stock”) provides for an annual cash dividend equal to 7% of the investment amount, which decreases to 3.5% after the fifth anniversary (March 19, 2009) from the issuance date (March 19, 2004). Cash dividends of $5.6 million were accrued on the series A preferred stock for the fiscal year ended June 30, 2007. Of this amount, approximately $4.2 million was paid as of June 30, 2007 with the remaining $1.4 million paid on July 3, 2007. Other than the dividends on our series A preferred stock, we are prohibited under the terms of the JPMorgan credit facility from making any distributions to common stockholders or declaring or paying any dividends on our common stock. Even if such prohibition were not in effect, we currently intend to retain any earnings to finance our growth. Any future payments of dividends other than as set forth above will be at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant, including our ability to make such dividend payments as well as their impact on our bank covenants and working capital.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about the securities authorized for issuance under our equity compensation plans as of June 30, 2007:

					Number of securities remaining
	Number of		Weighted-average		available for future issuance
	securities to be issued		price of		under
	upon exercise of		outstanding		equity compensation plans
	outstanding options,		options, warrants		(excluding securities reflected in
	warrants, and rights		and rights		column (a))
	(a)		(b)		(c)
Equity Compensation Plans approved by security holders (1)		1,144,136	$	22.22		1,115,107
Equity Compensation Plans approved by security holders (2)		42,540		—		657,460
Equity Compensation Plans not approved by security holders		—		—		—

(1)	Reflects information about outstanding and issuable options under the 1999 Stock Option Plan, as amended.
(2)	Reflects information about outstanding and issuable restricted stock awards under the 2000 Restricted Stock Grant Plan.

Recent Sales of Unregistered Securities

No unregistered shares of our securities were issued during the fiscal year ended June 30, 2007.

Issuer Purchases of Equity Securities

NMHC did not purchase any of its equity securities during the quarter ended June 30, 2007.

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Item 6. SELECTED FINANCIAL DATA.

The following selected financial data has been derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements, including notes thereto. All amounts are in thousands, except share amounts.

	Year Ended June 30,
	2007			2006			2005			2004			2003
Income Statement Data: (1)
Revenue	$	679,081		$	862,853		$	800,592		$	651,098		$	573,266
Cost of claims		591,766			771,487			713,883			587,055			525,472
Gross profit		87,315			91,366			86,709			64,043			47,794
Selling, general and administrative expenses		87,481			75,852			67,786			50,606			35,974
Operating (loss) income		(166	)		15,514			18,923			13,437			11,820
Other income (expense)		1,456			1,158			1,489			40			(804	)
Income before provision for income taxes		1,290			16,672			20,412			13,477			11,016
Provision for income taxes		1,198			7,015			8,031			5,524			4,602
Net income		92			9,657			12,381			7,953			6,414
Beneficial conversion feature		—			—			—			80,000			—
Redeemable convertible preferred stock cash dividends		5,600			5,600			5,600			1,596			—
Accretion of transaction expenses		475			475			475			135			—
Net (loss) income available to common stockholders	$	(5,983	)	$	3,582		$	6,306		$	(73,778	)	$	6,414
Earnings (loss) per common share:
Basic	$	(1.10	)	$	0.70		$	1.39		$	(11.14	)	$	0.85
Diluted	$	(1.10	)	$	0.67		$	1.03		$	(11.14	)	$	0.80
Weighted average number of shares outstanding:
Basic		5,454			5,143			4,542			6,622			7,590
Diluted		5,454			5,311			11,984			6,622			8,036
Balance Sheet Data:
Cash and cash equivalents	$	705		$	8,410		$	7,272		$	3,388		$	5,222
Restricted cash	$	19,276		$	4,845		$	3,994		$	1,695		$	2,383
Working capital (deficit) (2)	$	(3,383	)	$	(7,098	)	$	(24,437	)	$	(27,706	)	$	(32,567	)
Total assets	$	253,089		$	272,153		$	283,931		$	226,149		$	156,740
Long-term debt, including current portion	$	2,475		$	16		$	1,905		$	2,272		$	16,491
Redeemable convertible preferred stock	$	76,813		$	76,338		$	75,864		$	75,389		$	—
Total common stockholders’ equity (deficit)	$	25,513		$	25,006		$	9,854		$	(6,623	)	$	28,426
Prescriptions Paid		23,421			31,842			25,828			18,028			16,041
Retail		22,803			31,199			25,251			17,888			16,041
Mail (3)		618			644			577			140			N/A
Adjusted prescriptions (4)		24,657			33,130			26,982			18,308			16,041

(1)

Reference is made to Item 1 hereof, (Business), Item 7 hereof (Management’s Discussion & Analysis of Financial Condition and Results of Operations) and Item 8 hereof (Note 4 – Business Acquisitions) for descriptions of the various acquisitions that have been consummated in the last 3 years, and the financing arrangements that have been set in place; such acquisitions and financings affect the comparability of the information provided in the foregoing tables for fiscal years 2003 through 2007.

(2)

Calculated as current assets less current liabilities.

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(3)	We began filling prescriptions out of our Mail Service facility on July 1, 2003.
(4)	Adjusted prescription volume equals the Mail Service prescriptions multiplied by 3, plus retail prescriptions. These Mail Service prescriptions are multiplied by 3 to adjust for the fact that they typically include approximately 3 times the amount of product days supplied compared with retail prescriptions.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

During the fiscal year ended June 30, 2007, we identified various errors which resulted in a reduction of our operating income of approximately $211. These various errors consisted of the following:

Rebate Error. During the preparation of our Quarterly Report on Form 10-Q for the period ended September 30, 2006 (“First Quarter 10-Q”)) we determined that we incorrectly recognized $1,017 of rebate revenue during the fiscal year ended June 30, 2006. The error primarily related to an adjustment recorded during the fourth quarter of fiscal 2006 regarding a duplicate rebate payment made to a single customer in a prior period; however, management subsequently discovered that the duplicate payment of $1,032 had already been refunded by the customer. This duplicate payment was reflected as a reduction in our liability as of June 30, 2006 to this customer when it should not have been. Subsequent to the filing of our First Quarter 10-Q, we identified additional errors approximating $456. The net impact of errors relating to our rebate payable balances to customers resulted in a net decrease of approximately $1,473 of our rebate revenue and operating income for the fiscal year ended June 30, 2007 (the “Rebate Error”).

Claims Payable to Pharmacies. Based upon a review of our claims payable to pharmacies, we identified approximately $1,523 of liabilities incorrectly processed during prior periods. The components of the $1,523 are as follows: i) $1,099 of claims that should have been reversed into income during a prior period but were reflected as a liability as of June 30, 2006 and June 30, 2005, ii) approximately $407 of claims that were shown as a reduction to our claims payable balance when they should not have been and should have been written off during prior periods, and iii) approximately $831 of claims that should have been reversed during a prior period along with a corresponding net receivable of $831 from a former customer that should have been written off during that same prior period (note that item iii results in no net impact to our operating results).

The net impact of errors relating to claims payable to pharmacies for periods ended June 30, 2006 or prior and the related write-off of an uncollectible receivable resulted in a net increase of $692 of our operating income (increase of $1,523 of our gross profit) and was recorded during the quarter ended September 30, 2006 (the “Claims Payable Error”).

During the quarter ended March 31, 2005 we concluded that we were no longer liable for $1,099 of claims to various pharmacies on behalf of a former customer who went into receivership and properly reversed those claims into income. However, during the fourth quarter of fiscal 2005, the reversal of these claims in the prior quarter was not properly processed in our general ledger, resulting in their inclusion as a liability on our June 30, 2005 and June 30, 2006 balance sheets. This error resulted in a $1,099 overstatement of our cost of claims during the fourth quarter of fiscal 2005.

During the quarter ended September 30, 2006, due to the unlikelihood of collection, we wrote off approximately $407 of receivables related to unbillable claims that were shown as a reduction to our claims payable balance. We reviewed the nature of these receivables and determined that such receivables should have been written off in the prior periods in which they originated. As such, we wrote them off during the quarter ended September 30, 2006 through an increase to our cost of claims.

We have concluded that we did not properly reverse approximately $831 of claims to various pharmacies on behalf of a former customer who went into receivership during 2001 or write-off an $831 accounts receivable from such customer. This former customer was an insurance company and certain of their

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obligations were covered by a state trust fund. General counsel for the administrator of the state trust fund advised us that payments were made to various pharmacies on behalf of this former customer during 2003 and 2004. We have never received requests of additional payments from any pharmacies that processed claims on behalf of this former customer beyond what they were paid by the state trust fund. General counsel of the administrator of the state trust fund also informed us that the time period for submitting claims to the receiver has long since lapsed and furthermore, no more payments are being made in connection with this former customer. Our claims liabilities to pharmacies should have been reversed and the receivable from the former customer should have been written off during fiscal 2005 as that was the year in which the pharmacies were paid by the state trust fund. As such, we wrote off the receivable and reversed the claims into income during the quarter ended September 30, 2006. The write-off of the receivable and the reversal of claims to various pharmacies had no net impact to our operating results. The reversal of claims to various pharmacies resulted in a reduction in our cost of claims while the write-off of the receivable resulted in a corresponding increase to our selling, general and administrative expenses.

Accounting for Leases. We conducted a review of our leases and noted that the accounting treatment for various leases was not in accordance with SFAS No. 13, “Accounting for Leases”. As a result, we identified leases that were originally accounted for as operating leases when they should have been accounted for as capital leases. The change in the accounting treatment for various leases resulted in a $584 net increase of our operating income and was recorded during the quarter ended September 30, 2006 (the “Lease Error”). In addition, the change in accounting treatment for various leases resulted in $4,762 increase in our property and equipment and a $4,178 increase in our capital lease obligations.

We assessed the impact that the above mentioned errors had on our operating income, as well as other financial statement line items, during the fiscal year ended June 30, 2007. These errors resulted in a $211 net decrease of our operating income which we consider to be immaterial, individually and in the aggregate, to current and prior periods.

Overview

We provide comprehensive PBM services to our customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third party health care plan administrators, and federal and state government programs through our network of licensed pharmacies throughout the United States. Our PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail service pharmacy claims management, specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis. We own a mail service pharmacy (“Mail Service”) and a specialty service pharmacy (“Specialty Service”). In addition, we are a national provider of drug benefits to our customers under the federal government’s Medicare Part D program.

With the acquisition and significant growth of Ascend, we have two reportable segments, PBM and Specialty Service. The PBM segment includes the sale of traditional prescription drugs to our customers and their participants, either through our nationwide network of pharmacies or our Mail Service pharmacy. The Specialty Service segment includes the sale of higher margin specialty pharmacy products and services for the treatment of chronic and potentially life-threatening diseases. Both the PBM and Specialty Service segments operate in the United States and several of its territories.

Our revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, either through our nationwide network of pharmacies, our Mail Service pharmacy or our Specialty Service pharmacy. Revenue related to the sales of prescription drugs by our nationwide network of pharmacies, our Mail Service or Specialty Service pharmacies is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using our on-line processing system. Specialty Service revenues

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represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third party payors, patients and others.

Participant co-payments are not recorded as revenue. Under our customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, we do not include participant co-payments to pharmacies in revenue or cost of claims. For the fiscal years ended June 30, 2007, 2006 and 2005, excluded from our revenue and cost of claims was $249,526, $321,055, and $280,946, respectively, of participant co-payments to pharmacies. If the above amounts were included in our revenue and cost of claims, our operating income and net income would not have been affected.

We evaluate customer contracts to determine whether we act as a principal or as an agent in the fulfillment of prescriptions through our retail pharmacy network. We act as a principal in most of our transactions with customers and revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, as well as our administrative fees (“Gross Reporting”). Gross reporting is appropriate because we (i) have separate contractual relationships with customers and with pharmacies, (ii) are responsible to validate and economically manage a claim through our claims adjudication process, (iii) commit to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manage the overall prescription drug relationship with the patients, who are participants of customers’ plans, and (v) have credit risk for the price due from the customer. In instances where we merely administer a customer’s network pharmacy contract to which we are not a party and under which we do not assume credit risk, we only record our administrative fees as revenue. For these customers, we earn an administrative fee for collecting payments from the customer and remitting the corresponding amount to the pharmacies in the customer’s network. In these transactions, we act as a conduit for the customer. As we are not the principal in these transactions, drug ingredient cost is not included in our revenues or in our cost of claims. As such, there is no impact to our gross profit. Whether revenues are recorded on either a gross or net basis, we record the gross amount billed in accounts receivable and the related claims payable to pharmacies on our consolidated balance sheet.

The rebates that we receive from pharmaceutical manufacturers are recognized when we are entitled to them in accordance with the terms of our arrangements with pharmaceutical manufacturers and our third party rebate administrator, and when the amount of the rebate is determinable. Our revenue is reduced by the amount of rebates remitted to our customers. We compute the estimated amount of rebates due from the pharmaceutical manufacturers based on the actual claims data and the criteria established in each individual contract. The pharmaceutical manufacturers are obligated to reimburse us for earned rebates within a specified period of time. We reconcile our estimates to amounts received from the pharmaceutical manufacturers on a quarterly basis. Certain of our customers are contractually entitled to all or a portion of the rebates we receive from the pharmaceutical manufacturers. The manufacturer rebates retained by us, after the customers receive their contractual amounts, have historically had a significant impact on our financial performance. For the fiscal years ended June 30, 2007, 2006 and 2005, the rebates retained by us have approximated 13%, 20% and 22%, respectively, of our total gross profit. We expect rebates to continue to account for a significant, but declining, percentage of our total gross profit.

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

We plan to expand our growth through increased marketing of our services and by expanding the range of services offered, including home delivery services through Mail Service, and specialty pharmacy services through our Specialty Service segment. We also intend to provide our PDP services to our customers under the federal government’s Medicare Part D program. We believe these services to be in growing demand within the healthcare industry.

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OPERATING INCOME
($ in thousands)
Years ended June 30,

				Increase/					Increase/
	2007			(Decrease)			2006		(Decrease)			2005
Revenue	$	679,081			(21.3	)%	$	862,853		7.8	%	$	800,592
Cost of claims		591,766			(23.3	)%		771,487		8.1	%		713,883
Gross profit		87,315			(4.4	)%		91,366		5.4	%		86,709
Selling, general and administrative expenses		87,481			15.3	%		75,852		11.9	%		67,786
Operating (loss) income	$	(166	)		(101.1	)%	$	15,514		(18.0	)%	$	18,923

Results of Operations ($ in thousands)

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006

Revenue decreased $183,772 or 21.3%, from $862,853 for the fiscal year ended June 30, 2006 to $679,081 for the fiscal year ended June 30, 2007. We include in revenue only those co-payments earned from Mail Service. For the fiscal year ended June 30, 2007, there was $16,592 of co-payments included in revenue as compared to $18,423 for the fiscal year ended June 30, 2006. Co-payments retained by pharmacies on prescriptions filled for our participants and not included in our revenue were $249,526 and $321,055, for the fiscal years ended June 30, 2007 and 2006, respectively. Under our customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, we do not include participant co-payments to pharmacies in our revenue or our cost of claims.

The $183,772 or 21.3%, decrease in revenue during the fiscal year ended June 30, 2007 is primarily the result of a 25.6% decrease in the amount of adjusted prescriptions partially offset by a 5.8% increase in the gross revenue per adjusted prescription. The decrease in the amount of adjusted prescriptions is primarily attributable to a 20.9% decrease in covered lives during the fiscal year ended June 30, 2007 as compared to the fiscal year ended June 30, 2006 resulting from the loss of various customers. The increase in revenue per adjusted prescription is primarily the result of a change in customer mix.

Cost of claims decreased $179,721, or 23.3%, from $771,487 for the fiscal year ended June 30, 2006 to $591,766 for the fiscal year ended June 30, 2007. This decrease is primarily the result of a decrease in the amount of adjusted prescriptions as noted above. As a percentage of revenue, cost of claims decreased from 89.4% to 87.1% for the fiscal years ended June 30, 2006 and 2007, respectively.

Gross profit decreased $4,051 or 4.4%, from $91,366 for the fiscal year ended June 30, 2006 to $87,315 for the fiscal year ended June 30, 2007. This decrease is primarily the result of a $5,909 reduction in rebate revenue from our PBM segment (exclusive of the $1,473 Rebate Error as defined and discussed above) due to the current trends in negotiations with our customers. This decrease is partially offset by (i) $443 increase in gross profit from our PBM segment, exclusive of rebates, (ii) $1,365 increase in gross profit from our Specialty Service segment, and (iii) $50 net increase which consists of $1,523 relating to the Claims Payable Error as defined and discussed above offset by $1,473 relating to the Rebate Error. Primarily due to the changes in our customer mix, gross profit, as a percentage of revenue, increased from 10.6% for the fiscal year ended June 30, 2006 to 12.9% for the fiscal year ended June 30, 2007.

Selling, general and administrative expenses increased $11,629 or 15.3%, from $75,852 for the fiscal year ended June 30, 2006 to $87,481 for the fiscal year ended June 30, 2007. This increase is primarily the result of (i) $5,781 net increase in compensation and related items, inclusive of a $2,327 increase in one-time termination benefits primarily incurred in connection with our senior management changes during the fourth quarter of fiscal 2007, (ii) $2,945 increase in professional fees primarily related to the review

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of various financial transactions in conjunction with the filings of our First Quarter 10-Q and the Quarterly Report on Form 10-Q for the period ended December 31, 2006 (“Second Quarter 10-Q”), settlements of various legal proceedings as well as an increase in our insurance premiums, (iii) $1,236 increase in information-technology costs, which includes a $657 impairment loss related to the cancellation of various capitalized projects during the fourth quarter of fiscal 2007, (iv) $1,880 increase in bad debt expense (inclusive of the $831 Claims Payable Error), of which $1,152 was incurred during the fourth quarter of fiscal 2007, and (v) $371 of net increases in other selling, general and administrative expenses. These increases were offset by $584 related to the Lease Error as defined and discussed above.

Selling, general and administrative expenses as a percent of revenue increased from 8.8% for the fiscal year ended June 30, 2006 to 12.9% for the fiscal year ended June 30, 2007.

Other income, net increased $298 or 25.7%, from $1,158 for the fiscal year ended June 30, 2006 to $1,456 for the fiscal year ended June 30, 2007. The increase primarily relates to (i) $322 increase in interest income earned from higher interest rates and on higher cash balances during the fiscal year ended June 30, 2007, and (ii) $128 of late fees charged to various customers for untimely payments of their invoices during the fiscal year ended June 30, 2007. These increases were offset by $203 of additional interest expense incurred during the fiscal year ended June 30, 2007 primarily related to the financing of various capital leases.

Income before the provision for income taxes decreased $15,382, or 92.3%, from $16,672 for the fiscal year ended June 30, 2006 to $1,290 for the fiscal year ended June 30, 2007. The decrease primarily relates to the $4,051 decrease in our gross profit as well as the $11,629 increase in our selling, general and administrative expenses, offset by the $298 net increase in other income as noted above.

Our effective tax rate was 92.9% for the fiscal year ended June 30, 2007 as compared to 42.1% for the fiscal year ended June 30, 2006. The increase in the effective tax rate primarily resulted from lower pre-tax income combined with the effects of expensing stock options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”), offset by a $439 reversal of a prior state tax reserve as the related statute of limitations expired during the fiscal year ended June 30, 2007.

Net income decreased $9,565 or 99.0%, from $9,657 for the fiscal year ended June 30, 2006 to $92 for the fiscal year ended June 30, 2007. The decrease is primarily the result of (i) the decrease in gross profit, (ii) the increase in selling, general and administrative expenses, offset by (i) the increase in our effective tax rate from 42.1% to 92.9%, and (ii) the increase in other income, net.

In addition, there were two charges against net income available to common stockholders related to the New Mountain Transaction (see “Commitments and Contingencies”). The first of these charges relates to series A preferred stock cash dividends, which amounted to $5,600 for both fiscal years ended June 30, 2007 and 2006. The series A preferred stock provides for an initial cash dividend equal to 7% of the investment amount (currently $80,000), which decreases to 3.5% after the fifth anniversary of issuance, March 19, 2009. The dividends of $5,600 represent the amount accrued and paid for the fiscal year ended June 30, 2006. The dividends of $5,600 represent the amount accrued for the fiscal year ended June 30, 2007. However, $1,396 of this dividend was not paid until July 3, 2007. The second charge is for the accretion of transaction expenses which was $475 for both fiscal years ended June 30, 2007 and 2006.

After deducting these two charges from net income, there remained net income (loss) available to common stockholders of $(5,983) for the fiscal year ended June 30, 2007 as compared to $3,582 for the fiscal year ended June 30, 2006.

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Fiscal Year Ended June 30, 2006 Compared to Fiscal Year Ended June 30, 2005

Revenue increased $62,261 or 7.8%, from $800,592 for the fiscal year ended June 30, 2005 to $862,853 for the fiscal year ended June 30, 2006. The specific terms of the contracts that we enter into with our customers will determine whether we recognize the gross revenue related to the cost of the prescriptions filled. For those contracts that we only recognize net revenue, there is no impact on our gross profit since neither the prescription revenue nor the related costs of the prescriptions is recorded. Whether revenues are recorded on either a gross or net basis, we record the gross amount billed in accounts receivable and the related claims payable to pharmacies on our balance sheet. We include in revenue only those co-payments earned from Mail Service. For the fiscal year ended June 30, 2006, there was $18,423 of co-payments included in revenue as compared to $15,134 for the fiscal year ended June 30, 2005. Co-payments retained by pharmacies on prescriptions filled for our participants and not included in our revenue were $321,055 and $280,946, for the fiscal years ended June 30, 2006 and 2005, respectively. Under our customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, we do not include participant co-payments to pharmacies in our revenue or our cost of claims.

The $62,261 or 7.8%, increase in revenue during the fiscal year ended June 30, 2006 is primarily the result of (i) $59,176 inclusion of revenues from PCN, which we acquired on March 7, 2005, (ii) increase in co-payment revenue from Mail Service of $3,288 due to higher sales volume, and (iii) increase in revenue from Specialty Service of $3,618 due to higher sales volume. These increases were offset by $1,537 of additional credit memos issued to various customers and a $2,284 reduction in non-PCN business.

Cost of claims increased $57,604 or 8.1%, from $713,883 for the fiscal year ended June 30, 2005 to $771,487 for the fiscal year ended June 30, 2006. This increase is primarily the result of (i) $52,888 inclusion of cost of claims from PCN, which we acquired on March 7, 2005, (ii) increases in cost of claims from Specialty Service of $3,455 related to higher sales volumes, and (iii) $476 write-down of obsolete inventory from our Mail Service facility in Miramar, Florida. As a percentage of revenue, cost of claims increased from 89.2% to 89.4% for the fiscal years ended June 30, 2005 and June 30, 2006, respectively.

Gross profit increased $4,657 or 5.4%, from $86,709 for the fiscal year ended June 30, 2005 to $91,366 for the fiscal year ended June 30, 2006. This increase is primarily the result of (i) $6,288 related to the PCN acquisition and (ii) increase in volume of claims from our Mail Service pharmacy which resulted in additional gross profit of $1,000. These increases were partially offset by (i) $1,537 of additional credit memos issued to various customers, (ii) $476 write-down of obsolete inventory from our Mail Service facility in Miramar, Florida, and (iii) reduction in non-PCN business. Gross profit, as a percentage of revenue, decreased from 10.8% to 10.6% for the fiscal years ended June 30, 2005 and June 30, 2006, respectively.

Selling, general and administrative expenses increased $8,066 or 11.9%, from $67,786 for the fiscal year ended June 30, 2005 to $75,852 for the fiscal year ended June 30, 2006. This increase is primarily the result of (i) $3,641 related to the PCN acquisition, (ii) $3,204 of compensation expense primarily related to the expensing of employee stock options, beginning July 1, 2005, in accordance with SFAS 123R, and (iii) $2,912 related to investments in our information systems’ infrastructure and continual upgrading/maintenance of our claims adjudication system. These items were partially offset by a $1,702 reduction in legal settlements which primarily related to our settlement of the Midwest Health Plan lawsuit during August 2005 which was accrued for as of June 30, 2005.

Selling, general and administrative expenses as a percent of revenue increased from 8.5% for the fiscal year ended June 30, 2005 to 8.8% for the fiscal year ended June 30, 2006.

Other income, net decreased $331 or 22.2%, from $1,489 for the fiscal year ended June 30, 2005 to $1,158 for the fiscal year ended June 30, 2006. The decrease primary relates to the recognition of a

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$1,702 non-recurring gain from an insurance claim which represented the excess of the insurance proceeds over the carrying value of the assets covered by the claim during the fiscal year ended June 30, 2005. This item was partially offset by increased interest income earned on our higher cash balances throughout the fiscal year ended June 30, 2006. In addition, we aggregate rebates for an unrelated third party and charge such third party interest on advances we make to them for their rebates. For the fiscal year ended June 30, 2006, we earned $438 in interest income from this unrelated third party.

Income before the provision for income taxes decreased $3,740, or 18.3%, from $20,412 for the fiscal year ended June 30, 2005 to $16,672 for the fiscal year ended June 30, 2006. The decrease relates to the $4,657 increase in our gross profit primarily offset by the $8,066 increase in our selling, general and administrative expense as noted above.

Our effective tax rate was 42.1% for the fiscal year ended June 30, 2006 as compared to 39.3% for the fiscal year ended June 30, 2005. The increase in the effective tax rate for the fiscal year ended June 30, 2006 primarily resulted from the expensing of employee stock options in accordance with SFAS 123R. This compensation expense for incentive stock options, which is not deductible for income tax purposes, increased our effective tax rate by approximately 4%.

Net income decreased $2,724 or 22.0%, from $12,381 for the fiscal year ended June 30, 2005 to $9,657 for the fiscal year ended June 30, 2006. The decrease primarily relates to the $2,600 compensation charge, net of its income tax benefit, primarily related to the expensing of employee stock options in accordance with SFAS 123R. This decrease was further caused by the increase in selling, general and administrative expenses, offset by the increase in our gross profit.

In addition, there were two charges against net income available to common stockholders related to the New Mountain Transaction (see “Commitments and Contingencies”). The first of these charges relates to series A preferred stock cash dividends, which amounted to $5,600 for both fiscal years ended June 30, 2006 and 2005. The series A preferred stock provides for an initial cash dividend equal to 7% of the investment amount (currently $80,000), which decreases to 3.5% after the fifth anniversary of issuance, March 19, 2009. The dividend of $5,600 represents the amount accrued and paid for both fiscal years ended June 30, 2006 and 2005. The second charge is for the accretion of transaction expenses which were $475 for both fiscal years ended June 30, 2006 and 2005.

After deducting these two charges from net income, there remained net income available to common stockholders of $3,582 for the fiscal year ended June 30, 2006 as compared to $6,306 for the fiscal year ended June 30, 2005.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Liquidity and Capital Resources

Our primary cash requirements are for capital expenditures and operating expenses, including cost of pharmaceuticals, software and hardware upgrades, funding of accounts receivable and inventory in our Mail Service and Specialty Service pharmacies. We have acquired eight companies since July 2000 utilizing primarily cash. This has had the effect of increasing our working capital deficits until sufficient profitability is earned to offset these deficits. As of June 30, 2007 and 2006, we had working capital deficits of $3,383 and $7,098, respectively.

In July 2006, we received approval from CMS to operate as a PDP sponsor under Medicare Part D through our wholly-owned subsidiary, NMHC Group Solutions which commenced on January 1, 2007.

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In order for us to maintain our risk bearing licensures and continue to apply for additional licensures in the various states, we must fulfill statutory, capital and surplus requirements. We currently maintain approximately $5.2 million in a restricted cash account to fulfill such requirements. We do not intend to continue to provide our PDP to individual enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, as of January 1, 2008, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to risk. This change in PDP offerings may allow us to decrease the capital and surplus amounts maintained in our restricted cash accounts.

In addition, we may not be able to realize any return on our investments in Medicare initiatives if the cost and complexity of recent changes by and requirements of CMS exceed our expectations or prevent effective program implementation; if the government alters or reduces funding of Medicare programs because of the higher-than-anticipated cost to taxpayers of the MMA or for other reasons; if we fail to become a risk bearing entity prior to the expiration of the CMS waiver for the 49 other states and territories (we are in the process of obtaining the appropriate state licenses and are currently licensed in nine states); if we fail to design and maintain programs that are attractive to our customers or individual Medicare participants; if we are not successful in retaining employer groups and their enrollees, or winning contract renewals or new contracts under the MMA’s competitive bidding process; if the government alters or reduces funding of Medicare programs because of the higher-than-anticipated cost to taxpayers of the MMA or for other reasons.

Net cash provided by operating activities was $3,172 for the fiscal year ended June 30, 2007 as compared to $7,658 for the fiscal year ended June 30, 2006. This decrease of $4,486 is primarily the result of (i) $13,580 increase in restricted cash primarily attributable to a $5,665 increase in our statutory, capital and surplus requirements in connection with our PDP and an additional deposit of $9,400 required from a customer, (ii) $28,280 decrease in rebates payable to customers, (iii) $1,801 decrease in income taxes payable and other current liabilities, (iv) $2,312 decrease in claims payable to pharmacies, (v) $2,744 increase in accounts receivable, and (vi) $1,295 increase in prepaid expense and other current assets. These decreases were partially offset by (i) $15,028 decrease in rebates receivable, (ii) $19,307 increase in trade and other payables and accrued expenses, and (iii) $12,092 increase in customer deposits payable. This decrease was further caused by $901 of net changes in other operating activities.

Historically, the timing of our collections of accounts receivable and payments of accounts payable has generally been a net source of cash from operating activities. This is the result of the terms of trade in place with plan customers on the one hand, and our pharmacy network on the other hand. These terms generally lead to our payments to participating pharmacies being slower than our corresponding collections from plan customers. We believe that this situation is not unusual in the PBM industry and expect to operate on similar terms for the foreseeable future. However, there can be no assurance that such terms of trade will continue in the future and, if they were to change materially, we could require additional working capital financing. If such terms of trade were to change materially, and/or if we were unable to obtain additional working capital financing, there could be a material adverse effect on our business, financial condition, or results of operations. Although we have a $65,000 revolving credit facility, we currently cannot borrow the full amount under this credit facility and we may be limited, or unable, to borrow under this credit facility in the future. We are currently in the process of exploring alternative financing arrangements so we can fully access any funds as needed.

Net cash used in investing activities was $6,554 for the fiscal year ended June 30, 2007 as compared to $8,022 for the fiscal year ended June 30, 2006. The $6,554 net cash used in investing activities during the fiscal year ended June 30, 2007 was primarily the result of $5,392 used for capital expenditures, $901 used for an earnout payment to PPP and $266 used for the acquisition of MPP. See Item 8 hereof (Note 4 – Business Acquisitions) for descriptions of the various acquisitions that have been consummated in the last 3 years.

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Net cash used in financing activities was $4,323 for the fiscal year ended June 30, 2007 as compared to net cash provided by financing activities of $1,502 for the fiscal year ended June 30, 2006. This decrease of $5,825 is primarily the result of (i) additional payments of $2,630 towards our capital lease obligations, (ii) $2,557 reduction in the proceeds from the exercise of stock options, and (iii) $2,034 reduction in the excess tax benefit from the exercise of stock options. These decreases were offset by the Company not paying $1,396 of dividends on the series A preferred stock for the quarter ended June 30, 2007 until July 3, 2007.

Line of Credit

On January 28, 2005, we entered into a five-year $65,000 line of credit with a syndicate of commercial banks led by JPMorgan. Subject to certain conditions, the line of credit may be increased by an aggregate of $35,000. Depending on the timing and dollar amount of each loan request, we can either borrow at a spread above LIBOR, the overnight Federal Funds rate or JPMorgan’s prime rate. As of June 30, 2007, the spread is 1.50% for LIBOR and Federal Funds loans and 0.50% for prime rate loans. The line of credit contains various covenants that, among other things, require us to maintain certain financial ratios, which are consolidated net worth, consolidated fixed charge ratio and consolidated debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. The consolidated fixed charge ratio and the consolidated debt to EBITDA ratio are evaluated by JPMorgan as a measure of our liquidity and our ability to meet all of our obligations under the credit facility. As of and for the year ended June 30, 2007, there was no principal balance outstanding under the line of credit, and we were in compliance with the aforementioned financial covenants. Although we have a $65,000 revolving credit facility, we currently cannot borrow the full amount under this credit facility and we may be limited, or unable, to borrow under this credit facility in the future. As of June 30, 2007, we were able to borrow approximately $39,000 under the credit facility. If we are in compliance with the consolidated fixed charge ratio, we can then borrow up to 2.5 times the Company’s consolidated EBITDA for the preceding twelve months less consolidated debt, as defined in the credit facility. Based on our financial performance, we may not be in compliance with the aforementioned financial covenants during fiscal year 2008. We are currently in the process of exploring alternative financing arrangements so we can fully access any funds as needed.

EBITDA

We calculate and use EBITDA and EBITDA per adjusted prescription as indicators of our ability to generate cash from our reported operating results. These measurements are used in concert with net income and cash flows from operations, which measure actual cash generated in the period. In addition, we believe that EBITDA and EBITDA per adjusted prescription are supplemental measurement tools used by analysts and investors to help evaluate overall operating performance and the ability to incur and service debt and make capital expenditures. EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income or cash flows from operations data as measured under generally accepted accounting principles. The items excluded from EBITDA but included in the calculation of our reported net income are significant components of our consolidated statements of income, and must be considered in performing a comprehensive assessment of our overall financial performance. EBITDA, and the associated year-to-year trends, should not be considered in isolation. Our calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies.

EBITDA per adjusted prescription is calculated by dividing EBITDA by the adjusted prescription volume for the period. This measure is used as an indicator of our EBITDA performance on a per-unit basis, providing insight into the cash-generating potential of each prescription. EBITDA per adjusted prescription reflects the level of efficiency in the business and is affected by changes in prescription volumes between retail and mail, as well as the relative representation of brand-name, generic and specialty drugs.

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Net cash provided by operating activities can be reconciled to EBITDA, which we believe to be the most directly comparable financial measure to net cash provided by operating activities, as follows (in thousands):

	Year Ended June 30,
	2007			2006			2005 (1)
Net cash provided by operating activities	$	3,172		$	7,658		$	10,322
Provision for income taxes		1,198			7,015			8,031
Interest (income) expense, net		(1,396	)		(1,149	)		299
Net change in assets and liabilities		14,308			12,342			11,989
Non-cash items to reconcile net cash from operations to net income		(7,611	)		(2,873	)		(3,630	)
EBITDA	$	9,671		$	22,993		$	27,011
Adjusted prescriptions (2)		24,658			33,130			26,982
EBITDA per adjusted prescription	$	0.39		$	0.69		$	1.00

(1)	Includes PCN’s operating results commencing March 7, 2005, the date of acquisition.
(2)	Adjusted prescription volume equals the Mail Service prescriptions multiplied by 3, plus retail prescriptions. These Mail Service prescriptions are multiplied by 3 to adjust for the fact that they include approximately 3 times the amount of product days supplied compared with retail prescriptions.

Contractual Obligations

We lease offices and warehouse space throughout the United States under various operating leases. We also lease pill dispensing and counting devices for use in our Mail Service pharmacy, as well as computer equipment, for use in our various offices. In addition, we lease office equipment and computer software under various capital leases.

The following table summarizes scheduled maturities of our contractual obligations for which cash flows are fixed and determinable as of June 30, 2007 ($ in thousands):

Payments Due by Period

	Total		2008		2009-2010		2011-2012		Thereafter
Capital lease obligations	$	2,475	$	989	$	1,362	$	124	$	—
Operating leases		9,825		3,295		3,653		1,563		1,314
Total contractual cash obligations	$	12,300	$	4,284	$	5,015	$	1,687	$	1,314

Commitments and Contingencies

As an approved PDP sponsor, in order for us to maintain our risk bearing licensures and continue to apply for additional licensures in the various states, we must fulfill statutory, capital and surplus requirements. We currently maintain $5.2 million in a cash account to fulfill such requirements. We do not intend to continue to provide our PDP to individual enrollees in 2008 and CMS has acknowledged our intent to provide the PDP Medicare benefits solely to employer groups. In addition, we will only be providing non-risk bearing Medicare benefits to employer groups that will reimburse us directly for any prescription drug costs. We do not intend to offer our PDP to employer groups in instances where we could be subject to

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risk. This change in PDP offerings may allow us to decrease the capital and surplus amounts maintained in our restricted cash accounts.

Certain of our business acquisition agreements include “earn-out” provisions. These provisions generally require that we pay to the seller or sellers of the business additional amounts based on the performance of the acquired business. Since the size of each payment depends upon performance of the acquired business, we do not expect that such payments will have a material adverse impact on our future results of operations or financial condition.

We entered into an amended and restated preferred stock purchase agreement, dated as of November 26, 2003, with New Mountain Partners, L.P. (the “purchase agreement”). Pursuant to the purchase agreement, we agreed, subject to various conditions, to issue to New Mountain Partners a total of 6,956,522 shares of the series A preferred stock at a purchase price of $11.50 per share, for aggregate proceeds of approximately $80,000. On March 19, 2004, we completed the sale of the series A preferred stock to New Mountain Partners and used approximately $49,000 of the proceeds of the sale of the series A preferred stock to purchase, pursuant to a tender offer, 4,448,900 shares of our outstanding common stock at $11.00 per share (collectively, the “New Mountain Transaction”).

Following the completion of the tender offer, New Mountain Partners owned securities at March 19, 2004 that were initially convertible into approximately 64% of our issued and outstanding common stock and prior to conversion of the series A preferred stock were entitled to cast that number of votes that is equal to approximately 60% of our aggregate voting power. Following the closing of the New Mountain transaction, New Mountain Partners was entitled to and did nominate and elect 60% of the members of our board of directors.

We used the remaining proceeds from the issuance and sale of the series A preferred stock of approximately $24,000, excluding expenses related to the closing of the New Mountain Transaction, for the Inteq acquisition and working capital purposes. See Item 8 hereof (Note 4 – Business Acquisitions) for descriptions of the various acquisitions that have been consummated in the last 3 years.

The series A preferred stock provides for an initial annual cash dividend equal to 7% of the investment amount, which decreases to 3.5% after the fifth anniversary of issuance. The series A preferred stock is convertible into common stock at a price of $11.50 per share of common stock, or an aggregate of 6,956,522 shares of our common stock.

The series A preferred stock may be redeemed at our option subsequent to the fourth anniversary of its issuance, subject to certain conditions. Subject to certain conditions, after the fourth anniversary of its issuance, we can redeem shares of the series A preferred stock at its reported value on our consolidated balance sheet plus all unpaid dividends, whether or not declared. Subject to certain conditions, after the seventh anniversary of its issuance, we can redeem shares of series A preferred stock at $11.50 per share plus all unpaid dividends, whether or not declared. After the tenth anniversary of the issuance of the series A preferred stock, each holder of shares of series A preferred stock may require us to redeem all or a part of that holder’s shares of series A preferred stock. Each holder of shares of series A preferred stock can redeem their series A preferred stock at $11.50 per share plus all unpaid dividends, whether or not declared.

Subject to certain conditions, the liquidation value of the series A preferred stock is the greater of $11.50 per share plus all unpaid dividends, whether or not declared, or the amount that would be payable to a holder of the series A preferred stock if the series A preferred stock was converted into common stock immediately prior to the liquidation.

We anticipate that current cash positions, together with anticipated cash flows from operations and our borrowing capabilities, will be sufficient to satisfy our contemplated cash requirements for at least 24 months. This is based upon current levels of capital expenditures and anticipated operating results for the

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next 24 months. In addition, we will require cash to acquire inventory for our Mail Service and Specialty Service operations, and fulfill statutory capital and surplus requirements in connection with our PDP. In the event that our plans change or our assumptions prove to be inaccurate, or our cash on hand together with the proceeds from our revolving credit facility prove to be insufficient or unavailable to fund operations, we could be required to seek additional financing sooner than anticipated. There can be no assurance that such financing could be obtained at rates or on terms acceptable to us, if at all. Although we have a $65,000 revolving credit facility, we currently cannot borrow the full amount under this credit facility and we may be limited, or unable, to borrow under this credit facility in the future. As of June 30, 2007, we were able to borrow approximately $39,000 under the credit facility. If we are in compliance with the consolidated fixed charge ratio, we can then borrow up to 2.5 times the Company’s consolidated EBITDA less consolidated debt, as defined in the credit facility. Based on our financial performance, we may not be in compliance with the aforementioned financial covenants during fiscal year 2008. We are currently in the process of exploring alternative financing arrangements so we can fully access any funds as needed.

Condensed Interim Financial Data (Unaudited)
($ in thousands, except per share amounts)

	Fiscal Year 2007
Quarters ended	June 30			March 31			December 31			September 30
Revenue	$	146,038		$	145,026		$	199,304		$	188,713
Cost of claims		124,947			123,700			176,607			166,512
Gross profit	$	21,091		$	21,326		$	22,697		$	22,201
One-time termination benefits	$	1,938			—			—			—
(Loss) income before (benefit) provision for income taxes	$	(4,404	)	$	258		$	2,776		$	2,660
Net (loss) income	$	(3,263	)	$	430		$	1,514		$	1,411
Net loss available to common Stockholders	$	(4,778	)	$	(1,068	)	$	(16	)	$	(121	)
Earnings (loss) per common share:
Basic	$	(0.87	)	$	(0.20	)	$	(0.00	)	$	(0.02	)
Diluted	$	(0.87	)	$	(0.20	)	$	(0.00	)	$	(0.02	)
Weighted-average number of common shares outstanding:
Basic		5,489			5,471			5,469			5,375
Diluted		5,489			5,471			5,469			5,375

	Fiscal Year 2006
					December 31		September 30
Quarters ended	June 30		March 31		(restated)		(restated)
Revenue	$	211,451	$	216,801	$	219,909	$	214,692
Cost of claims		189,744		194,381		196,232		191,130
Gross profit	$	21,707	$	22,420	$	23,677	$	23,562
Income before provision for income taxes	$	3,122	$	3,501	$	5,043	$	5,006

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	Fiscal Year 2006
					December 31		September 30
Quarters ended	June 30		March 31		(restated)		(restated)
Net income	$	1,884	$	2,008	$	2,898	$	2,867
Net income available to common stockholders	$	369	$	510	$	1,368	$	1,335
Earnings per common share:
Basic	$	0.07	$	0.10	$	0.27	$	0.27
Diluted	$	0.07	$	0.10	$	0.24	$	0.24
Weighted-average number of common shares outstanding:
Basic		5,291		5,200		5,025		4,862
Diluted		5,413		5,302		12,146		12,102

Other Matters

Inflation

Changes in prices charged by manufacturers and wholesalers for pharmaceuticals affect our revenue and cost of claims.

Use of Estimates and Critical Accounting Policies

Use of Estimates

The preparation of consolidated financial statements requires companies to include certain amounts that are based on management’s best estimates and judgments. In preparing the consolidated financial statements, we reviewed our accounting policies and believe that these accounting policies are appropriate for a fair presentation of our financial position, results of operations and cash flows. Several of these accounting policies contain estimates, the most significant of which are discussed below. Actual results may differ from those estimates, and it is possible that future results of operations for any particular period could be materially affected by the ultimate actual results.

Critical Accounting Policies and Estimates

We describe below what we believe to be our critical accounting policies. (Also see Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.)

Revenue Recognition. Our revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, either through our nationwide network of pharmacies, our Mail Service pharmacy or our Specialty Service pharmacy. We enter into a fee for service (per claim charges) arrangement with our customers for the payment of administrative fees. Under the fee for service arrangement, we are paid contractually agreed upon rates from our customers based upon actual claims adjudicated plus a fixed transaction fee. Revenue related to the sales of prescription drugs by our nationwide network of pharmacies, our Mail Service pharmacy or our Specialty Service pharmacy is recognized when the claims are adjudicated and the prescription drugs are shipped.

Participant co-payments are not recorded as revenue. Under our customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, we do not include participant co-payments to pharmacies in revenue or cost of claims.

We evaluate customer contracts using the indicators of EITF No. 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent,” to determine whether we act as a principal or as an agent in the fulfillment of prescriptions through our retail pharmacy network. We act as a principal in most of our transactions

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with customers and revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, as well as our administrative fees (“Gross Reporting”). Gross reporting is appropriate because we (i) have separate contractual relationships with customers and with pharmacies, (ii) are responsible to validate and economically manage a claim through our claims adjudication process, (iii) commit to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manage the overall prescription drug plan relationship with the patients, who are participants of customers’ plans, and (v) have credit risk for the price due from the customer. There are certain contracts in which we recognize revenue on a net basis. The primary factor that leads to the recognition of net revenue on these contracts is that the amount we earn is primarily fixed. Whether revenues are recorded on either a gross or net basis, we record the gross amount billed in accounts receivable and the related claims payable to pharmacies on our consolidated balance sheet.

The rebates that we receive from pharmaceutical manufacturers are recognized when we are entitled to them in accordance with the terms of our arrangements with pharmaceutical manufacturers and our third party rebate administrator, and when the amount of the rebate is determinable. Our revenue is reduced by the amount of rebates earned by our customers.

Rebates Receivable and Payable. We record the rebate receivable and the appropriate payable to the customers based on estimates, which are subject to final settlement. The estimates are based upon claims submitted and our rebate experience, and are adjusted as additional information becomes available. Upon billing the manufacturer, any differences between our estimate and the actual amount of the rebates receivable is recorded to cost of claims, net of the estimated impact to our customers. Rebates are generally paid to customers on a quarterly basis, or as agreed upon with our customers, subsequent to collections from pharmaceutical manufacturers, although there are certain instances where rebates are paid to customers on a more accelerated basis.

Allowance for Doubtful Accounts. We estimate the allowance for doubtful accounts for our PBM and Specialty Service business based upon a variety of factors including the age of the outstanding receivables, trends of cash collections and bad debt write-offs, and the payor’s collection history. When circumstances related to specific collection patterns change, estimates of the recoverability of receivables are adjusted.

Property and Equipment. We state property and equipment at cost, less accumulated depreciation and amortization. We calculate depreciation using the straight-line method for assets with useful lives ranging from 3 to 8 years or, with respect to equipment under capital leases and leasehold improvements, we amortize them on a straight-line basis over the shorter of the lease term or the assets’ useful lives.

Internal Use Software. We invest heavily in developing software in order to enhance our operations as well as meet the needs of our customers. We apply the provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Under this SOP, certain costs of computer software developed or obtained for internal use are capitalized and amortized on a straight-line basis over three years. Costs for general and administrative expenses, overhead, maintenance and training, as well as the cost of software coding that does not add functionality to the existing system, are expensed as incurred. Reductions, if any, in the carrying value of capitalized software development costs to net realizable value are expensed.

Intangible Assets. Our intangible assets primarily reflect the value of client relationships that arose in connection with our various business acquisitions. These intangible assets are recorded at cost and are reviewed for impairment whenever events, such as losses of significant customers or other changes in circumstances indicate that the carrying amount may not be recoverable. We continually assess the useful lives of the intangible assets, taking into account historical customer turnover experience, including recent losses of customers and expected future losses, to ensure they reflect current circumstances.

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Goodwill. Our goodwill represents the excess of the acquisition costs over the fair value of the net tangible and identifiable intangible assets acquired that has been allocated to goodwill from our various business acquisitions. We test our goodwill for impairment on an annual basis, or whenever events, such as a protracted decline in our stock price or other changes in circumstances, indicate that the carrying amount may not be recoverable, using a two-step fair-value based test. The most recent assessment of goodwill impairment for each of our designated reporting units was performed as of June 30, 2007, and the recorded goodwill was determined not to be impaired.

Income Taxes. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. As of June 30, 2007, we have current net deferred tax assets of $1,913 and non-current net deferred tax liabilities of $8,780. The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently anticipated tax rates. We periodically consider whether or not we should record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Based on our assessment as of June 30, 2007, a valuation allowance is not required against our deferred tax assets.

Stock-Based Compensation. With the adoption of SFAS No. 123R on July 1, 2005, we are required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, we apply the lattice-binomial option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate, post-vesting terminations, sub-optimal exercise factor and dividend yield. While the risk-free interest rate, post-vesting terminations, sub-optimal exercise factor and dividend yield are less subjective assumptions that are based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates.

We use an expected stock-price volatility assumption that is based on the historical volatility of the underlying stock which is obtained from public data sources. This approach is used as a predictor of future realized and implied volatilities and is directly related to the stock option valuation. For stock options granted during the fiscal year ended June 30, 2007, we used a weighted-average expected stock-price volatility ranging from 49.7% to 58.2% based upon the historic volatility.

With regard to the weighted-average option life assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises. For stock options granted during the fiscal year ended June 30, 2007, we used an expected option life assumption of 5.5 years.

Recently Adopted Accounting Standards

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”) to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years existing in the

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current year’s ending balance sheet. Our adoption of SAB No. 108 during the fiscal year ended June 30, 2007 did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step evaluation process for tax positions taken, or expected to be taken, in a tax return. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.

Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN 48 may be recognized or, continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings in the fiscal year. In May 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48, an amendment of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes” (“FSP No. FIN 48-1”). FSP No. FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

We are currently evaluating the impact FIN 48 will have on our consolidated financial statements when it becomes effective for the Company in fiscal year 2008 and are unable, at this time, to quantify the impact, if any, to retained earnings at the time of adoption.

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

We do not engage in significant activity with respect to market risk sensitive instruments. Accordingly, our risk with respect to market risk sensitive instruments is immaterial.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information with respect to this item is contained in our audited consolidated financial statements and financial statement schedules listed in the index on page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference.

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

None.

Item 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act, which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the

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time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes to Internal Control Over Financial Reporting

In the course of our ongoing preparations for making management’s report on internal control over financial reporting included in this annual report, as required by Section 404 of the Sarbanes-Oxley Act of 2002, we have identified areas in need of improvement and have taken remedial actions to strengthen the affected controls as appropriate. From time to time, we make these and other changes to our internal control over financial reporting that are intended to enhance the effectiveness of our internal control over financial reporting and which do not have a material effect on our overall internal control. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate. Based upon our findings during the preparation of our Quarterly Report on Form 10-Q for the period ended September 30, 2006, we have implemented the following changes to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act:

• The Company implemented a process whereby our Legal Department and our Account Management Department, along with our Finance Department and Rebate and Formulary Group, evaluates the terms and conditions for rebate payments to clients which will serve as the basis for current and subsequent rebate payments to our customers.

• The Company has implemented procedures for reviewing outstanding claims payable to pharmacies to verify, on a timely basis, that the liabilities to the pharmacies are properly recorded.

• The Company has implemented procedures for reviewing all new leases to determine the proper accounting treatment in accordance with generally accepted accounting principles.

Other than as described above, there have been no significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred in this period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The Company will continue to evaluate the effectiveness of its internal controls and procedures on an ongoing basis and will implement further actions as necessary in its continuing efforts to strengthen the internal control process.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Our internal control over financial reporting includes those policies and procedures that:

     (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

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     (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

     (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

In making the assessment of internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment and those criteria, management believes that our internal control over financial reporting was effective as of June 30, 2007.

The effectiveness of the Company’s internal control over financial reporting as of June 30, 2007 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in this annual report below.

Report of Independent Registered Public Accounting Firm

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

We have audited National Medical Health Card Systems, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations

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of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, National Medical Health Card Systems, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of National Medical Health Card Systems, Inc. and Subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2007 of National Medical Health Card Systems, Inc. and Subsidiaries and our report dated September 12, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, New York
September 12, 2007

Item 9B. OTHER INFORMATION.

None.

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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required is incorporated herein by reference to the fiscal year 2007 Definitive Proxy Statement under the caption “Proposal 1 — Election of Directors”, which we anticipate filing by October 29, 2007.

Item 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated herein by reference to the information in the fiscal year 2007 Definitive Proxy Statement under the caption “Executive Compensation,” which we anticipate filing by October 29, 2007.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item is incorporated herein by reference to the information in the fiscal year 2007 Definitive Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management,” which we anticipate filing by October 29, 2007.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this item is incorporated herein by reference to the information in the fiscal year 2007 Definitive Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Proposal 1 — Election of Directors”, which we anticipate filing by October 29, 2007.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item is incorporated herein by reference to the information in the fiscal year 2007 Definitive Proxy Statement under the caption “Principal Accountant Fees and Services,” which we anticipate filing by October 29, 2007.

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PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

		Page No.
1.	Financial Statements
	The following Consolidated Financial Statements of NMHC are included herein:
	Report of Independent Registered Public Accounting Firm	F-2
	Consolidated Balance Sheets as of June 30, 2007 and 2006	F-3
	Consolidated Statements of Income for each of the years ended June 30, 2007, 2006 and 2005	F-4
	Consolidated Statements of Stockholders’ Equity for each of the years ended June 30, 2007, 2006 and 2005	F-5
	Consolidated Statements of Cash Flows for each of the years ended June 30, 2007, 2006 and 2005	F-6
	Notes to Consolidated Financial Statements	F-7 – F-27
2.	Financial Statement Schedule
	Schedule II: Valuation and Qualifying Accounts	S-1

All other information and financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.

3. Exhibits

Exhibit
Number	Description of Exhibit
2.1+	Stock Purchase Agreement dated as of July 31, 2003 by and among NMHC and Portland Professional Pharmacy, Portland Professional Pharmacy Associates and the individuals listed on Schedule I thereto (4)
2.2+	Amended and Restated Preferred Stock Purchase Agreement dated November 26, 2003 by and between NMHC and New Mountain Partners, L.P. (6)
2.3+	Asset Purchase Agreement dated as of April 1, 2004 among NMHC, Inteq PBM, LP, Inteq-RX Group, LLP, and the other persons named therein (9)
2.4+	Stock Purchase Agreement dated March 7, 2005 by and among NMHC, PCN Acquisition Corp., Pharmaceutical Care Network, and California Pharmacists Association (15)
3.1	Certificate of Incorporation of NMHC (2)
3.2	Certificate of Amendment of the Certificate of Incorporation of NMHC (8)
3.3	Amended and Restated By-Laws of NMHC (16)
4.1	Specimen of Common Stock Certificate
4.2	Specimen of Series A 7% Convertible Preferred Stock Certificate
4.3	Form of Representatives’ Warrant Agreement by and among NMHC, Ryan, Beck & Co.,

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Exhibit
Number	Description of Exhibit
	Inc. and Pennsylvania Merchant Group, including form of Warrant Certificate (1)
4.4	Certificate of Designations, Preferences and Rights of Series A 7% Convertible Preferred Stock of NMHC (8)
4.5	Registration Rights Agreement dated March 19, 2004 by and among NMHC, New Mountain Partners, L.P. , and New Mountain Affiliated Investors, L.P.
10.1+	Credit Agreement dated as of January 28, 2005 among NMHC, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Securities Inc., as Sole Bookrunner and Sole Lead Arranger (14)
10.2	Amendment No. 1 to Credit Agreement, dated as of March 7, 2005 to the Credit Agreement dated as of January 28, 2005 by and among NMHC, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders party thereto
10.3	Amendment No. 2 to Credit Agreement, dated as of September 28, 2005 to the Credit Agreement dated as of January 28, 2005 by and among NMHC, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders party thereto
10.4	Amendment No. 3 and Waiver to Credit Agreement, dated as of December 8, 2006 to the Credit Agreement dated as of January 28, 2005 by and among NMHC, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders party thereto (22)
10.5	Waiver to Credit Agreement, dated as of February 16, 2007 to the Credit Agreement dated as of January 28, 2005 by and among NMHC, JPMorgan Chase Bank, N.A., as Administrative Agent and the Lenders party thereto (23)
10.6	Lease Agreement dated November 18, 2002 between Sunbeam Development Corporation and NMHCRx Mail Order, Inc. (4)
10.7	Lease Expansion and Modification Agreement dated July 31, 2003 between Sunbeam Development Corporation and NMHCRx Mail Order, Inc. (4)
10.8*	Prime Vendor Agreement dated May 1, 2006, by AmerisourceBergen Drug Corporation, and NMHCRx Mail Order, Inc. d/b/a NMHC Mail (20)*
10.9	Health Card Sublease Agreement dated as of December 1, 2004, between BFS Realty, LLC, as Sublessor and NMHC, as Sublessee
10.10#	NMHC Amended and Restated 2000 Restricted Stock Grant Plan (12)
10.11#	NMHC 1999 Stock Option Plan, as amended on March 18, 2004 (8)
10.12#	Form of Restricted Stock Grant Agreement (19)
10.13#	Form of Stock Option Agreement between NMHC and Non-Employee Directors dated May 4, 2004 for a grant of 15,000 shares of common stock (10)
10.14#	Form of Stock Option Agreement between NMHC and Non-Employee Directors dated May 4, 2004 for a grant of 20,000 shares of common stock (10)
10.15#	Form of Stock Option Agreement between NMHC and Senior Management dated December 20, 2004 (13)
10.16#	Form of Stock Option Agreement between NMHC and Non-Employee Directors dated December 21, 2004 (13)
10.17#	Form of Stock Option Agreement between NMHC and Non-Employee Directors (17)
10.18#	Form of Stock Option Agreement between NMHC and Senior Executive Officers (17)
10.19#	Form of Severance Agreement and General Release for Senior Executive Officers (17)
10.20#	Form of Excise Tax Gross-Up Agreement between NMHC and Executive Officers(21)
10.21#	Form of Indemnification Agreement (19)
10.22#	Employment Agreement by and between NMHC and Mr. Stuart Diamond, dated December 16, 2005 (18)
10.23#	Agreement by and between NMHC and Mr. Thomas W. Erickson, dated February 23, 2007 (24)
10.24#	Stock Option Agreement by and between NMHC and Mr. Thomas W. Erickson, dated March 12, 2007 (25)
10.25#	Consulting Agreement and Departure Agreement and General Release Agreement between NMHC and Mr. Bill Masters, dated June 4, 2007

62

Exhibit
Number	Description of Exhibit
10.26#	Departure Agreement and General Release between NMHC and Mr. Tery Baskin, dated August 1, 2007
10.27#	Stock Option Agreement dated August 30, 2004 between NMHC and Mr. James F. Smith (11)
10.28#	Employment Agreement dated August 30, 2004 by and between NMHC and Mr. James F. Smith (11)
10.29#	Departure Agreement and General Release between NMHC and Mr. James F. Smith, dated August 17, 2007
10.30#	National Medical Health Card Fiscal Year 2007 Corporate Incentive Plan
10.31#	Form of Severance Agreement with executive officers
10.32	Support Agreement dated October 30, 2003, by and among NMHC, the Persons listed as stockholders on Schedule A attached thereto, and New Mountain Partners L.P. (7)
10.33	Management Rights Letter dated March 19, 2004, by and between New Mountain Partners, L.P., a Delaware limited partnership and NMHC
10.34#	Employment Agreement dated June 4, 2001, between NMHC and Mr. Tery Baskin (3)
10.35#	General Release dated June 28, 2007, between NMHC and Mr. Bill Masters
10.36#	Stock Option Agreement dated October 27, 2003 between NMHC and Mr. Mark Adkison
10.37#	Stock Option Agreement dated May 6, 2005 between NMHC and Mr. Robert Kordella
10.38#	Stock Option Agreement dated October 4, 2004 between NMHC and Mr. Bill Masters (11)
10.39#	Stock Option Agreement dated September 17, 2004 between NMHC and Mr. Tery Baskin
21.1	List of Subsidiaries
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
32.2	Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act

*	Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portion.
#	Management contract or compensatory plan or arrangement.
+	As directed by Item 601(b)(2) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
(1)	Denotes document filed as an Exhibit to NMHC’s Registration Statement on Form S-1 (Registration Number: 333-72209) and incorporated herein by reference.
(2)	Denotes document filed as Exhibit C to NMHC’s Definitive Proxy Statement on Schedule 14-A filed on December 21, 2001 and incorporated herein by reference.
(3)	Denotes document filed as an Exhibit to NMHC’s Report on Form 10-K for the fiscal year ended June 30, 2001 and incorporated herein by reference.
(4)	Denotes document filed as an Exhibit to NMHC’s Report on Form 10-K for the fiscal year ended June 30, 2003 and incorporated herein by reference.

63

(5)	Denotes document filed as an Exhibit to NMHC’s Report on Form 10-K/A Amendment Number 2 for the fiscal year ended June 30, 2003 and incorporated herein by reference.
(6)	Denotes document filed as Annex B to NMHC’s Definitive Proxy Statement on Schedule 14-A filed on February 19, 2004 and incorporated herein by reference.
(7)	Denotes document filed as Annex E to NMHC’s Definitive Proxy Statement on Schedule 14-A filed on February 19, 2004 and incorporated herein by reference.
(8)	Denotes document filed as an Exhibit to NMHC’s Form 10-Q for the fiscal quarter ended March 31, 2004 and incorporated herein by reference.
(9)	Denotes document filed as an Exhibit to NMHC’s Form 8-K filed on April 14, 2004 and incorporated herein by reference.
(10)	Denotes document filed as an exhibit to NMHC’s Form 10-K for the fiscal year ended June 30, 2004 and incorporated herein by reference.
(11)	Denotes document filed as an exhibit to NMHC’s Form 10-Q for the fiscal quarter ended September 30, 2004 and incorporated herein by reference.
(12)	Denotes document filed as Appendix D to NMHC’s Definitive Proxy Statement on Schedule 14-A filed on October 28, 2004 and incorporated herein by reference.
(13)	Denotes document filed as an exhibit to NMHC’s Form 10-Q for the fiscal quarter ended December 31, 2004 and incorporated herein by reference.
(14)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on February 3, 2005 and incorporated herein by reference.
(15)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on March 11, 2005 and incorporated herein by reference.
(16)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on November 14, 2005 and incorporated herein by reference.
(17)	Denotes document filed as an exhibit to NMHC’s Form 10-Q for the fiscal quarter ended December 31, 2005 and incorporated herein by reference.
(18)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on January 26, 2006 and incorporated herein by reference.
(19)	Denotes document filed as an exhibit to NMHC’s Form S-8 filed on February 3, 2006 and incorporated herein by reference.
(20)	Denotes document filed as an exhibit to NMHC’s Form 10-K for the fiscal year ended June 30, 2006 and incorporated herein by reference.
(21)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on September 22, 2006 and incorporated herein by reference.
(22)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on December 13, 2006 and incorporated herein by reference.
(23)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on February 20, 2007 and incorporated herein by reference.
(24)	Denotes document filed as an exhibit to NMHC’s Form 8-K filed on February 28, 2007 and incorporated herein by reference.

64

(25) Denotes document filed as an exhibit to NMHC’s Form 10-Q for the fiscal quarter ended March 31, 2007 and incorporated herein by reference.

65

SIGNATURES

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

	NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
	(Registrant)
By	/s/ Thomas W. Erickson Thomas W. Erickson, Chairman of the Board, Chief Executive Officer
Date: September 12, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By	/s/ Thomas W. Erickson Thomas W. Erickson, Chairman of the Board, Chief Executive Officer
Date: September 12, 2007
By	/s/ Harry Durity G. Harry Durity, Director
Date: September 12, 2007
By	/s/ Gerald Angowitz Gerald Angowitz, Director
Date: September 12, 2007
By	/s/ Paul J. Konigsberg Paul J. Konigsberg, Director
Date: September 12, 2007
By	/s/ Steven B. Klinsky Steven B. Klinsky, Director
Date: September 12, 2007
By	/s/ Michael Ajouz Michael Ajouz, Director
Date: September 12, 2007
By	/s/ Robert R. Grusky Robert R. Grusky, Director
Date: September 12, 2007
By	Daniel B. Hébert, Director
Date: September 12, 2007
By	Michael T. Flaherman, Director
Date: September 12, 2007
By	/s/ Stuart Diamond Stuart Diamond, Chief Financial Officer, Principal Accounting Officer
Date: September 12, 2007

66

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page No.
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Financial Statements:
Balance Sheets		F-3
Statements of Income		F-4
Statements of Stockholders’ Equity		F-5
Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7 - F-27

F-1

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of National Medical Health Card Systems, Inc. and Subsidiaries (the “Company”) as of June 30, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2007. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Medical Health Card Systems, Inc. and Subsidiaries at June 30, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2007, in conformity with United States generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated September 12, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, New York
September 12, 2007

F-2

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30,			June 30,
	2007			2006
Assets
Current Assets:
Cash and cash equivalents	$	705		$	8,410
Restricted cash		19,276			4,845
Accounts receivable, net		62,465			82,365
Rebates receivable		42,417			48,911
Inventory		6,250			5,666
Deferred tax assets		1,913			2,278
Prepaid expenses and other current assets		2,758			2,623
Total current assets		135,784			155,098
Property and equipment, net		14,541			13,653
Intangible assets, net		2,551			3,013
Goodwill		99,414			99,319
Other non-current assets		799			1,070
Total Assets	$	253,089		$	272,153
Liabilities, Redeemable Preferred Equity and Common Stockholders’ Equity
Current Liabilities:
Claims payable to pharmacies	$	59,508		$	88,979
Rebates payable to customers		45,668			60,953
Trade and other payables and accrued expenses		19,804			10,707
Current portion of capital lease obligations		989			16
Customer deposits payable		12,244			1,541
Other current liabilities		954			—
Total current liabilities		139,167			162,196
Capital lease obligations, less current portion		1,486			—
Other non-current liabilities		1,330			829
Deferred tax liabilities		8,780			7,784
Total liabilities		150,763			170,809
Commitments and Contingencies
Redeemable Preferred Equity:
Series A redeemable convertible preferred stock $.10 par value; 15,000,000 shares authorized, 6,956,522 issued and outstanding, aggregate liquidation preference of $111,304,352		76,813			76,338
Common Stockholders’ Equity:
Common Stock, $.001 par value, 35,000,000 shares authorized, 10,158,221 and 9,933,697 shares issued, 5,518,321 and 5,293,797 outstanding, respectively		10			10
Additional paid-in capital		133,120			126,630
Accumulated deficit		(55,738	)		(49,755	)
Treasury stock at cost, 4,639,900 shares		(51,879	)		(51,879	)
Total common stockholders’ equity		25,513			25,006
Total Liabilities, Redeemable Preferred Equity and Common Stockholders’ Equity	$	253,089		$	272,153

The accompanying notes are an integral part of these consolidated financial statements.

F-3

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for share data)

	Years ended June 30,
	2007			2006			2005
Revenue (excludes participant co-payments retained by the pharmacies of $249,526, $321,055 and $280,946, respectively)	$	679,081		$	862,853		$	800,592
Cost of claims (excludes participant co-payments retained by the pharmacies of $249,526, $321,055 and $280,946, respectively)		591,766			771,487			713,883
Gross profit		87,315			91,366			86,709
Selling, general and administrative expenses		87,481			75,852			67,786
Operating (loss) income		(166	)		15,514			18,923
Other income (expense):
Interest expense		(516	)		(313	)		(610	)
Interest income		1,912			1,462			311
Other income, net (includes insurance gain of $1,702 in 2005)		60			9			1,788
		1,456			1,158			1,489
Income before provision for income taxes		1,290			16,672			20,412
Provision for income taxes		1,198			7,015			8,031
Net income	$	92		$	9,657		$	12,381
Redeemable convertible preferred stock cash dividends		5,600			5,600			5,600
Accretion of transaction expenses		475			475			475
Net (loss) income available to common stockholders	$	(5,983	)	$	3,582		$	6,306
Earnings (loss) per common share:
Basic	$	(1.10	)	$	0.70		$	1.39
Diluted	$	(1.10	)	$	0.67		$	1.03
Weighted-average number of common shares outstanding:
Basic		5,454			5,143			4,542
Diluted		5,454			5,311			11,984

The accompanying notes are an integral part of these consolidated financial statements.

F-4

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

					Additional
	Common Stock				Paid-In		Accumulated			Treasury Stock
	Shares		Amount		Capital		Deficit			Shares		Amount			Total
Balances at June 30, 2004		8,970	$	9	$	104,890	$	(59,643	)		4,640	$	(51,879	)	$	(6,623	)
Accretion of transaction expenses related to preferred stock offering		—		—		—		(475	)		—		—			(475	)
Exercise of stock options		418		—		4,188		—			—		—			4,188
Shares issued related to outstanding warrants		61		—		—		—			—		—			—
Shares issued related to PPP earnout		13		—		358		—			—		—			358
Payments of redeemable convertible preferred stock cash dividends		—		—		—		(5,600	)		—		—			(5,600	)
Stock option income tax benefit		—		—		5,625		—			—		—			5,625
Net income		—		—		—		12,381			—		—			12,381
Balances at June 30, 2005		9,462		9		115,061		(53,337	)		4,640		(51,879	)		9,854
Accretion of transaction expenses related to preferred stock offering		—		—		—		(475	)		—		—			(475	)
Exercise of stock options		454		1		4,875		—			—		—			4,876
Shares issued related to PPP earnout		18		—		425		—			—		—			425
Payments of redeemable convertible preferred stock cash dividends		—		—		—		(5,600	)		—		—			(5,600	)
Stock option income tax benefit		—		—		3,029		—			—		—			3,029
Stock-based compensation		—		—		3,240		—			—		—			3,240
Net income		—		—		—		9,657			—		—			9,657
Balances at June 30, 2006		9,934		10		126,630		(49,755	)		4,640		(51,879	)		25,006
Accretion of transaction expenses related to preferred stock offering		—		—		—		(475	)		—		—			(475	)
Exercise of stock options		224		—		2,319		—			—		—			2,319
Accrual of redeemable convertible preferred stock cash dividends		—		—		—		(5,600	)		—		—			(5,600	)
Stock option income tax benefit		—		—		372		—			—		—			372
Stock-based compensation		—		—		3,799		—			—		—			3,799
Net income		—		—		—		92			—		—			92
Balances at June 30, 2007		10,158	$	10	$	133,120	$	(55,738	)		4,640	$	(51,879	)	$	25,513

The accompanying notes are an integral part of these consolidated financial statements.

F-5

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended June 30,
	2007			2006			2005
Cash flows from operating activities:
Net income	$	92		$	9,657		$	12,381
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,777			7,470			6,300
Stock-based compensation expense		3,799			3,240			—
Amortization of deferred gain		(21	)		(49	)		(100	)
Amortization of deferred financing costs		113			112			167
Loss on disposal of capital assets		—			38			—
Loss on impairment of capital assets		657			—			—
Provision for doubtful accounts		2,080			200			651
Deferred income taxes		1,204			1,587			2,912
Excess tax benefit from exercise of stock options		(221	)		(2,255	)		—
Changes in assets and liabilities:
Restricted cash		(14,431	)		(851	)		435
Accounts receivable		17,820			20,564			(27,425	)
Rebates receivable		6,494			(8,534	)		488
Inventory		(584	)		(1,547	)		(867	)
Due from affiliates		—			31			(13	)
Prepaid expenses and other current assets		(135	)		1,160			(3,867	)
Other non-current assets		158			113			2,694
Claims payable to pharmacies		(29,471	)		(27,159	)		16,401
Rebates payable to customers		(15,285	)		12,995			11,985
Trade and other payables and accrued expenses		8,418			(10,889	)		(19,108	)
Customer deposits payable		10,703			(1,389	)		2,918
Income taxes payable and other current liabilities		1,483			3,284			5,289
Other non-current liabilities		522			(120	)		(919	)
Net cash provided by operating activities		3,172			7,658			10,322
Cash flows from investing activities:
Capital expenditures		(5,392	)		(7,898	)		(5,795	)
Acquisition of PCN, net of cash required		—			—			3,150
Acquisition of Centrus, net of cash acquired		—			—			(1,000	)
Acquisition of Inteq, net of cash acquired		—			116			(139	)
Acquisition of PPP, net of cash acquired		(901	)		(425	)		(358	)
Acquisition of MPP		(266	)		—			—
Proceeds from sale of capital assets		5			185			—
Net cash used in investing activities		(6,554	)		(8,022	)		(4,142	)
Cash flows from financing activities:
Proceeds from exercise of stock options		2,319			4,876			4,188
Proceeds from revolving credit facility		—			82,625			724,758
Repayments of revolving credit facility		—			(82,625	)		(724,811	)
Payments of redeemable convertible preferred stock cash dividends		(4,204	)		(5,600	)		(5,600	)
Excess tax benefit from exercise of stock options		221			2,255			—
Deferred financing costs		—			—			(459	)
Repayments of debt and capital lease obligations		(2,659	)		(29	)		(372	)
Net cash (used in) provided by financing activities		(4,323	)		1,502			(2,296	)
Net (decrease) increase in cash and cash equivalents		(7,705	)		1,138			3,884
Cash and cash equivalents at beginning of year		8,410			7,272			3,388
Cash and cash equivalents at end of year	$	705		$	8,410		$	7,272

The accompanying notes are an integral part of these consolidated financial statements.

F-6

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All in thousands, except share amounts)

1. BUSINESS AND BASIS OF PRESENTATION

National Medical Health Card Systems, Inc. (the “Company” or ”NMHC”) provides comprehensive pharmacy benefit management (“PBM”) services to plan customers, which include managed care organizations, local governments, unions, corporations, health maintenance organizations (“HMO”), employers, workers’ compensation plans, third party health care plan administrators and federal and state government programs through its network of licensed pharmacies throughout the United States. The Company’s PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail service pharmacy claims management, specialty pharmacy claims management, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis. The Company owns a mail service pharmacy (“Mail Service”) and a specialty pharmacy (“Specialty Service”). In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents. Cash includes currency on hand and demand deposits with banks or other financial institutions. Cash equivalents of $79 and $487 at June 30, 2007 and 2006, respectively, are comprised of highly liquid overnight investments with an initial maturity date of three months or less from the purchase date. As a result of the Company’s normal payment cycle, cash disbursement accounts carrying negative book balances of $2,667 and $11,015 (representing outstanding checks not yet presented for payment) have been reclassified to claims payables to pharmacies, rebates payable to customers, and trade and other payables and accrued expenses at June 30, 2007 and June 30, 2006, respectively. This reclassification restores balances to cash and current liabilities for liabilities to the Company’s vendors, customers and participants which have not been settled. No overdraft or unsecured short-term loan exists in relation to these negative balances.

Restricted Cash. Restricted cash balances at June 30, 2007 and 2006 include $19,276 and $4,845, respectively, which are restricted as to their use as related to the maintenance of minimum cash balances in accordance with Ohio statute, contractual terms with customers and other customer restrictions.

In July 2006, the Company received approval from the Centers for Medicare & Medicaid Services (“CMS”) to operate as a national prescription drug plan (“PDP”) sponsor under Part D of the Medicare program through its wholly-owned subsidiary, NMHC Group Solutions Insurance, Inc. (“NMHC Group Solutions”) which commenced on January 1, 2007. As an approved PDP sponsor, NMHC Group Solutions is able to provide the PDP Medicare benefits to both individual enrollees and employer groups wishing to contract indirectly with CMS to offer a PDP to eligible members. In addition, as an approved PDP sponsor, NMHC Group Solutions is able to operate as a risk-bearing entity for individual enrollees and employer groups. Currently, NMHC Group Solutions is acting as a risk-bearing entity only for individual enrollees in its PDP and not employer groups.

In order for NMHC Group Solutions to maintain its risk-bearing licensures and continue to apply for additional licensures in the various states, it must fulfill statutory, capital and surplus requirements. NMHC Group Solutions currently maintains $5,156 in a cash account to fulfill such requirements. NMHC Group Solutions has obtained licensure in its domicile state, Delaware, and in eight additional states to operate as a risk-bearing entity under Medicare Part D. As of June 30, 2007, NMHC Group Solutions had $100 in escrow for the protection of Delaware policyholders and an additional $600 in Delaware accounts set aside to fulfill other state deposit requirements. CMS also requires that NMHC Group Solutions maintain $100 in a restricted escrow account for the benefit of policyholders to comply with insolvency requirements.

NMHC Group Solutions does not intend to continue to provide its PDP to individual enrollees as of January 1, 2008. CMS has acknowledged NMHC Group Solutions intent to provide the PDP Medicare benefits solely to

F-7

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

employer groups. In addition, effective January 1, 2008, NMHC Group Solutions will only be providing non-risk bearing Medicare benefits to employer groups that will directly reimburse them for any prescription drug costs. NMHC Group Solutions does not intend to offer its PDP to employer groups in instances where it could be subject to risk. This change in PDP offerings may allow NMHC Group Solutions to decrease the capital and surplus amounts maintained in its restricted cash accounts.

As of June 30, 2007, included in restricted cash is $12,244, which represents deposits from certain customers in order to satisfy liabilities to be incurred by the Company on the customer’s behalf for the adjudication of pharmacy claims.

Accounts Receivable. Accounts receivable include billed receivables from customers and other payors, including patient accounts receivable. A portion of the Specialty Service business includes reimbursement by payors, such as insurance companies, under a medical benefit, or by Medicare or Medicaid. The gross amount of Specialty Service’s accounts receivable amounted to $2,671 and $2,292 at June 30, 2007 and June 30, 2006, respectively.

Accounts receivable are presented net of an allowance for doubtful accounts and contractual allowances of $2,337 at June 30, 2007 (which includes $52 for Specialty Service) and $2,261 at June 30, 2006. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is based on a variety of factors, including the age of the outstanding receivable and the payor’s collection history. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance may be required.

Rebates. The Company administers a rebate program through which it receives rebates and administrative fees from pharmaceutical manufacturers. Rebates earned for the administration of this program are recorded as a reduction of cost of claims and the portion of the rebate payable to customers is treated as a reduction of revenue. Rebates receivable include billed and unbilled PBM receivables from pharmaceutical manufacturers. The Company records the gross rebate receivable and the appropriate payable to the customers based on estimates, which are subject to final settlement. The estimates are based upon claims submitted and the Company’s rebate experience, and are adjusted as additional information becomes available. Upon billing the pharmaceutical manufacturer, any differences between the Company’s estimate and the actual amount of the rebate receivable are recorded to cost of claims, net of the estimated impact to the Company’s customers. Currently, some rebates are processed by a third party rebate administrator and the remaining rebates are submitted directly by the Company to the pharmaceutical manufacturers for reimbursement. Subsequent to collections from pharmaceutical manufacturers, the Company generally pays rebates to its customers on a quarterly basis, or as agreed upon with its customers. There are certain instances where the Company pays rebates to its customers on a more accelerated basis.

As of June 30, 2007 and June 30, 2006, total unbilled manufacturer receivables amounted to $24,087 and $23,459, respectively.

Inventory. Inventory, which is located at the Company’s Mail Service and Specialty Service facilities, is primarily finished goods consisting primarily of prescription drugs and medical supplies. Inventory at the Company’s Mail Service facility is valued at the lower of the weighted average-cost method or market. Inventory at the Company’s Specialty Service facility is valued at the lower of the first-in, first-out (FIFO) cost or market.

Property and Equipment. Property and equipment is stated at cost, less accumulated depreciation and amortization. Equipment under capital leases is recorded at the present value of the total minimum lease payments. The Company calculates depreciation using the straight-line method for assets with useful lives ranging from 3 to 8 years, or with respect to equipment under capital leases and leasehold improvements, the Company amortizes them on a straight-line basis over the shorter of the lease term or the assets’ useful lives.

Internal Use Software. The Company applies the provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Under this SOP, certain costs of computer software developed or obtained for

F-8

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

internal use are capitalized and amortized on a straight-line basis over three years. Costs for general and administrative expenses, overhead, maintenance and training, as well as the cost of software coding that does not add functionality to the existing system, are expensed as incurred. Reductions, if any, in the carrying value of capitalized software development costs to net realizable value are expensed.

During the fiscal years ended June 30, 2007 and 2006, the Company capitalized $4,812 and $3,626, respectively, of software development costs related to internal programming time. Amortization expense of these software development costs was $4,477, $1,454 and $567 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively. Unamortized capitalized software development costs approximated $6,639 and $6,961 as of June 30, 2007 and 2006, respectively.

Intangible Assets. Intangible assets of $2,551 and $3,013 at June 30, 2007 and 2006, respectively, primarily reflect the value of client relationships that arose in connection with the Company’s various business acquisitions. These intangible assets are recorded at cost and are reviewed for impairment whenever events, such as losses of significant customers or other changes in circumstances indicate that the carrying amount may not be recoverable. The Company continually assesses the useful lives of the intangible assets, taking into account historical customer turnover experience, including recent losses of customers and expected future losses, to ensure they reflect current circumstances. See Note 4, “Business Acquisitions,” for more information.

Goodwill. Goodwill of $99,414 and $99,319 at June 30, 2007 and 2006, respectively, represents the excess acquisition costs over the fair value of the net tangible and identifiable intangible assets acquired that has been allocated to goodwill from the Company’s various business acquisitions. The balance as of June 30, 2007 and June 30, 2006 also includes a portion of the excess Ascend purchase price over the net tangible and identifiable assets acquired that has been allocated to goodwill. See Note 4, “Business Acquisitions,” for more information.

The Company tests the goodwill for impairment on an annual basis, or whenever events, such as a protracted decline in the Company’s stock price or other changes in circumstances, indicate that the carrying amount may not be recoverable, using a two-step fair-value based test. The most recent assessment of goodwill impairment for each of the designated reporting units was performed as of June 30, 2007, and the recorded goodwill was determined not to be impaired.

Impairment of Long-Lived Assets. The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including other intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business.

During the fiscal year ended June 30, 2007, certain internal use software projects for which the associated costs had previously been capitalized, were cancelled. As such, the capitalized costs associated with those projects were deemed impaired and their cost of $657 was written off during the fiscal year ended June 30, 2007. The Company classifies this impairment loss within selling, general and administrative expenses of its PBM segment.

Customer Deposits Payable. The Company requires deposits from certain customers in order to satisfy liabilities incurred by the Company on the customer’s behalf for the adjudication of pharmacy claims. Customer deposits payable were $12,244 and $1,541 as of June 30, 2007 and 2006, respectively.

Financial Instruments. The carrying amount of cash, accounts receivable, rebates receivable, claims payable to pharmacies, rebates payable to customers and trade and other payables and accrued expenses approximated fair values as of June 30, 2007 and June 30, 2006 due to the short-term maturities of these instruments.

F-9

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

Concentrations of Risks. For the fiscal year ended June 30, 2007, 14% of the Company’s revenue was from Mohawk Valley Physicians’ Health Plan, Inc. (“MVP”), a former customer administering multiple plans, which is reported within the PBM segment. For the fiscal years ended June 30, 2006 and 2005, MVP represented 22% and 27% of the Company’s revenue, respectively.

On May 4, 2006, MVP notified the Company of its intention not to renew their contract which expired December 31, 2006.

For the fiscal year ended June 30, 2007 and 2006, 16% and 10%, respectively, of the Company’s revenue was from Boston Medical Center Health Plan, Inc. (“BMC”) another customer, which is reported within the PBM segment. Amounts due from BMC approximated $4,287 as of June 30, 2007. None of the Company’s other customers individually represented more than 10% of Company’s revenue during the fiscal years ended June 30, 2007, 2006 and 2005.

For the fiscal years ended June 30, 2007, 2006, and 2005, no pharmacy chain accounted for more than 10% of the total cost of claims.

The Company may be subject to a concentration of credit risk with certain accounts receivables, which consist of amounts owed by various governmental agencies, insurance companies and private patients. Concentration of credit risk relating to these accounts receivable is limited to some extent by the diversity and number of payors.

Financial instruments which potentially subject the Company to concentrations of credit risk are cash balances deposited in financial institutions which exceed FDIC or SIPC insurance limits. Amounts on deposit with financial institutions, which exceeded the FDIC or SIPC insurance limits at June 30, 2007 and June 30, 2006, were $59,038 and $57,914, respectively.

The Company derives a substantial portion of its Specialty Service segment revenue from the sale of specialty drugs provided by a limited number of single-source biopharmaceutical manufacturers.

Revenue Recognition. The Company’s revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, either through the Company’s nationwide network of pharmacies, Mail Service or Specialty Service. The Company enters into a fee for service (per claim charges) arrangement with its customers for the payment of administrative fees. Under the fee for service arrangement, the Company is paid its contractually agreed upon rates by its customers based upon actual claims adjudicated plus a fixed transaction fee. Revenue related to the sales of prescription drugs by the Company’s nationwide network of pharmacies, Mail Service or Specialty Service is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using the Company’s on-line processing system. Co-payment revenue recognized during the fiscal years ended June 30, 2007, 2006 and 2005 was $16,592, $18,423 and $15,134, respectively. To date, Mail Service primarily fills prescriptions for the Company’s customers. Revenue from these intercompany sales is eliminated in consolidation. Specialty Service revenues represent revenues from the sale of primarily biopharmaceutical drugs and are reported at the net amount billed to third party payors, patients and others. For the fiscal year ended June 30, 2007, 54% of revenues from Specialty Service were from prescriptions filled for the Company’s customers. Revenue from these intercompany sales was eliminated in consolidation. The remaining 46% of revenues from Specialty Service were recognized at the point of shipment.

Participant co-payments are not recorded as revenue. Under the Company’s customer contracts, the pharmacy is solely obligated to collect the co-payments from the participants. As such, the Company does not include participant co-payments to pharmacies in revenue or cost of claims. For the fiscal years ended June 30, 2007, 2006 and 2005, excluded from the Company’s revenue and cost of claims was $249,526, $321,055 and $280,946, (unaudited) respectively, of participant co-payments to pharmacies. If the above amounts were included in the Company’s operating results, its operating income and net income would not have been affected.

F-10

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

The Company evaluates customer contracts using the indicators of Emerging Issues Task Force (“EITF”) No. 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent,” to determine whether the Company acts as a principal or as an agent in the fulfillment of prescriptions through the retail pharmacy network. The Company acts as a principal in most of its transactions with customers and revenues are recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus the Company’s administrative fees (“Gross Reporting”). Gross reporting is appropriate because the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) is responsible to validate and economically manage a claim through its claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug plan relationship with the patients, who are participants of customers’ plans, and (v) has credit risk for the price due from the customer. There are certain contracts in which the Company recognizes revenue on a net basis. The primary factor that leads to recognizing net revenue on these contracts is that the amount the Company earns is primarily fixed. Whether revenues are recorded on either a gross or net basis, the Company records the gross amount billed in accounts receivable and the related claims payable to pharmacies on its consolidated balance sheet.

The rebates that the Company receives from pharmaceutical manufacturers are recognized when the Company is entitled to them in accordance with the terms of the Company’s arrangements with pharmaceutical manufacturers and its third party rebate administrator, and when the amounts of the rebates are determinable. The Company’s revenue is reduced by the amount of rebates earned by the Company’s customers. For the fiscal years ended June 30, 2007, 2006 and 2005, rebates retained by the Company were $11,090, $18,501 and $18,979, respectively.

Cost of Claims. The Company’s cost of claims includes the cost of pharmaceuticals dispensed, either directly through Mail Service, Specialty Service or indirectly through its nationwide network of pharmacies. Cost of claims also includes an offsetting credit for rebates earned from pharmaceutical manufacturers.

Earnings per Share. The Company reports earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Basic EPS are computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock issued and outstanding during the reporting period. Diluted EPS are calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. For the fiscal year ended June 30, 2005, the dilutive effect of outstanding options, and their equivalents, is reflected in diluted EPS by application of the treasury stock method. Under the treasury stock method, the amount the employee or director must pay for exercising the award, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefit that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. United States generally accepted accounting principles require all anti-dilutive securities, including convertible preferred stock, to be excluded from the diluted earnings per share calculation. For the fiscal years ended June 30, 2007 and 2006, all of the Company’s redeemable convertible preferred stock issued to New Mountain Partners, L.P. was excluded from the diluted earnings per share calculation because their inclusion would have been anti-dilutive. If the Company were to include the assumed conversion of redeemable convertible preferred stock during the fiscal years ended June 30, 2007 and 2006, 6,956,522 equivalent shares of redeemable convertible preferred stock would have been added to the basic weighted average shares outstanding to compute the diluted weighted average shares outstanding.

The following is a reconciliation of the number of weighted average shares used in the basic and diluted EPS calculation:

F-11

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

Year ended June 30,	2007		2006		2005
Basic		5,454		5,143		4,542
Effect of assumed exercise of employee stock options		—		168		485
Series A preferred stock “as if converted”		—		—		6,957
Diluted		5,454		5,311		11,984

Stock-Based Compensation. On July 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all stock-based compensation awards made to employees and directors based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods subsequent to June 30, 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) which provides interpretative guidance in applying the provisions of SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified prospective transition method. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for periods prior to July 1, 2005 have not been restated to reflect, and do not include, the impact of SFAS 123R as the Company did not record stock-based compensation expense related to stock options.

Stock-based compensation expense recognized under SFAS 123R for the fiscal years ended June 30, 2007 and 2006 was $3,799 and $3,240, respectively, which consisted of stock-based compensation expense related to stock options and restricted stock awards.

SFAS 123R requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS 123, “Accounting for Stock-Based Compensation.” Under the intrinsic value method, no stock-based compensation expense had been recognized because the exercise price of the Company’s stock options granted to employees and directors at least equaled the fair market value of the underlying stock at the date of grant.

In addition, SFAS 123R requires that the benefits of realized tax deductions in excess of tax benefits on stock-based compensation expense, which amounted to $221 and $2,255 for the fiscal years ended June 30, 2007 and 2006, respectively, be reported as a component of cash flows from financing activities rather than as an operating cash flow, as previously required. In accordance with SAB 107, the Company classifies stock-based compensation within selling, general and administrative expenses to correspond with the line items in which cash compensation paid to employees and directors is recorded.

Stock-based compensation expense recognized in the Company’s consolidated statement of income for the fiscal year ended June 30, 2006 includes compensation expense for stock-based payment awards granted prior to, but not yet vested as of July 1, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. Additionally, the Company’s consolidated statement of income for the fiscal year ended June 30, 2007 includes compensation expense for stock-based payment awards granted subsequent to July 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

As stock-based compensation expense recognized in the Company’s consolidated statements of income is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

F-12

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

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position SFAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of stock-based compensation, and to determine the subsequent impact of the APIC pool and consolidated statements of cash flows of the tax effects of stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

The following table illustrates the proforma effect on net income available to common stockholders and earnings per share for the fiscal year ended June 30, 2005, which reflects results as if the Company had applied the fair value recognition provisions of SFAS 123, using the Black-Scholes model to compute the fair value of stock options granted.

Net income available to common stockholders, as reported	$	6,306
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effect applied using the provisions of SFAS 123		(2,436	)
Pro forma net income available to common stockholders	$	3,870
Pro forma earnings per share:
Basic — as reported	$	1.39
Basic — pro forma	$	0.85
Diluted — as reported	$	1.03
Diluted — pro forma	$	0.32

See Note 11, “Stock-Based Compensation Plans and Employee Benefit Plan,” for additional information concerning the Company’s stock-based compensation plans.

Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded based on temporary differences between the financial statement basis and the tax basis of assets and liabilities using presently enacted tax rates.

Use of Estimates. The consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. Estimates are used in determining such items as accruals for rebates receivable and payable, depreciable/useful lives, allowance for doubtful accounts, testing for impairment of goodwill and long-lived assets, stock-based compensation, income taxes, amounts recorded for contingencies and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Recent Accounting Pronouncements. In June 2006, the FASB issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step evaluation process for tax positions taken, or expected to be taken, in a tax return. The first step is recognition and the second is measurement. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold it is measured and recognized in the financial statements as the largest amount of tax benefit that is greater than 50% likely of being realized. If a tax position does not meet the more-likely-than-not recognition

F-13

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

threshold, the benefit of that position is not recognized in the financial statements.

Tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN 48 may be recognized or, continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings in the fiscal year. In May 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48, an amendment of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes” (“FSP No. FIN 48-1”). FSP No. FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

The Company is currently evaluating the impact FIN 48 will have on its consolidated financial statements when it becomes effective in fiscal year 2008 and are unable, at this time, to quantify the impact, if any, to retained earnings at the time of adoption.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”) to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Under SAB No. 108, companies should evaluate a misstatement based on its impact on the current year income statement, as well as the cumulative effect of correcting such misstatements that existed in prior years existing in the current year’s ending balance sheet. The Company adopted the provisions of SAB No. 108 during the fiscal year ended June 30, 2007. The Company’s adoption of SAB No. 108 during the fiscal year ended June 30, 2007 did not have a material impact on its consolidated financial statements.

Operating Segments. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has two reportable segments, PBM and Specialty Service. See Note 10, “Segment Reporting,” for more information. Both the PBM and Specialty Service segments operate in the United States and several of its territories.

Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation.

3. NEW MOUNTAIN TRANSACTION

The Company entered into an amended and restated preferred stock purchase agreement, dated as of November 26, 2003, with New Mountain Partners, L.P. (the “purchase agreement”). Pursuant to the purchase agreement, the Company agreed, subject to various conditions, to issue to New Mountain Partners a total of 6,956,522 shares of series A redeemable convertible preferred stock (the “series A preferred stock”) at a purchase price of $11.50 per share, for aggregate proceeds of approximately $80,000. On March 19, 2004, the Company completed the sale of the series A preferred stock to New Mountain Partners and used approximately $49,000 of the proceeds of the sale of the series A preferred stock to purchase, pursuant to a tender offer, 4,448,900 shares of the Company’s outstanding common stock at $11.00 per share (collectively, the “New Mountain Transaction”). Prior to the closing of the New Mountain Transaction, Bert E. Brodsky, the former chairman of the board of directors, and certain stockholders related to him, held (assuming the exercise of options and warrants to acquire 330,000 shares of the Company’s common stock held by Mr. Brodsky, which occurred in April 2004), in the aggregate, approximately 59% of the Company’s outstanding common stock and had agreed to tender 4,448,900 shares, or approximately 54% of the Company’s outstanding common stock, held by them, into the tender offer. No other stockholders tendered shares in the offer.

Following the completion of the tender offer, and the exercise of the options and warrants held by Mr. Brodsky, which occurred in April 2004, New Mountain Partners owned securities at March 19, 2004 that were initially convertible into approximately 64% of the Company’s issued and outstanding common stock and prior to conversion of the series A preferred stock were entitled to cast that number of votes that is equal to

F-14

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

approximately 60% of the Company’s aggregate voting power. Following the closing of the New Mountain Transaction, New Mountain Partners was entitled to and did nominate and elect 60% of the members of the Company’s board of directors.

The Company used the remaining proceeds from the issuance and sale of the series A preferred stock of approximately $24,000, excluding expenses related to the closing of the New Mountain Transaction, for the Inteq acquisition described in Note 4 – “Business Acquisitions” and for working capital purposes.

The series A preferred stock provides for an initial annual cash dividend equal to 7% of the investment amount, which decreases to 3.5% after the fifth anniversary of issuance. The series A preferred stock is convertible into common stock at a price of $11.50 per share of common stock, or an aggregate of 6,956,522 shares of the Company’s common stock.

After March 19, 2008, if the Company’s common stock is trading at or above a stated level, and subject to the satisfaction of other conditions, the Company may, at its option, redeem shares of the series A preferred stock at a price equal to its reported value on the Company’s consolidated balance sheet plus all unpaid dividends, whether or not declared. After March 19, 2011, the Company may, at its option, redeem shares of series A preferred stock at a price equal to $11.50 per share plus all unpaid dividends, whether or not declared. After March 19, 2014, each holder of shares of series A preferred stock may require the Company to redeem all or a part of that holder’s shares of series A preferred stock at price equal to $11.50 per share plus all unpaid dividends, whether or not declared.

Subject to certain conditions, the liquidation value of the series A preferred stock is the greater of $11.50 per share plus all unpaid dividends, whether or not declared, or the amount that would be payable to a holder of the series A preferred stock if the series A preferred stock was converted into common stock immediately prior to the liquidation.

Upon the closing of the New Mountain Transaction, the Company recorded a non-recurring, non-cash charge to net income available to holders of the Company’s common stock for a beneficial conversion feature related to the series A preferred stock, which is convertible into the Company’s common stock at $11.50 per share. Such non-cash charge reflects the difference between the fair market value of the Company’s common stock on the date of the closing of the New Mountain Transaction ($24.00 per share as of March 19, 2004) and the effective conversion price of $11.29 (after deducting the closing payment of $1,450 payable to New Mountain Partners) multiplied by 6,956,522, the number of shares of the Company’s common stock into which the series A preferred stock held by New Mountain Partners is convertible. The maximum amount of the beneficial conversion feature was limited to $80,000, which was the purchase price of the series A preferred stock.

4. BUSINESS ACQUISITIONS

Maintenance Prescriptions Programs, Inc. In July 2006, the Company entered into an Asset Purchase Agreement with Maintenance Prescriptions Programs, Inc., a New York corporation, and certain other owners named therein (collectively “MPP”), pursuant to which the Company agreed to acquire a customer contract from MPP relating to their mail service business. The aggregate purchase price of the acquired asset was $355. The Company has paid the former owners of MPP $266 out of the Company’s working capital with the remainder of the purchase price due by July 31, 2008. The purchase price for this contract was allocated to intangible assets and is being amortized over three (3) years.

Pharmaceutical Care Network. On March 7, 2005, the Company acquired all of the outstanding stock of Pharmaceutical Care Network (“PCN”), a California corporation, from the California Pharmacists Association (“CPhA”). PCN provides customary PBM services to corporations, HMO’s, insurance companies, third party administrators and union trusts. The aggregate purchase price of PCN was $13,000. In addition, the Company agreed to pay earnouts to CPhA, as additional purchase price, up to $30,000 over a three-year period if certain financial and performance targets are achieved. As of June 30, 2007, the financial and performance targets have not been achieved. The funds for the payment of the purchase price in connection with the PCN

F-15

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

acquisition were obtained out of the Company’s working capital and JPMorgan credit facility. See Note 8, “Line of Credit” for more information.

In addition to the $13,000 purchase price for the acquisition of PCN, there was $561 of acquisition related expenses incurred by the Company. Of the $13,000, $10,500 was paid to CPhA and certain of PCN’s current and former employees who participated in its Long Term Incentive Plan, and $2,500 was deposited into escrow to secure CPhA’s obligations under the purchase agreement. All escrow amounts securing CPhA’s obligations under the purchase agreement were released in accordance with the terms of the purchase agreement. At the time of the acquisition, PCN had approximately $30,942 of assets which included $16,711 of cash, $2,734 of restricted cash, $3,204 of accounts receivable, $6,090 of rebates receivable, $1,139 of other assets and $1,064 of property and equipment. They also had approximately $27,040 of liabilities which included $26,848 of claims and accounts payable, $97 of other current liabilities and $95 of other long-term liabilities. As a result of the PCN acquisition, $2,842 of severance and exit costs were accrued with $1,213 recorded as a deferred tax asset and $1,629 recorded as additional goodwill. Of this amount, $1,349 was paid as of June 30, 2007 and $332 was offset against goodwill as various employees did not satisfy conditions to receive their originally designated severance package. The acquisition was accounted for under the purchase method of accounting and the results of PCN’s operations were included in the consolidated financial statements commencing as of the closing date of the PCN acquisition. The excess of the acquisition costs over the fair value of identifiable net assets acquired was $12,053, and consisted of the following components: “know how” and computer software valued at $870 which are being amortized over ten (10) years; customer relationships valued at $380 which are being amortized over ten (10) years; and goodwill of $10,803. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the goodwill is not being amortized.

PCN’s operating results from March 7, 2005, the date of acquisition, through June 30, 2005, are included in the accompanying consolidated financial statements. The unaudited pro forma results of operations of the Company and PCN, assuming the PCN acquisition had occurred as of the beginning of the fiscal year presented, would have been as follows:

Year ended June 30, 2005
Revenue	$	855,624
Net income	$	10,901
Net income available to common stockholders	$	4,826
Net earnings per common share:
Basic	$	1.06
Diluted	$	0.91
Pro forma weighted-average number of common shares outstanding:
Basic		4,542
Diluted		11,983

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

Inteq. On April 1, 2004, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Inteq PBM, LP, a Texas limited partnership, The INTEQ-RX Group, LLP and certain other owners named therein (together with The INTEQ-RX Group, LLP, “Inteq”), pursuant to which the Company agreed to acquire certain assets of Inteq relating to their PBM business. The aggregate purchase price of Inteq was $31,500. In addition, the Company had agreed to pay earnouts to Inteq, as additional purchase price, up to $4,200 over a one-year period if certain financial and performance targets were achieved during the one-year period following the

F-16

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

closing. The Agreement required that the Company deposit $3,000 into escrow to cover the potential earnout payments to Inteq. Of this amount, $1,024 of additional consideration was earned and released from escrow, with the balance of $1,976 being returned to the Company. Funds for the Inteq acquisition were obtained out of proceeds from the New Mountain Transaction and the JPMorgan credit facility. See Note 3, “New Mountain Transaction” and Note 8, “Line of Credit” for more information.

The purchase price for the acquired assets of Inteq was $31,500 of which $29,640 was paid in cash at closing and $1,860 was paid in the form of a promissory note. In addition, there was $702 of acquisition related expenses incurred by the Company. Of the $29,640, $24,900 was paid to Inteq and $4,740 was deposited into escrow to secure Inteq’s indemnity obligations under the Agreement. The Company did not seek any indemnifications against Inteq and therefore released the $4,740 of escrow according to the terms of the Agreement.

At the time of the acquisition, Inteq had approximately $14,200 of assets, which included $4,134 of cash, $7,938 of accounts receivable, $2,041 of rebates receivable, $47 of other assets and $40 of property and equipment. They also had approximately $11,151 of liabilities, which included $11,138 of claims and accounts payable and $13 of miscellaneous payables. The acquisition was accounted for under the purchase method of accounting and the results of Inteq’s operations were included in the consolidated financial statements commencing with the acquisition date. The excess of the acquisition costs over the fair value of identifiable net assets acquired was $29,153, and consisted of the following components: customer relationships valued at $1,800 which are being amortized over ten (10) years; and goodwill of $27,353. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the goodwill is not being amortized.

Ascend. On July 31, 2003, the Company entered into a Stock Purchase Agreement with Portland Professional Pharmacy (“PPRX”), Portland Professional Pharmacy Associates (“PRXA”, and together with PPRX, “Specialty”, “Specialty Service”, “PPP” or “Ascend”) and the individual shareholders (the “PPP Shareholders”) to purchase all of the shares of PPP for $3,150. PPP provides specialty-pharmacy services in a broad range of areas, including women’s health, pediatric care, men’s health and transplant. Funds for the PPP acquisition were supplied by the Company’s JPMorgan credit facility. See Note 8, “Line of Credit” for more information. The Company has positioned PPP as a preferred provider with PPP’s target markets while focusing on the extension of their specialty services to the Company’s PBM division. In addition, the Company agreed to pay earnouts to the PPP Shareholders, as additional purchase price, up to $7,000 over a three-year period if the PPP business achieved certain financial targets. At the Company’s sole discretion, as much as 50% of the $7,000 could be paid in the form of the Company’s common stock. For the first year ended July 31, 2004, $716 was earned and was settled on September 15, 2004. Of this amount, $358 was paid in cash and $358 was paid in the form of the Company’s common stock (12,650 shares at $28.30 per share). For the second year ended July 31, 2005, $850 was earned and was settled on September 15, 2005. Of this amount, $425 was paid in cash and $425 was paid in the form of the Company’s common stock (17,127 shares at $24.84 per share). For the third year ended July 31, 2006, $931 was earned and was settled on September 30, 2006. Of this amount, $901 was paid in cash and $30 offset various legal fees paid by the Company on behalf of the former PPP Shareholders.

In addition to the $3,150 purchase price for PPP, there was $77 of acquisition related expenses incurred by the Company. At the time of the acquisition, PPP had approximately $1,664 of assets which included $177 of cash, $889 of accounts receivable, $539 of inventory, and $59 of property and equipment. PPP also had approximately $1,423 of liabilities, which included $609 of bank debt, which was paid off at closing and $814 of miscellaneous payables. The acquisition was accounted for under the purchase method of accounting and the results of PPP’s operations were included in the consolidated financial statements commencing with the acquisition date. The excess of the acquisition costs over the fair value of identifiable net assets acquired was $2,986, and consisted of the following components: (i) customer relationships valued at $295 which are being amortized over seven (7) years; (ii) employment and non-compete agreements valued at $100 each which are being amortized over four (4) years; (iii) the Portland Professional Pharmacy trade name valued at $100 which is being amortized over four (4) years; and (iv) goodwill of $2,391. From the date of acquisition through June

F-17

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

30, 2007, goodwill has increased by $2,497, which represents the cumulative amount of earnouts earned by PPP. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the goodwill is not being amortized. For tax purposes the Company has made an election which will allow it to amortize the goodwill and other intangibles over fifteen years.

5. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:

					Estimated
June 30,	2007		2006		Useful Life
Equipment	$	9,830	$	9,687		3 to 5 years
Software		30,305		25,906		3 to 5 years
Leasehold improvements		5,352		5,269		Term of lease
Equipment acquired under capital leases		4,002		122		Term of lease
Software acquired under capital leases		521		—		Term of lease
		50,010		40,984
Accumulated depreciation and amortization		35,469		27,331
	$	14,541	$	13,653

Accumulated depreciation on equipment and software acquired under capital lease obligations was $2,025 and $109 as of June 30, 2007 and 2006, respectively.

Depreciation and amortization expense on property and equipment, including equipment and software acquired under capital leases, for the fiscal years ended June 30, 2007, 2006 and 2005 was $8,960, $6,482 and $5,264, respectively.

6. COMMITMENTS AND CONTINGENCIES

The Company leases office and warehouse space throughout the United States under various operating leases. The Company also leases pill dispensing and counting devices for use in Mail Service, as well as computer equipment for use in its various offices. Rental expense, including utilities, was $2,807, $3,070 and $2,858 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively. The future minimum aggregate rental commitments under noncancelable operating leases, excluding renewal options, are as follows:

Year ending June 30,
2008	$	3,295
2009		2,257
2010		1,396
2011		870
2012		693
Thereafter		1,314
	$	9,825

In addition, the Company rented two houses from Living In Style, LLC, an entity partially owned by a former executive officer of the Company and a former Chairman of the Board, which were used for out-of-town employees. Pursuant to leases dated May 1, 2002 which expired April 30, 2007, the Company paid an aggregate of $128, $147 and $140 in rent for these two facilities during the fiscal years ended June 30, 2007, 2006 and 2005, respectively. Upon their expiration, the Company did not renew the lease for these two houses.

The Company is currently involved in various legal proceedings and other disputes with third parties that arise from time to time in the ordinary course of business. The Company has considered these proceedings

F-18

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

and disputes in determining the necessity of any reserves for losses that are probable and reasonably estimable in accordance with SFAS No. 5, “Accounting for Contingencies.” The Company’s recorded reserves are based on estimates developed with consideration given to the potential merits of claims, the range of possible settlements, advice from outside counsel, and management’s strategy with regard to the settlement of such claims or defense against such claims.

The Company has an agreement with an unrelated third party that may be risk-bearing in nature. As of June 30, 2007, the Company has not done any business in relation to this agreement.

7. GOODWILL AND INTANGIBLE ASSETS

The following is a summary of the Company’s goodwill and other intangible assets:

	PBM(1)		Specialty(2)		Total
Goodwill:
Balance as of June 30, 2006	$	94,526	$	4,793	$	99,319
Specialty additional consideration earned		—		95		95
Balance as of June 30, 2007	$	94,526	$	4,888	$	99,414

	June 30, 2007						June 30, 2006
	Gross						Gross
	Carrying		Accumulated		Net Book		Carrying		Accumulated		Net Book
	Amount		Amortization		Value		Amount		Amortization		Value
Intangible assets:
PBM (1)	$	7,034	$	4,619	$	2,415	$	6,679	$	3,919	$	2,760
Specialty (2)		595		459		136		595		342		253
Total	$	7,629	$	5,078	$	2,551	$	7,274	$	4,261	$	3,013

(1)

Primarily comprised of the excess acquisition costs over the fair value of the net tangible and identifiable assets acquired by the Company, which has been allocated to goodwill and intangible assets. The goodwill also includes any earnouts earned in conjunction with the acquisitions. The intangible assets consist primarily of customer relationships. See Note 4, “Business Acquisitions” for more information.

(2)

Represents the Specialty Service segment primarily reflecting the excess of the Ascend purchase price over the net tangible and identifiable assets acquired, which has been allocated to goodwill and intangible assets. The goodwill also includes any earnouts earned in conjunction with the acquisition. The change in goodwill from June 30, 2006 to June 30, 2007 is the result of final adjustments to the earnout in connection with the Ascend acquisition. The intangible assets consist primarily of customer relationships and employment agreements. See Note 4, “Business Acquisitions” for more information.

The weighted average useful life of all intangible assets subject to amortization is approximately 80 months for PBM acquired intangible assets and approximately 35 months for the Specialty Service acquired intangible assets. Amortization expense of intangible assets was $816, $988 and $1,037 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively.

As of June 30, 2007, $82,021 of the Company’s goodwill is deductible for income tax purposes on a straight-line basis over 15 years.

F-19

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

Future amortization expense for intangible assets existing at June 30, 2007 is expected to be as follows during the next five fiscal years: 2008—$471; 2009—$466; 2010—$357; 2011—$309; and 2012—$305.

8. LINE OF CREDIT

On January 28, 2005, the Company and certain of its subsidiaries entered into a five-year $65,000 line of credit with a syndicate of commercial banks led by JPMorgan Chase Bank, N.A. (“JPMorgan”). Subject to certain conditions including the consent of the existing lenders, the line of credit (the “credit facility”) may be increased by an aggregate of $35,000.

Depending on the timing and dollar amount of each loan request, the Company will either borrow at a spread above LIBOR, the overnight Federal Funds rate or JPMorgan’s prime rate. The initial spread was 1.75% for LIBOR and Federal Funds loans and 0.75% for prime rate loans. As of June 30, 2007, the spread was 1.50% for LIBOR and Federal Funds loans and 0.50% for prime rate loans. In addition, the Company incurs a fee on the unutilized portion of its line of credit. As of June 30, 2007, this fee, as defined in the credit facility, was 0.375%.

The credit facility is secured by the Company’s consolidated assets. The credit facility requires the Company to be in compliance with financial and other covenants. The three defined financial covenants include: consolidated net worth; consolidated fixed charge ratio; and consolidated debt to EBITDA ratio. The Company was in compliance with all covenants as set forth in the credit facility as of June 30, 2007. Although the Company has a $65,000 revolving credit facility, it currently cannot borrow the full amount under this credit facility and it may be limited, or unable, to borrow under this credit facility in the future. As of June 30, 2007, the Company was able to borrow approximately $39,000 under the credit facility. If the Company is in compliance with the consolidated fixed charge ratio, it can then borrow up to 2.5 times the Company’s consolidated EBITDA for the preceding twelve months less consolidated debt, as defined in the credit facility.

As of and for the fiscal year ended June 30, 2007, the Company had no outstanding borrowings under its line of credit.

The Company has a $250 irrevocable letter of credit which the Company has granted in favor of one of its customers to secure any indemnity obligations that may arise during the term of the customer agreement. The irrevocable letter of credit is cancellable upon the termination of the customer agreement. As of June 30, 2007, no amounts were drawn down under this letter of credit.

9. CAPITAL LEASE OBLIGATIONS

The Company leases office equipment and computer software under various capital leases. As a result, the present value of the remaining future minimum lease payments is recorded as a capitalized lease asset and related capital lease obligation in the accompanying consolidated balance sheet. The future minimum capital lease payments are as follows:

Year ending June 30,
2008	$	1,075
2009		823
2010		613
2011		91
2012		34
Total minimum lease payments		2,636
Amount representing interest		(161	)
Present value of net minimum lease payments		2,475
Current portion		(989	)
Total long-term portion	$	1,486

F-20

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

10. SEGMENT REPORTING

As of June 30, 2007, the Company has two reportable segments, PBM and Specialty Service. The PBM segment includes the sale of traditional prescription drugs to the Company’s customers and their participants, either through the Company’s nationwide network of pharmacies or the Company’s Mail Service pharmacy. The Specialty Service segment includes the sale of higher margin specialty pharmacy products and services for the treatment of chronic and potentially life-threatening diseases.

The chief operating decision maker assesses the Company’s performance of its operating segments through their gross profit, defined as segment revenue less segment cost of claims. Selling, general and administrative expenses are reported as corporate expenses. In addition, interest and other income and interest expense are reported within the corporate category.

The following tables present selected financial information about the Company’s reportable segments.

			Specialty		Intersegment
Year ended June 30, 2007	PBM		Pharmacy		Elimination			Corporate			Total
Revenue	$	653,485	$	56,027	$	(30,431	)	$	—		$	679,081
Cost of claims		569,390		48,987		(26,611	)		—			591,766
Gross profit		84,095		7,040		(3,820	)		—			87,315
Selling, general and administrative expenses		—		—		—			87,481			87,481
Interest and other income		—		—		—			1,972			1,972
Interest expense		—		—		—			(516	)		(516	)
Income before provision for income taxes		—		—		—			—			1,290
Provision for income taxes		—		—		—			—			1,198
Net income		—		—		—			—		$	92
Total identifiable assets	$	243,657	$	97,530	$	(88,098	)		—		$	253,089

			Specialty		Intersegment
Year ended June 30, 2006	PBM		Pharmacy		Elimination			Corporate			Total
Revenue	$	839,991	$	44,180	$	(21,318	)	$	—		$	862,853
Cost of claims		751,677		38,505		(18,695	)		—			771,487
Gross profit		88,314		5,675		(2,623	)		—			91,366
Selling, general and administrative expenses		—		—		—			75,852			75,852
Interest and other income		—		—		—			1,471			1,471
Interest expense		—		—		—			(313	)		(313	)
Income before provision for income taxes		—		—		—			—			16,672
Provision for income taxes		—		—		—			—			7,015
Net income		—		—		—			—		$	9,657
Total identifiable assets	$	263,274	$	40,717	$	(31,838	)		—		$	272,153

F-21

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

			Specialty		Intersegment
Year ended June 30, 2005	PBM		Pharmacy		Elimination			Corporate			Total
Revenue	$	781,360	$	28,898	$	(9,666	)	$	—		$	800,592
Cost of claims		697,528		24,647		(8,292	)		—			713,883
Gross profit		83,832		4,251		(1,374	)		—			86,709
Selling, general and administrative expenses		—		—		—			67,786			67,786
Interest and other income		—		—		—			2,099			2,099
Interest expense		—		—		—			(610	)		(610	)
Income before provision for income taxes		—		—		—			—			20,412
Provision for income taxes		—		—		—			—			8,031
Net income		—		—		—			—		$	12,381
Total identifiable assets	$	276,235	$	8,721	$	(1,025	)		—		$	283,931

11. STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFIT PLAN

Employee Stock Option Plan

The Company grants stock options under the 1999 Stock Option Plan, as amended (the “Plan”). Stock option grants are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of stock option grants are based on competitive practices, operating results of the Company, and government regulations.

The maximum number of shares of common stock issuable over the term of the Plan is limited to 4,850,000 shares plus an indeterminable number of shares of common stock issuable upon the exercise of “reload options.” There are no options outstanding that contain the “reload” provision. The Plan permits the granting of stock options, stock grants, stock units and stock appreciation rights to employees (including employee directors and officers) and consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Options granted under the Plan have an exercise price of at least 100% of the fair market value of the underlying stock, or 110% in the case of an individual who owns more than 10% of the combined voting power of all classes of stock of the Company on the grant date. Options granted under the Plan generally vest over a three or four year period. As of June 30, 2007, there are 1,115,107 options issuable under the Plan.

Upon adoption of SFAS 123R, the Company changed its method of valuation for share-based awards granted to a lattice-binomial option-pricing model (“lattice-binomial model”) from the Black-Scholes option-pricing model (“Black-Scholes model”) which was previously used for the Company’s pro forma information required under SFAS 123. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected life of the awards, and actual and projected stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined in accordance with SFAS 123R and SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The weighted-average fair value of stock options granted during the fiscal years ended June 30, 2007, 2006 and 2005 was $8.00, $16.78 and $16.26, respectively. The weighted-average assumptions utilized for stock options granted during the fiscal years presented below are as follows:

F-22

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

Year ended June 30,	2007			2006			2005
Expected dividend yield		—			—			—
Risk-free interest rate		4.9	%		5.1	%		3.4%-4.4	%
Expected volatility		49.7%-58.2	%		54.0%-69.5	%		70.8%-74.4	%
Expected life (years)		5.5			5.5 - 7.0			6.9
Post-vesting terminations		1.0	%		1.0	%		—
Sub-optimal exercise factor		3.8			4.0			—

Summarized information related to stock option activity is as follows:

						Weighted-
						Average
						Remaining		Aggregate
	Number of			Weighted-Average		Contractual		Intrinsic
	Options			Exercise Price		Term (in years)		Value
Outstanding at June 30, 2006		1,510,556		$	22.60
Cancelled/forfeited		(522,436	)		22.64
Granted		380,540			14.27
Exercised		(224,524	)		10.33
Outstanding at June 30, 2007		1,144,136		$	22.22		6.22	$	1,204
Exercisable at June 30, 2007		484,477		$	23.34		4.41	$	648

The total intrinsic value of options exercised during the fiscal years ended June 30, 2007, 2006 and 2005 was $1,273, $1,389 and $6,078, respectively. The total fair value of shares vested during the fiscal years ended June 30, 2007, 2006 and 2005 was $4,332, $2,552 and $2,242, respectively. The Company expects the majority of outstanding nonvested options to vest. The total number of in-the-money options exercisable as of June 30, 2007 was 120,251.

Nonvested stock option activity for the fiscal year ended June 30, 2007 is as follows:

				Weighted-Average
	Number of			Grant Date Fair
	Options			Value
Nonvested at June 30, 2006		1,036,724		$	16.27
Granted		380,540			8.00
Vested		(285,192	)		15.19
Cancelled/forfeited		(472,413	)		14.33
Nonvested at June 30, 2007		659,659		$	11.60

As of June 30, 2007, there was $4,943 of total unrecognized compensation related to outstanding stock options. That cost is expected to be recognized over a weighted-average period of 32 months.

Pursuant to an agreement dated February 23, 2007 (“Chairman Agreement”), Thomas W. Erickson was appointed the Company’s Chairman of the Board of Directors. On March 12, 2007, the Company granted Thomas W. Erickson an option to acquire 100,000 shares of the Company’s common stock with an exercise price of $14.02 per share (the closing price of the Company’s common stock on March 12, 2007). Except as specifically provided for in the stock option agreement, the option vests and becomes exercisable upon the satisfaction of the following two conditions: (i) Thomas W. Erickson shall have been a director of the Company through at least February 23, 2008 (the “First Anniversary”) or Thomas W. Erickson shall have resigned at the request of the Board of Directors or have been involuntarily terminated on or prior to the First Anniversary and (ii) a change in control (as defined in the Chairman Agreement) shall have occurred. The option immediately vests upon a change in control prior to the First Anniversary. The option expires on the tenth anniversary of the stock option agreement. This option has both service and performance conditions as

F-23

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

defined in SFAS 123R. In accordance with the provisions of SFAS 123R, recognition of stock compensation expense will be deferred until when/or if a change of control is consummated.

Restricted Stock Grant Plan

In October 2004, the Company’s board of directors approved the adoption of the Company’s Amended and Restated 2000 Restricted Stock Grant Plan (the “Stock Grant Plan”), under which 700,000 shares of the Company’s common stock have been reserved for issuance. The Stock Grant Plan provides for the issuance of shares of restricted stock or restricted stock units that are subject to both standard restrictions on the sale or transfer of such shares and/or restrictions that the Company’s board of directors may impose, such as restrictions relating to length of service, corporate performance or other restrictions. All restricted stock and restricted stock unit awards are settled in shares of the Company’s common stock. No restricted stock units have been granted under the Stock Grant Plan.

All restricted stock awards issued under the Stock Grant Plan are valued at the closing market value of the Company’s common stock on the date of grant. The fair value of the restricted stock award is expensed on a straight-line basis over the requisite service period. During the fiscal years ended June 30, 2007 and 2006, stock-based compensation expense related to restricted stock awards was $55 and $84, respectively.

Summarized information related to restricted stock awards is as follows:

				Weighted Average		Aggregate
				Grant Date		Intrinsic
	Shares			Fair Value		Value
Outstanding at June 30, 2006		20,400		$	26.99
Granted		61,330			15.02
Vested		—			—
Cancelled/forfeited		(39,190	)		21.62
Outstanding at June 30, 2007		42,540		$	19.75	$	840

The weighted-average fair value of restricted stock awards granted during the fiscal years ended June 30, 2007 and 2006 was $15.02 and $26.99, respectively. Restricted stock was not granted during the fiscal year ended June 30, 2005. As of June 30, 2007, no restricted stock awards were converted into shares of the Company’s common stock.

As of June 30, 2007, there was $573 of total unrecognized compensation related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 40 months. During the fiscal years ended June 30, 2007 and 2006, no restricted stock awards vested. The Company expects the majority of the nonvested restricted stock awards to vest.

Employee 401(k) Plan

The Company sponsors the National Medical Health Card Systems, Inc. 401K Employee Savings Plan (the “Plan”) to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible employees.

Employees can contribute up to 60% of their annual compensation to the Plan. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches employee contributions up to 100% of the first 2.5% of eligible earnings that are contributed by employees. All matching contributions vest over a five-year period. The Company’s matching contributions to the Plan totaled $460, $491 and $350 during the fiscal years ended June 30, 2007, 2006 and 2005, respectively.

F-24

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

In addition, the Plan provides for discretionary contributions as determined by the Company. There were no discretionary contributions made during fiscal 2007, 2006 or 2005.

12. RELATED PARTY TRANSACTIONS

The Company received certain services from a former Chairman of the Board, James Bigl, pursuant to a consulting agreement signed at the end of his employment with the Company. James Bigl resigned as Chairman of the Board on March 13, 2006 but the consulting agreement continued until August 31, 2006. During the fiscal years ended June 30, 2007, 2006 and 2005, $21, $125 and $125 were paid under this agreement, respectively. During the fiscal year ended June 30, 2007, the Company also paid $5 of legal fees on behalf of James Bigl.

The Company had historically entered into various verbal and written agreements with Sandata Technologies, Inc. (“Sandata”) and its wholly owned subsidiaries. Bert E. Brodsky, a former Chairman of the Board of the Company, is a principal stockholder of Sandata. Sandata provides computerized data processing services and custom software and programming services.

For the fiscal year ended June 30, 2005, certain general, administrative and other expenses reflected in the consolidated financial statements include allocations of certain corporate expenses from affiliates which take into consideration personnel, estimates of the time spent to provide services or other appropriate bases. These allocations include services and expenses for information systems maintenance, financial consulting, employee benefits administration, legal communications and other miscellaneous services.

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

General and administrative expenses related to transactions with affiliates included in the Company’s consolidated statements of income are:

Year ended June 30,	2007		2006		2005
Management and consulting fees (a)	$	21	$	125	$	171
Administrative, accounting services and supplies (b)		5		—		198
Rent and utilities (c)		128		147		961
	$	154	$	272	$	1,330

(a)	The Company incurred fees to certain other affiliated companies for various management and consulting services.
(b)	A company affiliated by common ownership provided the Company with various administrative, legal and accounting services.
(c)	See Note 6, “Commitments and Contingencies”, for additional information regarding leases with related parties. For fiscal 2007, 2006 and 2005, the Company leased its corporate headquarters from an affiliate of Bert E. Brodsky, the Company’s former Chairman of the Board.

13. SUPPLEMENTAL CASH FLOW INFORMATION

Year ended June 30,	2007		2006		2005
Cash paid:
Interest	$	270	$	403	$	567
Income taxes	$	450	$	1,099	$	2,825

F-25

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

During the fiscal year ended June 30, 2007, the Company financed $89 for the acquisition of MPP through its trade payables. In addition, as of June 30, 2007, the Company financed $5,118 of capital expenditures through capital lease obligations. On July 3, 2007, the Company paid $1,396 of dividends on the series A preferred stock for the quarter ended June 30, 2007.

14. INCOME TAXES

The Company’s provision (benefit) for federal and state income taxes consists of the following:

Year ended June 30,	2007			2006		2005
Current:
Federal	$	104		$	4,474	$	4,237
State		(110	)		954		882
		(6	)		5,428		5,119
Deferred:
Federal		1,140			1,272		1,704
State		64			315		1,208
		1,204			1,587		2,912
Total	$	1,198		$	7,015	$	8,031

The net tax benefits from stock options was $372, $3,029 and $5,625 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively, and was reflected as an increase to additional paid-in capital in the Company’s consolidated statement of stockholders’ equity.

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

Year ended June 30,	2007			2006			2005
Federal statutory rate		34.0	%		34.0	%		34.0	%
Stock-based compensation		45.9			3.5			—
State taxes — net of federal tax benefit		(8.2	)		5.8			5.3
Permanent differences		7.6			0.5			0.6
Adjustment for prior year taxes		13.6			—			—
Other, net		—			(1.7	)		(0.6	)
Effective tax rate		92.9	%		42.1	%		39.3	%

The Company’s effective tax rate increased to 92.9% for the fiscal year ended June 30, 2007 as compared to 42.1% for the fiscal year ended June 30, 2006. The increase in the effective tax rate primarily resulted from lower pre-tax income combined with the effects of expensing stock options in accordance with SFAS 123R, offset by a $439 reversal of a prior state tax reserve as the related statute of limitations expired during the fiscal year ended June 30, 2007.

The tax effects of temporary differences which give rise to significant portions of deferred tax assets and liabilities at June 30, 2007 and 2006 are as follows:

F-26

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

June 30,	2007		2006
Allowance for doubtful accounts	$	898	$	833
Management severance accrual		482		—
Vacation expense accrual		193		134
Acquisition related severance and restructuring		109		448
Accrued liabilities		231		863
Net deferred tax assets	$	1,913	$	2,278

June 30,	2007			2006
Stock-based compensation	$	1,318		$	518
NOL carryforwards		362			612
Excess tax depreciation		(2,310	)		(2,430	)
Excess tax amortization		(8,624	)		(6,612	)
Accrued liabilities		474			128
Net deferred tax liabilities	$	8,780		$	7,784

Under SFAS No. 109, “Accounting for Income Taxes”, the Company is required to record a valuation allowance against a deferred tax asset for the future tax benefits of tax loss and tax credit carryforwards, as well as for other temporary differences, if it is more likely than not that the Company will not be able to utilize the deferred tax asset to offset future taxes. The Company evaluates the realizability of the deferred tax assets and the need for a valuation allowance on a quarterly basis. As of June 30, 2007, based on current facts and circumstances, management believes that it is more likely than not that the Company will realize benefit for its gross deferred tax assets and that a valuation allowance against its deferred tax assets is not necessary.

As of June 30, 2007, the Company had net operating loss carryforwards for state and federal income tax purposes of $10,736, varying amounts of which will expire in subsequent years through 2027.

15. MANAGEMENT CHANGES

In May 2007, the Company took steps to execute a series of management changes which included the termination of various members of the Company’s management. As of June 30, 2007, $1,938 of one-time termination benefits were incurred in connection with these and other management changes, which is included within selling, general and administrative expenses of the PBM segment. Of this amount, $17 was paid as of June 30, 2007.

F-27

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

($ in thousands)

Allowance for Doubtful Accounts Receivable:

			Additions
	Balance at		Charged to								Balance
	Beginning		Costs and					Other			at End
Description	of Year		Expense (a)		Write-offs			Changes			of Year
Year ended June 30, 2005	$	2,312	$	651	$	(1,016	)	$	260	(b)	$	2,207
Year ended June 30, 2006	$	2,207	$	200	$	(42	)	$	(104	) (c)	$	2,261
Year ended June 30, 2007	$	2,261	$	2,080	$	(2,004	)		—		$	2,337

(a)	Charged to bad debts
(b)	Includes a $6 opening reserve balance of acquisition, a reclassification to increase Specialty Service’s accounts receivable balance by $254, and the allowance for doubtful accounts by $254. The reclassification was made to adjust the presentation of a valuation reserve that had previously been netted against the gross accounts receivable. There was no impact to net accounts receivable due to this reclassification.
(c)	Primarily includes a reclassification to increase Specialty Service’s accounts receivable balance by $150 and the allowance for doubtful accounts by $150. The reclassification was made to adjust the presentation of a valuation reserve that had previously been netted against the gross accounts receivable. There was no impact to net accounts receivable due to this reclassification.

 S-1

EX-4.1

EXHIBIT 4.1

COMMON SHARES Pharmacy Benefits Manager

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

CUSIP 63918l 30 2

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

THIS CERTIFIES THAT

SPECIMEN

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE COMMON SHARES, PAR VALUE $.001 PER SHARE, OF

transferable only on the certifilate properly endorsed. This certificate and the shares represenyed hereby issued and shall l%e|held subject to all the provisions of the certificateir If the Corporation and and amendments thereto to all of whichthe holder of certificate by acceptance hereof asents. This Certificates is not valid unless countersigned registered by the Transfer.

Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

NATIONAL MEDICAL HEALTH CARD SYSTEM, INC,

CORPORATE SEAL

2001

Dated:

CORPORATE SECRETARY CHAIRMAN OF THE BOARD

The Corporation will furnish to any shareholder, upon request and without charge, a full statement of the designation, relative rights,

preferences, and limitations of the shares of each class of stock of the Corporation authorized to be issued and the designation, relative rights, preferences, and limitations of each series of Preferred Shares so far as they have been fixed by the Board of Directors of the Corporation pursuant to authority heretofore granted to it.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out

in full according to applicable laws or regulations: • •. ‘

TEN COM — as tenants in common            UNIF GIFT MIN ACT- ...... Custodian TENENT — as tenants by the entireties ^(Cust) (Minor); JT TEN — as joint tenants with right of            under Uniform Gifts to Minors survivorship and not as tenants            Act in common (Stale) Additional abbreviations may also be used though not in the above list. • . PLEASE INSERT SOCIAL SECURITY OR OTHER

IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

• * . »

Signature(s) Guaranteed:

STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

EX-4.2

EXHIBIT 4.2

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT -Custodian TEN ENT -as tenants by the entireties (Cust) (Minor) under Uniform Gifts to Minors JT TEN -as joint tenants with right of Act survivorship and not as tenants in common (State) ‘ Additional abbreviations may also be used though not in the above list. For value ‘ received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE) NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated In presence of THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE . UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

EX-4.5

EXHIBIT 4.5

EXECUTION COPY

REGISTRATION RIGHTS AGREEMENT

by and among

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.,

NEW MOUNTAIN PARTNERS, L.P.,

and

NEW MOUNTAIN AFFILIATED INVESTORS, L.P.

dated as of

March 19, 2004

     REGISTRATION RIGHTS AGREEMENT, dated as of March 19, 2004, by and among National Medical Health Card Systems, Inc., a Delaware corporation (the “Company”), New Mountain Partners, L.P., a Delaware limited partnership (“New Mountain”) New Mountain Affiliated Partners, L.P., a Delaware limited partnership (together with New Mountain, the “Purchasers”) and such other persons who become signatories hereto from time to time as provided for herein.

     WHEREAS, pursuant to the Amended and Restated Preferred Stock Purchase Agreement, dated as of November 26, 2003 (the “Purchase Agreement”), by and between the Company and New Mountain, upon the terms and subject to the conditions contained therein, the Company will issue and sell to the Purchasers 6,956,522 shares of Series A Preferred Stock, par value $0.10 per share, of the Company (the “Series A Preferred Stock”);

     WHEREAS, to induce New Mountain to execute and deliver the Purchase Agreement and as a condition to New Mountain consummating the transactions contemplated thereby, the Company has agreed to provide the Purchasers with the rights set forth in this Agreement.

     Accordingly, the parties hereto agree as follows:

     SECTION 1. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings:

     1.1. “Affiliate” means with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person.

     1.2. “Assignee” has the meaning set forth in Section 4.2.

     1.3. “Board of Directors” means the board of directors of the Company.

     1.4. “Common Stock” means any shares of common stock, par value $0.001 per share, of the Company, now or hereafter authorized to be issued, and any and all securities of any kind whatsoever of the Company or any successor thereof which may be issued on or after the date hereof in respect of, in exchange for, or upon conversion of shares of Common Stock pursuant to a merger, consolidation, stock split, reverse split, stock dividend, recapitalization of the Company or otherwise.

     1.5. “Company” shall mean National Medical Health Card Systems, Inc., a Delaware corporation, and shall include any successor thereto by merger, consolidation, acquisition of substantially all the assets thereof, or otherwise.

     1.6. “Convertible Securities” shall mean (i) any options or warrants to purchase or other rights to acquire Common Stock, (ii) any securities by their terms convertible into or exchangeable for Common Stock, and (iii) any options or warrants to purchase or other rights to acquire any such convertible or exchangeable securities.

     1.7. “Demand Exercise Notice” has the meaning set forth in Section 2.1(a).

     1.8. “Demand Registration” has the meaning set forth in Section 2.1(h).

     1.9. “Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act,shall include a reference to the comparable section, if any, of any such similar federal statute.

     1.10. “Form S-3” means a Form S-3 registration statement under the Securities Act, and any successor or similar form thereto.

     1.11. “Holder” means any of the Purchasers and any Assignee.

     1.12. “Holder Demand” has the meaning set forth in Section 2.1 (a).

     1.13. “indemnified party” means any Person seeking indemnification pursuant to Section 2.6.

     1.14. “indemnifying party” means any Person from whom indemnification is sought pursuant to Section 2.6.

     1.15. “Indemnitees” has the meaning set forth in Section 2.6(a).

     1.16. “Initiating Holder” means the party or parties delivering a Holder Demand as provided for under Section 2.1 (a).

     1.17. “Losses” has the meaning set forth in Section 2.6(a).

     1.18. “Majority Participating Holders” means, at any time, Participating Holders holding more than 50% of the Registrable Securities proposed to be included in any offering of Registrable Securities by such Participating Holders pursuant to Section 2.1 or Section 2.2.

     1.19. “NASD” means National Association of Securities Dealers, Inc.

     1.20. “Nasdaq” has the meaning set forth in Section 2.3(a)(x).

     1.21. “Participating Holders” means any Holder participating in any offering of Registrable Securities pursuant to Section 2.1 or Section 2.2.

     1.22. “Partner Distribution” has the meaning set forth in Section 2.1 (a).

     1.23. “Person” means an individual, a corporation, a partnership, a limited liability company, a business, an association, a trust, an individual, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

     1.24. “Postponement Period” has the meaning set forth in Section 2.1(j).

2

     1.25. “Purchase Agreement” has the meaning set forth in the recitals.

     1.26. “Purchasers” has the meaning set forth in the introduction.

     1.27. “Registrable Securities” means any of the following when held by a Holder: (i) any shares of Common Stock issued upon the conversion of the Series A Preferred Stock, (ii) any shares of Common Stock acquired by the Holders from the Company after the date hereof, including shares of Common Stock acquired upon exercise or conversion of Convertible Securities that are acquired by the Holders from the Company after the date hereof, and (iii) any shares of the Series A Preferred Stock. For purposes of this Agreement, a Person will be deemed to a Holder of Registrable Securities whenever such Person has the right to acquire, directly or indirectly, such Registrable Securities (upon conversion, exercise or exchange of any Convertible Securities but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and such Person shall not be required to convert, exercise or exchange such Convertible Security (or otherwise acquire such Registrable Security) to participate on any registered offering hereunder until the closing of such offering. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement or (b) when such securities shall have been sold pursuant to Rule 144 under the Securities Act or similar rule then in effect.

     1.28. “Registration Expenses” means all fees and expenses incurred in connection with the Company’s performance of or compliance with Section 2 hereof, including, without limitation, (i) all registration, filing and applicable SEC fees, NASD fees, national securities exchange or inter-dealer quotation system fees, and fees and expenses of complying with state securities or blue sky laws (including fees and disbursements of counsel to the underwriters and the Participating Holders in connection with “blue sky” qualification of the Registrable Securities and determination of their eligibility for investment under the laws of the various jurisdictions), (ii) all printing (including printing certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company and printing preliminary and final prospectuses), word processing, duplicating, telephone and facsimile expenses, and messenger and delivery expenses, (iii) all fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of “cold comfort” letters or any special audits required by, or incident to, such registration, (iv) all reasonable fees and expenses of one law firm or other counsel selected by the Majority Participating Holders for the benefit of all of the Participating Holders, (v) all reasonable fees and expenses of any special experts or other Persons retained by the Company in connection with any registration, (vi) Securities Act liability insurance or similar insurance if the Company so desires or the underwriters so require in accordance with then-customary underwriting practices, (vii) all applicable rating agency fees with respect to the Registrable Securities, (viii) reasonable fees and expenses of a Qualified Independent Underwriter (as such term is defined in Schedule E to the By-Laws of the NASD) and its counsel, (ix) all fees and disbursements of the underwriters (other than underwriting discounts and commissions but, including reasonable fees and disbursements of one counsel for such underwriters), (x) all transfer taxes, and (xi) all expenses incurred in connection with promotional efforts or “roadshows” (as negotiated by the Company

3

with the underwriters); provided, however, that Registration Expenses shall exclude, and the Participating Holders shall pay ratably, underwriting discounts and commissions in respect of the Registrable Securities being registered for such Participating Holders.

     1.29. “SEC” means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

     1.30. “Section 2.2 Sale Amount” has the meaning set forth in Section 2.2(c).

     1.31. “Securities Act” means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time. References to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar federal statute.

     1.32. “Selected Courts” has the meaning set forth in Section 4.4(b).

     1.33. “Series A Preferred Stock” has the meaning set forth in the recitals.

     SECTION 2. Registration Under Securities Act.

     2.1. Registration on Demand.

          (a) Demand. At any time or from time to time, a Holder or Holders holding a majority of Registrable Securities then outstanding may require the Company to effect the registration under the Securities Act of all or part of their respective Registrable Securities, by delivering a written request (a “Holder Demand”) therefor to the Company specifying the number of shares of Registrable Securities to be registered and the intended method of distribution thereof. As promptly as practicable, but no later than 10 days after receipt of a Holder Demand, the Company shall give written notice (the “Demand Exercise Notice”) of the Holder Demand to all Holders of Registrable Securities. Such Holders shall have the option, within 20 days after the receipt of the Demand Exercise Notice (or, 10 days if, at the request of the Initiating Holder, the Company states in such written notice or gives telephonic notice to each Holder, with written confirmation to follow promptly thereafter, stating that (i) such registration will be on Form S-3 and (ii) such shorter period of time is required because of a planned filing date), to request, in writing, that the Company include in such registration any Registrable Securities held by such Holder (which request shall specify the maximum number of Registrable Securities intended to be disposed of by such Holder). The Company shall as expeditiously as possible use its best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register by the Initiating Holder and any other Holders which have made such written request. The Company shall (i) use its best efforts to effect the registration of Registrable Securities for distribution in accordance with the intended method of distribution set forth in a written request delivered by the Majority Participating Holders, which may include, at the option of such Majority Participating Holders, a distribution to, and resale by, the partners of such Holder or Holders (a “Partner Distribution”), and (ii) if requested by the Majority Participating Holders, obtain acceleration of the effective date of the registration statement relating to such registration.

4

          (b) Partner Distributions. Notwithstanding anything contained herein to the contrary, the Company shall, at the request of any Participating Holder seeking to effect a Partner Distribution, file any prospectus supplement or post-effective amendments and shall otherwise take any action necessary to include such language, if such language was not included in the initial registration statement, or revise such language if deemed necessary by such Participating Holder, to effect such Partner Distribution.

          (c) Registration Statement Form. Registrations under this Section 2.1 shall be on such appropriate form of the SEC (i) as shall be selected by the Company and as shall be reasonably acceptable to the Majority Participating Holders and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in such Participating Holders’ requests for such registration, including, without limitation, a Partner Distribution or a continuous or delayed basis offering pursuant to Rule 415 under the Securities Act, The Company agrees to include in any such registration statement all information which, in the opinion of counsel to the Participating Holders and counsel to the Company, is necessary or desirable to be included therein.

          (d) Expenses. The Company shall pay, and shall be responsible for, all Registration Expenses in connection with any registration requested pursuant to this Section 2.1, Notwithstanding the foregoing, the provisions of this Section 2.1(d) shall be deemed amended to the extent necessary to cause these expense provisions to comply with “blue sky” laws of each state or the securities laws of any other jurisdiction in the United States and its territories in which the offering is made.

          (e) Effective Registration Statement. A registration requested pursuant to this Section 2.1 shall not be deemed a Demand Registration (including for purposes of Section 2.1(h)) unless a registration statement with respect thereto has become effective and has been kept continuously effective for the period set forth in Section 2.3(a)(i) or, if such registration statement relates to an underwritten offering, such longer period as in the opinion of counsel for the underwriter or underwriters a Prospectus is required by law to be delivered in connection with sales of Registrable Securities by an underwriter or dealer. Should a Demand Registration not become effective due to the failure of a Participating Holder to perform its obligations under this Agreement, or in the event the Majority Participating Holders withdraw or do not pursue the request for the Demand Registration as provided for in Section 2.1(g) (in each of the foregoing cases, provided that at such time the Company is in compliance in all material respects with its obligations under this Agreement), then, such Demand Registration shall be deemed to have been effected (including for purposes of Section 2.1(h)); provided, that, if (i) the Demand Registration does not become effective because a material adverse change has occurred, or is reasonably likely to occur, in the condition (financial or otherwise), prospects, business, assets or results of operations of the Company and its subsidiaries taken as a whole subsequent to the date of the delivery of the Demand Exercise Notice, (ii) after the Demand Registration has become effective, such registration is interfered with by any stop order, injunction, or other order or requirement of the SEC or other governmental agency or court, (iii) the Demand Registration is withdrawn at the request of the Majority Participating Holders due to the advice of the managing underwriter(s) that the Registrable Securities covered by the registration statement could not be sold in such offering within a price range acceptable to the Majority Participating

5

Holders, (iv) the Demand Registration is withdrawn for any reason at any time during a Postponement Period or within ten days thereafter, or (v) the Participating Holders reimburse the Company for any and all Registration Expenses incurred by the Company in connection with such request for a Demand Registration that was withdrawn or not pursued, then the Demand Registration shall not be deemed to have been effected and will not count as a Demand Registration).

          (f) Selection of Underwriters. The underwriters of each underwritten offering of the Registrable Securities pursuant to this Section 2.1 shall be selected by the Majority Participating Holders, which underwriters shall be reasonably acceptable to the Company.

          (g) Right to Withdraw. Any Participating Holder shall have the right to withdraw its request for inclusion of Registrable Securities in any registration statement pursuant to this Section 2.1 at any time prior to the effective date of such registration statement (but in no event less than 24 hours prior to such date) by giving written notice to the Company of its request to withdraw. Upon receipt of notices from the Majority Participating Holders to such effect, the Company shall cease all efforts to obtain effectiveness of the applicable registration statement, and whether the Initiating Holder’s request for registration pursuant to this Section 2.1 shall be counted as a Demand Registration for purposes of Section 2.1(h) shall be determined in accordance with Section 2.1(e) above.

          (h) Limitations on Registration on Demand. The Holders shall be entitled to require the Company to effect, and the Company shall be required to effect, four (4) registrations in the aggregate pursuant to this Section 2.1 (each, a “Demand Registration”): provided, however, that the Company shall not be required to have a registration statement declared effective pursuant to a Demand Registration until at least 90 days after the effective date of any other registration statement filed by the Company pursuant to a previous Demand Registration. The aggregate offering value of the shares to be registered pursuant to any such registration shall be at least $5 million (determined as of the date the demand is made), unless the registration is of the balance of the Registrable Securities held by the Holders.

          (i) Priority in Registrations on Demand. Whenever the Company effects a registration pursuant to this Section 2.1 in connection with an underwritten offering by Holders, no securities other than Registrable Securities shall be included among the securities covered by such registration unless the Majority Participating Holders consent in writing to the inclusion therein of such other securities, which consent may be subject to terms and conditions determined by the Majority Participating Holders in their sole discretion. If any registration pursuant to a Holder Demand involves an underwritten offering and the managing underwriter(s) of such offering shall inform the Company in writing of its belief that the number of Registrable Securities requested to be included in such registration pursuant to this Section 2.1, when added to the number of any other securities to be offered in such registration, would materially adversely affect such offering, then the Participating Holders shall be entitled to participate on a pro rata basis based on the number of shares of Registrable Securities requested to be included in the offering by each such Participating Holder prior to the inclusion of any securities other than Registrable Securities.

6

          (j) Postponement. The Company shall be entitled once in any twelvemonth period to postpone for a reasonable period of time (but not exceeding 90 days) (the “Postponement Period”) the filing of any registration statement required to be prepared and filed by it pursuant to this Section 2.1 if the Company determines, in its reasonable judgment, upon advice of counsel, as authorized by a resolution of the Board of Directors, that such registration and offering would require premature disclosure of any material financing, material corporate reorganization or other material transaction involving the Company, and promptly gives the Participating Holders written notice of such determination, containing a specific statement of the reasons for such postponement and an approximation of the anticipated delay.

     2.2. Incidental Registration.

          (a) Right to Include Registrable Securities. If the Company at any time proposes to register any of its equity securities under the Securities Act by registration on Form S-l, S-2 or S-3, or any successor or similar form(s) (except registrations (i) pursuant to Section 2.1, (ii) solely for registration of equity securities in connection with an employee benefit plan (as defined in 405 of the Securities Act) or dividend reinvestment plan on Form S-8 or any successor form thereto or (iii) in connection with any acquisition or merger on Form S-4 or any successor form thereto), whether or not for sale for its own account, it will each such time give prompt written notice (but in no event less than 30 days prior to the initial filing of a registration statement with respect thereto) to each of the Holders of its intention to do so and such notice shall offer the Holders of such Registrable Securities the opportunity to register under such registration statement such number of Registrable Securities as each such Holder may request in writing. Upon the written request of any of the Holders (which request shall specify the maximum number of Registrable Securities intended to be disposed of by such Holder), made as promptly as practicable and in any event within 20 days after the receipt of any such notice (or, 10 days if the Company states in such written notice or gives telephonic notice to each Holder, with written confirmation to follow promptly thereafter, stating that (i) such registration will be on Form S-3 and (ii) such shorter period of time is required because of a planned filing date), the Company shall include in such registration under the Securities Act all Registrable Securities which the Company has been so requested to register by each Holder; provided, however, that if, at any time after giving written notice of its intention to register any equity securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such equity securities, the Company shall give written notice of such determination and its reasons therefor to the Holders and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith as provided for in Section 2.2(d)), without prejudice, however, to the rights of the Holders to request that such registration be effected as a registration under Section 2.1 and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 2.2 shall relieve the Company of its obligation to effect any registration upon request under Section 2.1.

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          (b) Right to Withdraw; Option to Participate in Shelf Takedowns. Any Holder shall have the right to withdraw its request for inclusion of Registrable Securities in any registration statement pursuant to this Section 2.2 at any time prior to the effective date of such registration statement (but in no event less than 24 hours prior to such date) by giving written notice to the Company of its request to withdraw. In the event that the Holder has requested inclusion of Registrable Securities in a shelf registration, the Holder shall have the right, but not the obligation, to participate in any offering of the Company’s equity securities under such shelf registration.

          (c) Priority in Incidental Registrations. If any registration pursuant to this Section 2.2 involves an underwritten offering and the managing underwriter(s) of such offering shall inform the Company in writing of its belief that the number of Registrable Securities requested to be included in such registration or offering, when added to the number of other equity securities to be offered in such registration or offering, would materially adversely affect such offering, then the Company shall include in such registration or offering, to the extent of the number and type which the Company is so advised can be sold in (or during the time of) such registration or offering without so materially adversely affecting such registration or offering (the “Section 2.2 Sale Amount”), (i) all of the securities proposed by the Company to be sold for its own account; (ii) thereafter, to the extent the Section 2.2 Sale Amount is not exceeded, the Registrable Securities requested by the Participating Holders (provided that if all of the Registrable Securities requested by the Participating Holders may not be included, the Participating Holders shall be entitled to participate on a pro rata basis based on the aggregate number of shares of Registrable Securities requested by the Participating Holders to be registered); and (iii) thereafter, to the extent the Section 2.2 Sale Amount is not exceeded, any other securities of the Company requested to be included by Company stockholders holding other such registration rights.

          (d) Expenses. The Company shall pay, and shall be responsible for, all Registration Expenses in connection with any registration requested pursuant to this Section 2.2. Notwithstanding the foregoing, the provisions of this Section 2.2(d) shall be deemed amended to the extent necessary to cause these expense provisions to comply with “blue sky” laws of each state or the securities laws of any other jurisdiction in the United States and its territories in which the offering is made.

          (e) Selection of Underwriters. The underwriters of each underwritten offering of the Registrable Securities pursuant to this Section 2.2 shall be selected by the Company provided that the Majority Participating Holders shall have the right to select a co-managing underwriter.

          (f) Plan of Distribution: Partner Distributions. Any participation by Holders in a registration by the Company shall be in accordance with the Company’s plan of distribution, which shall include, upon the written request of such Holder or Holders, a Partner Distribution. Notwithstanding anything contained herein to the contrary, the Company shall, at the request of any Holder seeking to effect a Partner Distribution, file any prospectus supplement or post-effective amendments and otherwise take any action necessary to include such language,

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if such language was not included in the initial registration statement, or revise such language if deemed reasonably necessary by such Holder to effect such Partner Distribution.

          (g) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration, whether or not any Holder has elected to include Registrable Securities in such registration.

     2.3. Registration Procedures.

          (a) If and whenever the Company is required to effect the registration of any Registrable Securities under the Securities Act pursuant to either Section 2.1 or Section 2.2 hereof, the Company shall as expeditiously as possible:

               (i) prepare and file with the SEC as soon as practicable (and in the case of a demand pursuant to Section 2.1, within 30 days after receipt by the Company of a Demand Exercise Notice) a registration statement on an appropriate registration form of the SEC for the disposition of such Registrable Securities in accordance with the intended method of disposition thereof (including, without limitation, a Partner Distribution) which registration statement shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and thereafter use its best efforts to cause such registration statement to become and remain effective (A) with respect to an underwritten offering, for a period of at least 90 days or until all shares subject to such.registration statement have been sold and (B) with respect to a shelf registration, until the earlier of (1) the sale of all Registrable Securities thereunder and (2) the earlier of the tenth anniversary of the date of this Agreement and the third anniversary of the effective date of such shelf registration;

               (ii) prepare and file with the SEC any amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended methods of disposition by the Participating Holders set forth in such registration statement for such period as provided for in Section 2.3(a)(i) above;

               (iii) furnish, without charge, to each Participating Holder and each underwriter such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as the Majority Participating Holders and such underwriters may request (it being understood that the Company consents to the use of such prospectus or any amendment or supplement thereto by each Participating Holder and the underwriters in connection with the

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offering and sale of the Registrable Securities covered by such prospectus or any amendment or supplement thereto);

               (iv) use its best efforts (A) to register or qualify all Registrable Securities and other securities covered by such registration statement under such state securities or blue sky laws where an exemption is not available and as the Majority Participating Holders or any managing underwriter shall reasonably request, (B) to keep such registration or qualification in effect for so long as such registration statement remains in effect, and (C) to take any and all other actions which may be necessary or advisable to enable the Participating Holders or underwriters to consummate the disposition in such jurisdictions of the securities to be sold by the Participating Holders or underwriters, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not, but for the requirements of this Section 2.3(a)(iv), be obligated to be so qualified;

               (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Participating Holders to consummate the disposition of such Registrable Securities;

               (vi) furnish to each Participating Holder and each underwriter a signed counterpart of (A) an opinion of counsel for the Company and (B) a “comfort” letter signed by the independent public accountants who have certified the Company’s financial statements included or incorporated by reference in such registration statement, in each case, addressed to each Participating Holder and each underwriter covering matters with respect to such registration statement (and the prospectus included therein) as such Majority Participating Holders and managing underwriter(s) shall request;

               (vii) promptly notify each Participating Holder and each managing underwriter (A) when such registration statement, any pre-effective amendment, the prospectus or any prospectus supplement related thereto or post-effective amendment to such registration statement has been filed, and, with respect to such registration statement or any post-effective amendment, when the same has become effective; (B) of the receipt by the Company of any comments from the SEC or receipt of any request by the SEC for additional information with respect to any registration statement or the prospectus related thereto or any request by the SEC for amending or supplementing the registration statement and the prospectus used in connection therewith; (C) of the issuance by the SEC of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose; (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation of any proceeding for such purpose; and (E) at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not

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misleading, in the light of the circumstances under which they were made, and in the case of this clause (E), promptly prepare and furnish, at the Company’s expense, to each Participating Holder and each managing underwriter a number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and (F) at any time when the representations and warranties of the Company contemplated by Section 2.4(a) or (b) hereof cease to be true and correct;

               (viii) otherwise comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as practicable (and in any event within 16 months after the effective date of the registration statement), an earnings statement covering the period of at least twelve (12) consecutive months beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 1l(a) of the Securities Act and Rule 158 promulgated thereunder;

               (ix) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement;

               (x) (A) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar securities issued by the Company are then listed (if any), if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (B) if no similar securities are then so listed, use its best efforts to (1) cause all such Registrable Securities to be listed on a national securities exchange or (2) secure designation of all such Registrable Securities as a National Association of Securities Dealers, Inc. Automated Quotation System (“Nasdaq”) “national market system security” within the meaning of Rule 11Aa2-l of the SEC or (3) failing that, to secure Nasdaq authorization for such shares and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such shares with the NASD;

               (xi) deliver promptly to counsel to the Participating Holders and each, underwriter, if any, participating in the offering of the Registrable Securities, copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to such registration statement;

               (xii) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement;

               (xiii) provide a CUSIP number for all Registrable Securities, no later than the effective date of the registration statement and provide the applicable transfer agents with printed certificates for the Registrable Securities which are in a form eligible for deposit with The Depository Trust Company; and

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               (xiv) cause its officers and employees to participate in, and to otherwise facilitate and cooperate with the preparation of the registration statement and prospectus and any amendments or supplements thereto (including participating in meetings, drafting sessions, due diligence sessions and the marketing of the Registrable Securities covered by the registration statement (including, without limitation, participation in “road shows”) taking into account the Company’s business needs;

               (xv) enter into and perform its obligations under such customary agreements (including, without limitation, if applicable, an underwriting agreement as provided for in Section 2.4 herein) and take such other actions as the Majority Participating Holders or managing underwriter(s) shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities;

               (xvi) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter(s) or Majority Participating Holders reasonably request to be included therein relating to the plan of distribution with respect to such Registrable Securities; and make all required filings of such prospectus supplement or post-effective amendment as soon as practicable after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment;

               (xvii) cooperate with each Participating Holder and each underwriter, and their respective counsel in connection with any filings required to be made with the NASD, New York Stock Exchange, or any other securities exchange on which such Registrable Securities are traded or will be traded;

               (xviii) promptly prior to the filing of any document which is to be incorporated by reference into the registration statement or the prospectus contained therein (after the initial filing of such registration statement) provide copies of such document to counsel for the Participating Holders and to each managing underwriter, and make the Company’s representatives available for discussion of such document and make such changes in such document concerning the Participating Holders prior to the filing thereof as counsel for such Participating Holders or underwriters may request;

               (xix) furnish to each Participating Holder and each managing underwriter(s), without charge, at least one signed (which may be a conforming signature) copy of the registration statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference);

               (xx) cooperate with the Participating Holders and the managing underwriter(s) to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement prior to any sale of Registrable Securities to the underwriters or, if not an underwritten offering, in accordance with the instructions of the Participating Holders at

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least five business days prior to any sale of Registrable Securities and instruct any transfer agent or registrar of Registrable Securities to release any stop transfer orders in respect thereof;

               (xxi) to the extent required by the rules and regulations of the NASD, retain a Qualified Independent Underwriter, which shall be reasonably acceptable to the Majority Participating Holders; and

               (xxii) take no direct or indirect action prohibited by Regulation M under the Exchange Act; provided, however, that to the extent that any prohibition is applicable to the Company, the Company will take such action as is necessary to make any such prohibition inapplicable.

          (b) Each Participating Holder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 2.3(a)(vii)(C) or (E), each Participating Holder will, to the extent appropriate, discontinue its disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until, in the case of Section 2.3(a)(vii)(E), its receipt of the copies of the supplemented or amended prospectus contemplated by Section 2.3(a)(vii)(E) and, if so directed by the Company, will deliver to the Company (at the Company’s expense) all copies, other than permanent file copies, then in its possession, of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. If the disposition by a Participating Holder of its securities is discontinued pursuant to the foregoing sentence, the Company shall extend the period of effectiveness of the registration statement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Participating Holder shall have received copies of the supplemented or amended prospectus contemplated by Section 2.3(a)(vii)(E); and, if the Company shall not so extend such period, the Participating Holder’s request pursuant to which such registration statement was filed shall not be counted for purposes of the requests for registration to which the Participating Holder is entitled pursuant to Section 2.1 hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 2.1 or Section 2.2 is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 2.3(a)(i) so that Registrable Securities may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Securities pursuant to such registration statement may be resumed.

          (c) If any such registration statement or comparable statement under “blue sky” laws refers to any Holder by name or otherwise as the Holder of any securities of the Company, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such Holder and the Company, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the Company’s securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such Holder by name or otherwise is not in the judgment of the Company, as advised by counsel, required by the Securities Act or any similar federal

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statute or any state “blue sky” or securities law then in force, the deletion of the reference to such Holder.

          (d) Holders may seek to register different types of Registrable Securities simultaneously and the Company shall use its reasonable best efforts to effect such registration and sale in accordance with the intended method or methods of disposition specified by such holders.

     2.4. Underwritten Offerings.

          (a) Demanded Underwritten Offerings. If requested by the underwriters for any underwritten offering by the Participating Holders pursuant to a registration requested under Section 2.1, the Company shall enter into a customary underwriting agreement with the managing underwriter(s) selected by the Majority Participating Holders (in accordance with Section 2.l(f) hereto). Such underwriting agreement shall be reasonably satisfactory in form and substance to the Majority Participating Holders and shall contain such representations and warranties by, and such other agreements on the part of, the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, customary provisions relating to indemnification and contribution which are no less favorable to the recipient than those provided in Section 2.6 hereof. Each Participating Holder shall be a party to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of each Participating Holder and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of each Participating Holder. No Participating Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Participating Holder, its ownership of and title to the Registrable Securities, and its intended method of distribution; and any liability of any Participating Holder to any underwriter or other person under such underwriting agreement shall be limited to liability arising from breach of its representations and warranties and shall be limited to an amount equal to the proceeds (net of expenses and underwriting discounts and commissions) that it derives from such registration.

          (b) Incidental Underwritten Offerings. In the case of a registration pursuant to Section 2.2 hereof, if the Company shall have determined to enter into an underwriting agreement in connection therewith, all of the Registrable Securities to be included in such registration shall be subject to such underwriting agreements. The Participating Holders may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Participating Holders and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of the Participating Holders. None of the Participating Holders shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Participating Holder, its ownership of and title to the Registrable Securities and its intended

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method of distribution; and any liability of any Participating Holder to any underwriter or other Person under such underwriting agreement shall be limited to liability arising from breach of its representations and warranties and shall be limited to an amount equal to the proceeds (net of expenses and underwriting discounts and commissions) that it derives from such registration.

          (c) Participation in Underwritten Registrations. In the case of an underwritten registration pursuant to Section 2.1 or Section 2.2 hereof, as the Company may, from time to time reasonably request in writing, the Company may require the Participating Holders (i) to furnish the Company such information regarding such Participating Holders and the distribution of the Registrable Securities to enable the Company to comply with the requirements of applicable laws or regulations in connection with such registration and (ii) to complete and execute all customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. The Company shall not be obligated to effect the registration of any Registrable Securities of a particular Participating Holder unless such information and documents regarding such Participating Holder and the distribution of such Participating Holder’s Registrable Securities is provided to the Company.

     2.5. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the Participating Holders, the managing underwriter(s), and their respective counsel, accountants and other representatives and agents the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto or comparable statements under securities or blue sky laws of any jurisdiction, and give each of the foregoing parties access to its books and records, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and such opportunities to discuss the business of the Company and its subsidiaries with their respective directors, officers and employees and the independent public accountants who have certified the Company and its subsidiaries’ financial statements, and supply all other information and respond to all inquiries requested by such Participating Holders, managing underwriter(s), or their respective counsel, accountants or other representatives or agents in connection with such registration statement, as shall be necessary or appropriate, in the opinion of counsel to such Participating Holder or managing underwriter(s), to conduct a reasonable investigation within the meaning of the Securities Act, and the Company shall not file any registration statement or amendment thereto or any prospectus or supplement thereto to which the Majority Participating Holders or the managing underwriter(s) shall object.

     2.6. Indemnification.

          (a) Indemnification by the Company. The Company agrees that in the event of any registration of any Registrable Securities under the Securities Act, the Company shall, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, (i) each of the Holders and their Affiliates, (ii) each of the Holders’ and their Affiliates’ respective Affiliates, officers, directors, successors, assigns, members, partners, shareholders, employees, advisors, representatives, and agents, (iii) each other Person who participates as an underwriter or Qualified Independent Underwriter in the offering or sale of such securities, (iv) each Person

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who controls (within the meaning of the Securities Act or the Exchange Act) any of the Persons listed in clauses (i), (ii), (iii) or (iv), and (v) any representative (legal or otherwise) of any of the Persons listed in clauses (i), (ii), (iii) or (iv) (collectively, the “Indemnitees”). from and against any losses, penalties, fines, liens, judgments, suits, claims, damages, liabilities, costs and expenses (including reasonable attorney’s fees and any amounts paid in any settlement effected in compliance with Section 2.6(e)) or liabilities, joint or several (or actions or proceedings, whether commenced or threatened, in respect thereof, and whether or not such Indemnitee is a party thereto) (“Losses”), to which such Indemnitee has become or may become subject under the Securities Act or otherwise, insofar as such Losses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, or any preliminary prospectus, final prospectus or summary prospectus contained therein, any amendment or supplement thereto, or any documents incorporated by reference therein, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnitee for any reasonable legal or any other fees or expenses incurred by it in connection with investigating or defending any such Loss; provided that the Company shall not be liable to an Indemnitee to the extent that any such Loss arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement, or document incorporated by reference, in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Indemnitee, which specifically states that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement.

          (b) Indemnification by Participating Holders. As a condition to including any Registrable Securities in any registration statement, the Company shall have received an undertaking reasonably satisfactory to it from each Participating Holder so including any Registrable Securities to, severally and not jointly, to the fullest extent permitted by law, indemnify and hold harmless (i) the Company, each director and officer of the Company (including each officer of the Company that signed the registration statement), employees and agents and each other Person, if any, who controls the Company within the meaning of the Securities Act or Exchange Act and (ii) any underwriters of the Registrable Securities, their officers and directors and each person who controls such underwriters (within the meaning of the Securities Act or the Exchange Act), with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, but only to the extent such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished by such Participating Holder to the Company specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement and such Participating Holder shall reimburse such indemnified party for any reasonable legal or any

16

other fees or expenses reasonably incurred by them in connection with investigating or defending any such Loss; provided, however, that the liability of such indemnifying party under this Section 2.6(b) shall be limited to the amount of proceeds (net of expenses and underwriting discounts and commissions) received by such indemnifying party in the offering giving rise to such liability. Each Participating Holder shall also indemnify and hold harmless all other prospective sellers and Participating Holders, their respective Affiliates, officers, directors, successors, assigns, members, partners, shareholders, employees, advisors, representatives, and agents, and each Person who controls (within the meaning of the Securities Act or the Exchange Act) any such seller or Participating Holder to the same extent as provided above with respect to indemnification of the Company and underwriters.

          (c) Notices of Claims. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 2.6(a) or Section 2.6(b), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to such indemnifying party of the commencement of such action or proceeding; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 2.6(a) or Section 2.6(b), except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice, and shall not relieve the indemnifying party from any liability which it may have to the indemnified party otherwise than under this Section 2.6.

          (d) Defense of Claims. In case any such action or proceeding is brought against an indemnified party, except as provided for in the next sentence, the indemnifying party shall be entitled to participate therein and assume the defense thereof, jointly with any other indemnifying party, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than costs of investigation and the indemnified party shall be entitled to participate in such defense at its own expense. If (i) the indemnifying party fails to notify the indemnified party in writing, within 15 days after the indemnified party has given notice of the action or proceeding, that the indemnifying party will indemnify the indemnified party from and against all Losses the indemnified party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the claim, (ii) the indemnifying party fails to provide the indemnified party with evidence acceptable to the indemnified party that the indemnifying party will have the financial resources to defend against the claim or proceeding and fulfill its indemnification obligations hereunder, (iii) the indemnifying party fails to defend diligently the action or proceeding within 15 days after receiving notice of such failure from such indemnified party; (iv) such indemnified party reasonably shall have concluded (upon advice of its counsel) that there may be one or more legal defenses available to such indemnified party or other indemnified parties which are not available to the indemnifying party; or (v) if such indemnified party reasonably shall have concluded (upon advice of its counsel) that, with respect to such claims, the indemnified party and the indemnifying party may have different, conflicting, or adverse legal positions or interests then, in

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any such case, the indemnified party shall have the right to assume or continue its own defense and the indemnifying party shall be liable for any fees and expenses therefor.

          (e) Consent to Entry of Judgment and Settlements. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld, provided, that, in the case where the indemnifying party shall have failed to take any of the actions listed in clauses (i), (ii) or (iii) of the last sentence of Section 2.6(d), the indemnified party shall have the right to compromise or settle such action on behalf of and for the account, expense, and risk of the indemnifying party and the indemnifying party will remain responsible for any Losses the indemnified party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the action or proceeding to the fullest extent provided in this Section 2.6. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (A) includes an unconditional release of the indemnified party from all liability arising out of such action or claim, (B) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party and (C) does not require any inaction or action other than the payment of money by the indemnifying party.

          (f) Contribution. If for any reason the indemnification provided for in Sections 2.6(a), (b) or (g) is unavailable to an indemnified party or insufficient in respect of any Losses referred to therein, then, in lieu of the amount paid or payable under Sections 2.6(a), (b) or (g), the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such Loss (i) in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand, and the indemnified party on the other, with respect to the statements or omissions which resulted in such Loss, as well as any other relevant equitable considerations, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or if the allocation provided in this clause (ii) provides a greater amount to the indemnified party than clause (i) above, in such proportion as shall be appropriate to reflect not only the relative fault but also the relative benefits received by the indemnifying party and the indemnified party from the offering of the securities covered by such registration statement as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 2.6(f) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the preceding sentence of this Section 2.6(f). No Person guilty of fraudulent misrepresentation (within the meaning of Section 1l(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the Losses referred to in Sections 2.6(a), (b) or (g) shall be deemed to include,

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subject to the limitations set forth in Sections 2.6(a), (b) and (g), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding anything in this Section 2.6(f) to the contrary, no Participating Holder shall be required to contribute any amount in excess of the proceeds (net of expenses and underwriting discounts and commissions) received by such Participating Holder from the sale of the Registrable Securities in the offering to which the Losses of the indemnified parties relate.

          (g) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subsections of this Section 2.6 (with appropriate modifications) shall be given by the Company and the Participating Holders with respect to any required registration or other qualification of securities under state or blue sky law or regulation. The indemnification agreements contained in this Section 2.6 shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Indemnitee or other indemnified party and shall survive the transfer of any of the Registrable Securities by any such party.

          (h) Indemnification Payments. The indemnification and contribution required by this Section 2.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or a Loss is incurred.

     2.7. Limitation on Sale of Securities.

          (a) For the Company and Others. If the Company receives a request for registration pursuant to an underwritten offering of Registrable Securities pursuant to Section 2.1 or 2.2 hereof, and if such a request is being implemented or has not been withdrawn or abandoned, the Company agrees that (i) the Company shall not effect any public or private offer, sale, distribution or other disposition of any of its equity securities or of any security convertible into or exchangeable or exercisable for any equity security of the Company or effect any registration of any of such securities under the Securities Act (in each case, other than (x) option grants to employees pursuant to the Company’s option plan, (y) as part of such registration and (z) as a registration using Form S-8 or any successor or similar form which is then in effect), whether or not for sale for its own account, during the period beginning on the date the Company receives such request until 90 days after the effective date of such registration (or such shorter period as the managing underwriter(s) may require) and (ii) the Company shall use its reasonable best efforts to obtain from each of its officers, directors and beneficial owners of 5% or more of Common Stock, an agreement not to effect any public or private offer, sale, distribution or other disposition of Common Stock, or any securities that are convertible or exchangeable or exercisable for Common Stock, during the period referred to in clause (i) of this paragraph, including, without limitation, a sale pursuant to Rule 144 under the Securities Act, The Company agrees to cause each holder of Common Stock, or any securities that are convertible or exchangeable or exercisable for Common Stock, purchased or otherwise acquired from the Company (other than in a public offering) at any time after the date of this Agreement to agree not to effect any public or private offer, sale, distribution or other disposition of any such

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securities during the period referred to in clause (i) of the preceding sentence, including, without limitation, a sale pursuant to Rule 144 under the Securities Act

          (b) For the Holders. If the Company receives a request for registration pursuant to an underwritten offering of Registrable Securities pursuant to Section 2.1 or 2.2 hereof, and if such a request is being implemented or has not been withdrawn or abandoned, each Holder agrees that, to the extent requested in writing by the managing underwriter(s); it will not effect any public or private offer, sale, distribution or other disposition of any Registrable Securities, or any securities convertible into or exchangeable or exercisable for such Registrable Securities (other than the conversion of shares of the Series A Preferred Stock), including, without limitation, any sale pursuant to Rule 144 under the Securities Act, during the 90-day period beginning on the effective date of such registration statement (or such shorter period as the managing underwriter(s) may require), provided, that each Holder has received the written notice required by Sections 2.1 (a) and 2.2(a); and further, provided, that in connection with such underwritten offering each officer and director of the Company is subject to restrictions substantially equivalent to those imposed on the Holders.

     2.8. No Required Sale. Nothing in this Agreement shall be deemed to create an independent obligation on the part of any of the Holders to sell any Registrable Securities pursuant to any effective registration statement.

     2.9. Rule 144; Rule 144A; Regulation S. The Company covenants that, at its own expense, it will file the reports required to be filed by it under the Securities Act and the Exchange Act, and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rules 144, 144A or Regulation S under the Securities Act or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of a Holder, the Company, at its own expense, will promptly deliver to such Holder (i) a written statement as to whether it has complied with such requirements (and such Holder shall be entitled to rely upon the accuracy of such written statement), (ii) a copy of the most recent annual or quarterly report of the Company and (iii) such other reports and documents as such Holder may reasonably request in order to avail itself of any rule or regulation of the SEC allowing it to sell any Registrable Securities without registration.

     2.10. Adjustments. At the request of any Holder, in the event of any change in the capitalization of the Company as a result of any stock split, stock dividend, reverse split, combination, recapitalization, merger, consolidation, or otherwise, the provisions of this Section 2 shall be appropriately adjusted. The Company agrees that it shall not effect or permit to occur any combination or subdivision of shares which would adversely affect the ability of the Holders to include any Registrable Securities in any registration contemplated by this Agreement or the marketability of such Registrable Securities in any such registration. The Company agrees, upon obtaining necessary approval, that it will take all steps necessary to effect a combination or subdivision of shares if in the reasonable judgment of the Purchasers, or in connection with an offering pursuant to a Demand Registration or incidental registration under this Section 2, the Majority Participating Holders or managing underwriter(s) determine that such combination or subdivision would enhance the marketability of the Registrable Securities.

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     SECTION 3. Subsequent Registration Rights; No Inconsistent Agreements.

     3.1. Limitations on Subsequent Registration Rights. From and after the date of this Agreement until the Holders and their respective assigns shall no longer hold any Registrable Securities, without the prior written consent of each of the Purchasers, the Company shall not enter into an agreement that grants a holder or prospective holder of any securities of the Company demand or incidental registration rights that by their terms are not subordinate to the registration rights granted to the Holders in this Agreement. Notwithstanding the foregoing, if after the date of this Agreement the Company enters into any other agreement with respect to the registration of any of its equity securities, and the terms contained therein are more favorable to, or less restrictive on, the other party thereto than the terms and conditions contained in this Agreement (insofar as they are applicable) with respect to the Holders, then the terms of this Agreement shall immediately be deemed to have been amended without further action by the Company or the Holders so that the Holders shall be entitled to the benefit of any such more favorable or less restrictive terms or conditions.

     3.2. No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Holders in Section 2 or otherwise conflicts with the provisions of Section 2, other than any customary lock-up agreement with the underwriters in connection with any offering effected hereunder, pursuant to which the Company shall agree not to register for sale, and the Company shall agree not to sell or otherwise dispose of, Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, for a specified period (not to exceed 180 days) following such offering. Except as set forth on Schedule 3.6 of the Company Disclosure Schedules, the Company warrants that the rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with any other agreements to which the Company is a party or by which it is bound. Except as set forth on Schedule 3,6 the Company Disclosure Schedules, the Company has not previously entered into any agreement with respect to its securities granting any registration rights to any Person.

     SECTION 4. Miscellaneous.

     4.1. Amendments and Waivers. This Agreement and any of the provisions hereof may be amended, waived (either generally or in a particular instance and either retroactively or prospectively), modified or supplemented, in whole or in part, only by written agreement of the Company (by an independent committee of the Board of Directors) and the Purchasers; provided, however, that any amendment, waiver, modification or supplement of Section 2.6 shall require the written agreement of the Company and all Holders; and provided, further, that the observance of any provision of this Agreement may be waived in writing by the party that will lose the benefit of such provision as a result of such waiver. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach, except as otherwise explicitly provided for in such waiver. Except as otherwise expressly provided herein, no failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder, or otherwise available in respect hereof at law or in equity, shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or

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remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The execution of a counterpart signature page to this Agreement after the date hereof by any Person as provided for herein shall not require consent of any party hereto and shall not be deemed an amendment to this Agreement.

     4.2. Assignment; Third Party Beneficiaries. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and any of their respective successors, personal representatives and permitted assigns who agree in writing to be bound by the terms hereof. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the prior written consent of the Holders. Any Holder may, at its election and at any time or from time to time, assign its rights and delegate its duties under this Agreement, in whole or in part, to an Affiliate, to a partner of such Holder or Affiliate or to any Person to whom the Holder sells, assigns or otherwise transfers any of its Registrable Securities (an “Assignee”); provided that, no such assignment shall be binding upon or obligate the Company to any such Assignee unless and until the Assignee delivers to the Company (i) a written notice stating the name and address of the Assignee and identifying the securities with respect to which such rights are being assigned, if any, and (ii) a written instrument by which such Assignee agrees to be bound by the obligations imposed upon Holders under this Agreement to the same extent as if such Assignee were a party hereto (or executes and delivers to the Company a counterpart to this Agreement and agrees to be treated as a “Holder” for all purposes of this Agreement).

     4.3. Notice. Unless otherwise provided herein, all notices, requests, demands, claims and other communications provided for under the terms of this Agreement shall be in writing and shall be delivered personally, telecopied or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given if delivered personally or telecopied, on the date of such delivery, or if sent by reputable overnight courier, on the first business day following the date of such mailing, as follows:

(a)	If to any of the Holders, to:
	New Mountain Partners, L.P. 712 Fifth Avenue, 23rd Floor New York, NY 10019 Facsimile: (212) 582-2277 Attention: Steven B. Klinsky
	With a copy to (which shall not constitute notice):
	Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004 Facsimile: (212) 859-4000 Attention: Aviva F. Diamant, Esq.

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(b)	If to the Company, to:
	National Medical Health Card Systems, Inc. 26 Harbor Park Drive Port Washington, New York 11050 Facsimile: (516)626-8002 Attention: Chief Financial Officer
	With a copy to (which shall not constitute notice):
	Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, New York 10103 Facsimile: (212) 318-3400 Attention: Steven I. Suzzan, Esq.

     Any party may by notice given in accordance with this Section 4.3 designate another address or person for receipt of notices hereunder.

     4.4. Governing Law; Venue: Service of Process; Waiver of Jury Trials.

          (a) Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights and obligations of the parties hereto shall be governed by, the laws of the State of New York, without giving effect to the principles of conflicts of laws except for §5-1401 and §5-1402 of the General Obligations Law Provisions of the State of New York.

          (b) Venue and Service of Process. By execution and delivery of this Agreement, each of the parties hereto hereby irrevocably and unconditionally (i) consents to submit to the exclusive jurisdiction of the courts of the State of New York in New York county and the United States District Court for the Southern District of New York (the “Selected Courts”) for any action or proceeding arising out of or relating to this Agreement and the transactions contemplated hereby, and agrees not to commence any action or proceeding relating thereto except in the Selected Courts, provided, that, a party may commence any action or proceeding in a court other than a Selected Court solely for the purpose of enforcing an order or judgment issued by one of the Selected Courts; (ii) consents to service of any process, summons, notice or document in any action or proceeding by registered first-class mail, postage prepaid, return receipt requested or by nationally recognized courier guaranteeing overnight delivery in accordance with Section 4.3 hereof and agrees that such service of process shall be effective service of process for any action or proceeding brought against it in any such court, provided, that, nothing herein shall affect the right of any party hereto to serve process in any other manner permitted by law; (iii) waives any objection to the laying of venue of any action or proceeding arising out of this Agreement or the transactions contemplated hereby in the Selected Courts; and (iv) waives and agrees not to plead or claim in any court that any such action or proceeding brought in any such Selected Court has been brought in an inconvenient forum.

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          (c) Waiver of Jury Trial. With respect to any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, each of the parties hereby irrevocably, to the extent not prohibited by applicable law that cannot be waived, waives, and covenants that it will not assert (whether as plaintiff, defendant or otherwise), any right to trial by jury in any action arising in whole or in part under or in connection with this Agreement or the transactions contemplated hereby, whether now existing or hereafter arising, and whether sounding in contract, tort or otherwise, and agrees that any of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained-for agreement among the parties irrevocably to waive its right to trial by jury in any action or proceeding whatsoever between them relating to this Agreement or the transactions contemplated hereby. Such action or proceeding shall instead be tried in a Selected Court by a judge sitting without a jury.

     4.5. Remedies. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached and further agree that money damages or other remedy at law would not be a sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that, in addition to all other remedies available to them, each of them shall be entitled to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including, without limitation, specific performance of the terms and provisions of this Agreement. Any requirements for the securing or posting of any bond with respect to such remedy are hereby waived by each of the parties hereto. Each party further agrees that, in the event of any action for an injunction or other equitable remedy in respect of such breach or enforcement of specific performance, it will not assert the defense that a remedy at law would be adequate. In any action or proceeding brought to enforce any provision of this Agreement (including the indemnification provisions thereof), or where any provision hereof is validly asserted as a defense, the successful party to such action or proceeding shall be entitled to recover, to the extent permitted by applicable law, attorneys’ fees in addition to its costs and expenses and any other available remedy.

     4.6. Further Assurances. Each party hereto shall cooperate with each other party, shall do and perform or cause to be done and performed all further acts and things, and shall execute and deliver all other agreements, certificates, instruments, and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

     4.7. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof.

     4.8. Entire Agreement. This Agreement, the Purchase Agreement and the documents referred to herein or therein or delivered pursuant hereto or thereto, are intended by

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the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, the Purchase Agreement and the documents referred to herein or therein or delivered pursuant hereto or thereto, supersede all prior agreements and understandings between the parties with respect to such subject matter.

     4.9. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, all of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

     4.10. Defaults. A default by any party to this Agreement in such party’s compliance with any of the conditions or covenants hereof or performance of any of the obligations of such party hereunder shall not constitute a default by any other party.

     4.11. General Interpretive Principles. Whenever used in this Agreement, except as otherwise expressly provided or unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders. The headings of the sections, paragraphs, subparagraphs, clauses and subclauses of this Agreement are for convenience of reference only and shall not in any way affect the meaning or interpretation of any of the provisions hereof. Unless otherwise specified, the terms “hereof,” “herein” and similar terms refer to this Agreement as a whole, and references herein to Sections refer to Sections of this Agreement. Words of inclusion shall not be construed as terms of limitation herein, so that references to “include”, “includes” and “including” shall not be limiting and shall be regarded as references to non-exclusive and non-characterizing illustrations.

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     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:	/s/ James J. Brigl
	James J. Brigl
	Chief Executive Officer
NEW MOUNTAIN PARTNERS, L.P.
By:	New Mountain Investments, L.P., its general partner
	By:	New Mountain GP, LLC, its general partner
		By:	/s/ Steven B. Klinsky
			Steven B. Klinsky
			Chief Executive Officer
NEW MOUNTAIN AFFILIATED INVESTORS, L.P.
By:	New Mountain GP, LLC, its general partner
	By:	/s/ Steven B. Klinsky
		Steven B. Klinsky
		Chief Executive Officer

Registration Rights Agreement

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EX-10.2

EXHIBIT 10.2

AMENDMENT NO. 1
TO CREDIT AGREEMENT

     AMENDMENT NO. 1, dated as of March 7, 2005 (this “Amendment “) to the Credit Agreement, dated as of January 28, 2005 (as amended, restated, modified or otherwise supplemented, from time to time, the “Credit Agreement”), by and among NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. (the “Borrower”), JPMORGAN CHASE BANK, N.A., as Administrative Agent and the LENDERS from time to time party thereto (each, a “Lender” and, collectively, the “Lenders”).

     WHEREAS, the Borrower has requested, and the Required Lenders have agreed, subject to the terms and conditions of this Amendment, to amend certain provisions of the Credit Agreement as set forth herein.

     NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows:

1. Amendments.

     (a) A new definition entitled “Cal Optima Contract” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “Cal Optima Contract” means that certain contract, dated as of January 1, 2003, by and between PCN and Cal Optima Inc., a California corporation.

     (b) A new definition entitled “PCN” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “PCN” means Pharmaceutical Care Network, a California corporation.

     (c) A new definition entitled “PCN Acquisition” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “PCN Acquisition” means the acquisition by PCN Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Borrower, of all of the issued and outstanding capital stock of PCN.

     (d) A new definition entitled “PCN Acquisition Closing Date” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “PCN Acquisition Closing Date” means March 7, 2005.

     (e) A new definition entitled “ PCN Agency Arrangements” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “PCN Agency Arrangements” means those contracts of PCN which are structured as Agency Arrangements (as such term is defined in Section 6.13(a) hereof).

     (f) A new definition entitled “PCN Maximum Gross Profit Earn-out Amount” shall be added to Section 1.01. of the Credit Agreement in its proper alphabetical order, which new definition shall read in its entirety as follows:

     “PCN Maximum Gross Profit Earn-out Amount” means $15,000,000, which represents the amount which may be payable by the Borrower pursuant to Section 2.6(b)l of the PCN Stock Purchase Agreement, made and entered into as of March 7, 2005, by and among the Borrower, PCN Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Borrower, Pharmaceutical Care Network, a California corporation, and California Pharmacists Association, a California mutual benefit corporation.

     (g) The definition of “Consolidated Fixed Charge Ratio” in Section 1.01. of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

     “Consolidated Fixed Charge Ratio” means the ratio of (1) Consolidated EBITDA minus Consolidated Unfunded Capital Expenditures to (2) the sum of (a) the current portion of Consolidated Debt (excluding any amounts constituting all or a portion of the PCN Maximum Gross Profit Earn-out Amount), plus (b) cash “earn-out” payments made by the Borrower and its Subsidiaries in the twelve (12) months preceding the date of calculation, but solely with respect to those payments which were not, at any time prior to their payment, reflected as debt, an accrued liability or deferred purchase price on the consolidated balance sheets of the Borrower and its Subsidiaries delivered pursuant to Section 5.01 hereof, plus (c) interest expense, plus (d) dividends, plus (e) cash taxes paid by the Borrower and its Subsidiaries. Each of the foregoing categories shall be measured on a consolidated basis for the Borrower and its Subsidiaries and shall calculated in accordance with GAAP. The Consolidated Fixed Charge Coverage Ratio shall be tested quarterly, measured for the four (4) fiscal quarters then ended, except for the current portion of Consolidated Debt, which shall each be measured for the next succeeding four (4) fiscal quarters.

     (h) The definition of “Consolidated Debt to Consolidated EBITDA Ratio” in Section 1.01. of the Credit Agreement is hereby amended by adding a new sentence at the end of such definition which sentence shall read in its entirety as follows:

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     Solely for purposes of calculating compliance with Section 6.12(c) hereof and not for purposes of determining the Applicable Rate, during the period from the PCN Acquisition Closing Date through May 29, 2006, Consolidated Debt shall include the PCN Maximum Gross Profit Earn-out Amount.

     (i) Section 2.01. of the Credit Agreement is hereby amended by adding a new sentence at the end of such Section which sentence shall read in its entirety as follows:

     Notwithstanding the foregoing, during the period from the PCN Acquisition Closing Date through May 29, 2006, the sum of the total Revolving Credit Exposures plus the PCN Maximum Gross Profit Earn-out Amount (or such lesser amount as agreed to in writing by the Required Lenders) shall not exceed the total Commitments.

     (j) Section 6.13(a) of the Credit Agreement is hereby amended by adding a new sentence at the end of such sub-section which sentence shall read in its entirety as follows:

     Notwithstanding the foregoing, for a period of sixty (60) days following the PCN Acquisition Closing Date, the PCN Agency Arrangements shall not be included in the calculation of compliance with this covenant.

     (k) Section 6.13(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

     (b) Not more than five percent (5%) of the accounts receivable of the Borrower and its Subsidiaries, on a consolidated basis, are (i) accounts receivable in which the Administrative Agent, for the ratable benefit of the Lenders, cannot obtain a perfected and/or enforceable security interest as determined by the Administrative Agent on the basis of collateral audits of the Borrower and/or its Subsidiaries, or (ii) accounts receivable arising under Agency Arrangements. Notwithstanding the foregoing, for a period of sixty (60) days following the PCN Acquisition Closing Date, the PCN Agency Arrangements shall not be included in the calculation of compliance with this covenant. In addition, accounts receivable arising under the Cal Optima Contract shall not at any time be included in the calculation of compliance with this covenant.

     (1) Subsection (o) of Article VII of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

          (o) any of the Liens purported to be granted pursuant to any Security Document shall fail or cease for any reason to be legal, valid and enforceable liens on a “material portion” of the collateral purported to be covered thereby or shall fail or cease to have the priority purported to be created thereby, where, for purposes hereof, a “material portion” means collateral (other than accounts receivable arising under the Cal Optima Contract) having a value in

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excess of five percent (5%) of the consolidated total accounts receivable and inventory of the Borrower (without giving effect to accounts receivable arising under the Cal Optima Contract), as reported on the asset side of the Borrower’s consolidated balance sheet;

2. Conditions to Effectiveness.

     This Amendment shall become effective upon receipt by the Administrative Agent this Amendment duly executed by each of the parties hereto.

3. Miscellaneous.

     The amendment herein contained is limited specifically to the matters set forth above and does not constitute directly or by implication a waiver or amendment of any other provisions of the Credit Agreement or a waiver of any Default or Event of Default which may occur or may have occurred.

     Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement.

     Except as expressly amended hereby, or as may have been previously amended, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof.

     The Borrower hereby represents and warrants that (a) after giving effect to this Amendment, the representations and warranties in the Credit Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof with the same effect as though such representations and warranties have been made on and as of such date, unless such representation is as of a specific date, in which case, as of such date, and (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.

     This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one amendment.

     THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

     This Amendment shall constitute a Loan Document.

4. Agreement with Respect to Undertaking.

     The parties hereto acknowledge and agree that, with respect to Item 2 to the Undertaking Letter dated as of January 28, 2005 delivered by the Borrower to the Administrative Agent requiring delivery of certain original stock certificates to the Administrative Agent within twenty

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(20) days of the Closing Date, the Required Lenders, effective as of February 16, 2005, have granted an extension to the Borrower to permit the Borrower to deliver the original stock certificates for NMHCRX Contracts, Inc. to the Administrative Agent on or prior to March 25, 2005.

[the next page is the signature page]

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     IN WITNESS WHEREOF, the Borrower and the Administrative Agent, as authorized on behalf of the Required Lenders, have caused this Amendment to be duly executed as of the day and year first above written.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Chief Financial Officer
JPMORGAN CHASE BANK, N.A., as
Administrative Agent
By:	/s/ Stephen Zajac
Name:	Stephen Zajac
Title:	Vice President

6

CONSENT

     Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Guaranty dated as of January 28, 2005, hereby consents to and acknowledges the terms of the Amendment to which this consent is attached and confirms that its Guaranty is in full force and effect and reaffirms its continuing liability under its Guaranty in respect of the Credit Agreement as amended hereby and all the documents, instruments and agreements executed pursuant thereto or in connection therewith, without offset, defense or counterclaim (any such offset, defense or counterclaim as may exist being hereby irrevocably waived by such guarantor).

NMHCRX MAIL ORDER, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEGRAIL, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
NMHC FUNDING, LLC
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
NMHCRX, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEQ CORP.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer

7

INTEQ TX CORP.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEQ PBM, L.P.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PORTLAND PROFESSIONAL
PHARMACY
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PORTLAND PROFESSIONAL
PHARMACY ASSOCIATES
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
SPECIALTY PHARMACY CARE, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
CENTRUS CORPORATION
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer

8

NATIONAL MEDICAL HEALTH CARD IPA, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
NMHCRX CONTRACTS, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PHARMACY ASSOCIATES, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTERCHANGE PMP, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer

9

EX-10.3

EXHIBIT 10.3

AMENDMENT NO. 2
TO CREDIT AGREEMENT

     AMENDMENT NO. 2, dated as of September 28, 2005 (this “Amendment “) to the Credit Agreement, dated as of January 28, 2005 (as amended, restated, modified or otherwise supplemented, from time to time, the “Credit Agreement”), by and among NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC. (the “Borrower”), JPMORGAN CHASE BANK, N.A., as Administrative Agent and the LENDERS from time to time party thereto (each, a “Lender” and, collectively, the “Lenders”).

     WHEREAS, the Borrower has requested, and the Required Lenders have agreed, subject to the terms and conditions of this Amendment, to amend a provision of the Credit Agreement as set forth herein.

     NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows:

1. Amendment.

     Section 2.01. of the Credit Agreement is hereby amended by deleting in its entirety the last sentence of such Section (which sentence was added pursuant to Section l(i) of Amendment No. 1 to the Credit Agreement, dated March 7, 2005).

2. Conditions to Effectiveness.

     This Amendment shall become effective upon receipt by the Administrative Agent of this Amendment duly executed by each of the parties hereto.

3. Miscellaneous.

     The amendment herein contained is limited specifically to the matters set forth above and does not constitute directly or by implication a waiver or amendment of any other provision of the Credit Agreement or a waiver of any Default or Event of Default which may occur or may have occurred.

     Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement.

     Except as expressly amended hereby, or as may have been previously amended, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof.

     The Borrower hereby represents and warrants that (a) after giving effect to this Amendment, the representations and warranties in the Credit Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof with the same effect

as though such representations and warranties have been made on and as of such date, unless such representation is as of a specific date, in which case, as of such date, and (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing.

     This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one amendment.

     THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

     This Amendment shall constitute a Loan Document.

[the next page is the signature page]

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     IN WITNESS WHEREOF, the Borrower and the Administrative Agent, as authorized on behalf of the Required Lenders, have caused this Amendment to be duly executed as of the day and year first above written.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:	/s/ Jonathan Friedman
Name:	Jonathan Friedman
Title:	Vice President Legal Affairs
JPMORGAN CHASE BANK, N.A., as
Administrative Agent
By:	/s/ Stephen Zajac
Name:	Stephen Zajac
Title:	Vice President

3

CONSENT

     Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Corporate Guaranty, hereby consents to and acknowledges the terms of the Amendment to which this consent is attached and confirms that its Corporate Guaranty is in full force and effect and reaffirms its continuing liability under its Corporate Guaranty in respect of the Credit Agreement as amended hereby and all the documents, instruments and agreements executed pursuant thereto or in connection therewith, without offset, defense or counterclaim (any such offset, defense or counterclaim as may exist being hereby irrevocably waived by such guarantor).

NMHCRX MAIL ORDER, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEGRAIL, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
NMHC FUNDING, LLC
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
NMHCRX, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEQ CORP.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer

4

INTEQ TX CORP.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTEQ PBM, L.P.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PORTLAND PROFESSIONAL PHARMACY
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PORTLAND PROFESSIONAL PHARMACY ASSOCIATES
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
SPECIALTY PHARMACY CARE, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
CENTRUS CORPORATION
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer

5

NATIONAL MEDICAL HEALTH CARD IPA, INC.
By:	/s/ Stuart F. Fleischer
Name: Title:	Stuart F. Fleischer Treasurer
NMHCRX CONTRACTS, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PHARMACY ASSOCIATES, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
INTERCHANGE PMP, INC.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Treasurer
PCN DE CORP.
By:	/s/ Stuart F. Fleischer
Name:	Stuart F. Fleischer
Title:	Chief Financial Officer and Treasurer

6

EX-10.9

Exhibit 10.9

BFS REALTY, LLC,
as Sublessor

and

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.,
as Sublessee

HEALTH CARD SUBLEASE AGREEMENT

DATED AS OF December 1, 2004

ADDRESS:	26 Harbor Park Drive
TOWN:	North Hempstead
COUNTY:	Nassau
STATE:	New York
SECTION:	6
BLOCK:	89
LOT:	10

Record and Return to:
Phillips Lytle LLP
1100 Franklin Avenue
Garden City, New York 11530
Attention: Milan K. Tyler, Esq.

HEALTH CARE SUBLEASE AGREEMENT

     THIS HEALTH CARE SUBLEASE AGREEMENT, dated as of December 2004 (this “Sublease Agreement”), by and between BFS REALTY, LLC, a limited liability company organized and existing under the laws of the State of New York and authorized to do business in the State of New York, having its principal office at 26 Harbor Park Drive, port Washington, New York 11050 (the “Sublessor” or the “Company”), and NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware and authorized to do business in the State of New York, having its principal office at 26 Harbor Park Drive, Port Washington, New York 11050 (the “Sublessee” or “Health Card”).

W I T N E S S E T H:

     WHEREAS, the New York State Industrial Development Agency Act, constituting Title 1 of Article 18-A of the General Municipal Law, Chapter 24 of the Consolidated Laws of New York, as amended (the “Enabling Act”) authorizes and provides for the creation of industrial development agencies in the several counties, cities, villages and towns in the State of New York and empowers such agencies, among other things, to acquire, construct, reconstruct, lease, improve, maintain, equip and furnish land, any building or other improvement, and all real and personal properties, including but not limited to machinery and equipment, deemed necessary in connection therewith, whether or not now in existence or under construction, which shall be suitable for manufacturing, warehousing, research, commercial, industrial or civic purposes, to the end that such agencies may be able to promote, develop, encourage, assist and advance the job opportunities, health, general prosperity and economic welfare of the people of the State of New York and to improve their prosperity and standard of living; and

     WHEREAS, pursuant to and in accordance with the provisions of the Enabling Act, the Nassau County Industrial Development Agency (the “Agency”) was established by Chapter 674 of the 1975 Laws of New York, as amended (together with the Enabling Act, the “Act”) for the benefit of the County of Nassau and the inhabitants thereof; and

     WHEREAS, to accomplish its stated purposes, the Agency is authorized and empowered under the Act to acquire, construct, reconstruct and install one or more “projects” (as defined in the Act), or to cause said projects to be acquired, constructed, reconstructed and installed and to convey said projects or to lease said projects with the obligation to purchase; and

     WHEREAS, to accomplish the purposes of the Act, the Agency has entered into negotiations with the Sublessor for a “project” within the meaning of the Act (as described in the recitals hereto) within the territorial boundaries of the County of Nassau; and

     WHEREAS, the project will involve the Company, as Applicant, together with Sandata Technologies, Inc. (“Sandata”) and Health Card (each an “Applicant” and, collectively, the “Applicants”), and the Applicants have each presented an application (as amended) (each an “Application” and, collectively, the “Applications”) to the Agency, requesting that the Agency consider undertaking certain projects (“the “Projects”) consisting of the following: (A)(1) the

acquisition of an interest in an approximately 6.34 acre parcel of land located at 26 Harbor Park Drive, Port Washington, Town of North Hempstead, County of Nassau, New York (the “Land”), together with an existing approximately 73,445 square foot building containing office space, a data center and warehouse space and related improvements located on the Land, (2) the renovation and expansion of the existing building to provide additional office space, data center space and warehouse space (the “Building”), together with certain fixtures, machinery, equipment and furniture for use in connection with the Building (the “Equipment”), and (3) the acquisition and installation and/or vendor lease and installation of furniture, machinery, computer, data processing, telecommunications and office systems and equipment for the benefit of Sandata and/or Health Card (the “Project Equipment”), all of the foregoing to constitute an office/data/warehouse facility (collectively, but excluding the Project Equipment, the “Project Facility”); (B) the granting of certain “financial assistance” (within the meaning of Section 854(14) of the Act) with respect to the foregoing, including potential exemptions or partial exemptions from sales and use taxes, mortgage recording taxes, real property taxes, real property transfer taxes and recording fees and charges for the Project (collectively, the “Financial Assistance”); (C) the lease (with an obligations to purchase) or sale of all or part of the portion of the Project Facility consisting of the Land and Building to the Company; (D) the sublease of all or part of the portion of the Project Facility consisting of the Land and Building by Company to Sandata and Health Card and one or more third parties satisfactory to the Agency designated by an Applicant and agreed upon by the Agency; and (E) the lease (with an obligation to purchase) and/or sublease of a leasehold interest and/or vendee leasehold interest in the Project Equipment to Sandata and Health Card; and

     WHEREAS, the Company, in its Application, has designated Sandata with respect to the Sandata Portion of the Project Facility, Health Card with respect to the Health Card Portion of the Project Facility, Medical Arts Office Services, Inc. (“MAOS”) with respect to the MAOS Portion of the Project Facility, PW Capital, LLC (“PW”) with respect to the PW Portion of the Project Facility, Northeast Equity Management, LLC (“Northeast”) with respect to the Northeast Portion of the Project Facility and Identification, Data & Imagining, LLC (“IDI”) with respect to the IDI Portion of the Project Facility, all as the sublessees of the Realty pursuant to, respectively, the Sandata Sublease Agreement, the Health Card Sublease Agreement, the MAOS Sublease Agreement, the PW Sublease Agreement, the Northeast Sublease Agreement and the IDI Sublease Agreement (collectively, the “Sublease Agreements”) (as all such capitalized terms not defined herein shall have the meanings ascribed thereto in the Lease Agreement referenced below in these recitals); and

     WHEREAS, in connection with the Project Equipment, the Agency contemplates entering into a separate lease thereof with Sandata (the “Sandata Equipment Lease”) with respect to the portion of the Project Equipment to be leased to and used by Sandata (the “Sandata Equipment”); and

     WHEREAS, in connection with the Project Equipment, the Agency also contemplates entering into a separate lease thereof with Health Card (the “Health Card Equipment Lease”) with respect to the portion of the Project Equipment to be leased to and used by Health Card (the “Health Card Equipment”); and

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     WHEREAS, pursuant to the authorization contained in that certain resolution adopted by the members of the Agency on February 11, 2004 (the “Public Hearing Resolution”), the Executive Director of the Agency (A) caused notice of a public hearing of the Agency pursuant to Section 859-a of the Act (the “Public Hearing”) to hear all persons interested in the Project and the Financial Assistance being contemplated by the Agency with respect to the Project, to be mailed on April 23, 2004 to the chief executive officer of Nassau County and of each other affected tax jurisdiction within which the Project Facility is to be located, (B) caused notice of the Public Hearing to be published on April 23, 2004 in Newsday, a newspaper of general circulation available to residents of the Town of North Hempstead, New York, (C) conducted the Public Hearing on June 4, 2004 at 10:00 a.m., local time at North Hempstead Town Hall, 220 Plandome Road, Manhasset, Town of North Hempstead, Nassau County, New York, and (D) prepared a report of the Public Hearing (the “Report”) which fairly summarized the views presented at the Public Hearing and distributed same to the members of the Agency; and

     WHEREAS, pursuant to the authorization contained in the Public Hearing Resolution, the Executive Director of the Agency (A) caused notice of a meeting of the Agency (the “IDA Meeting”) with respect to the proposed deviation from the Agency’s uniform tax exemption policy and guidelines to be mailed on April 23, 2004 to the chief executive officer of each affected tax jurisdiction, and (B) conducted the IDA Meeting on June 9, 2004 and reviewed and responded to any comments or correspondence received from the affected tax jurisdictions at or before the IDA Meeting regarding the proposed deviation from the Agency’s uniform tax exemption policy; and

     WHEREAS, pursuant to Article 8 of the Environmental Conservation Law, Chapter 43-B of the Consolidated Laws of New York, as amended (the “SEQR Act”) and the regulations adopted pursuant thereto by the Department of Environmental Conservation of the State of New York (the “Regulations” and collectively with the SEQR Act, “SEQRA”), the Agency, by resolution dated October 19, 2004, designated itself “lead agency” under SEQRA with respect to the Project, determined that the Project will not have a significant adverse impact on the environment and issued and filed a “negative declaration” for purposes of SEQRA; and

     WHEREAS, by resolution adopted by the members of the Agency on December 7, 2004 (the “Inducement Resolution”), the Agency, following a review of the Report, made a determination to proceed with the Project and to grant the Financial Assistance; and

     WHEREAS, by further resolution adopted by the members of the Agency on December 7, 2004 (the “Authorizing Resolution”), the Agency determined to enter into the “straight lease transaction” (as such quoted term is defined in the Act) contemplated by the Lease Agreement (hereinafter defined) and the other Transaction Documents and, in addition, the Sandata Equipment Lease and the Health Card Equipment Lease; and

     WHEREAS, to facilitate the Project, in addition to the transactions contemplated by the Sandata Equipment Lease and the Health Card Equipment Lease with respect to the Project Equipment, the Agency and the Sublessor have entered into negotiations to enter into a “straight lease transaction” within the meaning of the Act in which the Agency will acquire fee simple title to the Land and the improvements thereon and the Agency will lease its interest in the Project Facility to the Sublessor pursuant to a Lease Agreement (Realty) of even date herewith (the “Lease

3

Agreement”), and, in furtherance of such purposes, the Agency adopted the Inducement Resolution and the Authorizing Resolution authorizing the undertaking of the Project, the acquisition, renovation, installation and equipping of the Project Facility by the Agency and the lease of the Project Facility by the Agency to the Sublessor pursuant to the Lease Agreement for sublease to the Sublessees pursuant to the Sublease Agreements; and

     WHEREAS, the provision by the Agency of financial assistance to the Sublessor and the Sublessees has been determined to be necessary to enable the Company to proceed with the Project in Nassau County; and

     WHEREAS, immediately prior to the execution and delivery of the Lease Agreement, the Sublessor will execute and deliver or cause to be executed and delivered to the Agency (A) a certain deed dated as of the date hereof (the “Deed to the Agency”) from the Sublessor to the Agency, which conveys to the Agency all right, title and interest of the Sublessor in and to the Premises, and (B) a bill of sale dated as of the date hereof (the “Bill of Sale to Agency”), which conveys to the Agency all right, title and interest of the Sublessor in and to the Equipment (excluding the Project Equipment referenced above, which is to be conveyed to the Agency pursuant to separate bills of sale from Sandata and Health Card and/or in which the Agency shall acquire a vendee leasehold interest therein); and

     WHEREAS, pursuant to the Lease Agreement, the Agency will lease the Project Facility to the Company, and pursuant to the Sublease Agreements referenced above, of even date herewith between the Company and the Sublessees, the Company will sublease the Project Facility in whole to the Sublessees; and

     WHEREAS, pursuant to a certain Payment in Lieu of Taxes Agreement of even date herewith among the Company, Sandata, Health Card, IDI, PW, Northeast and MAOS and the Agency, the Company, Sandata, Health Card, IDI, PW, Northeast and MAOS each has agreed to make certain payments in lieu of real estate taxes with respect to the Land and the improvements thereon, and such obligation is to be secured pursuant to a Mortgage of even date herewith (the “PILOT Mortgage”) from the Company, Sandata, Health Card, IDI, PW, Northeast and MAOS and the Agency, as mortgagors, to the County of Nassau (the “County”), as mortgagee, pursuant to which the Agency, the Company, Sandata, Health Card, IDI, PW, Northeast and MAOS will grant a first mortgage lien on the Land and the improvements thereon; and

     WHEREAS, in order to finance a portion of the costs of the Project, HSBC Bank USA, National Association (the “Bank”) has agreed to lend $9,400,000 in the aggregate to the Company (the “Bank Mortgage Loan”); and

     WHEREAS, in order to evidence its obligation to repay the Bank Mortgage Loan, the Company will issue to the Bank a promissory note (the “Bank Mortgage Note”) in the principal amount of the Bank Mortgage Loan dated the Closing Date; and

     WHEREAS, in order to secure its obligations to the Bank under the Bank Mortgage Note, the Company will, joined in by the Agency for the sole purpose of subjecting to the lien thereof the Agency’s interest in the Project Facility, grant a mortgage in the Project Facility and the

4

leasehold interest created by the Lease to the Bank, to be entitled “Fee and Leasehold Mortgage with Security Agreement and Assignment of Rents”, and dated the Closing Date (the “Bank Mortgage”) from the Company and the Agency to the Bank; and

     WHEREAS, to provide Financial Assistance in connection with the Project Equipment, the Agency (i) will enter into the Sandata Equipment Lease with Sandata with respect to the Sandata Equipment and (ii) will enter into the Health Card Equipment Lease with Health Card with respect to the Health Card Equipment; and

     WHEREAS, in connection with the foregoing, to effect a sublease of the Health Card Portion of the Project Facility from the Company, as sublessor, to Health Card, as sublessee, the Company has entered into this Sublease Agreement with Health Card; and

     WHEREAS, this Sublease Agreement is authorized pursuant to Section 5.6 and Section 9.3 of the Lease Agreement,

     NOW, THEREFORE, in consideration of the premises and the respective representations and agreements hereinafter contained, the parties hereto agree as follows:

     Section 1. Definitions. Any term not defined herein shall have the meaning set forth for such term in the Lease Agreement (Realty) or in Appendix A attached hereto and made a part hereof.

     Section 2. Construction. In this Sublease Agreement, unless the context otherwise requires:

     (a) The terms “hereby”, “hereof, “hereto”, “herein”, “hereunder” and any similar terms, as used in this Sublease Agreement, refer to this Sublease Agreement, and the term “hereafter” shall mean after, and the term “heretofore” shall mean before, the date of the execution and delivery of this Sublease Agreement.

     (b) Words of the masculine gender shall mean and include correlative words of the feminine and neuter genders and words importing the singular number shall mean and include the plural number and vice versa.

     (c) Words importing persons shall include firms, associations, partnerships (including limited partnerships), trusts, corporations, limited liability companies and other legal entities, including public bodies, as well as natural persons.

     (d) Any headings preceding the texts of the several Sections of this Sublease Agreement, and any table of contents appended to copies hereof, shall be solely for convenience of reference and shall not constitute a part of this Sublease Agreement, nor shall they affect its meaning, construction or effect.

5

     (e) References to documents, instruments, or agreements shall mean such documents, instruments and agreements as they may be amended, modified, renewed, replaced or restated from time to time.

     Section 3. Representations and Warranties by Sublessee. The Sublessee makes the following representations, warranties and covenants to the Agency and the Sublessor:

     (a) The Sublessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is authorized to do business in the State of New York, is not in violation of any provision of its certificate of incorporation or by-laws, has the corporate power and authority to own its property and assets, to carry on its business as now being conducted by it and to execute, deliver and perform this Sublease Agreement and each other Transaction Document to which it is or shall be a party.

     (b) The execution, delivery and performance of this Sublease Agreement and each other Transaction Document to which it is or shall be a party and the consummation of the transactions herein and therein contemplated have been duly authorized by all requisite corporate action on its part and will not violate any provision of law, any order of any court or agency of government, or its certificate of incorporation or by-laws, or any indenture, agreement or other instrument to which it is a party or by which it or any of its property is subject to or bound, or be in conflict with or result in a breach of or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or other instrument or result in the imposition of any lien, charge or encumbrance of any nature whatsoever on the Project Facility other than Permitted Encumbrances.

     (c) Sublessee has no knowledge of any action or proceeding pending or threatened by or against it by or before any court or administrative agency that would adversely affect its ability to perform its obligations under this Sublease Agreement and each other Transaction Document to which it shall be a party and all authorizations, consents and approvals of governmental bodies or agencies required to be obtained by it as of the date hereof in connection with the execution and delivery of this Sublease Agreement and each other Transaction Document to which it shall be a party or in connection with the performance of its obligations hereunder and under each of the Transaction Documents have been obtained.

     (d) The Project Facility will constitute a “project” under the Act, and it intends to operate the Sandata Portion of the Project Facility, or cause the Sandata Portion of the Project Facility to be operated, in accordance with this Sublease Agreement and as a facility to be used for the purposes set forth in the recitals hereto and as a qualified “project” in accordance with and as defined under the Act.

     (e) The financial assistance (within the meaning of the Act) provided by the Agency to the Sublessor and the Sublessee through the straight-lease transaction (within the meaning of the Act) as contemplated by this Sublease Agreement is reasonably necessary to induce it to proceed with the Project.

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     (f) Subject to Sections 7.1 and 7.2 of the Lease Agreement, no Equipment shall be located at any site other than the Project Facility.

     (g) The Project is reasonably necessary to discourage it from removing its operations from within the State to a location outside the State and to preserve its competitive position in its industry.

     (h) The transactions contemplated by this Sublease Agreement shall not result in the removal of any facility or plant of it or any other occupant or user of the Project Facility from one area of the State (but outside of the County) to within the County or in the abandonment of one or more of the facilities or plants of it or of any other occupant or user of the Project Facility located within the State (but outside of the County).

     (i) The transactions contemplated by this Sublease Agreement shall not provide financial assistance in respect of any project where facilities or property that are primarily used in making retail sales (within the meaning of the Act) of goods or services to customers who personally visit such facilities constitute more than one-third of the total project costs and undertaking the Project will serve the public purposes of the Act by preserving permanent, private sector jobs or increasing the overall number of permanent, private sector jobs in the State.

     (j) No funds of the Agency shall be used in connection with the transactions contemplated by this Sublease Agreement for the purpose of preventing the establishment of an industrial or manufacturing plant or for the purpose of advertising or promoting materials which depict elected or appointed government officials in either print or electronic media, nor shall any funds of the Agency be given hereunder to any group or organization which is attempting to prevent the establishment of an industrial or manufacturing plant within the State.

     (k) This Sublease Agreement and the other Transaction Documents constitute the legal, valid and binding obligations of it enforceable against it in accordance with their respective terms.

     (1) To the best of Sublessee’s knowledge, the Sublessor and the Sublessee are in compliance, and will continue to comply, with all Federal, State and local laws or ordinances (including rules and regulations) relating to zoning, building, safety and environmental quality applicable to the Project and the operation of the Project Facility.

     (m) No Person other than the Sublessor and the Sublessee is or will be in use, occupancy or possession of any portion of the Health Card Portion of the Project Facility.

     (n) The Project will be designed, and the operation of the Health Card Portion of the Project Facility will be, in compliance with all applicable Federal, State and local laws or ordinances (including rules and regulations) relating to safety and environmental quality.

     (o) The Sublessor and the Sublessee are affiliates of one another and share common ownership and/or control.

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     (p) The moneys available to the Sublessor and the Sublessee are sufficient to pay all costs in connection with the completion of the Project that pertains to the Project Facility.

     (q) The representations, warrants, and covenants made by the Company as set forth in Section 2.2 of the Lease Agreement are adopted and incorporated into this Sublease Agreement as the representations, warrants and covenants of the Sublessee as though fully set forth herein and given by the Sublessee under this Section 3.

     (r) The Sublessees shall maintain at all times during the term of this Sublease Agreement and the Health Card Equipment Lease their current level of employment at the Project Facility in the State of New York as set forth in the Application, which current level of employment consists of two hundred twelve (212) full time equivalent, private sector jobs. The Sublessees shall also (i) create at least twenty-four (24) new, full-time equivalent, private sector jobs in the State of New York within one (1) year after the Scheduled Completion Date and maintain such jobs throughout the term of this Sublease Agreement and the Health Card Equipment Lease, (ii) create at least forty-eight (48) new, full-time equivalent, private sector jobs in the State of New York within two (2) years after the Scheduled Completion Date and maintain such jobs throughout the term of this Sublease and the Health Card Equipment Lease, and (iii) create at least seventy-one (71) new, full-time equivalent, private sector jobs in the State of New York within three (3) years after the Scheduled Completion Date and maintain such jobs throughout the term of this Sublease Agreement and the Health Card Equipment Lease, all of which jobs shall, at all times during the term of this Sublease Agreement and the Health Card Equipment Lease, be located at the Health Card Portion of the Project Facility pursuant to the terms and provisions of the Lease Agreement, this Sublease Agreement and the Health Card Equipment Lease.

     Section 4. Incorporation of Lease Agreement and Prior Sublease.

     (a) The Sublessee acknowledges receipt of a true and complete copy of the Lease Agreement and consents to the terms thereof. All of the terms, conditions and covenants of the Lease Agreement (including, without limitation, Section 1.3 thereof) are deemed incorporated by reference in this Sublease Agreement, with the same force and effect as if each and every provision thereof were more fully and at length set forth herein, provided, however, that only the Sublessor can exercise the option to purchase the Project Facility as set forth in Article XI of the Lease Agreement and only the Sublessor can function as the “agent” of the Agency under Section 4.1 of the Lease Agreement. The Sublessee covenants and agrees to comply with every requirement and obligation imposed upon it pursuant to the terms and provisions of the Lease Agreement or as may be required or permitted of it at the insistence of the Sublessor in accordance with the terms and provisions of the Lease Agreement.

     (b) The parties hereto are parties to a Lease Agreement dated August 1, 2001 and amended on October 23, 2003 and April 26, 2004 (the “Prior Sublease”), a copy of which is attached hereto as Exhibit C. This Sublease Agreement is in replacement and restatement of the Prior Sublease. To the extent not inconsistent with the terms hereof, the other terms, conditions and covenants of the Prior Sublease are deemed incorporated by reference in this Sublease Agreement, with the same force and effect as if each and every provision thereof were more fully and at length set forth herein.

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     Section 5. Sublease of Facility. (a) The Sublessor hereby subleases to the Sublessee and the Sublessee hereby subleases from the Sublessor the Health Card Portion of the Project Facility for and during the term herein provided and upon and subject to the terms and conditions herein set forth. The Health Card Portion of the Project Facility is more fully described in Exhibit B hereto and is located on the Land more fully described in Exhibit A hereto. The Sublessee shall at all times during the term of this Sublease Agreement occupy, use and operate the Health Card Portion of the Project Facility as a facility to be used for the purposes set forth in the recitals hereto and as a qualified “project” in accordance with the provisions of the Act.

     The term of this Sublease Agreement shall commence on the date of the execution and delivery of this Sublease Agreement and shall expire on December 31, 2015 or upon such earlier or later date as may be provided in accordance with the terms of the Lease Agreement (or upon such earlier termination of the Lease Agreement as provided therein) but in no event earlier than one day prior to the termination of the Lease Agreement. This Sublease Agreement shall survive the transfer of the Project Facility to the Sublessor in the manner and to the extent provided in Section 11.2(D) of the Lease Agreement.

     (b) During the term of this Sublease Agreement, the Sublessee agrees to pay sublease rentals to the Sublessor in accordance with the Prior Sublease. To the extent not inconsistent with this Sublease Agreement, all of the terms, provisions, conditions and covenants of the Prior Sublease are deemed incorporated by reference in this Sublease Agreement, with the same force and effect as if each and every provision thereof were more fully and at length set forth herein.

The Sublessor agrees that any sublease rentals payable pursuant to the preceding sentence of this paragraph (b) attributable to the Rental Payments under the Lease Agreement shall be paid directly or for the account of the Agency as provided in the Lease Agreement (and hereby directs the Sublessee and the Sublessee agrees to make such payments), except that if the Lease Agreement or the Agency requires Rental Payments to be paid otherwise, such sublease rentals shall be paid in the same manner as so required. Any sublease rentals payable to Sublessor pursuant to this paragraph in excess of the Rental Payment and other payments then due under the Lease Agreement may be retained by Sublessor for its own purposes subject to the obligations of Sublessor to the Bank, except under the following circumstances: (i) an Event of Default under the Lease Agreement has occurred and is continuing uncured, (ii) a recapture of Agency benefits pursuant to Section 11.4 of the Lease Agreement is pending due to the occurrence of a “Recapture Event” (as defined in Section 11.4 of the Lease Agreement) and the payment obligation resulting from the occurrence of the Recapture Event remains unpaid and unsatisfied, or (iii) payments are presently owed and unpaid to the Agency, including pursuant to any right of indemnification extended to the Agency and others under the terms of the Lease Agreement.

     (c) Subject to the provisions of Section 1.3 of the Lease Agreement and as set forth in Section 4 of this Sublease Agreement, the Sublessee hereby agrees to be bound by each and every obligation, term, covenant, condition and agreement of the Lease Agreement by which the Sublessor as Lessee thereunder is bound and hereby assumes all of the Sublessor’s obligations under the Lease Agreement as if the Sublessee was the named Lessee under the Lease Agreement and agrees to keep and perform all of the obligations, terms, covenants, conditions and agreements of the

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Lease Agreement and to pay all sums due under the Lease Agreement on the part of the Sublessor thereunder to be kept and performed and paid and further assumes all obligations as specifically relate to the Sublessee as are contained in the Lease Agreement. Those obligations of the Sublessor in the Lease Agreement which are set forth as surviving the termination of the Lease Agreement shall similarly survive as obligations of the Sublessee and survive the termination of this Sublease Agreement.

     Section 6. Nature of Sublessee’s Obligations Unconditional. The Sublessee’s obligations under this Sublease Agreement to pay sublease rentals and to pay other amounts required to be paid hereunder shall be absolute, unconditional and general obligations, and irrespective of any defense or any rights of set-off, recoupment or counterclaim or deduction and without any rights of suspension, deferment, diminution or reduction either might otherwise have against the Sublessor, the Agency or any other Person and the obligation of the Sublessee shall arise whether or not the Project has been completed as provided in the Lease Agreement. The Sublessee will not suspend or discontinue payment of any sublease rental or other amounts due and payable hereunder or performance or observance of any covenant or agreement required on the part of the Sublessee hereunder for any cause whatsoever, and the Sublessee waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction in the sublease rentals due or to become due hereunder.

     Section 7. Dissolution or Merger of Sublessee; Restrictions on Sublessee. The Sublessee covenants and agrees that at all times during the term of this Sublease Agreement, it will maintain its existence as a corporation as in effect on the date hereof and will not dissolve or otherwise dispose of all or substantially all of its assets, will not consolidate with or merge into another corporation or other Person, or permit one or more corporations or other Persons to consolidate with or merge into it, without giving prior notice to the Agency and obtaining the consent of the Agency. The Sublessee agrees that it will not change its name or its state of organization without giving prior written notice to the Agency and obtaining the consent of the Agency, which consent shall not be unreasonably withheld or delayed.

     The Sublessee further represents, covenants and agrees that it is and throughout the term of this Sublease Agreement will (y) continue to be owned or controlled by the same individuals or entities as shall own or control the beneficial ownership in the Sublessor, and (z) continue to be. duly qualified to do business in the State and that any legal entity succeeding to its rights under this Sublease Agreement shall be and continue to be duly qualified to do business in the State.

     Section 8. Events of Default. Any one or more of the following events shall constitute an “Event of Default” hereunder:

     (a) Failure of the Sublessee to pay any rental under Section 5(b) hereof that has become due and payable by the terms hereof which results in the occurrence of an Event of Default under the Lease Agreement;

     (b) (i) Failure of the Sublessee to pay any amount (except the obligation to pay rent under Section 5(b) hereof) that has become due and payable or to observe and perform any covenant, condition or agreement on its part to be performed under Section 6 or 7 hereunder or with

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respect to Sections 6.2, 6.6, 8.4, 8.9, 8.12, 9.1, 9.3, 10.4 and 11.4 of the Lease Agreement or with respect to the indemnification provisions set forth in Sections 2.2(G), 3.1, 3.3, 6.1, 8.2 and 12.9(C) of the Lease Agreement and continuance of such failure for a period of fifteen (15) days after receipt by the Sublessee of written notice specifying the nature of such default from the Agency;

     (ii) Failure of the Sublessee to pay any amount (except the obligation to pay rent under Section 5(b) hereof) that has become due and payable or to observe and perform any covenant, condition or agreement on its part to be performed with respect to Section 6.3 of the Lease Agreement and continuance of such failure for a period of fifteen (15) days after receipt by the Sublessee of written notice specifying the nature of such default from the Agency;

     (c) Failure of the Sublessee to observe and perform any covenant, condition or agreement hereunder on its part to be performed (except as set forth in Section 8(a) or (b) above) and (1) continuance of such failure for a period of fifteen (15) days after receipt by the Sublessee of written notice specifying the nature of such default from the Agency, or (2) if by reason of the nature of such default the same can be remedied, but not within the said fifteen (15) days, the Sublessee fails to proceed with reasonable diligence after receipt of said notice to cure the same or fails to continue with reasonable diligence its efforts to cure the same;

     (d) The Sublessee, the Sublessor or any Guarantor shall (i) apply for or consent to the appointment of or the taking of possession by a receiver, liquidator, custodian or trustee of itself or of all or a substantial part of its property, (ii) admit in writing its inability, or be generally unable, to pay its debts as such debts generally become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, (vi) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against itself in an involuntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (vii) take any action for the purpose of effecting any of the foregoing, or (viii) be adjudicated a bankrupt or insolvent by any court;

     (e) A proceeding or case shall be commenced, without the application or consent of the Sublessee, the Sublessor or any Guarantor, in any court of competent jurisdiction, seeking, (i) liquidation, reorganization, dissolution, winding-up or composition or adjustment of debts, (ii) the appointment of a trustee, receiver, liquidator, custodian or the like of the Sublessee, the Sublessor or any Guarantor, or of all or any substantial part of its respective assets, or (iii) similar relief under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of sixty (60) days, or any order for relief against the Sublessee, the Sublessor or any Guarantor shall be entered in an involuntary case under such Bankruptcy Code; the terms “dissolution” or “liquidation” of the Sublessee, the Sublessor or any Guarantor as used above shall not be construed to prohibit any action otherwise permitted by Section 7 hereof, Section 8.4 of the Lease Agreement, or Section 3.7 of the Guaranty Agreement;

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     (f) Any representation or warranty made by the Sublessee, the Sublessor or any Guarantor in (i) the application and related materials submitted to the Agency for approval of the Project or the transactions contemplated by this Sublease Agreement, (ii) herein or in any other Transaction Document, or (iii) any report, certificate, financial statement or other instrument furnished pursuant hereto or any of the foregoing, shall prove to be false, misleading or incorrect in any material respect as of the date made; or

     (g) An “Event of Default” under the Guaranty or the Lease Agreement or the Sandata Equipment Lease or any other Transaction Document shall occur and be continuing.

     Whenever any Event of Default shall have occurred and be continuing, the Agency may take any of the same remedial steps with respect to the Sublessee under this Sublease Agreement as are set forth in the Lease Agreement with respect to the Lessee or the Sublessee in connection with an Event of Default thereunder.

     Section 9. Sublease Agreement for Benefit of the Agency. It is understood and agreed by the parties hereto that this Sublease Agreement is entered into for the benefit of the Agency, and the payments, obligations, covenants and agreements of the parties hereto may be enforced by the Agency as if it were a party to this Sublease Agreement.

     Section 10. Recording. This Sublease Agreement or a memorandum hereof shall be recorded by the Sublessee subsequent to the recordation of the Lease Agreement in the appropriate office of the County Clerk of Nassau County, or in such other office as may at the time be provided by law as the proper place for the recordation thereof.

     Section 11. Miscellaneous. This Sublease Agreement shall inure to the benefit of the Sublessor, the Sublessee and the Agency, and shall be binding upon the Sublessor and the Sublessee and their respective successors and assigns.

     This Sublease Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

     The Sublessor and the Sublessee agree that this Sublease Agreement is subject to and is expressly subordinated to the PILOT Agreement, the PILOT Mortgage, and the Lease Agreement and all extensions, modifications, amendments and renewals thereof. This Sublease Agreement, except for the corresponding obligations of the Sublessee under the Sublease Agreement with respect to the PILOT Agreement, the Agency’s rights under Section 11.4 of the Lease Agreement, obligations owed to the Agency resulting from the Agency’s Unassigned Rights under the Lease Agreement and the PILOT Mortgage, is subordinate to the mortgage and the terms and conditions of the Bank Mortgage and the Ancillary Documents, including all amounts advanced thereunder and all renewals, replacements and modifications thereto. The Bank Mortgage and the Ancillary Documents (including all amounts advanced thereunder and all renewals, replacements and modifications thereto) shall be subject and subordinate to the corresponding obligations of the Sublessee under this Sublease Agreement with respect to the PILOT Agreement, the Agency’s rights under Section 11.4 of the Lease Agreement, obligations owed to the Agency resulting from the Agency’s Unassigned Rights under the Lease Agreement and the PILOT Mortgage.

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     This Sublease Agreement shall not be assigned, modified, amended, rescinded, terminated, repealed or cancelled without the prior written consent of the Agency in each instance.

     The Sublessee shall not seek to recover from the Agency any moneys paid to the Agency pursuant to this Sublease Agreement, whether by reason of set-off, counterclaim or deduction or for any reason whatsoever. The Sublessee covenants and agrees (w) that whenever the consent or approval of the Sublessor is required or permitted under this Sublease Agreement, the written consent or approval of the Agency shall first be obtained before taking any action or omitting to take any action for which such consent or permission is needed by the Sublessor; (x) simultaneously to give to the Agency copies of all notices and communications by the Sublessee under this Sublease Agreement; (y) that the Agency shall not be obligated by reason of the assignment of this Sublease Agreement or otherwise to perform or be responsible for the performance of any duties or obligations of the Sublessor hereunder; and (z) not to make any prepayments of rents or other sums due hereunder to the Sublessor unless such prepayments shall also be simultaneously applied as a prepayment of Rental Payments or other sums due or to become due under the Lease Agreement.

     Any obligations that may be imposed upon the Agency by virtue of operation of this Sublease Agreement shall be subject to the non-recourse provisions of Section 12.9 of the Lease Agreement as though such non-recourse provisions were fully set forth herein.

     The Sublessee hereby waives the provisions of Section 227 of the New York Real Property Law or any law of like import now or hereafter in effect.

     All notices, certificates or other communications hereunder shall be sufficient if sent by registered or certified United States mail, postage prepaid, addressed, if to the Sublessor, to BFS Realty LLC, 26 Harbor Park Drive, Port Washington, New York 11050, Attention: Bert E. Brodsky, Manager, with a copy to Kenneth D. Faltischek, Esq., 26 Harbor Park Drive, Port Washington, New York 11050, and Ruskin Moscou Faltischek, P.C., East Tower, 15^th Floor, 190 EAB Plaza, Uniondale, New York 11556, Attention: Edward Ambrosino, Esq., and if to the Sublessee, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, Attention: Bert E. Brodsky, Chairman of the Board, with a copy to Kenneth D. Faltischek, Esq., 26 Harbor Park Drive, Port Washington, New York 11050, and Ruskin Moscou Faltischek, P.C., East Tower, 15^th Floor, 190 EAB Plaza, Uniondale, New York 11556, Attention: Edward Ambrosino, Esq. Copies of any notices delivered to the Sublessor or to the Sublessee shall also be sent to the Agency at 400 County Seat Drive, Mineola, New York 11501, Attention: Executive Director, with a copy to Phillips Lytle LLP, 1100 Franklin Avenue, Suite 400, Garden City, New York 11530, Attention: Milan K. Tyler.

     This Sublease Agreement, together with the Prior Sublease shall completely and fully supersede all other prior understandings or agreements, both written and oral, between the Sublessor and the Sublessee relating to the Project Facility.

     If any clause, provision or section of this Sublease Agreement be ruled invalid by any court of competent jurisdiction, the invalidity of such clause, provision or section shall not affect any of the remaining provisions hereof.

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     The Sublessee will permit the Agency, or its duly authorized agent, at all reasonable times and upon reasonable notice, to enter the Project Facility but solely for the purpose of assuring that the Sublessee is operating the Project Facility, or is causing the Project Facility to be operated, as a facility to be used for the purposes set forth in the recitals hereto and a qualified “project” within the meaning of the Act consistent with the purposes set forth in the recitals to this Sublease Agreement and with the public purposes of the Agency, and not for any purpose of assuring the proper maintenance or repair of the Project Facility as such latter obligation is and shall remain solely the obligation of the Sublessee.

     This Sublease Agreement shall become effective upon its delivery. It may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

     It is the intention of the parties hereto that this Sublease Agreement be a “net lease” and that the portion of the rent set forth in Section 5(b) of the Sublease Agreement be available for Rental Payments under the Lease Agreement, and this Sublease Agreement shall be construed to effect such intent.

     THE PARTIES HERETO DO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS SUBLEASE AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION WITH THIS SUBLEASE AGREEMENT.

     The provision of this Sublease Agreement relating to waiver of a jury trial and the right of re-entry or re-possession shall survive the termination or expiration of this Sublease Agreement.

     The Sublessee shall not make, or suffer to be made, any leases (other than the Lease Agreement and this Sublease Agreement and subleases made in accordance with Section 9.3 of the Lease Agreement) or cancel or modify any leases or further assign the whole or any part of the rents without the prior written consent of the Agency. No lease (other than the Lease Agreement and this Sublease Agreement) covering all or any part of the Project Facility shall be valid or effective without the prior written approval of the Agency. In respect of any lease, the Sublessee will (i) fulfill or perform each and every provision thereof on its part to be fulfilled or performed; (ii) promptly send copies of all notices of default which it shall send or receive thereunder to the Agency, and (iii) enforce, short of termination thereof, the performance or observance of the provisions thereof. Nothing contained in this Sublease Agreement shall be deemed to impose on the Agency any of the obligations of the lessor under the leases.

     The date of this Sublease Agreement shall be for reference purposes only and shall not be construed to imply that this Sublease Agreement was executed on the date first above written. This Sublease Agreement was executed and delivered on the Closing Date.

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     IN WITNESS WHEREOF, the Sublessor and the Sublessee have authorized the execution of this Sublease Agreement and the Agency has executed its consent thereto, all being done as of the year and day first above written.

BFS REALTY, LLC,
	as Sublessor
By:	/s/ Bert E. Brodsky Name: Bert E. Brodsky
	Title: Manager
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.,
	as Sublessee
By:	/s/ Stuart Fleischer
	Name: Stuart Fleischer
	Title: Chief Financial Officer

16

STATE OF NEW YORK	)
	) ss.:
COUNTY OF NASSAU	)

     On the 14th day of December, in the year two thousand four, before me the undersigned, a Notary Public in and for said State, personally appeared BERT E. BRODSKY personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual executed the instrument.

/s/ Mary Farruggio
Notary Public

(STAMP)

17

STATE OF NEW YORK	)
	) ss.:
COUNTY OF NASSAU	)

     On the 14th day of December, in the year two thousand four, before me the undersigned, a Notary Public in and for said State, personally appeared STUART FLEISCHER personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual executed the instrument.

/s/ Mary Farruggio
Notary Public

(STAMP)

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EXHIBIT A

DESCRIPTION OF LAND

     ALL THAT CERTAIN plot, piece or parcel of land, situate, lying and being at Port Washington, Town of North Hempstead, County of Nassau and State of New York, known and designated as Block 89, Lot 10, on the map of Hempstead Harbor Industrial Park, Section No. 4, filed in the Office of the Nassau County Clerk on February 19, 1980 as Case No. 8815, which is bounded and described as follows:

     BEGINNING at a point on the westerly side of Harbor Park Drive distant 2263.29 feet northwesterly, westerly and southerly when measured along the northeasterly, northerly and westerly side of Harbor Park Drive from the extreme northwesterly end of the curve which connects the northeasterly side of Harbor Park Drive with the westerly side of Roslyn West Shore Drive, said point of beginning is also where the division line between Lot 9 and 10 in Block 89 on the aforesaid map intersect the westerly side of Harbor Park Drive;

     RUNNING THENCE southerly along the westerly side of Harbor Park Drive the following two courses and distances;

     (1) along the arc of a curve bearing to the left having a radius of 354.90 feet a distance of 114.82 feet;

     (2) south 19 degrees 59 minutes 44 seconds east, 157.61 feet;

     THENCE south 70 degrees 00 minutes 16 seconds west, 505.90 feet;

     THENCE north 12 degrees 14 minutes 15 seconds west, 38.96 feet;

     THENCE south 76 degrees 45 minutes 46 seconds west, 100.02 feet;

     THENCE north 12 degrees 14 minutes 15 seconds west, 200.03 feet;

     THENCE south 76 degrees 45 minutes 45 seconds west, 265.34 feet;

     THENCE north 14 degrees 51 minutes 26 seconds west, 270.25 feet;

     THENCE north 88 degrees 32 minutes 28 seconds east, 876.11 feet to the westerly side of Harbor Park Drive, the point or place of BEGINNING.

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EXHIBIT B

SUBLEASED PORTIONS OF THE PROJECT FACILITY

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EXHIBIT C

PRIOR SUBLEASE

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SECOND AMENDMENT TO LEASE AGREEMENT

     This Second Amendment, dated as of April 26 , 2004, is by and among BFS Realty, LLC (“Owner”) and National Medical Health Card Systems, Inc. (“NMHC”). All defined terms used, but not otherwise defined herein, shall have their meanings set forth in the Lease Agreement between NMHC and Owner, dated as of August 1, 2001, as amended by an Amendment (the “Amendment”) dated as of October 23, 2003, together with any and all attachments thereto (the “Lease Agreement”).

     WHEREAS, NMHC and Owner have entered into the Lease Agreement pursuant to which NMHC leases approximately 34,270 square feet in the building known as 26 Harbor Park Drive, Port Washington, NY 11050 (the “Building”) from Owner;

     WHEREAS, the amount of square footage to be occupied by NMHC (34,270 square feet) pursuant to the Amendment is inaccurate and the correct square footage to be occupied by NMHC is 37,108 square feet;

     WHEREAS, the parties desire to amend the terms of the Lease Agreement to reflect the correct square footage to be occupied by NMHC from 34,270 square feet to 37,108 square feet and to make such other changes and modifications as hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises and covenants and agreements contained herein, the parties agree as follows:

     1.      The Lease Agreement is hereby amended as follows:

          a.      The first sentence of the second paragraph of the Lease Agreement shall be deleted in its entirety and replaced with the following:

          “Witnesseth: Owner hereby leases to Tenant and Tenant hires from Owner approximately 37,108 square feet (as described in Schedule A) in the building known as 26 Harbor Park Drive, Port Washington, New York 11050 (the “Building”) in the County of Nassau for the term as defined herein or until such term shall sooner cease and expire as hereinafter provided, at an annual rate set forth as provided in Rider B attached hereto and made a part hereof.”

          b.      The attached Schedule A shall be added to and made a part of the Lease Agreement.

          c.      Rider B of the Lease Agreement shall be deleted in its entirety and replaced with the Rider B attached hereto and made a part of the Lease Agreement.

          d.      The definition of “Term” in Section A-1.16 of Rider A of the Lease Agreement shall be deleted in its entirety and replaced with the following:

          “Term” is the period from the Lease Commencement Date to the close of business on the last day of the one-hundred and twentieth (120^th) month following the Effective Time (as defined in the Amendment dated October 23, 2003; such date being hereinafter referred to as the “Expiration Date”) or such earlier date

upon which the Term of this Lease shall expire or be cancelled or terminated pursuant to any of the conditions or covenants of this Lease or pursuant to law.”

          e.      The definition of “Rentable Square Footage” in Section A-l-17 of Rider A shall be deleted in its entirety and replaced with the following:

               “Rentable Square Footage” shall mean approximately 37,108 square feet; provided, however, that Tenant shall have the right, upon sixty (60) days prior written notice to Landlord, to reduce the Rentable Square Footage by (i) 500 square feet covering the portion of the Premises designated in Exhibit A as “New Human Resources” and (ii) the amount of square footage utilized by NMHC for Human Resources purposes prior to the execution of the Amendment (such amount being included as a portion of the square footage set forth in Exhibit A as “Common Area.”)”

          f.      Section A-l6.04(a) of Rider A is hereby deleted in its entirety and replaced with the following:

               “(a) Notwithstanding any provision(s) in this Lease to the contrary, the parties acknowledge and agree that (i) the Premises are demised under this Lease for a minimum aggregate Rent (subject to such increases and other costs as provided throughout this Lease and Tenant’s Early Termination right) of $5,801,740 for the Term, payable upon the execution of this Lease, (ii) the terms of this Lease which provide for the payment of Rent in installments are solely for the convenience of Tenant, and (iii) upon the default in the payment of Rent in installments as aforesaid, then the full aggregate Rent hereby reserved for the entire Term then remaining unpaid shall, at Landlord’s option, become due and payable upon demand.”

          g.      Section A-l8.24 of Rider A is hereby deleted in its entirety and replaced with the following:

               “A-l8.24 Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right to terminate this Lease on, and only on, the last day of the sixtieth (60 ^th) month following the Effective Time (“Early Termination”). If Tenant wishes to exercise its right of Early Termination it shall provide Landlord with sixty (60) days prior written notice prior to the end of the then effective year of the Term (the “Early Termination Notice”) of its intent to do so. The failure by Tenant to exercise its right of Early Termination shall waive Tenant’s right of Early Termination. In consideration for its right of Early Termination, Tenant hereby agrees to pay to Landlord an amount equal to the Fixed Rent that would otherwise be payable by Tenant to Landlord for the next succeeding thirty (30) months, plus twelve thousand five hundred dollars ($12,500) (the “Early Termination Fee”). The Early Termination Fee shall be payable by Tenant, in whole, at any time following the Early Termination Notice; provided, however, that in no event shall such Early Termination Fee be paid by Tenant following the end of the thirty (30) day period after such Early Termination Notice. Failure by Tenant to pay the Early Termination Fee during such thirty (30) day period shall cancel Tenant’s right of Early Termination granted hereunder. Notwithstanding the foregoing, if Landlord shall lease all of the Premises at any time during the immediate thirty (30) months following Tenant’s Early Termination, Landlord shall pay to Tenant (the “Termination Fee Reimbursement”) within 30 days an amount equal to the difference between (a) the Early Termination Fee, less twelve thousand five hundred dollars ($12,500) and (b) the product of (i) the monthly Fixed Rent used to calculate the Early Termination Fee and (ii) the difference between thirty (30) months and the

number of months that have passed since Tenant’s Early Termination which number shall be calculated as of the date in which such new tenant takes possession of the Premises; provided, however, that if the base rent payable by such new tenant during such period is less than the Termination Fee Reimbursement, Landlord shall only be obligated to reimburse Tenant the difference between the Termination Fee Reimbursement and the base rent payable by such new tenant during such period.”

          h.      Each of Landlord and Tenant acknowledge that Tenant has expended approximately one million dollars ($1,000,000) of the cost of certain improvements to the demised premises and that Landlord has paid for the balance of such improvements. Landlord and Tenant agree that Tenant is the owner of said one million dollars ($1,000,000) of improvements and Landlord is the owner of the balance of such improvements and as such each party agrees to treat such improvements as such party’s property for income tax purposes.

          i.      Within thirty (30) days of the date hereof, Tenant shall have the right to request Landlord, and upon such request Landlord shall, at its sole cost and expense, to sub-divide the portion of the demised premises designated “training room” on Schedule A attached hereto by erecting a maximum of three interior walls within said training room. Nothing herein shall be construed to require Landlord to make any structural, mechanical, plumbing or electrical modifications to the demised premises or in said training room.

     2.      Except as expressly provided herein; all terms and conditions of the Lease Agreement shall be unmodified and in full force and effect.

     3.      From and after the execution and delivery of this Amendment, all references to the Lease Agreement contained in other agreements and instruments executed and delivered pursuant to or in connection with the Lease Agreement shall hereinafter mean and refer to the Lease Agreement as amended hereby.

     4.      This Amendment may be executed in counterparts by the parties hereto, all of which shall constitute one and the same instrument. A facsimile transmission of this signed Amendment bearing a signature on behalf of a party hereto shall be binding on such party.

     5.      This Amendment shall be governed by the laws of the State of New York.

     IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the day and year first above written.

BFS REALTY, LLC
By:	/s/ Bert E. Brodsky
	Name:	Bert E. Brodsky
	Title:	Manager
NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.
By:	/s/ James J. Bigl
	Name:	James J. Bigl
	Title:	President & CEO

SCHEDULE A*

Square Footage

Dedicated to NMHC

Work Area/Executive Area	19,373
Data Center	2,132
Board Room	567
Training Room	3,285
Shared Areas
New Cafeteria	1,020
Gym	500
New Human Resources	500
Loading Area	344
Mail Room	272
Warehouse	3,522
Common Area**:	5,713
Total:	37,108

*A Floor Plan is attached hereto as Exhibit A

**Includes Bath Rooms, Hallways and Reception

EXHIBIT A

FLOOR PLAN

RIDER B

Rent

     Beginning at the Effective Time, Fixed Rent shall be $580,174, payable in advance in equal monthly installments of $48,347.83, for the 12 month period beginning at the Effective Time. Fixed Rent during the remainder of the Term shall be increased as follows:

     Commencing on the first anniversary of the Effective Time, and continuing on each annual anniversary of such day throughout the remainder of the Term (each such day being referred to as a “Rent Adjustment Date”), the Fixed Rent shall be increased by the Consumer Price Index plus 2.5%; provided however, that in no event shall the Fixed Rent on a Rent Adjustment Date be more than 3.5% percent greater than the Fixed Rent due for the immediately preceding lease year.

     The term “Consumer Price Index” shall mean the Consumer Price Index for the New York-Northeastern New Jersey area, which is currently published by the United States Department of Labor, Bureau of Labor Statistics. If however, this Consumer Price Index is changed so that the base year is altered from that used as of the commencement of the Effective Time, then the Consumer Price Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics, to obtain the same results that would have been obtained had the base year not been changed. If no conversion factor is available, or if the Consumer Price Index is otherwise changed, revised or discounted for any reason, there shall be substituted in lieu thereof, and the term “Consumer Price Index” shall thereafter refer to, the most nearly comparable official price index of the United States Government to obtain substantially the same result as would have been obtained had the original Consumer Price Index not been changed, revised or discontinued, which alternative index shall be selected by Landlord and shall be subject to Tenant’s reasonable, prior, written approval.

     If Tenant exercises its right to reduce the Rentable Square Footage by 500 square feet as provided herein, the Fixed Rent shall be reduced pro rata.

EX-10.25

EXHIBIT 10.25

CONSULTING AGREEMENT AND
DEPARTURE AGREEMENT AND GENERAL RELEASE

(PLEASE READ CAREFULLY. THIS DEPARTURE AGREEMENT AND GENERAL RELEASE HAS IMPORTANT LEGAL CONSEQUENCES.)

     This Consulting Agreement and Departure Agreement and General Release (this “Agreement”) is between National Medical Health Card Systems, Inc. (“Company”) and Bill Masters (“Employee”) and is a complete, final and binding settlement of all claims and potential claims, if any, with respect to their employment relationship. Employee and the Company may sometimes be referred to collectively as the “Parties.”

          WHEREAS, the Company and Employee are parties to an Employment Agreement dated on or about October 4, 2004 (the “Employment Agreement”); and

          WHEREAS, the Company and Employee are parties to a letter dated November 28, 2005 (the “Severance Letter”); and

          WHEREAS, the Company and Employee have agreed on certain terms and conditions regarding the termination of Employee’s employment under the Employment Agreement and Severance Letter (without “Cause” as such term is defined in the Employment Agreement and Severance Letter) but wish to do so only after a Consulting Period (as hereinafter defined);

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, be it agreed as follows:

     1. As of May 21, 2007, Employee’s employment relationship as Chief Information Officer with the Company will terminate (the “Termination Date”), but Employee shall continue to provide consulting services as set out in paragraph 2 of this Agreement as an employee of the Company. This Agreement has been presented to Employee on or before the Termination Date and will become effective seven (7) days (the “Effective Date”) after the execution of this Agreement by the Employee (the “Execution Date”).

     2. Consulting Period and Payments During the Consulting Period.

     (a) Employee agrees that he shall provide consulting services from the Termination Date hereof through June 28, 2007 (the “Consulting Period”), as may be reasonably requested by the Chief Executive Officer of the Company, or his designee. Such consulting services shall include providing information with regard to the information systems of the Company, providing information with regard to personnel or legal matters, or such other duties as may reasonably be directed by the Company.

     (b) Such services shall not exceed an average of ten hours per week, although there may be some weeks in which more than ten hours may be requested.

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     (c) The Company will pay Employee his regular base salary in the amount of $8,750 per bi-weekly pay period through the Consulting Period (the “Payments”), less applicable federal, state, and local legally required deductions and less any deductions authorized by Employee to pay his portion to continue group health coverage. The Payments will not commence until this Agreement is executed and the Revocation Period (as defined below) expires. On the first regular pay date following the expiration of the Revocation Period, the Company will pay Employee any Payments that accrued during the Review Period (as defined below) and the Revocation Period. For the period for which Employee is eligible to continue benefits under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), and so long as Employee is not employed by another employer offering group health coverage, but not to exceed the end of the later of the Consulting Period and Severance Period (as defined below), Company will pay the Company’s portion of the premiums for Employee’s medical, dental, and prescription coverage.

     (d) In all matters relating to the provisions of this paragraph 2, Employee shall continue to be an employee of the Company, but his participation and eligibility in any employee benefit plans sponsored by the Company shall be only in accordance with the terms of such employee benefit plans.

     (e) During the Consulting Period, Employee shall comply with all provisions contained in Sections 6 through 11 of the Employment Agreement, but nothing in this Agreement shall imply any limitation on the time duration of any obligation of Employee in paragraphs 6 through 11 of the Employment Agreement.

     (f) During the Consulting Period, Employee will not make any defamatory or disparaging remarks regarding the Company, its officers, or its products or services to any person with whom the Company has business relations, including any vendor, customer, supplier or employee of the Company.

     (g) During the Consulting Period, Employee may be employed or may pursue other business opportunities, and the Company will use reasonable efforts to ensure that the consulting services may be rendered at times that do not conflict with such employment or other business opportunities. However and notwithstanding the foregoing, during the Consulting Period, Employee will continue to owe duties of loyalty and confidentiality to the Company, and Employee will not, for himself or on behalf of another, accept employment, pursue any business opportunity, render any services for or with any competitor of the Company, or otherwise engage in any competitive activity against the Company.

     (h) The Company may terminate Employee’s employment as a consultant and the Payments if Employee (i) refuses to perform consulting services reasonably requested by the Company; (ii) fails to perform such consulting services to the reasonable satisfaction of the Company; (iii) breaches any promise contained in this Agreement or Sections 6 through 11 of the Employment Agreement; or (iv) dies or becomes disabled, with reasonable accommodation, to perform the essential functions of his consulting

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services. The Consulting Period will not renew upon its expiration and no renewal of the Consulting Period will be implied by law.

     3. For purposes of the National Medical Health Card Systems, Inc. 1999 Stock Option Plan, as amended (the “Stock Option Plan”) and the National Medical Health Card Systems, Inc. Amended and Restated 2000 Restricted Stock Grant Plan (the “Restricted Stock Plan”), Employee’s credited service will continue until the date of termination or date of expiration (whichever occurs first) of the Consulting Period (such date to be referred to as the “Consulting Period Termination Date”). Accordingly, except as otherwise provided by the Stock Option Plan (with respect to the effect of termination of service by the Company for “cause” or by the Employee voluntarily or due to Employee’s death or disability), Employee will have 90 days following the Consulting Period Termination Date to exercise any of his vested options. The Parties acknowledge that, on the Consulting Period Termination Date, Employee will forfeit and have no further right, title or interest in or with respect to, any and all non-vested options, shares of restricted stock and restricted stock unit awards held by Employee under the Stock Option Plan and/or the Restricted Stock Plan. Employee affirms the provision of any Restricted Stock Agreement that the Company shall have the right to instruct the Company’s transfer agent to transfer any unvested restricted stock to the Company.

     4. Severance Payments.

     (a) Provided that the Employee executes an additional release substantially in the form attached hereto as Exhibit “B” at the end of the Consulting Period, Company will pay Employee’s present salary for a period not to exceed one year (such period to be referred to as the “Severance Period”), beginning on the Consulting Period Termination Date, but only so long as Executive has not breached and does not breach the provisions of Sections 6 through 11 of the Employment Agreement, for a total sum not to exceed $227,500, payable in twenty-six installments of $8,750 each, all in accordance with the Company’s general payroll practices, less applicable federal, state, and local legally required deductions and less any deductions authorized by Employee to pay his portion to continue group health coverage. Any payments to which Employee is entitled pursuant to this paragraph 4(a) shall be payable to Employee’s estate in the event of Employee’s death prior to the end of the Severance period.

     (b) Employee shall receive all accrued salary through the Termination Date in accordance with the Company’s general payroll practices, less applicable federal, state, and local legally required deductions.

     (c) For the period for which Employee is eligible to continue benefits under COBRA, Company will pay the Company’s portion of the premiums for Employee’s medical, dental, and prescription coverage from the Termination Date through the end of such period of eligibility but not to exceed the end of the Severance Period, subject to Employee’s strict compliance with Sections 6 through 11 of the Employment Agreement and the terms and provisions of this Agreement.

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     (d) Employee shall receive all reimbursable expenses pursuant to the Company’s Travel & Entertainment policy incurred through the Consulting Period Termination Date and submitted within thirty (30) days after the Consulting Period Termination Date.

     (e) Employee shall receive all accrued vacation pay to which Employee is entitled through and including the Termination Date, which amount is $2,840.47.

     (f) The Company will reimburse Employee for attorney’s fees reasonably incurred in the review and execution of this Agreement, not to exceed $5,000. Such request for reimbursement must be submitted no later than July 15, 2007 and will be paid within thirty (30) days after Employee presents an itemized invoice for such services.

     (g) Employee acknowledges and agrees that he is not entitled to any additional wages, bonus payments, benefits or other compensation from the Company except as set forth herein.

     5. Release Provisions.

     (a) As a material inducement to the Employee to enter this Agreement, and in consideration for the Company’s payments to Employee as set forth in this Agreement, and for other good and valuable consideration, as and for Employee’s complete release of all statutory, contract, tort and all other claims against the Company and each of its current and former owners (including, without limitation, New Mountain Capital, L.L.C., New Mountain Partners, L.P., New Mountain Affiliated Investors, L.P., and their respective affiliates), predecessors, assigns, employees, representatives, attorneys, benefit plans, insurers, parent companies, divisions, subsidiaries, affiliates, directors, managers, partners, members, and officers, including any and all persons acting by, through, or under or in concert with any of them (collectively “Releasees”), Employee hereby releases and forever discharges the Releasees from any all actions, causes of action, suits, dues, sums of money, reckonings, covenants, contracts, bonuses, controversies, agreements, claims, promises, charges, obligations, complaints and demands whatsoever in law or equity, which Employee (and Employee’s heirs, executors, administrators, successors and/or assigns) may now have or hereafter can, shall, may, or may have had for, upon, or by reason of any matter, cause or actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the execution of this Agreement by the Employee, including without limitation, any claim arising out of or relating to the Employee’s employment by the Company and each of its subsidiaries and affiliated entities, and any and all obligations and liabilities of the Company under the Employment Agreement and Severance Letter or any other agreement between the Employee and any of the Releasees, and the ownership, acquisition, offer or sale of, or rights to any equity interest, or any option to purchase or acquire any equity interest in the Company, excepting only the rights and obligations (i) created by this Agreement; (ii) that may exist under (A) any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee or (B) the Company’s D&O insurance coverage; (iii) Employee’s rights under state worker’s compensation laws (for occupational illness or injury only) and (iv)

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Employee’s vested rights under the Company’s health, dental, pharmacy and 401(k) benefit plans.

     (b) Without limiting the generality of the foregoing, this Agreement is intended to and shall release Releasees from any and all claims, whether known or unknown, which Employee ever had, has, or may have against any Releasee with respect to Employee’s employment, the terms, benefits, and conditions of that employment, and/or the termination thereof, including without limitation those arising under the Civil Rights Act of 1866, 42 U.S.C.A. Section 1981, the Civil Rights Act of 1964, as amended, 42 U.S.C.A. Section 2000e, et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.A. Section 621 et seq., the National Labor Relations Act, 29 U.S.C.A. Section 151 et seq., the Fair Labor Standards Act, 29 U.S.C.A. Section 201 et seq., the Labor Management Reporting and Disclosure Act of 1959, as amended, 29 U.S.C.A. Section 401 et seq., the Americans with Disabilities Act, 42 U.S.C.A. Section 12101, et. Seq., the Constitution and the laws of the United States and the State of New York, including specifically, New York’s Human Rights Law, Executive Law Section 290 et seq., or any other federal, state, or local human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulation, public policy, contract or tort law; and any and all claims arising out of the ownership, acquisition, offer or sale of, or rights to any equity interest, or relating to any option to purchase or acquire any equity interest in the Company, that Employee has held at any time in the Company or any of its predecessors or affiliates, including any claims, arising under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any federal, state or local securities law, the rules or regulations promulgated under any of them, or any doctrine of common law or equity applicable to the ownership, acquisition or sale of securities or the solicitation of proxies with respect thereto; and any and all claims for attorneys’ fees, costs, disbursements, or any action similar thereto.

EMPLOYEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT BY EXECUTING THIS AGREEMENT, HE IS WAIVING ALL RIGHTS OR CLAIMS, IF ANY, THAT HE HAS OR MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED. EMPLOYEE FURTHER ACKNOWLEDGES AND AGREES THAT HIS WAIVER OF SUCH RIGHTS OR CLAIMS IS KNOWING AND VOLUNTARY.

     (c) Employee promises never to initiate, be represented or participate in, submit or file, or permit to be submitted or filed on or in his behalf, any lawsuit, charge, claim, complaint or other proceeding against any Releasee with any administrative agency, court, arbitrator or other forum, based upon claims that were released pursuant to this Agreement. This covenant not to sue (and the remedies provided in this Agreement, including those in paragraph 5(d)) does not affect Employee’s right to test the knowing and voluntary nature of his waiver of rights. Nothing in this Agreement shall be construed to affect the rights and responsibilities of the Equal Employment Opportunity Commission, or any other state or local agency with similar responsibilities (the “Commission”), to enforce any laws pertaining to employment discrimination or

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retaliation. Likewise, this waiver will not be used to justify interfering with the protected right of any employee to file a charge or participate in an investigation or proceeding conducted by the Commission; however, Employee waives the right to any benefits or recovery arising out of any such proceeding.

     (d) Subject to paragraph 5(d), if Employee materially breaches any of his promises contained in this paragraph 5 by filing a lawsuit or administrative charge based on claims that he has released, Employee will indemnify the Company and/or any Releasee for any costs, including reasonable attorneys’ fees, that the Company and/or any Releasee may incur as the result of Employee’s breach. In addition, if Employee materially breaches the promises made in any provision of this Agreement, he must repay all benefits previously received in accordance with paragraph 4 of this Agreement, upon the Company’s reasonable demand, and Company shall cease making further payments, if any, pursuant to paragraph 4 above.

     6. Employee acknowledges and agrees that, for the time periods set forth in the Employment Agreement, he shall comply with paragraphs 6 through 11 of the Employment Agreement and that such provisions shall survive the termination of the Employment Agreement. Company acknowledges and agrees that the provisions of paragraph 9 of the Employment Agreement are not intended to prevent Employee’s employment or service with (i) companies that supply products and services to the PBM industry, but do not themselves provide PBM Services, so long as Employee’s services are not the services prohibited by paragraph 9 of the Employment Agreement; or (ii) subsidiaries, operating divisions, or other business entities of companies that provide PBM Services, so long as Employee’s services are not directly for the benefit of the PBM functions of those companies and are not the services prohibited by paragraph 9 of the Employment Agreement. Employee acknowledges and agrees that the provisions of paragraphs 6 through 11 of the Employment Agreement are fully enforceable and reasonable to protect the legitimate business interests of the Company. Furthermore, Employee represents and warrants that he has returned to the Company any and all identification cards, files, books, records, materials, equipment or documents in his possession or under his control that were provided to or obtained by him in connection his employment.

     7. Employee further agrees to never to make any statements or comments, whether oral or written to any person or entity that would tend to disparage or harm the Company; provided, however, that this sentence shall not be construed to constrain Employee from providing truthful testimony when required by law in the course of a legal or administrative proceeding. Employee understands and agrees that violation of this paragraph shall be treated as a material breach of this Agreement.

     8. Employee expressly agrees that this Agreement is not and shall not in any way be deemed to constitute an admission or evidence of any breach of contract, wrongdoing or liability on the part of the Company, nor of any violation of any federal, state or municipal statute, regulation or principle of common law or equity.

     9. Employee agrees to make himself reasonably available in connection with any information the Company requires relating to the services Employee had provided to Company, including any litigation the Company is or may become involved in to which the Employee has

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knowledge. Company agrees to provide Employee with reasonable notice in connection with any depositions or court appearances where his presence is necessary or reasonably desirable. The Company shall pay Employee’s travel expenses in this regard. Employee and Company shall agree on a reasonable per diem fee for any time greater than three full days the Employee is required to make himself available in person pursuant to this paragraph.

     10. Employee and the Company acknowledge and agree:

     (a) that each of them has read and understands the contents of this Agreement;

     (b) that this Agreement does not waive rights or claims that may arise after the date that this Agreement is executed;

     (c) that Employee waives rights or claims only in exchange for consideration that the Employee would not be entitled to but for executing this Agreement;

     (d) that the Company has informed Employee that Employee should consult with an attorney in connection with this Agreement; and

     (e) that Employee’s decision to consult with an attorney or not to consult with any attorney was made without influence by the Company.

     11. Both Parties understand that the Employee shall have 45 days (the “Review Period”) to consider this Agreement before signing. Both Parties understand that the Employee shall have seven (7) days (the “Revocation Period”) in which to revoke this Agreement after signing, and that this Agreement shall not become effective or enforceable until the expiration of seven (7) days after signing, and the Payments under the Consulting Period and the severance compensation payable hereunder shall not be due and owing until after the Effective Date set forth herein and the fulfillment of all conditions set forth herein. To accept the Agreement, Employee must send a signed copy to Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com, such that it is received no later than 45 days after the date that this Agreement has been presented to Employee. Any notice of revocation must also be sent such that it is received prior to the end of the seven day Revocation Period by Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com. Employee also acknowledges receipt of the following information:

     (a) The group of individuals covered: All employees who hold positions whose employment is being terminated on or about May 21, 2007.

     (b) Eligibility factors: A severance proposal is being offered to all employees whose employment is being terminated on or about May 21, 2007.

     (c) Time limits: Each employee who is offered a severance proposal has 45 days to consider the Agreement and seven (7) days to revoke acceptance after signing.

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     (d) Employee acknowledges that Employee has received and reviewed the information contained in Exhibit “A” to this Agreement. The information in Exhibit “A” includes the job titles and ages of all individuals from the group of employees considered for termination on or about May 21, 2007, and whether or not those employees were selected for termination of employment or otherwise offered a severance proposal.

     12. This Agreement is made in the State of New York. This Agreement is to be interpreted under the laws of the State of New York without regard to conflict of laws principles. The Parties agree that the federal and state courts sitting in Nassau County, New York, shall be the exclusive venue for the resolution of any dispute arising out of or relating to this Agreement.

     13. Except as provided in this Agreement, this is the entire agreement between the Employee and the Company and supersedes any and all prior agreements or understandings between the Parties, whether written or oral, pertaining to Employee’s employment with the Company. This Agreement may only be amended or modified by a written document signed by both Parties. The Company has made no promises to Employee other than those in this Agreement. Notwithstanding anything to the contrary in this paragraph 13, except as explicitly provided otherwise in this Agreement, (i) paragraphs 6 through 11 of the Employment Agreement, and (ii) any obligation of the Company under any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee shall survive the execution of this Agreement in accordance with their respective terms and conditions.

     14. Should any provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity of the remaining parts, terms and provisions shall not be effected thereby and any said illegal, invalid or unenforceable part, terms or provisions shall be deemed stricken and severed from this Agreement.

     15. This Agreement may be executed in one or more counterparts, and each effective counterpart shall be effective as a signed original.

     16. Company makes no representations to Employee concerning the tax consequences arising out of any payments under this Agreement, including, without limitation, whether any of the payments hereunder are subject to 26 U.S.C. § 409A. Company urges Employee to obtain his own tax counsel with regard to any tax consequences arising out of or relating to this Agreement.

     17. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS CAREFULLY READ THIS AGREEMENT; THAT EMPLOYEE HAS HAD AT LEAST 45 DAYS IN WHICH TO CONSIDER AND RETURN THIS AGREEMENT; THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH ANY ATTORNEY OF EMPLOYEE’S CHOICE IN CONNECTION WITH THIS AGREEMENT; THAT EMPLOYEE FULLY UNDERSTANDS THE TERMS, CONDITIONS, AND SIGNIFICANCE AND CONSEQUENCES OF THIS AGREEMENT; AND THAT EMPLOYEE HAS EXECUTED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, AND OF EMPLOYEE’S OWN FREE WILL.

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     IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date below.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

By:                                                            
                    , its authorized representative

Date:_____________________________

                                                            
      Bill Masters

Date:_______________________________

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Exhibit “A”

		OFFERED SEVERANCE PROPOSAL
JOB TITLE	AGE	OR NOT (Y/N)
Chief Human Resource Officer	51	N
Chief Clinical Officer	46	N
Chief Specialty Officer	44	N
Chief Services Officer	48	N
Chief Financial Officer	46	N
Senior Vice President, Sales	47	N
President and Chief Executive Officer	58	Y
Chief Marketing Officer	53	Y
Chief Information Officer	56	Y
Chief Legal Officer	37	Y
Vice President Marketing	44	Y
Controller	48	Y

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Exhibit “B”

Form of Release

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EX-10.26

EXHIBIT 10.26

DEPARTURE AGREEMENT AND GENERAL RELEASE

(PLEASE READ CAREFULLY. THIS DEPARTURE AGREEMENT AND GENERAL RELEASE HAS IMPORTANT LEGAL CONSEQUENCES.)

     This Departure Agreement and General Release (this “Agreement”) is between National Medical Health Card Systems, Inc. (the “Company”) and Tery Baskin (“Employee”) and is a complete, final and binding settlement of all claims and potential claims, if any, with respect to their employment relationship. Employee and the Company may sometimes be referred to collectively as the “Parties.”

          WHEREAS, the Company and Employee are parties to an Employment Agreement dated on or about June 4, 2001 (the “Employment Agreement”); and

          WHEREAS, the Company and Employee have agreed on certain terms and conditions regarding the termination of employment under the Employment Agreement;

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, be it agreed as follows:

     1. As of May 21, 2007, Employee’s employment relationship with the Company will terminate (the “Termination Date”). This Agreement has been presented to Employee on or before the Termination Date.

     2. In consideration for the covenants and promises set forth herein, following the execution of the Agreement by Employee ( the “Execution Date”):

     (a) The Company will pay Employee’s present salary for twelve months (such period to be referred to as the “Severance Period”), but only so long as Employee has not breached and does not breach the provisions of paragraphs 6 through 11 of the Employment Agreement, for a total sum not to exceed $230,000, payable in twenty-six bi-weekly installments of $8,846.15 in accordance with the Company’s general payroll practices, less applicable federal, state, and local legally required deductions and less any deductions authorized by Employee to pay his portion to continue group health coverage.

     (b) Employee has received all accrued salary through the Termination Date in accordance with the Company’s general payroll practices, less applicable federal, state, and local legally required deductions.

     (c) Provided that Employee does not violate paragraphs 6 through 11 of the Employment Agreement and provided that Employee provides any assistance reasonably requested by the Company in connection with the renewal of such contracts, the Company will pay Employee a commission (the “Commission Payments”) equal to three cents per net paid claim for the Arkansas

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State Employees account (“ASE”) and State of Arkansas Public School account (“SAPS”), for each net paid claim submitted during the period commencing on the 2007 renewal dates of each such account and ending on the third anniversary of the 2007 renewal dates. The Commission Payments shall not exceed a total of $83,333 per calendar year, and the total Commission Payments shall be no greater than $250,000. Each Commission Payment will be made on a quarterly basis and will be paid by the sixtieth day following each calendar quarter, and each Commission Payment shall be paid only if Employee has continued to provide any assistance reasonably requested by the Company in connection with such accounts and has otherwise not breached this Agreement. Such payments will be subject to withholding if and as required by law. Any dispute arising out of or relating to the Commission Payments shall be submitted to binding arbitration by a party’s giving written notice to such effect to the other party and the office of the American Arbitration Association (the “AAA”) in New York, New York. Arbitration of such controversy, disagreement, or dispute shall be conducted by a single arbitrator in accordance with the Federal Arbitration Act and the Employment Arbitration Rules of the AAA.

     (d) For the period for which Employee is eligible to continue benefits under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), so long as Employee has not breached and does not breach the provisions of paragraphs 6 through 11 of the Employment Agreement, the Company will pay the Company’s portion of the premiums as of the date of this Agreement ($7,121 per annum, subject to adjustment at the renewal date in February 2008) for Employee’s medical, dental and prescription coverage from the Termination Date through the end of such period of eligibility but not to exceed the earlier of the date that (x) Employee is employed by an employer offering health coverage or (y) the end of the Severance Period. In addition, the Company will assign its interest in the life insurance policy purchased with respect to Employee within thirty (30) days of the execution of this Agreement and waive any claim to reimbursement for premiums paid.

     (e) Employee has received all reimbursable expenses pursuant to the Company’s Travel & Entertainment policy incurred through the Termination Date and submitted within thirty (30) days after the Termination Date.

     (f) Employee has received all accrued vacation pay to which Employee is entitled through and including the Termination Date, which amount is $11,315.34.

     (g) The Company will reimburse Employee for attorney’s fees reasonably incurred in the review and execution of this Agreement, not to exceed $5,000. Such request for reimbursement must be submitted no later than thirty (30) days after the signature of Employee and the Company to this Agreement and will be paid within thirty (30) days after Employee presents a summary invoice for such services.

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     (h) Employee acknowledges and agrees that he is not entitled to any additional wages, bonus payments, benefits or other compensation from the Company except as set forth herein.

     3. For purposes of the National Medical Health Card Systems, Inc. 1999 Stock Option Plan, as amended (the “Stock Option Plan”), and the National Medical Health Card Systems, Inc. Amended and Restated 2000 Restricted Stock Grant Plan (the “Restricted Stock Plan”), the termination of Employee’s employment will be considered as an involuntary termination without cause. Accordingly, under the terms of the Stock Option Plan, Employee will have 90 days following the Termination Date to exercise any of his vested options. The Parties acknowledge that, on the Termination Date, Employee will forfeit and have no further right, title or interest in or with respect to, any and all non-vested options, shares of restricted stock and restricted stock unit awards held by Employee under the Stock Option Plan and/or the Company’s Restricted Stock Plan. Employee affirms the provision of any Restricted Stock Agreement that the Company shall have the right to instruct the Company’s transfer agent to transfer any unvested restricted stock to the Company.

     4. Release Provisions.

     (a) As a material inducement to Employee to enter this Agreement, and in consideration for the Company’s payments to Employee as set forth in this Agreement, and for other good and valuable consideration, as and for Employee’s complete release of all statutory, contract, tort and all other claims against the Company and each of its current and former owners (including, without limitation, New Mountain Capital, L.L.C., New Mountain Partners, L.P., New Mountain Affiliated Investors, L.P., and their respective affiliates), predecessors, assigns, employees, representatives, attorneys, benefit plans, insurers, parent companies, divisions, subsidiaries, affiliates, directors, managers, partners, members, and officers, including any and all persons acting by, through, or under or in concert with any of them (collectively “Releasees”), Employee hereby releases and forever discharges the Releasees from any all actions, causes of action, suits, dues, sums of money, reckonings, covenants, contracts, bonuses, controversies, agreements, claims, promises, charges, obligations, complaints and demands whatsoever in law or equity, which Employee (and Employee’s heirs, executors, administrators, successors and/or assigns) may now have or hereafter can, shall, may, or may have had for, upon, or by reason of any matter, cause or actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the execution of this Agreement by Employee, including without limitation, any claim arising out of or relating to Employee’s employment by the Company and each of its subsidiaries and affiliated entities, and any and all obligations and liabilities of the Company under the Employment Agreement, the letter agreement dated November 28, 2005 between the Company and Employee (to the extent such letter agreement exists and is effective), or any other agreement between Employee and any of the Releasees, including, without limitation, any claim for car allowances, club dues, unused vacation time, or other benefits incident to Employee’s employment, and the ownership, acquisition,

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offer or sale of, or rights to any equity interest, or any option to purchase or acquire any equity interest in the Company, excepting only the rights and obligations (i) created by this Agreement; (ii) that may exist under any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee; (iii) Employee’s rights under state worker’s compensation laws (for occupational illness or injury only) (iv) Employee’s vested rights under the Company’s health, dental, pharmacy and 401(k) benefit plans, (v) any rights, whenever arising, Employee may have in his capacity as a shareholder of the Company and not arising from his capacity as officer, employee or agent of the Company; provided, however, that Employee shall neither (A) initiate any claim based in whole or in part upon Employee’s status as a shareholder of the Company nor (B) directly or indirectly counsel or encourage another person or entity to initiate, or voluntarily provide assistance in respect of, any claims based in whole or in part upon any person’s or entity’s status as a shareholder of the Company; provided, further, that nothing herein is intended to nor shall it preclude Employee from providing truthful testimony if under legal compulsion as a witness regarding any such claim and (vi) any cause of action that arises in whatever capacity after the date of this Agreement.

     (b) Without limiting the generality of the foregoing, this Agreement is intended to and shall release Releasees from any and all claims, whether known or unknown, which Employee ever had, has, or may have against any Releasee with respect to Employee’s employment, the terms, benefits, and conditions of that employment, and/or the termination thereof, including without limitation those arising under the Civil Rights Act of 1866, 42 U.S.C.A. Section 1981, the Civil Rights Act of 1964, as amended, 42 U.S.C.A. Section 2000e, et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.A. Section 621 et seq., the National Labor Relations Act, 29 U.S.C.A. Section 151 et seq., the Fair Labor Standards Act, 29 U.S.C.A. Section 201 et seq., the Labor Management Reporting and Disclosure Act of 1959, as amended, 29 U.S.C.A. Section 401 et seq., the Americans with Disabilities Act, 42 U.S.C.A. Section 12101, et. Seq., the Constitution and the laws of the United States and the State of New York, including specifically, New York’s Human Rights Law, Executive Law Section 290 et seq., or any other federal, state, or local human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulation, public policy, contract or tort law; and any and all claims arising out of the acquisition, offer or sale of, or rights to any equity interest, or relating to any option to purchase or acquire any equity interest in the Company, that Employee has held at any time in the Company or any of its predecessors or affiliates, including any claims, arising under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any federal, state or local securities law, the rules or regulations promulgated under any of them, or any doctrine of common law or equity applicable to the ownership, acquisition or sale of securities or the solicitation of proxies with respect thereto; and any and all claims for attorneys’ fees, costs, disbursements, or any action similar thereto.

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EMPLOYEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT BY EXECUTING THIS AGREEMENT, HE IS WAIVING ALL RIGHTS OR CLAIMS, IF ANY, THAT HE HAS OR MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED. EMPLOYEE FURTHER ACKNOWLEDGES AND AGREES THAT HIS WAIVER OF SUCH RIGHTS OR CLAIMS IS KNOWING AND VOLUNTARY.

     (c) Employee promises never to initiate, be represented or participate in, submit or file, or permit to be submitted or filed on or in his behalf, any lawsuit, charge, claim, complaint or other proceeding against any Releasee with any administrative agency, court, arbitrator or other forum, based upon claims that were released pursuant to this Agreement. This covenant not to sue (and the remedies provided in this Agreement, including those in paragraph 4(d)) does not affect Employee’s right to test the knowing and voluntary nature of his waiver of rights. Nothing in this Agreement shall be construed to affect the rights and responsibilities of the Equal Employment Opportunity Commission, or any other state or local agency with similar responsibilities (the “Commission”), to enforce any laws pertaining to employment discrimination or retaliation. Likewise, this waiver will not be used to justify interfering with the protected right of any employee to file a charge or participate in an investigation or proceeding conducted by the Commission; however, Employee waives the right to any benefits or recovery arising out of any such proceeding.

     (d) Subject to paragraph 4(c), if Employee materially breaches any of his promises contained in this paragraph 4 by filing a lawsuit or administrative charge based on claims that he has released, Employee will indemnify the Company and/or any Releasee for any costs, including reasonable attorneys’ fees, that the Company and/or any Releasee may incur as the result of Employee’s breach. In addition, without limiting any other legal or equitable remedy available to the Company under this Agreement or otherwise, if Employee materially breaches the promises made in any provision of this Agreement (other than the promises made in paragraph 7 of this Agreement), (i) the Company shall cease making further payments, if any, pursuant to paragraph 2 above and (ii) Employee shall forfeit and immediately repay to the Company the amount of all payments, if any, received pursuant to paragraph 2(a) and the first sentence of paragraph 2(d) above to the extent such payments received exceed $115,000.

     (e) The Company represents to Employee that, to the actual knowledge of the current executive officers of the Company as of the Execution Date, there is no basis for any lawsuit, charge, claim, complaint or other proceeding by the Company against Employee.

     5. The Company will honor its obligation to indemnify Employee pursuant to the Company’s Certificate of Incorporation and Bylaws, as amended (the “Charter Documents”) and the Company acknowledges that Employee was an officer of the Company for such purposes. In the event that the provisions of any of the Charter Documents relating to indemnification, exculpation or advancement of expenses are

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amended after the Execution Date in a manner adverse to Employee, then subject to applicable law, the Company will indemnify Employee in accordance with the terms of the Charter Documents as they exist as provided to Employee on July 10, 2007. Nothing contained in this paragraph will limit or preclude the exercise or be deemed exclusive of any right under the law, by contract or otherwise, relating to indemnification of or advancement of expenses to Employee as an employee or officer of the Company or was serving, at the Company’s request, as a general partner, manager, officer, director, member, limited partner, trustee, employee or agent of another partnership, association, limited partnership, limited liability company, corporation, joint venture, trust, employee benefit plan or other enterprise. Nothing contained in this paragraph will limit the ability of the Company to otherwise indemnify or advance expenses to Employee.

     6. Employee acknowledges and agrees that, for the time periods set forth in the Employment Agreement, he shall comply with paragraphs 6 through 11 of the Employment Agreement and that such provisions shall survive the termination of the Employment Agreement. Employee acknowledges and agrees that the provisions of paragraphs 6 through 11 of the Employment Agreement are fully enforceable and reasonable to protect the legitimate business interests of the Company. Furthermore, Employee represents and warrants that he has returned to the Company any and all identification cards, files, books, records, materials, equipment or documents in his possession or under his control that were provided to or obtained by him in connection his employment. The Company acknowledges that for purposes of the Employment Agreement, ideas, as opposed to expressions of ideas, are not Inventions (within the meaning of such term as used in the Employment Agreement) and specifically agrees that the Employee’s ideas of integration of TPA, case management, PBM and data analysis is not an Invention for the purposes of the Employment Agreement.

     7. Employee further agrees, at all times prior to October 1, 2010, to refrain from making any statements or comments, whether oral or written to any person or entity that would tend to disparage or harm the Company; provided, however, that this sentence shall not be construed to constrain Employee from providing truthful testimony when required by law in the course of a legal or administrative proceeding. Without limiting any other legal or equitable remedy available to it under this Agreement or otherwise, the Company shall be entitled to offset against amounts otherwise payable to Employee pursuant to paragraphs 2(a) or 2(d) above an amount equal to the amount of any damages the Company suffers resulting from any such disparaging or harmful remark. Employee understands and agrees that violation of this paragraph shall be treated as a material breach of this Agreement. Any dispute arising out of or relating to the Company’s exercise of the offset right provided above shall be submitted to binding arbitration by a party’s giving written notice to such effect to the other party and the office of the AAA in New York, New York. Arbitration of such controversy, disagreement, or dispute shall be conducted by a single arbitrator in accordance with the Federal Arbitration Act and the Employment Arbitration Rules of the AAA.

     8. The Company expressly agrees that upon its material breach of this Agreement in addition to the remedy of the benefits provided to Employee under this Agreement, such breach shall release Employee from any and all restrictions and

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obligations under paragraphs 6 through 11 of the Employment Agreement as well as any restrictions and obligations under the terms of this Agreement as of the date of such breach. For purposes of this paragraph, unless Employee shall have failed to comply with paragraphs 6 through 11 of the Employment Agreement, failure by the Company to strictly comply with any payment obligation set forth in paragraphs 2(a) and 2(d) above within ten (10) days after receipt by the Company (at the physical mailing address or facsimile number set forth in paragraph 12 below, to the attention of the Company’s President) of written notice from Employee specifying such noncompliance in reasonable detail shall be a material breach of this Agreement.

     9. Employee expressly agrees that this Agreement is not and shall not in any way be deemed to constitute an admission or evidence of any breach of contract, wrongdoing or liability on the part of the Company, nor of any violation of any federal, state or municipal statute, regulation or principle of common law or equity.

     10. Employee agrees to make himself reasonably available in connection with any information the Company requires relating to the services Employee had provided to the Company, including any litigation the Company is or may become involved in to which Employee has knowledge. The Company agrees to provide Employee with reasonable notice in connection with any depositions or court appearances where his presence is necessary or reasonably desirable. The Company shall pay Employee’s travel expenses in this regard. Employee and the Company shall agree on a reasonable per diem fee for any time Employee is required to make himself available in person pursuant to this paragraph.

     11. Employee and the Company acknowledge and agree:

     (a) that each of them has read and understands the contents of this Agreement;

     (b) that this Agreement does not waive rights or claims that may arise after the date that this Agreement is executed;

     (c) that Employee waives rights or claims only in exchange for consideration that Employee would not be entitled to but for executing this Agreement;

     (d) that the Company has informed Employee that Employee should consult with an attorney in connection with this Agreement; and

     (e) that Employee’s decision to consult with an attorney or not to consult with any attorney was made without influence by the Company.

     12. Both Parties understand that Employee shall have 45 days to consider this Agreement before signing. Both Parties understand that Employee shall have seven (7) days in which to revoke this Agreement after signing, and that this Agreement shall not become effective or enforceable until the expiration of seven (7) days after signing (the date of such expiration, “Effective Date”), and the severance compensation payable

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hereunder (beyond the $115,000 payable under the Employment Agreement) shall not be due and owing until after the Effective Date set forth herein. To accept the Agreement, Employee must send a signed copy to Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com. Any notice of revocation must also be sent such that it is received prior to the end of the seven day revocation period by Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com. Employee also acknowledges receipt of the following information:

     (a) The group of individuals covered: All employees who hold positions whose employment is being terminated on or about May 21, 2007.

     (b) Eligibility factors: A severance proposal is being offered to all employees whose employment is being terminated on or about May 21, 2007.

     (c) Time limits: Each employee who is offered a severance proposal has 45 days to consider the Agreement and seven (7) days to revoke acceptance after signing.

     (d) Employee acknowledges that Employee has received and reviewed the information contained in Exhibit “A” to this Agreement. The information in Exhibit “A” includes the job titles and ages of all individuals from the group of employees considered for termination on or about May 21, 2007, and whether or not those employees were selected for termination of employment or otherwise offered a severance proposal.

     13. This Agreement is made in the State of New York. This Agreement is to be interpreted under the laws of the State of New York without regard to conflict of laws principles. The Parties agree that the federal and state courts sitting in Nassau County, New York, shall be the exclusive venue for the resolution of any dispute arising out of or relating to this Agreement.

     14. Except as provided in this Agreement, this is the entire agreement between Employee and the Company and supersedes any and all prior agreements or understandings between the Parties, whether written or oral, pertaining to Employee’s employment with the Company. This Agreement may only be amended or modified by a written document signed by both Parties. The Company has made no promises to Employee other than those in this Agreement. Notwithstanding anything to the contrary in this paragraph 14, except as explicitly provided otherwise in this Agreement, (i) paragraphs 6 through 11 of the Employment Agreement, and (ii) any obligation of the Company under any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended and in existence on July 10, 2007, to indemnify Employee shall survive the execution of this Agreement in accordance with their respective terms and conditions.

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     15. Should any provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity of the remaining parts, terms and provisions shall not be effected thereby and any said illegal, invalid or unenforceable part, terms or provisions shall be deemed stricken and severed from this Agreement.

     16. The obligations of the Company as set forth in paragraph 2 above shall survive the death or disability of Employee and upon the death of Employee, payments shall be made to the estate of Employee or as Employee may otherwise designate in writing to the Company or in any will or trust executed after the date hereof.

     17. This Agreement may be executed in one or more counterparts, and each effective counterpart shall be effective as a signed original.

     18. The Company makes no representations to Employee concerning the tax consequences arising out of any payments under this Agreement, including, without limitation, whether any of the payments hereunder are subject to 26 U.S.C. § 409A. The Company urges Employee to obtain his own tax counsel with regard to any tax consequences arising out of or relating to this Agreement.

     19. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS CAREFULLY READ THIS AGREEMENT; THAT EMPLOYEE HAS HAD AT LEAST 45 DAYS IN WHICH TO CONSIDER AND RETURN THIS AGREEMENT; THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH ANY ATTORNEY OF EMPLOYEE’S CHOICE IN CONNECTION WITH THIS AGREEMENT; THAT EMPLOYEE FULLY UNDERSTANDS THE TERMS, CONDITIONS, AND SIGNIFICANCE AND CONSEQUENCES OF THIS AGREEMENT; AND THAT EMPLOYEE HAS EXECUTED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, AND OF EMPLOYEE’S OWN FREE WILL.

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     IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date below.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

By:	/s/ Thomas W. Erickson
	, its authorized representative
Date: August 1, 2007
	/s/ Tery Baskin
Tery	Baskin

Date: August 1, 2007

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Exhibit “A”

		OFFERED SEVERANCE PROPOSAL
JOB TITLE	AGE	OR NOT (Y/N)
Chief Human Resource Officer	51	N
Chief Clinical Officer	46	N
Chief Specialty Officer	44	N
Chief Services Officer	48	Y
Chief Financial Officer	46	N
Senior Vice President, Sales	47	N
President and Chief Executive Officer	58	Y
Chief Marketing Officer	53	Y
Chief Information Officer	56	Y
Chief Legal Officer	37	Y
Vice President Marketing	44	Y
Controller	48	Y

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EX-10.29

EXHIBIT 10.29

DEPARTURE AGREEMENT AND GENERAL RELEASE

(PLEASE READ CAREFULLY. THIS DEPARTURE AGREEMENT AND GENERAL RELEASE HAS IMPORTANT LEGAL CONSEQUENCES.)

     This Departure Agreement and General Release (this “Agreement”) is between National Medical Health Card Systems, Inc. (“Company”) and James F. Smith (“Employee”) and is a complete, final and binding settlement of all claims and potential claims, if any, with respect to their employment relationship. Employee and the Company may sometimes be referred to collectively as the “Parties.”

     WHEREAS, the Company and Employee are parties to an Employment Agreement dated on or about August 30, 2004 (the “Employment Agreement”); and

     WHEREAS, the Company and Employee have agreed on certain terms and conditions regarding the termination of employment under the Employment Agreement,

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, be it agreed as follows:

     1. As of May 21, 2007 (the “Termination Date”), Employee’s employment relationship with the Company and under the Employment Agreement terminated and Employee ceased to be an officer or manager with the Company (including any and all subsidiaries or affiliated entities). Effective immediately upon his execution of this Agreement, Employee resigns as a member of the Board of Directors of the Company (the “Board”).

     2. In consideration for the covenants and promises set forth herein, following the execution of the Agreement by Employee ( the “Execution Date”):

     (a) Company will pay Employee’s present salary for a period not to exceed two years from the Termination Date (such period to be referred to as the “Severance Period”), but only so long as Employee has not breached and does not breach the provisions of paragraphs 6 through 11 of the Employment Agreement, for a total sum not to exceed $750,000, plus a payment in the amount of $600.00 per month in respect of Employee’s former car payment (the “Total Severance Amount”), payable as follows: (i) Employee shall receive an amount, in one lump sum payment within fourteen (14) days after the Execution Date, equal to the portion of the Total Severance Amount that would have accrued during the period commencing on the Termination Date and ending on the Execution Date had the Company been obligated to pay Employee severance payments from and after the Termination Date; and (ii) the remaining portion of the Total Severance Amount shall be paid in accordance with the Company’s general payroll practices in bi-weekly payments of $14,423.08 each (plus the $600.00 per month payment described above) following the Execution Date, in each case less applicable federal, state, and local legally required deductions and less any deductions authorized by Employee to pay his portion to continue group health coverage (such lump sum and

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installment payments to become payable only when Employee has executed, and has not revoked, this Agreement as provided herein).

     (b) Employee received all accrued salary through the Termination Date in accordance with the Company’s general payroll practices, less applicable federal, state, and local legally required deductions.

     (c) For the period for which Employee is eligible to continue benefits under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), Company will pay the Company’s portion of the premiums for Employee’s medical, dental, and prescription coverage from the Termination Date through the end of such period of eligibility but not to exceed the end of the Severance Period, subject to Employee’s strict compliance with paragraphs 6 through 11 of the Employment Agreement and the terms and provisions of this Agreement.

     (d) In addition, and in lieu of any remaining benefits for health, dental, and pharmaceutical coverage for the remainder of the Severance Period for which COBRA is not available, the Company will pay Employee a one-time payment of $19,750, within fourteen (14) days of the execution of this Agreement.

     (e) Employee received all reimbursable expenses pursuant to the Company’s Travel & Entertainment policy incurred through the Termination Date and submitted within thirty (30) days after the Termination Date.

     (f) Employee received all accrued vacation pay to which Employee is entitled through and including the Termination Date, which amount is $11,893.63.

     (g) The Company will reimburse Employee for attorney’s fees reasonably incurred in the review and execution of this Agreement, not to exceed $5,000. Such request for reimbursement must be submitted no later than thirty (30) days after the execution of this Agreement and will be paid within thirty (30) days after Employee presents a summary invoice for such services.

     (h) Employee acknowledges and agrees that he is not entitled to any additional wages, bonus payments, benefits or other compensation from the Company except as set forth herein.

     3. For purposes of the National Medical Health Card Systems, Inc. 1999 Stock Option Plan, as amended (the “Stock Option Plan”), and the National Medical Health Card Systems, Inc. Amended and Restated 2000 Restricted Stock Grant Plan (the “Restricted Stock Plan”), the termination of Employee’s employment will be considered as an involuntary termination without cause. Accordingly, under the terms of the Stock Option Plan, Employee will have 90 days following the Termination Date to exercise any of his vested options. The Parties acknowledge that, on the Termination Date, Employee will forfeit and have no further right, title or interest in or with respect to, any and all non-vested options, shares of restricted stock and restricted stock unit awards held by Employee under the Stock Option Plan and/or the Company’s Restricted Stock Plan. Employee affirms the provision of any Restricted Stock

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Agreement that the Company shall have the right to instruct the Company’s transfer agent to transfer any unvested restricted stock to the Company.

     4. Release Provisions.

     (a) As a material inducement to the Employee to enter this Agreement, and in consideration for the Company’s payments to Employee as set forth in this Agreement, and for other good and valuable consideration, as and for Employee’s complete release of all statutory, contract, tort and all other claims against the Company and each of its current and former owners (including, without limitation, New Mountain Capital, L.L.C., New Mountain Partners, L.P., New Mountain Affiliated Investors, L.P., and their respective affiliates), predecessors, assigns, employees, representatives, attorneys, benefit plans, insurers, parent companies, divisions, subsidiaries, affiliates, directors, managers, partners, members, and officers, including any and all persons acting by, through, or under or in concert with any of them (collectively “Releasees”), Employee hereby releases and forever discharges the Releasees from any all actions, causes of action, suits, dues, sums of money, reckonings, covenants, contracts, bonuses, controversies, agreements, claims, promises, charges, obligations, complaints and demands whatsoever in law or equity, which Employee (and Employee’s heirs, executors, administrators, successors and/or assigns) may now have or hereafter can, shall, may, or may have had for, upon, or by reason of any matter, cause or actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the execution of this Agreement by the Employee, including without limitation, any claim arising out of or relating to the Employee’s employment by the Company or service on the Board or any similar governing body of the Company and each of its subsidiaries and affiliated entities, any and all obligations and liabilities of the Company under the Employment Agreement or any other agreement between the Employee and any of the Releasees, and the ownership, acquisition, offer or sale of, or rights to any equity interest, or any option to purchase or acquire any equity interest in the Company, excepting only the rights and obligations (i) created by this Agreement; (ii) that may exist under any defense or indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee; (iii) created by contracts of liability insurance; (iv) Employee’s rights under state worker’s compensation laws (for occupational illness or injury only); (v) Employee’s vested rights under the Company’s health, dental, pharmacy and 401(k) benefit plans; and (vi) any rights, whenever arising, Employee may have in his capacity as a shareholder of the Company and not arising from his capacity as officer, director, employee or agent of the Company; provided, however, that Employee shall neither (A) initiate any claim based in whole or in part upon Employee’s status as a shareholder of the Company nor (B) directly or indirectly counsel or encourage another person or entity to initiate, or voluntarily provide assistance in respect of, any claims based in whole or in part upon any person’s or entity’s status as a shareholder of the Company; provided, further, that nothing herein is intended to nor shall it preclude Employee from providing truthful testimony if under legal compulsion as a witness regarding any such claim.

     (b) Without limiting the generality of the foregoing, this Agreement is intended to and shall release Releasees from any and all claims, whether known or

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unknown, which Employee ever had, has, or may have against any Releasee with respect to Employee’s employment, the terms, benefits, and conditions of that employment, and/or the termination thereof, including without limitation those arising under the Civil Rights Act of 1866, 42 U.S.C.A. Section 1981, the Civil Rights Act of 1964, as amended, 42 U.S.C.A. Section 2000e, et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.A. Section 621 et seq., the National Labor Relations Act, 29 U.S.C.A. Section 151 et seq., the Fair Labor Standards Act, 29 U.S.C.A. Section 201 et seq., the Labor Management Reporting and Disclosure Act of 1959, as amended, 29 U.S.C.A. Section 401 et seq., the Americans with Disabilities Act, 42 U.S.C.A. Section 12101, et. Seq., the Constitution and the laws of the United States and the State of New York, including specifically, New York’s Human Rights Law, Executive Law Section 290 et seq., or any other federal, state, or local human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulation, public policy, contract or tort law; and any and all claims arising out of the ownership, acquisition, offer or sale of, or rights to any equity interest, or relating to any option to purchase or acquire any equity interest in the Company, that Employee has held at any time in the Company or any of its predecessors or affiliates, including any claims, arising under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any federal, state or local securities law, the rules or regulations promulgated under any of them, or any doctrine of common law or equity applicable to the ownership, acquisition or sale of securities or the solicitation of proxies with respect thereto; and any and all claims for attorneys’ fees, costs, disbursements, or any action similar thereto.

EMPLOYEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT BY EXECUTING THIS AGREEMENT, HE IS WAIVING ALL RIGHTS OR CLAIMS, IF ANY, THAT HE HAS OR MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED. EMPLOYEE FURTHER ACKNOWLEDGES AND AGREES THAT HIS WAIVER OF SUCH RIGHTS OR CLAIMS IS KNOWING AND VOLUNTARY.

     (c) Employee promises never to initiate, be represented or participate in, submit or file, or permit to be submitted or filed on or in his behalf, any lawsuit, charge, claim, complaint or other proceeding against any Releasee with any administrative agency, court, arbitrator or other forum, based upon claims that were released pursuant to this Agreement. This covenant not to sue (and the remedies provided in this Agreement, including those in paragraph 4(d)) does not affect Employee’s right to test the knowing and voluntary nature of his waiver of rights. Nothing in this Agreement shall be construed to affect the rights and responsibilities of the Equal Employment Opportunity Commission, or any other state or local agency with similar responsibilities (the “Commission”), to enforce any laws pertaining to employment discrimination or retaliation. Likewise, this waiver will not be used to justify interfering with the protected right of any employee to file a charge or participate in an investigation or proceeding conducted by the Commission; however, Employee waives the right to any benefits or recovery arising out of any such proceeding.

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     (d) Subject to paragraph 4(c), if Employee materially breaches any of his promises contained in this paragraph 4 by filing a lawsuit or administrative charge based on claims that he has released, Employee will indemnify the Company and/or any Releasee for any costs, including reasonable attorneys’ fees, that the Company and/or any Releasee may incur as the result of Employee’s breach. In addition, if Employee materially breaches the promises made in any of this Agreement (other than the promises made in paragraph 6 of this Agreement), he must repay all benefits previously received in accordance with paragraph 2 of this Agreement, upon the Company’s reasonable demand, and Company shall cease making further payments, if any, pursuant to paragraph 2 above.

     5. Employee acknowledges and agrees that, for the time periods set forth in the Employment Agreement, he shall comply with paragraphs 6 through 11 of the Employment Agreement and that such provisions shall survive the termination of the Employment Agreement. Employee acknowledges and agrees that the provisions of paragraphs 6 through 11 of the Employment Agreement are fully enforceable and reasonable to protect the legitimate business interests of the Company. Furthermore, Employee represents and warrants that he has returned to the Company any and all identification cards, files, books, records, materials, equipment or documents in his possession or under his control that were provided to or obtained by him in connection his employment. Without limiting Employee’s obligations under any other provisions of this Agreement or paragraphs 6 through 11 of the Employment Agreement, for the purposes of paragraph 9 of the Employment Agreement, the Company agrees that Employee shall not be deemed to be in breach of the provisions of paragraph 9 of the Employment Agreement solely by reason of Employee accepting employment with any employer which owns or operates a division or subsidiary providing PBM Services (as defined in the Employment Agreement), so long as Employee does not directly or indirectly assist with any aspect of such PBM Services function. At any time following the occurrence of a Change in Control of the Company, Employee may elect, by delivering written notice to the Company (the “Election Notice”), to forego and waive any and all rights to receive any further payments under paragraph 2(a) of this Agreement that otherwise would be payable in respect of periods after the date the Company receives the Election Notice. From and after the date of the Company’s receipt of an Election Notice following the occurrence of a Change in Control, Employee shall be deemed released from any further obligations under paragraph 9 of the Employment Agreement and the Company shall be deemed released from any further obligations under paragraph 2(a) of this Agreement. As used in this paragraph, a “Change in Control” shall mean:

     • the transfer, through one transaction or a series of related transactions, either directly or indirectly, or through one or more intermediaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities and Exchange Act of 1934) of 50% or more of either the then outstanding shares of the Company’s common stock, $0.001 par value per share (the “Common Stock”) or the combined voting power of the Company’s then outstanding voting securities entitled to vote generally in the election of directors, or the last of any series of transfers that results in the transfer of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 50% or more of either the then outstanding Common Stock or the combined voting power of the Company’s then outstanding voting securities entitled to vote generally in the election of directors;

5

     • approval by the stockholders of the Company of a merger or consolidation, with respect to which persons who were the stockholders of the Company immediately prior to such merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power of the merged or consolidated company’s then outstanding voting securities, entitled to vote generally, in the election of directors or with respect to a liquidation or dissolution of the Company or the sale of all or substantially all of the assets of the Company;

     • the transfer, through one transaction or a series of related transactions, of more than 50% of the assets of the Company, or the last of any series of transfers that results in the transfer of more than 50% of the assets of the Company. For purposes of this paragraph, the determination of what constitutes more than 50% of the assets of the Company shall be determined based on the most recent financial statements prepared by the Company’s independent accountants; or

     • during any fiscal year, individuals who at the beginning of such year constituted the Board and any new director or directors whose election by the Board was approved by a vote of a majority of the directors then still in office who either were directors at the beginning of the year or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof.

     6. Employee further agrees never to make any statements or comments, whether oral or written to any person or entity that would tend to disparage or harm the Company; provided, however, that this sentence shall not be construed to constrain Employee from providing truthful testimony when required by law in the course of a legal or administrative proceeding. Without limiting any other legal or equitable remedy available to it under this Agreement or otherwise, the Company shall be entitled to offset against amounts otherwise payable to Employee pursuant to paragraphs 2(a) or 2(c) above an amount equal to the amount of damages the Company suffers resulting from any such disparaging or harmful remark. Employee understands and agrees that violation of this paragraph shall be treated as a material breach of this Agreement.

     7. Employee expressly agrees that this Agreement is not and shall not in any way be deemed to constitute an admission or evidence of any breach of contract, wrongdoing or liability on the part of the Company, nor of any violation of any federal, state or municipal statute, regulation or principle of common law or equity.

     8. Employee agrees to make himself reasonably available in connection with any information the Company requires relating to the services Employee had provided to Company, including any litigation the Company is or may become involved in to which the Employee has knowledge. Company agrees to provide Employee with reasonable notice in connection with any depositions or court appearances where his presence is necessary or reasonably desirable. The Company shall pay Employee’s travel expenses in this regard. Employee and Company shall agree on a reasonable per diem fee for any time the Employee is required to make himself available in person pursuant to this paragraph.

     9. Employee and the Company acknowledge and agree:

6

     (a) that each of them has read and understands the contents of this Agreement;

     (b) that this Agreement does not waive rights or claims that may arise after the date that this Agreement is executed;

     (c) that Employee waives rights or claims only in exchange for consideration that the Employee would not be entitled to but for executing this Agreement;

     (d) that the Company has informed Employee that Employee should consult with an attorney in connection with this Agreement; and

     (e) that Employee’s decision to consult with an attorney or not to consult with any attorney was made without influence by the Company.

     10. Both Parties understand that the Employee shall have 45 days to consider this Agreement before signing. Both Parties understand that the Employee shall have seven (7) days in which to revoke this Agreement after signing, and that this Agreement shall not become effective or enforceable until the expiration of seven (7) days after signing (the date of such expiration, “Effective Date”), and the severance compensation payable hereunder shall not be due and owing until after the Effective Date set forth herein. To accept the Agreement, Employee must send a signed copy to Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com, such that it is received no later than 45 days after the date that this Agreement has been presented to Employee. Any notice of revocation must also be sent such that it is received prior to the end of the seven day revocation period by Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com. Employee also acknowledges receipt of the following information:

     (a) The group of individuals covered: All employees who hold positions whose employment is being terminated on or about May 21, 2007.

     (b) Eligibility factors: A severance proposal is being offered to all employees whose employment is being terminated on or about May 21, 2007.

     (c) Time limits: Each employee who is offered a severance proposal has 45 days to consider the Agreement and seven (7) days to revoke acceptance after signing.

     (d) Employee acknowledges that Employee has received and reviewed the information contained in Exhibit “A” to this Agreement. The information in Exhibit “A” includes the job titles and ages of all individuals from the group of employees considered for termination on or about May 21, 2007, and whether or not those employees were selected for termination of employment or otherwise offered a severance proposal.

     11. This Agreement is made in the State of New York. This Agreement is to be interpreted under the laws of the State of New York without regard to conflict of laws principles. The Parties agree that the federal and state courts sitting in Nassau County, New York, shall be the exclusive venue for the resolution of any dispute arising out of or relating to this Agreement.

7

     12. Except as provided in this Agreement, this is the entire agreement between the Employee and the Company and supersedes any and all prior agreements or understandings between the Parties, whether written or oral, pertaining to Employee’s employment with the Company. This Agreement may only be amended or modified by a written document signed by both Parties. The Company has made no promises to Employee other than those in this Agreement. Notwithstanding anything to the contrary in this paragraph 12, except as explicitly provided otherwise in this Agreement, (i) paragraphs 6 through 11 of the Employment Agreement, and (ii) any obligation of the Company under any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify, hold harmless and advance expenses to Employee shall survive the execution of this Agreement in accordance with their respective terms and conditions.

     13. Should any provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity of the remaining parts, terms and provisions shall not be effected thereby and any said illegal, invalid or unenforceable part, terms or provisions shall be deemed stricken and severed from this Agreement.

     14. This Agreement may be executed in one or more counterparts, and each effective counterpart shall be effective as a signed original.

     15. Company makes no representations to Employee concerning the tax consequences arising out of any payments under this Agreement, including, without limitation, whether any of the payments hereunder are subject to 26 U.S.C. § 409A. Company urges Employee to obtain his own tax counsel with regard to any tax consequences arising out of or relating to this Agreement.

     16. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS CAREFULLY READ THIS AGREEMENT; THAT EMPLOYEE HAS HAD AT LEAST 45 DAYS IN WHICH TO CONSIDER AND RETURN THIS AGREEMENT; THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH ANY ATTORNEY OF EMPLOYEE’S CHOICE IN CONNECTION WITH THIS AGREEMENT; THAT EMPLOYEE FULLY UNDERSTANDS THE TERMS, CONDITIONS, AND SIGNIFICANCE AND CONSEQUENCES OF THIS AGREEMENT; AND THAT EMPLOYEE HAS EXECUTED THIS AGREEMENT KNOWINGLY AND VOLUNTARILY, AND OF EMPLOYEE’S OWN FREE WILL.

8

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date below.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

By:	/s/ Stuart Diamond
	, its authorized representative
Date: August 20, 2007
	/s/ James F. Smith
James	F. Smith

Date: August 17, 2007

9

Exhibit “A”

		OFFERED SEVERANCE
JOB TITLE	AGE	PROPOSAL OR NOT (Y/N)
Chief Human Resource Officer	51	N
Chief Clinical Officer	46	N
Chief Specialty Officer	44	N
Chief Services Officer	48	Y
Chief Financial Officer	46	N
Senior Vice President, Sales	47	N
President and Chief Executive Officer	58	Y
Chief Marketing Officer	53	Y
Chief Information Officer	56	Y
Chief Legal Officer	37	Y
Vice President Marketing	44	Y
Controller	48	Y

10

EX-10.30

EXHIBIT 10.30

NATIONAL MEDICAL HEALTH CARD
CORPORATE INCENTIVE PLAN
SUMMARY PLAN DESCRIPTION
FY 2007

Table of Contents

Introduction	2
Section 1: Award Levels	2
Section 2: Calculation of Award	2
1. Individual Performance Element	3
2. Net Income Element	3
3. Gross Profit	4
Section 3: Definitions	5
Section 4: Eligibility	5
Section 5: Award Payments	6
Section 6: General Provisions	6

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FY 2007 CORPORATE INCENTIVE PLAN

Introduction

At National Medical Health Card (“the Company”), we believe associates can make a difference in overall corporate performance and in the achievement of our strategic initiatives. The Corporate Incentive Plan (the “CIP” or the “Plan”) is designed to reward Associates for performance that significantly contributes to our growth and financial success.

All management associates at NMHC play a critical role in assisting the Company in achieving the financial goals expected by our shareholders. Our investors provide us with the necessary capital to operate the Company anticipating a sufficient return on the dollars invested. If we achieve our goals and meet shareholders expectations, we should share in the financial success. Likewise, if we fail to meet our objectives, we should share in the same financial shortfall as our investors. We have designed the Plan so that good management efforts resulting in financial success is aligned in the best interest of our shareholders.

The 2007 Plan is designed to reward three important elements of performance: (1) Individual Performance (2) Net Income and (3) Gross Profit.

The following is a summary of the Plan.

Section 1: Award Levels

Target bonus award levels, expressed as a percent of eligible compensation for professional levels of Manager and above are based on considerations of affordability, internal equity and market positioning with peer companies. Target award levels are subject to review annually to assure conformance of NMHC’s compensation strategy and market conditions.

No award will be paid if threshold requirements for that element are not met. Awards will never exceed maximum. No bonus award, for any element, will be paid in the event the Company does not report positive Net Income.

Your Target Corporate Incentive Bonus for FY 2007 is described in your Total Compensation Statement, provided under separate cover.

Section 2: Calculation of Award

The Plan has been linked to correspond directly to our business goals for Fiscal Year 2007. Award results for each element will be calculated and added together to represent your 2007 Bonus Award as illustrated in Table 1.

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FY 2007 CORPORATE INCENTIVE PLAN

Table 1

Measures	Weight			Threshold			Target			Maximum
Individual Performance		30	%		0	%		100	%		120	%
Net Income		50	%	$	9,957		$	12,447		$	14,936
Gross Profit		20	%	$	77,712		$	97,141		$	116,569

1. Individual Performance Element

Individual Performance, based on meeting your personal goals and objectives, is a hallmark of our corporate culture. We base 30% of your overall bonus on your individual performance results, as determined by your managers. Awards for individual performance are granted from a fixed budget for each business unit and will range generally from 80% to 100% of target, within an overall range of zero to 120% of target. As long as the company is profitable, the Individual Performance bonus will be paid, regardless of Company financial performance measures for the fiscal year. This feature of the plan is designed to recognize individual contributions and to provide a bonus opportunity, even if the Company fails to meet its financial objectives.

Awards for this element are based on a “zero-sum” model, and can be subject to forced distribution requirements.

2. Net Income Element

A portion of your total target bonus will be based on the Company’s financial performance, as measured by Net Income (excluding the expensing of stock options and related taxes). Senior management has established threshold, target and maximum levels for Net Income. Table 2 illustrates the relationship of financial results to the Net Income financial performance element; award levels will be interpolated for performance between threshold, target and maximum levels.

Awards under this element will range from 50% of target for business results equal to 80% of the FY 2007 business plan to 150%. No award will be paid for this element for business results less than 80% of the Plan.

Table 2

	Net Income (% of Plan)			Net Income Element Award
Threshold		80	%		50	%
Target		100	%		100	%
Maximum		120	%		150	%
Example		110	%		125	%

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FY 2007 CORPORATE INCENTIVE PLAN

3. Gross Profit Element

Twenty percent of your bonus will be based on the Company’s Gross Profit. Senior management has established threshold, target and maximum levels for Gross Profit. Table 3 illustrates the relationship of financial results to the Gross Profit financial performance element; award levels will be interpolated for performance between threshold, target and maximum levels.

Awards under this element will range from 50% of target for business results equal to 80% of the FY 2007 business plan to 150%. No award will be paid for this element for business results less than 80% of the Plan.

Table 3

	Gross Profit (% of Plan)			Gross Profit Element Award
Threshold		80	%		50	%
Target		100	%		100	%
Maximum		120	%		150	%
Example		90	%		75	%

Example of Total Bonus Opportunity

Assumptions:

à	Eligible Earnings $75,000
à	Total Target Incentive = 10%
à	Individual Performance = 100%
à	Net Income = $12,290
à	Gross Profit = $116,569

						Element
	Target %			Target $		Award			Award $
Individual Performance		30	%	$	2,250		100	%	$	2,250
Net Income		50	%	$	3,750		93.7	%	$	3,513.75
Gross Profit		20	%	$	1,500		150	%	$	2,250
Total		100	%	$	7,500		107	%	$	8,013.75

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FY 2007 CORPORATE INCENTIVE PLAN

Section 3: Definitions

The following terms have been defined for the purpose of clarification:

à	Actively Employed: Period of time an Associate is employed. Does not include Associates who are on medical leave or workers compensation.
à	Bonus Award: The sum of awards earned under the elements of the Plan: Individual Performance, Net Income and Gross Profit.
à	Bonus Target: The percent of Eligible Compensation representing the Bonus Award for performance equal to Plan (i.e. Individual Performance plus Net Income plus Gross Profit equal to Plan).
à	Determination Date: The date on which your target and business unit is fixed for calculation of the Bonus Award. The Determination Date is June 1st of the Plan Year. Your bonus will be based on your target bonus percent, as in effect on June 1st, 2007.
à	Net Income: As reported in NMHC’s SEC filings, Gross Sales minus taxes, interest, depreciation, and other expenses excluding special, non-recurring charges. For purposes of the Plan, Net Income results are reviewed and approved by the compensation committee of the Board of Directors.
à	Eligible Compensation: The following types of earnings, paid during the Plan Year, are included as eligible compensation: base pay, non-exempt overtime, holiday, vacation, FTO, and shift differential, as applicable. All other forms of pay are not considered eligible compensation
à	Participant: An Associate who has met the eligibility criteria outlined in accordance with Section 4.
à	Plan: The 2007 Corporate Incentive Plan as outlined in this Summary Plan Description.
à	Plan Year: The fiscal year beginning July 1, 2006 and ending June 30, 2007.

Section 4: Eligibility

All employees in professional levels of Manager and above are eligible to participate in the Plan, except:

à	Associates who participate in any sales-based or other specific incentive compensation plan, or
à	Non-exempt Member Relation Associates who participate in the Member Relation Incentive Plan, or
à	Consultants, Contract and Temporary Associates

The bonus Award for any Associate who begins employment with the Company after the beginning of the Plan Year shall be pro-rated based on the amount of eligible earnings earned during the Plan Year. An Associate who begins employment on or after April 2, 2007 is not eligible to participate in the Plan for that Plan Year.

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FY 2007 CORPORATE INCENTIVE PLAN

An Associate who terminates or is terminated for any reason during the Plan Year is not eligible to receive an award.

Part-Time Associates are eligible for participation based on their Target Bonus at the Determination Date and the amount of eligible compensation earned during the Plan Year.

Associates who are on medical leave of absence such as disability, or workers compensation are eligible for a bonus award. Bonus calculations will be based on eligible compensation earned while Associate is Actively Employed.

To be eligible to receive any award under the Plan, the Associate must be considered in good standing as that term is defined by the Company in its sole discretion.

Section 5: Award Payments

Awards will be paid, generally, during the first quarter following the Plan Year, subject to the availability of all required performance results.

All bonus awards payable under the Plan are subject to all required withholding income tax and such other taxes as may be required.

Associates must be employed at the time of payment.

Fidelity 401(k) Plan deductions will be withheld at the same percentage as elected for normal paychecks, and will be eligible for NMHC’s Company Match, up to the 401(k) Plan limits.

Section 6: General Provisions

The company reserves the right to amend the Plan from time to time and to terminate this Plan at any time solely in its discretion.

Nothing contained herein shall be construed to confer on the Participant any right to continue as an Associate of the Company or to derogate from any right of the Company to request the resignation or discharge the Participant, or to lay off or require a leave of absence of the Participant, with or without pay, at any time, with or without cause or notice.

These guidelines should not be construed as a contract between NMHC and any Associate. No Manager or other representative of the Company (other than the Chief Executive Officer) has the authority to make any representations, promises or commitments to any associate regarding incentive amounts different from or contrary to the formula set forth in this Summary Plan Description. Further, no such representations made by the Chief Executive Officer shall be binding on the

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FY 2007 CORPORATE INCENTIVE PLAN

Company or enforceable, unless they are in writing, and signed by the respective Associate and the Chief Executive Officer.

The Chief Executive Officer shall have full authority to interpret the Plan, to establish and amend rules and regulations relating to it and to make all other determinations necessary or advisable for the administration of the Plan.

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EX-10.31

EXHIBIT 10.31

[NMHC letterhead]

[Date]

[Executive’s name
& address]

Dear [Executive]:

We are pleased to offer you the executive Severance Package described below in the event that National Medical Health Card Systems, Inc. or any of its successors or assigns (“the Company”) decides to terminate your employment for any reason other than cause or if, you terminate your employment for Good Reason. For the purposes of this Agreement, cause shall be defined as theft, embezzlement or conviction of a felony or a misdemeanor (“Cause”). For the purposes of this Agreement, “Good Reason” shall be defined as

(a)	Action by the Company that results in the material diminution of your position, authority, duties or responsibilities absent your written consent;
(b)	Reductions in your base salary, bonus target, and material reductions in retirement benefits, and/or welfare benefits.
(c)	Changes in your eligibility or reduction in your level of participation in the Company’s Long Term Incentive plan that has a targeted value equal to ___% of your annual base salary.

By signing below, you and the Company agree that if the Company decides to terminate your employment other than for Cause or if you terminate your employment for Good Reason, then you shall be entitled to receive the following payment and benefits (“Severance Package”):

i) severance payments equal to your then current annualized salary, payable pursuant to the Company’s payroll practices;

ii) benefits generally payable to terminated employees under 401(k) plans, qualified benefits plans, and other employee benefit plans and as may be mandated by state or federal benefits continuation laws; and

iii) continuation of health insurance under the Company’s group plans for the lesser of one (1) year or until you become employed by another employer offering group health coverage.

You are required to notify the Company when you become employed by another employer. You agree to arbitrate through the expedited commercial procedures of the American Arbitration Association in Manhattan regarding any dispute arising under this Agreement. This Agreement shall be governed by New York Law.

     As a condition of receiving the executive Severance Package, you will be required to sign a separation agreement and general release in a form acceptable to the Company. Please indicate your acceptance of this executive severance Agreement by signing below.

	Very truly yours,
AGREED TO:

EX-10.33

EXHIBIT 10.33

EXECUTION COPY
CONFIDENTIAL

Management Rights Letter

March 19, 2004

New Mountain Partners, L.P.
712 Fifth Avenue
New York, New York 10019

Dear Sirs:

This letter will confirm our agreement that, in connection with your investment in National Medical Health Card Systems, Inc., a Delaware corporation (the “Company”), pursuant to the Amended and Restated Preferred Stock Purchase Agreement, dated as of November 26, 2003, by and among New Mountain Partners, L.P., a Delaware limited partnership (“Investor”), the Company, and such other parties who may be signatories thereto from time to time (as such agreement may be amended from time to time, the “Preferred Stock Purchase Agreement”), the Investor will be entitled to the following contractual management rights relating to the Company (collectively, the “Management Rights”). Any capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Preferred Stock Purchase Agreement.

1.

Investor shall be entitled to routinely consult with and advise management of the Company with respect to operations of the Company and its direct and indirect subsidiaries, including all the Company’s business and financial matters and management’s proposed annual operating plans, and management will, upon Investor’s request, meet with representatives of Investor (the “Representatives”) at reasonable intervals at the Company’s facilities at mutually agreeable times for such consultation and advice, including to review progress in achieving said plans. The Company shall give Investor reasonable advance written notice of any significant new initiatives or material changes to existing operating plans of the Company and its direct and indirect subsidiaries and shall afford Investor adequate time to meet with management to consult on such initiatives or changes prior to implementation. The Company agrees to give due consideration to the advice given and any proposals made by Investor.

2.

Investor may, upon notice during normal business hours, inspect all documents, contracts, books, records, personnel, offices and other facilities and properties of the Company and its direct and indirect subsidiaries and, to the extent available to the Company after the Company uses reasonable efforts to obtain them, the records of its legal advisors and accountants, including the accountants’ work papers, and Investor may make such copies and inspections thereof as Investor may reasonably request. The Company shall furnish Investor with such financial and operating data and other information with respect to the business and properties of the Company and its direct and indirect subsidiaries as the Investor may reasonably request. The Company shall permit the Representatives to discuss the affairs, finances and accounts of the Company and its direct and indirect subsidiaries with the principal officers of the Company and to make proposals and furnish advice with respect thereto to such persons.

3.

At any time during which Investor does not have a right pursuant to the certificate of designations setting forth the designation, powers and preferences of the Company’s Series A Convertible Preferred Stock to designate at least one member to the Company’s board of directors (the “Board”), the Company shall, after receiving notice from Investor as to the identity of such person (a “Board Observer”), (i) permit a Board Observer to attend all meetings of the Board and all committees thereof as a non-voting observer; (ii) provide the Board Observer advance notice of each such meeting, including such meeting’s time and place, at the same time and in the same manner as such notice is provided to the members of the Board (or such committee thereof); (iii) provide the Board Observer with copies of all materials, including notices, minutes and consents, distributed to the members of the Board (or such committee thereof) at the same time as such materials are distributed to such Board (or such committee thereof) and permit the Board Observer to have the same access to information concerning the business and operations of the Company and its direct and indirect subsidiaries as is provided to the members of the Board; and (iv) permit the Board Observer to discuss the affairs, finances and accounts of the Company and its direct and indirect subsidiaries with, and to make proposals and furnish advice with respect thereto to, the Board, without voting, and the Board and the Company’s officers shall give due consideration to such proposals or advice; provided, however that the Board Observer may be excluded from access to any materials or attendance at any meeting or portion thereof or upon advice of counsel (which may be the Company’s general counsel) that such exclusion is reasonably necessary to preserve the attorney-client privilege or to comply with applicable law. Reasonable documented costs and expenses incurred by the Board Observer for the purposes of attending Board (or committee) meetings and conducting other Company business will be paid by the Company.

4.

The Company shall deliver to Investor:

(a)

for so long as the Company or any direct or indirect subsidiary is required by law or pursuant to the terms of any outstanding indebtedness of the Company or any direct or indirect subsidiary to prepare such reports, any annual reports; quarterly reports and other periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, prepared by the Company or any direct or indirect subsidiary as soon as available; and

(b)

in the event that the Company is no longer required by law or pursuant to the terms of any outstanding indebtedness to prepare annual reports, quarterly reports or other periodic reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended:

(i) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, consolidated balance sheets of the Company and its direct and indirect subsidiaries as of the end of such period then ended, and consolidated statements of income and cash flows of the Company and its direct and indirect subsidiaries for

- 2 -

the period then ended, in each case prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis, except as otherwise noted therein and subject to the absence of footnotes and to year-end adjustments; and

(ii)

as soon as available and in any event within 120 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its direct and indirect subsidiaries as of the end of such year, and consolidated statements of income and cash flows of the Company and its direct and indirect subsidiaries for the year then ended, in each case prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis, except as otherwise noted therein, together with an auditor’s report thereon of a firm of established national reputation.

     The Investor’s rights described herein shall terminate and be of no further force or effect upon the Investor ceasing to be the holder of at least one percent (1%) of shares of Common Stock (as defined in the Purchase Agreement) issued and/or issuable upon the conversion of the Preferred Stock (as defined in the Purchase Agreement); provided, however, that the Investor’s rights shall not terminate by reason of this paragraph in the event that the Investor notifies the Company, in writing, that it has made a good faith determination that it is necessary for the Investor to continue to have the rights described herein in order to maintain Investor’s status as a “venture capital operating company” for purposes of the Department of Labor’s “plan assets” regulations (but without regard for whether there are other actions that could be taken to maintain such status).

     Investor hereby agrees, and any Representative that Investors may appoint will agree, to hold in confidence and trust and not use or disclose any non-public information (“Confidential Information”), in whatever form or format and however it may be embodied, concerning the Company that is furnished, made available, or otherwise disclosed to Investor by or on behalf of the Company, orally or in writing, in connection with any of Investor’s rights under this letter agreement, unless otherwise required by law or unless such confidential information otherwise becomes publicly available or available to it other than through this letter agreement. Any Representative or other officer, partner, employee or agent of Investor that will have access to the Company’s information shall be advised of these confidentiality restrictions before receiving any Confidential Information concerning the Company.

     The rights set forth in this letter agreement are intended to satisfy the requirement of contractual management rights for purposes of qualifying Investor’s interests in the Company as venture capital investments for purposes of the Department of Labor’s “plan assets” regulations, and in the event that, after the date hereof, as a result of any change in applicable law or regulation or a judicial or administrative interpretation of applicable law or regulation, it is determined that such rights are not satisfactory for such purpose, Investor and the Company shall reasonably cooperate in good faith to agree upon mutually satisfactory management rights which satisfy such regulations.

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Very truly yours, NATIONAL MEDICAL HEALTH CARD      SYSTEMS, INC.
By:	/s/ James J. Bigl
	James J. Bigl
	Chief Executive Officer

AGREED AND ACCEPTED THIS 19th day of March, 2004
NEW MOUNTAIN PARTNERS, L.P.
By:	New Mountain Investments, L.P., its general partner
	By:	New Mountain GP, LLC,
		its general partner
	By:	/s/ Steven B. Klinsky
		Steven B. Klinsky Chief Executive Officer

Management Rights Letter

EX-10.35

EXHIBIT 10.35

GENERAL RELEASE

(PLEASE READ CAREFULLY. THIS GENERAL RELEASE HAS IMPORTANT LEGAL CONSEQUENCES.)

     This General Release (this “Release”) is between National Medical Health Card Systems, Inc. (“Company”) and Bill Masters (“Employee”) and is a complete, final and binding settlement of all claims and potential claims, if any, with respect to their employment relationship. Employee and the Company may sometimes be referred to collectively as the “Parties.”

     WHEREAS, the Company and Employee were parties to an Employment Agreement dated on or about October 4, 2004 (the “Employment Agreement”); and

     WHEREAS, the Company and Employee were parties to a letter dated November 28, 2005 (the “Severance Letter”); and

     WHEREAS, the Company and Employee are parties to a Consulting Agreement and Departure Agreement and General Release (the “Departure Agreement”); and

     WHEREAS, the Company and Employee have agreed on certain terms and conditions regarding the termination of Employee’s employment under the Departure Agreement; and

     WHEREAS, the Company’s obligation to pay Employee severance compensation as contemplated in the Departure Agreement is conditioned upon the execution and delivery (without revocation) of this Release by Employee;

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, be it agreed as follows:

     1. As of June 28, 2007, Employee’s employment relationship as a consultant with the Company will terminate (the “Consulting Period Termination Date”). This Release has been presented to Employee on or before the Consulting Period Termination Date and will become effective seven (7) days (the “Effective Date”) after the execution of this Release by the Employee (the “Execution Date”).

     2. For purposes of the National Medical Health Card Systems, Inc. 1999 Stock Option Plan, as amended (the “Stock Option Plan”), and the National Medical Health Card Systems, Inc. Amended and Restated 2000 Restricted Stock Grant Plan (the “Restricted Stock Plan”), the termination of Employee’s employment will be considered as an involuntary termination without cause. Accordingly, under the terms of the Stock Option Plan, Employee will have 90 days following the Termination Date to exercise any of his vested options. The Parties acknowledge that, on the Termination Date, Employee will forfeit and have no further right, title or interest in or with respect to, any and all non-vested options, shares of restricted stock and restricted stock unit awards held by Employee under the Stock Option Plan and/or the Company’s Restricted Stock Plan. Employee affirms the provision of any Restricted Stock

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Agreement that the Company shall have the right to instruct the Company’s transfer agent to transfer any unvested restricted stock to the Company.

     3. Release Provisions.

     (a) In consideration for the Company’s payments to Employee as set forth in the Departure Agreement, and for other good and valuable consideration, as and for Employee’s complete release of all statutory, contract, tort and all other claims against the Company and each of its current and former owners (including, without limitation, New Mountain Capital, L.L.C., New Mountain Partners, L.P., New Mountain Affiliated Investors, L.P., and their respective affiliates), predecessors, assigns, employees, representatives, attorneys, benefit plans, insurers, parent companies, divisions, subsidiaries, affiliates, directors, managers, partners, members, and officers, including any and all persons acting by, through, or under or in concert with any of them (collectively “Releasees”), Employee hereby releases and forever discharges the Releasees from any all actions, causes of action, suits, dues, sums of money, reckonings, covenants, contracts, bonuses, controversies, agreements, claims, promises, charges, obligations, complaints and demands whatsoever in law or equity, which Employee (and Employee’s heirs, executors, administrators, successors and/or assigns) may now have or hereafter can, shall, may, or may have had for, upon, or by reason of any matter, cause or actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the execution of this Release by the Employee, including without limitation, any claim arising out of or relating to the Employee’s employment by the Company and each of its subsidiaries and affiliated entities, and any and all obligations and liabilities of the Company under the Employment Agreement, Departure Agreement and Severance Letter or any other agreement between the Employee and any of the Releasees, and the ownership, acquisition, offer or sale of, or rights to any equity interest, or any option to purchase or acquire any equity interest in the Company, excepting only the rights and obligations (i) created by this Release; (ii) that may exist under (A) any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee or (B) the Company’s D&O insurance coverage; (iii) Employee’s rights under state worker’s compensation laws (for occupational illness or injury only); (iv) Employee’s vested rights under the Company’s health, dental, pharmacy and 401(k) benefit plans and (v) to receive payments under paragraph 4 of the Departure Agreement.

     (b) Without limiting the generality of the foregoing, this Release is intended to and shall release Releasees from any and all claims, whether known or unknown, which Employee ever had, has, or may have against any Releasee with respect to Employee’s employment, the terms, benefits, and conditions of that employment, and/or the termination thereof, including without limitation those arising under the Civil Rights Act of 1866, 42 U.S.C.A. Section 1981, the Civil Rights Act of 1964, as amended, 42 U.S.C.A. Section 2000e, et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.A. Section 621 et seq., the National Labor Relations Act, 29 U.S.C.A. Section 151 et seq., the Fair Labor Standards Act, 29 U.S.C.A. Section 201 et seq., the Labor Management Reporting and Disclosure Act of 1959, as amended, 29 U.S.C.A. Section 401 et seq., the Americans with Disabilities Act, 42 U.S.C.A.

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Section 12101, et. Seq., the Constitution and the laws of the United States and the State of New York, including specifically, New York’s Human Rights Law, Executive Law Section 290 et seq., or any other federal, state, or local human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulation, public policy, contract or tort law; and any and all claims arising out of the ownership, acquisition, offer or sale of, or rights to any equity interest, or relating to any option to purchase or acquire any equity interest in the Company, that Employee has held at any time in the Company or any of its predecessors or affiliates, including any claims, arising under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, any federal, state or local securities law, the rules or regulations promulgated under any of them, or any doctrine of common law or equity applicable to the ownership, acquisition or sale of securities or the solicitation of proxies with respect thereto; and any and all claims for attorneys’ fees, costs, disbursements, or any action similar thereto.

EMPLOYEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT BY EXECUTING THIS RELEASE, HE IS WAIVING ALL RIGHTS OR CLAIMS, IF ANY, THAT HE HAS OR MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED. EMPLOYEE FURTHER ACKNOWLEDGES AND AGREES THAT HIS WAIVER OF SUCH RIGHTS OR CLAIMS IS KNOWING AND VOLUNTARY.

     (c) Employee promises never to initiate, be represented or participate in, submit or file, or permit to be submitted or filed on or in his behalf, any lawsuit, charge, claim, complaint or other proceeding against any Releasee with any administrative agency, court, arbitrator or other forum, based upon claims that were released pursuant to this Release. This covenant not to sue (and the remedies provided in this Release, including those in paragraph 3(d)) does not affect Employee’s right to test the knowing and voluntary nature of his waiver of rights. Nothing in this Release shall be construed to affect the rights and responsibilities of the Equal Employment Opportunity Commission, or any other state or local agency with similar responsibilities (the “Commission”), to enforce any laws pertaining to employment discrimination or retaliation. Likewise, this waiver will not be used to justify interfering with the protected right of any employee to file a charge or participate in an investigation or proceeding conducted by the Commission; however, Employee waives the right to any benefits or recovery arising out of any such proceeding.

     (d) Subject to paragraph 3(c), if Employee materially breaches any of his promises contained in this paragraph 3 by filing a lawsuit or administrative charge based on claims that he has released, Employee will indemnify the Company and/or any Releasee for any costs, including reasonable attorneys’ fees, that the Company and/or any Releasee may incur as the result of Employee’s breach. In addition, if Employee materially breaches the promises made in any provision of this Release or the Departure Agreement, he must repay all benefits previously received in accordance with the Departure Agreement, upon the Company’s reasonable demand, and Company shall cease making further payments, if any, pursuant to the Departure Agreement.

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     4. Employee acknowledges and agrees that, for the time periods set forth in the Employment Agreement, he shall comply with paragraphs 6 through 11 of the Employment Agreement and that such provisions shall survive the termination of the Employment Agreement. Company acknowledges and agrees that the provisions of paragraph 9 of the Employment Agreement are not intended to prevent Employee’s employment or service with (i) companies that supply products and services to the PBM industry, but do not themselves provide PBM Services, so long as Employee’s services are not the services prohibited by paragraph 9 of the Employment Agreement; or (ii) subsidiaries, operating divisions, or other business entities of companies that provide PBM Services, so long as Employee’s services are not directly for the benefit of the PBM functions of those companies and are not the services prohibited by paragraph 9 of the Employment Agreement. Employee acknowledges and agrees that the provisions of paragraphs 6 through 11 of the Employment Agreement are fully enforceable and reasonable to protect the legitimate business interests of the Company. Furthermore, Employee represents and warrants that he has returned to the Company any and all identification cards, files, books, records, materials, equipment or documents in his possession or under his control that were provided to or obtained by him in connection his employment.

     5. Employee further agrees to never to make any statements or comments, whether oral or written to any person or entity that would tend to disparage or harm the Company; provided, however, that this sentence shall not be construed to constrain Employee from providing truthful testimony when required by law in the course of a legal or administrative proceeding. Employee understands and agrees that violation of this paragraph shall be treated as a material breach of this Release.

     6. Employee expressly agrees that this Release is not and shall not in any way be deemed to constitute an admission or evidence of any breach of contract, wrongdoing or liability on the part of the Company, nor of any violation of any federal, state or municipal statute, regulation or principle of common law or equity.

     7. Employee agrees to make himself reasonably available in connection with any information the Company requires relating to the services Employee had provided to Company, including any litigation the Company is or may become involved in to which the Employee has knowledge. Company agrees to provide Employee with reasonable notice in connection with any depositions or court appearances where his presence is necessary or reasonably desirable. The Company shall pay Employee’s travel expenses in this regard. Employee and Company shall agree on a reasonable per diem fee for any time greater than three full days the Employee is required to make himself available in person pursuant to this paragraph.

     8. Employee and the Company acknowledge and agree:

     (a) that each of them has read and understands the contents of this Release;

     (b) that this Release does not waive rights or claims that may arise after the date that this Release is executed;

     (c) that Employee waives rights or claims only in exchange for consideration that the Employee would not be entitled to but for executing this Release;

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     (d) that the Company has informed Employee that Employee should consult with an attorney in connection with this Release; and

     (e) that Employee’s decision to consult with an attorney or not to consult with any attorney was made without influence by the Company.

     9. Both Parties understand that the Employee shall have 21 days (the “Review Period”) to consider this Release before signing. Both Parties understand that the Employee shall have seven (7) days (the “Revocation Period”) in which to revoke this Release after signing, and that this Release shall not become effective or enforceable until the expiration of seven (7) days after signing, and the severance compensation payable under the Departure Agreement shall not be due and owing until after the Effective Date set forth herein and the fulfillment of all conditions set forth herein. To accept the Release, Employee must send a signed copy to Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com, such that it is received no later than 21 days after the date that this Release has been presented to Employee. Any notice of revocation must also be sent such that it is received prior to the end of the seven day Revocation Period by Neil Carfagna, National Medical Health Card Systems, Inc., 26 Harbor Park Drive, Port Washington, New York 11050, (516) 605 6802, (516) 626 4632 (facsimile), NCarfagna@nmhc.com.

     10. This Release is made in the State of New York. This Release is to be interpreted under the laws of the State of New York without regard to conflict of laws principles. The Parties agree that the federal and state courts sitting in Nassau County, New York, shall be the exclusive venue for the resolution of any dispute arising out of or relating to this Release.

     11. Except as provided in this Release, this is the entire agreement between the Employee and the Company and supersedes any and all prior agreements or understandings between the Parties, whether written or oral, pertaining to Employee’s employment with the Company. This Release may only be amended or modified by a written document signed by both Parties. The Company has made no promises to Employee other than those in this Release. Notwithstanding anything to the contrary in this paragraph 11, except as explicitly provided otherwise in this Release, (i) paragraphs 6 through 11 of the Employment Agreement, and (ii) any obligation of the Company under any indemnification agreement or the Company’s Certificate of Incorporation and Bylaws, as amended, to indemnify Employee shall survive the execution of this Release in accordance with their respective terms and conditions.

     12. Should any provision of this Release be declared or determined by any court to be illegal, invalid or unenforceable, the validity of the remaining parts, terms and provisions shall not be effected thereby and any said illegal, invalid or unenforceable part, terms or provisions shall be deemed stricken and severed from this Release.

     13. This Release may be executed in one or more counterparts, and each effective counterpart shall be effective as a signed original.

     14. Company makes no representations to Employee concerning the tax consequences arising out of any payments under this Release, including, without limitation, whether any of the

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payments hereunder are subject to 26 U.S.C. § 409A. Company urges Employee to obtain his own tax counsel with regard to any tax consequences arising out of or relating to this Release.

     15. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS CAREFULLY READ THIS RELEASE; THAT EMPLOYEE HAS HAD AT LEAST 21 DAYS IN WHICH TO CONSIDER AND RETURN THIS RELEASE; THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH ANY ATTORNEY OF EMPLOYEE’S CHOICE IN CONNECTION WITH THIS RELEASE; THAT EMPLOYEE FULLY UNDERSTANDS THE TERMS, CONDITIONS, AND SIGNIFICANCE AND CONSEQUENCES OF THIS RELEASE; AND THAT EMPLOYEE HAS EXECUTED THIS RELEASE KNOWINGLY AND VOLUNTARILY, AND OF EMPLOYEE’S OWN FREE WILL.

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IN WITNESS WHEREOF, the Parties hereto have executed this Release as of the date below.

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

By:	/s/ Stuart Diamond
	, its authorized representative
Date: June 4, 2007
	/s/ Bill Masters
Bill	Masters

Date: May 31, 2007

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EX-10.36

EXHIBIT 10.36

EXHIBIT A

STOCK OPTION AGREEMENT made as of the October 27, 2003 between NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a Delaware corporation (the “Company”), and Mark Adkison (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 Fifty (50,000) thousand Common Shares of the Company (the “Option Shares”) during the following periods:

          (a) All or any part of sixteen thousand six hundred and sixty seven (16,667) Common Shares may be purchased during the period commencing one year from the date hereof and terminating at 5:00 P.M. on October ___, 2013 (the “Expiration Date”).

          (b) All or any part of sixteen thousand six hundred and sixty seven (16,667) 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.

          (c) All or any part of sixteen thousand six hundred and sixty six (16,666) 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.

     2. NATURE OF OPTION. Such Options to purchase the Option Shares are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, relating to “incentive stock options”.

     3. EXERCISE PRICE. The exercise price of each of the Option Shares shall be 13.59 ($    ) 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.

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     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 IN 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 Bigl

          James Bigl, CEO

/s/ Mark A. Adkison

          Signature of Optionee

Mark A. Adkison

          Name of Optionee

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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 therefore.

Name of Optionee

Signature of Optionee

Address of Holder

Date

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EX-10.37

EXHIBIT 10.37

STOCK OPTION AGREEMENT made as of May 6, 2005 between NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a Delaware corporation (the “Company”), and Robert Kordella (“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 Twenty Thousand (20,000) Common Shares of the Company (the “Option Shares”) during the following periods:

               (a) All or any part of Five Thousand (5,000) Common Shares may be purchased during the period commencing one year from the date hereof and terminating at 5:00 P.M. on May 2, 2015 (the “Expiration Date”).

               (b) All or any part of Five Thousand (5,000) 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.

               (c) All or any part of Five Thousand (5,000) 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.

               (d) All or any part of Five Thousand (5,000) 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. Such Options to purchase the Option Shares are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, relating to “incentive stock options”.

          3. EXERCISE PRICE. The exercise price of each of the Option Shares shall be Twenty One Dollars and 70/100 Cents ($21.70) (the “Option Price”). The Company shall pay all original issue or transfer taxes on the exercise of the Option.

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

          7. 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: Secretary 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.

          8. 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.

          9. 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/ Jonathan Friedman

Jonathan Friedman, VP of Legal Affairs

/s/ Robert J. Kordella

Signature of Optionee

Robert J. Kordella

Name of Optionee

145 Stilwell Court

Pittsburgh, PA 15228

Address of Optionee

EXHIBIT A

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

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.

Name of Optionee

Signature of Optionee

Address of Holder

Date

EX-10.39

Exhibit 10.39

STOCK OPTION AGREEMENT made as of the 17th day of September, 2004 between NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC., a Delaware corporation (the “Company”), and Tery Baskin (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 fifteen thousand Common Shares of the Company (the “Option Shares”) during the following periods:

          (a) All or any part of three thousand seven hundred and fifty (3,750) Common Shares may be purchased during the period commencing one year from the date hereof and terminating at 5:00 P.M. on September 17, 2014 (the “Expiration Date”).

          (b) All or any part of three thousand seven hundred and fifty (3,750) 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.

          (c) All or any part of three thousand seven hundred and fifty (3,750) 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.

          (d) All or any part of three thousand seven hundred and fifty (3,750) 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. Such Options to purchase the Option Shares are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended, relating to “incentive stock options”.

     3. EXERCISE PRICE. The exercise price of each of the Option Shares shall be $25.10 (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 IN CONTROL. In the event of a Change in Control any Options granted hereunder which have not vested as of the date of the Change in Control shall automatically vest on such date. Change of Control shall mean, (i) the acquisition by any Person or Persons acting as a group (other than any existing shareholder of the Company) of more than 50% of the Company’s outstanding voting stock; (ii) the merger of the Company with or into another corporation where the Company is not the surviving entity; (iii) any reverse merger in which the Company’s shareholders immediately prior to the merger do not have the right to elect a majority of the members of the Board of the surviving entity; or (iv) the sale of all or substantially all of the assets of the Company.

     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: Secretary 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/ Jim Smith
	Jim Smith, CEO

/s/ Terry Baskin  

Signature of Optionee 

Terry Baskin  

Name of Optionee

 

Address of Optionee 

EXHIBIT A

NATIONAL MEDICAL HEALTH CARD SYSTEMS, INC.

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.

Name of Optionee 

Signature of Optionee 

Address of Holder 

Date 

EX-21.1

EXHIBIT 21.1

List of Subsidiaries

	State of Incorporation/
Subsidiary	Formation	D/B/A
1. Centrus Corporation	Delaware
2. Integrail Inc.	Delaware
3. Inteq Corp.	Delaware
4. Inteq PBM, L.P.	Texas
5. Inteq TX Corp.	Texas
6. Interchange PMP, Inc.	Oklahoma
7. National Medical Health Card IPA, Inc.	New York	NMHCRX IPA
8. NMHC Funding, LLC	Delaware
9. NMHC Group Solutions Insurance, Inc.	Delaware
10. NMHCRX, Inc.	Delaware
11. NMHCRX Contracts, Inc	Delaware
12. NMHCRX Mail Order, Inc.	Delaware	NMHC Mail
13. PBM Technology, Inc.	Delaware
14. PCN DE Corp.	Delaware
15. Pharmaceutical Care Network	California	PCN
16. Pharmacy Associates, Inc.	Arkansas
17. Portland Professional Pharmacy	Maine	NMHC Ascend
18. Portland Professional Pharmacy Associates	Maine	NMHC Ascend
19. Specialty Pharmacy Care, Inc.	New York

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-82224, 333-119144 and 333-131506) pertaining to the National Medical Health Card Systems, Inc. and Subsidiaries 1999 Stock Option Plan of our reports dated September 12, 2007, with respect to National Medical Health Card Systems, Inc. and Subsidiaries consolidated financial statements and schedule and the effectiveness of internal control over financial reporting of National Medical Health Card Systems, Inc. and Subsidiaries included in its Annual Report (Form 10-K) for the year ended June 30, 2007.

/s/ Ernst & Young LLP

New York, New York
September 12, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Thomas W. Erickson, certify that:

1.	I have reviewed this annual report on Form 10-K of National Medical Health Card Systems, Inc. (the “Registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.
4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: September 13, 2007	/s/ Thomas W. Erickson
	Thomas W. Erickson, Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Stuart Diamond certify that:

1.	I have reviewed this annual report on Form 10-K of National Medical Health Card Systems, Inc. (the “Registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.
4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: September 13, 2007	/s/ Stuart Diamond
	Stuart Diamond, Chief Financial Officer
	(Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of National Medical Health Card Systems, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas W. Erickson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas W. Erickson Thomas W. Erickson
Chief Executive Officer
(Principal Executive Officer)

September 13, 2007

EX-32.2

EXHIBIT 32.2

CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of National Medical Health Card Systems, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stuart Diamond, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Stuart Diamond Stuart Diamond
Chief Financial Officer
(Principal Accounting Officer)

September 13, 2007