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  <p align="center" style="border:none;margin:0in 0in .0001pt;padding:0in;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">&nbsp;</font></b></p>
  
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  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="5" face="Times New Roman" style="font-size:18.0pt;font-weight:bold;">UNITED
  STATES</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="5" face="Times New Roman" style="font-size:18.0pt;font-weight:bold;">SECURITIES
  AND EXCHANGE COMMISSION</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">&nbsp;</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">Washington,
  D.C. 20549</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <div align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><hr size="1" width="25%" noshade color="black" align="center"></div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="5" face="Times New Roman" style="font-size:18.0pt;font-weight:bold;">FORM&nbsp;8-K</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="3" face="Times New Roman" style="font-size:12.0pt;font-weight:bold;">CURRENT
  REPORT</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="3" face="Times New Roman" style="font-size:12.0pt;font-weight:bold;">Pursuant
  to Section&nbsp;13 or 15(d)&nbsp;of the</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="3" face="Times New Roman" style="font-size:12.0pt;font-weight:bold;">Securities
  Exchange Act of 1934</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Date of Report (Date of
  earliest event reported):&nbsp;&nbsp;<b> May&nbsp;12,
  2008</b></font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="5" face="Times New Roman" style="font-size:18.0pt;font-weight:bold;">UNIVERSAL
  AMERICAN CORP.</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(Exact name of Registrant
  as Specified in Charter)</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <div align="center">
  
  <table border="0" cellspacing="0" cellpadding="0" width="100%" style="border-collapse:collapse;width:100.0%;">
   <tr>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">New
    York</font></b></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:1.0pt;font-weight:bold;">&nbsp;</font></b></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">0-11321</font></b></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:1.0pt;font-weight:bold;">&nbsp;</font></b></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">11-2580136</font></b></p>
    </td>
   </tr>
   <tr>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(State of incorporation
    or</font></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(Commission File
    Number)</font></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(I.R.S. Employer</font></p>
    </td>
   </tr>
   <tr>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">organization)</font></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="2%" valign="bottom" style="padding:0in .7pt 0in .7pt;width:2.0%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="32%" valign="top" style="padding:0in .7pt 0in .7pt;width:32.0%;">
    <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Identification No.)</font></p>
    </td>
   </tr>
  </table>
  
  </div>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">Six
  International Drive, Suite&nbsp;190</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">Rye
  Brook, New York 10573</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(Address of Principal
  Executive Offices) (Zip Code)</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">(914)
  934-5200</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(Registrant&#146;s telephone
  number, including area code)</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">N/A</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(Former Name or Former
  Address, if Changed Since Last Report)</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Check the appropriate box below if the Form&nbsp;8-K filing is intended
  to simultaneously satisfy the filing obligation of the registrant under any of
  the following provisions:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Wingdings" style="font-size:10.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Written communications pursuant to Rule&nbsp;425
  under the Securities Act (17 CFR 230.425)</p>
  
  <p style="margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Wingdings" style="font-size:10.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Soliciting material pursuant to Rule&nbsp;14a-12
  under the Exchange Act (17 CFR 240.14a-12)</p>
  
  <p style="margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Wingdings" style="font-size:10.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Pre-commencement communications pursuant
  to Rule&nbsp;14d-2(b)&nbsp;under the Exchange Act (17 CFR 240.14d-2(b))</p>
  
  <p style="margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 19.8pt;text-autospace:none;text-indent:-19.8pt;"><font size="2" face="Wingdings" style="font-size:10.0pt;">o</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Pre-commencement communications pursuant
  to Rule&nbsp;13e-4(c)&nbsp;under the Exchange Act (17 CFR 24013e-4(c))</p>
  
  <div style="border:none;border-bottom:double windowtext 6.0pt;padding:0in 0in 0in 0in;">
  
  <p style="border:none;margin:0in 0in .0001pt;padding:0in;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  </div>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='',FILE='C:\JMS\dchen\08-14082-1\task2933364\14082-1-ba-01.htm',USER='dchen',CD='May 12 10:32 2008' -->
  
  
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  <div style="font-family:Times New Roman;">
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">Item 8.01. <u>Other Events</u></font></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(a)&nbsp;<i><u style="font-style:italic;">Litigation Settlement</u></i>. On July&nbsp;25,
  2007, plaintiffs filed a purported class action entitled <i>Elizabeth A. Conolly, Thomas McCormack, Shelly Z.
  Zhang, Green Meadows Partners, James Stellato and Rocco Sorrentino vs.
  Universal American Financial Corporation, Richard A. Barasch, Lee Equity
  Partners&nbsp;LLC, Perry Capital&nbsp;LLC, Union Square Partners
  Management&nbsp;LLC, Welsh, Carson, Anderson&nbsp;&amp; Stowe, Barry Averill,
  Bradley E. Cooper, Mark M. Harmeling, Bertram Harnett, Linda H. Lamel, Eric W.
  Leathers, Patrick J. McLaughlin, Robert A. Spass, and Robert F. Wright</i>
  in the Supreme Court for New York State, Westchester County. The complaint
  alleges that</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the
  defendants who are our directors allegedly breached fiduciary duties they owed
  to our shareholders in connection with our entering into the merger agreement
  to acquire MemberHealth and concurrent agreements with equity investors for
  these equity investors to acquire our securities, and the defendants who are
  equity investors purportedly aided and abetted that breach; and</p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the
  defendants who are our directors allegedly breached their duty of candor to our
  shareholders by failing to disclose material information concerning these
  transactions.</p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The plaintiffs sought,
  among other things, an injunction against the consummation of the transactions
  and damages in an amount to be determined.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">On May&nbsp;6, 2008, the
  parties entered into a stipulation of settlement dated as of May&nbsp;1, 2008,
  pursuant to which they have agreed to settle this action. The settlement
  stipulation provides for the amendment of our by-laws to require specified
  procedures in the event of related party transactions described in the
  amendment, and to require that we maintain a committee that includes at least
  one independent member of our board of directors to oversee the process of
  preparing bids for the MemberHealth Part&nbsp;D plans. The stipulation also
  provides for the payment of the plaintiffs&#146; legal fees in an amount not to
  exceed $800,000. Our directors and officers insurance carrier has provisionally
  agreed to pay 75% of this amount. The payment of the plaintiffs&#146; legal fees and
  other terms of the settlement are subject to the approval of the Court.
  Shareholders who are members of the class proposed to be certified in the
  settlement will receive notice describing the full terms of the settlement.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">(b)&nbsp;<i><u style="font-style:italic;">Risk Factors</u></i>. On March&nbsp;17, 2008,
  we filed with the Securities and Exchange Commission our annual report on Form&nbsp;10-K
  for the fiscal year ended December&nbsp;31, 2007. The annual report contains
  risk factors related to our business. These risk factors are included in this
  report below.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Unless the context
  otherwise requires, references in this report to Universal American, our, we or
  us means Universal American Corp., together with its subsidiaries.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:29.7pt;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">Risk
  Factors</font></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">This report contains both
  historical and forward-looking statements. We are making the forward-looking
  statements within the meaning of Section&nbsp;27A of the Securities Act of
  1933, as amended, and Section&nbsp;21E of the Securities Exchange Act of 1934,
  as amended. We intend the forward-looking statements in this report or made by
  us elsewhere to be covered by the safe harbor provisions for forward-looking
  statements contained in the Private Securities Litigation Reform Act of 1995,
  and we are including this statement for purposes of complying with and relying
  upon these safe harbor provisions. We have based these forward-looking
  statements on our current expectations and projections about future events,
  trends and uncertainties. These forward-looking statements are not guarantees
  of future performance and are subject to risks, uncertainties and assumptions,
  such as, among other things, the information discussed below. If any of the
  following risks or uncertainties develops into actual events, this could
  significantly and adversely affect our business, prospects, financial condition
  or operating results. The risks and uncertainties described below are not the
  only ones that we face. Additional risks and uncertainties not presently known
  to us or that we currently believe to be immaterial also may adversely affect
  our business. In making these statements, we are not undertaking to address or
  update each factor in future filings or communications regarding our business
  or results. Our business is highly complicated, regulated and competitive with
  many different factors affecting results. If any of the following risks or
  uncertainties develops into actual events, this could significantly and
  adversely affect our business, prospects, financial condition and operating
  results. In that case, the trading price of our common stock could decline
  materially.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The integration of MemberHealth and any future acquisition
  with our current business may not be successful, which could have a material
  adverse effect on our business, financial condition and results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our management will be
  required to devote a significant amount of time and attention to the process of
  integrating the operations of MemberHealth&#146;s business and any future
  acquisition with our historical business. This may decrease the time they will
  have to service existing customers, attract new customers and develop new
  services or strategies. The integration of the businesses may present
  significant systems and operational integration risks. We may be unable to
  integrate any acquired business into our</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">2</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">historical operations in an efficient, timely and
  effective manner, which could have a material adverse effect on our business,
  financial condition and results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may fail to realize the anticipated synergies, cost
  savings and growth opportunities we anticipate from the MemberHealth
  acquisition and any future acquisition, which could result in a material
  adverse effect on our financial position, results of operations and cash flows.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The success of the
  MemberHealth acquisition and any future acquisition will depend, in part, on
  our ability to realize synergies, cost savings and growth opportunities that we
  anticipate from integrating our historical businesses with those of the
  acquired business. Our success in realizing these synergies, cost savings and
  growth opportunities, and the timing of this realization, depends on the
  successful integration of the businesses and operations. Even if we are able to
  integrate the businesses and operations successfully, there can be no assurance
  that this integration will result in the realization of the full benefits of
  synergies, cost savings and growth opportunities that we would expect from this
  integration or that these benefits will be achieved within the time frame we
  anticipate. For example, the elimination of duplicative costs may not be possible
  or may take longer than anticipated, the benefits from the acquisition may be
  offset by costs incurred or delays in integrating the businesses and regulatory
  authorities could impose conditions on the combined company&#146;s business.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The growth of our Medicare
  Advantage and Medicare Part&nbsp;D business is an important part of our
  business strategy. Any failure to achieve this growth may have a material
  adverse effect on our financial position, results of operations or cash flows.
  In addition, the expansion of our Medicare Advantage and Medicare Part&nbsp;D
  business in relation to our other businesses may intensify the regulatory and
  other risks to us inherent in the Medicare Advantage and Medicare Part&nbsp;D
  business, which we describe elsewhere in this document. These expansion efforts
  may result in less diversification of our revenue stream.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">There can be no assurance
  that we will be able to successfully implement our operational and strategic
  initiatives that are intended to position us for future growth, or that the
  products we design will be accepted or adopted in the time periods assumed. We
  also make no assurance that investments in these initiatives will recoup their
  costs or be profitable in the future. Failure to implement this strategy may
  result in a material adverse effect on our financial position, results of
  operations and cash flows.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The completion of the MemberHealth acquisition or any future
  acquisition could impact or cause disruptions in our businesses, which could
  have an adverse effect on our results of operations and financial condition.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Specifically:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our employees
  may experience uncertainty about their future roles with the combined company,
  which might adversely affect the combined company&#146;s ability to retain and hire
  key managers and other employees;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the potential
  availability of &#147;change in control&#148; benefits could result in increased costs
  for us and difficulties in retaining our officers and employees;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the direction of
  the attention of our management toward the completion of the acquisition and
  transaction-related considerations during the pendency of the transaction may
  prove to have diverted their attention from the day-to-day business operations
  of their respective companies, and the direction of the attention of our
  management toward the integration of the acquisition may currently and in the
  future divert their attention from the day-to-day business operations of their
  respective companies; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>pharmaceutical
  manufacturers, retail pharmacies, pharmacy benefit management, or PBM,
  companies or other vendors or suppliers may seek to modify or terminate their
  business relationships with us.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Following the MemberHealth acquisition, we may not be able
  to continue for an indefinite period, all of the prescription drug plans that
  we currently operate.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Current rules&nbsp;promulgated
  by the Centers for Medicare and Medicaid Services, or CMS, will allow us to
  operate both our and MemberHealth&#146;s historical Part&nbsp;D plans for a period
  of up to the following three years for which contract bids may be submitted to
  CMS to operate Part&nbsp;D Plans. After that we will only be allowed to offer
  up to two basic benefit plans in each region. We may be allowed to offer up to
  four plans in a given region if the four plans include two plans with gap
  coverage and at least one plan that offers coverage of all generics and all
  preferred brands through the entire gap period. The restriction on the number
  of plans we may offer could adversely affect our results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Sales of our common stock and the ownership of common stock
  by the former shareholders of MemberHealth and by the equity investors, or by
  the former shareholders of or the investors who finance any future acquisitions,
  may negatively affect the market price of our common stock.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The market price of our
  common stock could decline as a result of sales of increased number of shares
  of our common stock in the market after the completion of the MemberHealth
  acquisition and any future acquisition or upon the sale of shares by the equity
  investors who finance any acquisition, or the perception that these sales could
  occur. All shares of our common stock received by an </font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">3</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">acquired company&#146;s shareholders in the acquisition and
  not otherwise subject to the contractual restrictions are freely transferable
  following the consummation of the acquisition. All shares of our series&nbsp;A
  preferred stock and series&nbsp;B preferred stock received by the equity
  investors pursuant to the securities purchase agreements entered into in
  connection with the MemberHealth acquisition, and common shares issuable upon
  the direct or indirect conversion of those shares of preferred stock, will be
  transferable after a period of one year following the acquisition of the
  series&nbsp;A preferred stock and series&nbsp;B preferred stock by the equity
  investors. Shares of our stock issued to finance any future acquisition may be
  similarly transferable. These sales, or the possibility that these sales may
  occur, may also make it more difficult for us to obtain additional capital by
  selling equity securities in the future at a time and at a price that we deem
  appropriate.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Following the
  MemberHealth acquisition and the completion of the transactions contemplated by
  the securities purchase agreements entered into in connection with the
  acquisition, the former shareholders of MemberHealth and the equity investors
  own a significant block of our voting shares and have the ability to appoint
  six of our thirteen directors. A similar situation could arise following a
  future acquisition. This may negatively affect the market price of our common
  stock.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The MemberHealth acquisition may not be accretive and may
  cause dilution to our earnings per share, which may harm the market price of
  our common stock.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Prior to the consummation
  of the MemberHealth acquisition, we anticipated that the acquisition would be
  accretive to earnings per share during the first full calendar year after the
  acquisition. This expectation was based on preliminary estimates and
  assumptions which may materially change after the completion of the
  acquisition.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The combined businesses
  could encounter additional transaction and integration-related costs or other
  factors such as the failure to realize all of the benefits anticipated in the
  acquisition. These or other factors could cause dilution to our earnings per
  share or decrease the expected accretive effect of the acquisition and cause a
  decrease in the price of our common stock.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Some of our directors and executive officers may have
  interests that are different from, or in addition to, the interests of our
  shareholders generally.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Some of our directors and executive officers may have
  significant equity ownership in us, employment, indemnification and severance
  benefit arrangements, potential rights to other benefits on a change in control
  and rights to ongoing indemnification and insurance that provide them with
  interests that may differ from the interests of our shareholders generally. The
  receipt of compensation or other benefits by our directors or executive
  officers in connection with the MemberHealth acquisition or any future
  acquisition may make it more difficult for the combined company to retain their
  services after the acquisition, or require the combined company to expend
  additional sums to continue to retain their services. In addition, consistent
  with our compensation philosophy of senior executives being awarded
  approximately 5% of our aggregate equity ownership, some of our executives are
  likely to receive additional equity grants as a result of the increase in our
  outstanding shares due to the acquisition and the investment by the equity
  investors.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may be unable to continue to provide Medicare Advantage or
  Medicare Part&nbsp;D plans profitably.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Beginning in 2006,
  organizations that offer Medicare Advantage plans of the type we currently
  offer were required to offer a prescription drug benefit, as defined by CMS,
  and Medicare Advantage enrollees were required to obtain their drug benefit
  from their Medicare Advantage plan. These combined managed care plans offering
  drug benefits are, under the new law, called MA-PDs. Current enrollees may
  prefer a stand-alone drug plan and may disenroll from the Medicare Advantage
  plan altogether in order to participate in another drug plan, which could
  reduce our profitability and membership enrollment.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Some enrollees may have
  chosen our Medicare Advantage plan in the past rather than a competitor&#146;s
  Medicare Advantage plan because of the added drug benefit that we offer with
  our Medicare Advantage plans. Effective January&nbsp;1, 2006, Medicare
  beneficiaries began having the opportunity to obtain a drug benefit without
  joining a managed care plan. Additionally, Medicare beneficiaries who
  participate in a Medicare Advantage plan and enroll in a stand-alone
  Prescription Drug Plan, known as a PDP, will be automatically disenrolled from
  their Medicare Advantage plan. Accordingly, the existence of PDPs in the
  regions in which we sell Medicare Advantage plans could result in our members
  intentionally disenrolling or automatically being disenrolled from our Medicare
  Advantage plans and reduce our membership and profitability.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We began marketing our
  MA-PDs and PDPs in October&nbsp;2005 and began enrolling members on November&nbsp;15,
  2005, effective as of January&nbsp;1, 2006, as did MemberHealth with its PDPs.
  Our ability to operate our MA-PDs and PDPs profitably will depend on our
  ability to attract members, to continue to develop the necessary core systems
  and processes and to manage our medical expenses related to these plans, and
  other factors. Because there has only been two full years and one partial year
  of experience with CMS&#146;s Medicare Part&nbsp;D program, there remains
  uncertainty as to the ultimate market size, consumer demand, and related
  medical loss ratio. Accordingly, we are uncertain whether we will be able to
  operate our MA-PDs or PDPs profitably or competitively in the future, and our
  failure to do so could have a material adverse effect on our results of
  operations and financial condition; even if we are able to operate our MA-PDs
  or PDPs profitably and competitively in the future, our margins on these
  products may decline over time.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The Medicare Prescription
  Drug, Improvement and Modernization Act of 2003, known as the MMA, provides for
  &#147;risk corridors&#148; that are expected to limit to some extent the losses MA-PDs or
  PDPs would incur if their costs turned out to be higher than those in the per
  member per month bids submitted to CMS in excess of specified ranges. For
  example, for 2006 and 2007 drug plans </font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">4</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">will bear all gains and losses up to 2.5% of their
  expected costs, but will be reimbursed for 75% of the losses between 2.5% and
  5%, and 80% of losses in excess of 5%. We anticipate that the initial risk
  corridors in 2006 and 2007 will provide more protection against excess losses
  than will be available beginning in 2008 and future years as the thresholds
  increase and the reimbursement percentages decrease or disappear.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition, we expect
  there will be a delay in obtaining reimbursement from CMS for reimbursable
  losses pursuant to the risk corridors. In that event, we expect there would be
  a negative impact on our results of operation, cash flows and financial
  condition as a result of being required to finance excess losses until we
  receive reimbursement. In addition, as the risk corridors are designed to be
  symmetrical, a plan whose actual costs fall below its expected costs would be
  required to reimburse CMS based on a similar methodology as set forth above.
  Furthermore, reconciliation payments for estimated upfront Federal reinsurance
  payments and payments for low income cost sharing subsidies, are made
  retroactively on an annual basis, which could expose plans to upfront costs in
  providing the benefit. Accordingly, it may be difficult to accurately predict
  or report the operating results associated with our drug benefits. We
  anticipate settling with CMS on amounts related to the risk corridor adjustment
  and subsidies for a given plan year in the following year.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">CMS&#146;s risk adjustment payment system and budget neutrality
  factors make our revenue and profitability difficult to predict and could
  result in material retroactive adjustments to our results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">All of the Medicare
  Advantage programs we offer are offered through Medicare. As a result, our
  profitability is dependent, in large part, on continued funding for government
  healthcare programs at or above current levels. The reimbursement rates paid to
  health plans like ours by the Federal government are established by contract,
  although the rates differ depending on a combination of factors such as a
  member&#146;s health status, age, gender, county or region, benefit mix, member
  eligibility categories, and the plans&#146; risk scores.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">CMS has implemented a
  risk adjustment model that apportions premiums paid to Medicare health plans
  according to health severity. A risk adjustment model pays more for enrollees
  with predictably higher costs. CMS has completely phased in this payment
  methodology with a risk adjustment model that bases a portion of the total CMS
  reimbursement payments on various clinical and demographic factors such as</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>hospital
  inpatient diagnoses,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>diagnosis data
  from ambulatory treatment settings, such as hospital outpatient facilities and
  physician visits,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>gender,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>age, and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Medicaid
  eligibility.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Under the risk adjustment
  methodology, all Medicare health plans must capture, collect and submit the
  necessary diagnosis code information from inpatient and ambulatory treatment
  settings to CMS within prescribed deadlines. The CMS risk adjustment model uses
  this diagnosis data to calculate the risk adjusted premium payment to Medicare
  health plans. As a result of this process, it is difficult to predict with
  certainty our future revenue or profitability. In addition, our own risk scores
  for any period may result in favorable or unfavorable adjustments to the payments
  we receive from CMS and our Medicare premium revenue. Because diagnosis coding
  is a manual process, there is the potential for human error in the recording of
  codings, and there can be no assurance that our contracting physicians and
  hospitals will be successful in improving the accuracy of recording diagnosis
  code information, thereby enhancing our risk scores.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Coincident with phase-in
  of the risk-adjustment methodology, CMS also adjusted payments to Medicare
  Advantage plans by a &#147;budget neutrality&#148; factor. CMS implemented the budget
  neutrality factor to prevent overall health plan payments from being reduced
  during the transition to the risk-adjustment payment model. CMS first developed
  the payment adjustments for budget neutrality in 2002 and began to use them
  with the 2003 payments. CMS will begin phasing out the budget neutrality
  adjustment in 2007 and will fully eliminate it by 2011. The risk adjustment
  methodology and phase-out of the budget neutrality factor will reduce our plans&#146;
  premiums unless our risk scores increase. We do not know if our risk scores
  will increase in the future or, if they do, that they will be large enough to
  offset the elimination of this adjustment. As a result of the CMS payment
  methodology described previously, the amount and timing of our CMS monthly
  premium payments per member may change materially, either favorably or
  unfavorably. In addition, there exists the possibility that CMS may reduce
  revenues in 2009 or thereafter for plans whose risk scores have increased significantly
  greater than the general Medicare average increase in risk scores. If our risk
  scores increase significantly greater than the general Medicare average
  increase, and CMS introduces this approach, it could adversely affect our
  results of operations.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">5</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='5',FILE='C:\JMS\dchen\08-14082-1\task2933364\14082-1-ba-01.htm',USER='dchen',CD='May 12 10:32 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our ability to market some of our Part&nbsp;D plans is
  substantially dependent on two of our strategic relationships with third
  parties.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our ability to market
  some of our Part&nbsp;D plans is substantially dependent on our strategic
  alliance with the National Community Pharmacists Association, known as the
  NCPA, which provides outreach and communications for our CCRx Part&nbsp;D plans
  to NCPA&#146;s independent pharmacy membership. NCPA member pharmacies make up over
  one-third of MemberHealth&#146;s pharmacy network and, in 2007, accounted for
  approximately 60% of the prescriptions filled under MemberHealth&#146;s Part&nbsp;D
  plans. Additionally, we are substantially dependent on its strategic
  relationship with Community Care Outreach Services&nbsp;LLC, or CCOS, an
  insurance marketing operation that provides the historical MemberHealth
  business its primary &#147;outsourced&#148; sales force. If either of these strategic
  relationships are terminated, or do not provide us with the services and
  benefits we anticipate, our ability to market CCRx Part&nbsp;D plans could be
  materially and adversely affected. Further, to the extent that CMS or other
  regulatory authorities determine that any provisions of our agreements with
  NCPA or CCOS conflict with any applicable law, regulation or policy, we may not
  be able to realize fully the benefits we anticipate from the acquisition, and
  we could potentially incur regulatory liability.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">There are significant risks associated with our
  participation in the Medicare Part&nbsp;D program, the occurrence of which
  could have an adverse effect on our results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Effective January&nbsp;1,
  2006, we began offering Medicare-approved PDPs to Medicare-eligible
  beneficiaries. MemberHealth&#146;s business consists primarily of Medicare Part&nbsp;D
  members. Our actual results may differ from our assumptions regarding the
  Medicare Part&nbsp;D program. Our participation in the Medicare Part&nbsp;D
  program involves the following risks, the occurrence of any or all of which
  could have an adverse effect on our financial condition, results of operations
  and cash flows:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>CMS continues to
  release regulations on Medicare Part&nbsp;D, including important requirements
  related to the implementation and marketing of the Medicare Part&nbsp;D
  prescription drug benefit plan. This may create challenges for planning,
  implementing and operating the Medicare Part&nbsp;D program, and we can provide
  no assurance that Congress or CMS will not alter the program in a manner that
  will be detrimental to us.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>CMS has released
  call letters on Medicare Part&nbsp;D that impact the revenue that can be earned
  by our strategic alliance, PDMS, in 2008, the last year of its existence, or by
  our successor Part&nbsp;D plans in 2009 and thereafter.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We anticipate
  that the level of earnings of our successor Part&nbsp;D plans to PDMS will be
  significantly reduced beginning in 2009 resulting from CMS&#146;s indication in its
  recent call letter that amounts paid by the PDP sponsor&#146;s PBM to the retail
  pharmacy, rather than the amounts paid by the PDP sponsor to its PBM, be
  reported as part of the risk corridor calculation. We presently report only our
  share of this difference in our risk corridor calculation but not the Caremark
  share. This expected change in risk corridor reporting methodology is likely to
  reduce our revenues in 2009 and beyond.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Our contracts
  with CMS, as well as applicable Medicare Part&nbsp;D regulations and Federal
  and state laws, require us, among other obligations, to:</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>comply with
  specified disclosure, filing, record-keeping and marketing rules;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>operate quality
  assurance, drug utilization management and medication therapy management
  programs;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>support
  e-prescribing initiatives;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>implement
  grievance, appeals and formulary exception processes;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>comply with
  payment protocols, which require the return of overpayments to CMS and, in
  specified circumstances, coordination with state pharmacy assistance programs;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>use approved
  networks and formularies, and provide access to these networks to any willing
  pharmacy;</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>provide
  emergency out-of-network coverage; and</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>adopt a comprehensive
  Medicare and fraud, waste and abuse compliance program.</p>
  
  <p style="margin:0in 0in .0001pt 1.25in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Any contractual or
  regulatory non-compliance on our part could entail significant sanctions and
  monetary penalties, which in turn could negatively affect the market price of
  our common stock.</font></p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We cannot be
  certain that other regulatory changes, such as a restructuring of the Medicare Part&nbsp;D
  program, will not affect our ability to operate under the Part&nbsp;D program
  or increase our costs or reduce our reimbursements.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We cannot be
  certain that our products will be competitive with the products offered by
  other PDPs. We cannot be certain that our future bids will be competitive with
  the bids submitted by other PDPs. We cannot be certain that our future bids
  will be under the benchmark bids calculated by CMS.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>PDP bids are
  submitted annually, no less than six months in advance of the corresponding
  benefit year. We endeavor to use the best available member eligibility, claims
  and risk score data at the time of developing the bid. Futhermore, we are
  making actuarial assumptions about the utilization of benefits in our PDPs.
  Because Medicare Part&nbsp;D is a relatively new program, there is little
  historical basis for these assumptions, and we cannot be assured that the data
  and assumptions used at the time of bid development will prove to be correct
  and that premiums will be sufficient to cover benefits.</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">6</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='6',FILE='C:\JMS\dchen\08-14082-1\task2933364\14082-1-ba-01.htm',USER='dchen',CD='May 12 10:32 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>We may
  experience higher benefit expenses as a result of an increase in the cost of
  pharmaceuticals, possible changes in our pharmacy rebate program with drug
  manufacturers, higher than expected utilization and new mandated benefits or
  other regulatory changes that increase our costs.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>As of December&nbsp;31,
  2007, CMS had automatically assigned dual eligibles to our PDPs in regions
  where our premiums for our standard plans were under the CMS established
  regional benchmarks. We cannot guarantee that all of these dual eligibles
  assigned to us will continue to participate in our PDPs in the future because
  dual eligible beneficiaries can change their PDP each month. Moreover, we also
  cannot guarantee whether dual eligibles will be auto assigned to us in the future
  for a region since we are required to bid anew each year and there exists the
  possibility that our bid for the region could be above the CMS established
  benchmark; if our bid is below the benchmark, we cannot predict the number of
  dual eligibles that will be assigned to us.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>Medicare Part&nbsp;D
  is a relatively new program and the competitive landscape is uncertain. We
  expect to encounter competition from other PDP sponsors, some of which may have
  significantly greater resources and brand recognition than we do. Our marketing
  arrangement with CVS Caremark will end after the 2008 plan year, and we cannot
  predict whether we will enter into other marketing arrangements with
  competitors. We cannot predict whether we will be able to effectively compete
  in this new market.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>If our current
  pharmacy and other providers terminate their contracts, we will have to
  contract with other providers to take their place.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>CMS and other
  service providers may not be able to deliver or process information completely,
  timely and accurately relating to our PDP, which could negatively impact our
  operations.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>There is
  uncertainty as to whether the dual eligibles auto-assigned to us for 2008 will
  be re-assigned to our PDPs in 2009 and beyond if our bids are not below the
  benchmark bids calculated by CMS.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>There is
  uncertainty as to whether marketing practices will be restricted, which could
  negatively impact our ability to market and sell our product.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>There may be
  other unforeseen occurrences that could negatively impact our PDP operations.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our inability to collect receivables owed to us by other
  Medicare Part&nbsp;D PDPs may disrupt or adversely affect our PDPs.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">During 2006, we incurred
  Medicare Part&nbsp;D prescription expenses on behalf of Medicare beneficiaries
  who were not members of our PDPs. Likewise, we received notice of claims from
  other plans that paid claims on behalf of our members. CMS established a
  plan-to-plan, known as P2P, reconciliation process to address this condition
  and provide a means of settlement between plans. Additionally, CMS recently
  published its state-to-plan, known as S2P, reconciliation process whereby
  health plans will settle with state Medicaid programs that paid claims on
  behalf of Medicare beneficiaries. We have recorded our estimated liabilities
  under P2P and S2P as of December&nbsp;31, 2007. Ultimate resolution of the P2P
  and S2P reconciliation processes could result in adjustments, positive or
  negative, to the amounts currently estimated and recoverable.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Although CMS has
  initiated a process for reconciling these errors in membership and drug costs,
  there can be no assurance that we will be fully reimbursed for these costs by
  CMS or another PDP sponsor. Although we intend to actively pursue amounts due
  us in the CMS reconciliation process, we cannot assure you that we will receive
  reimbursements from any other plan. Any amounts not collectible will be
  reported as additional claim costs and are subject to both reinsurance and the
  risk corridor adjustment.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our liabilities related to the CMS policy regarding the special
  transition period for retroactive enrollment may result in an unknown amount of
  liability, which could adversely affect our PDPs.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">On May&nbsp;25, 2007, CMS
  issued a memorandum to clarify Medicare Part&nbsp;D sponsors&#146; obligations under
  the Prescription Drug Benefit Manual on Coordination of Benefits,
  Chapter&nbsp;14, Section&nbsp;50.10, entitled &#147;Special Transition for
  Retroactive Enrollment Situations.&#148; Under Section&nbsp;50.10, Part&nbsp;D plans
  must provide a special transition period in 2007 to accommodate specified
  claims incurred by or on behalf of beneficiaries whom CMS has retroactively
  enrolled in a Part&nbsp;D plan. Part&nbsp;D plans must accommodate claims
  incurred by or on behalf of these beneficiaries during a no greater than
  seven-month retroactive eligibility period, which may extend into 2006.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In the May&nbsp;25, 2007
  memorandum CMS emphasized that Part&nbsp;D sponsors may not use the March&nbsp;31,
  2007 coverage year deadline, which is the cut-off date for the submission of
  claims associated with payment reconciliation, to deny requests for
  reimbursement of claims incurred during retroactive enrollment periods. Indeed,
  CMS noted that Part&nbsp;D plans are liable for claims received after March&nbsp;31st&nbsp;even
  if retroactive enrollment is not an issue, subject to contractual provisions
  regarding timely claims filing for network pharmacies. To ensure that third
  party payors have the opportunity to request reimbursement for claims incurred
  during a retroactive enrollment period on behalf of dual eligible
  beneficiaries, CMS stated that Part&nbsp;D sponsors must use the date of
  Medicaid notification to establish a new timely claims filing period. CMS also
  provided an attachment describing how the special transition period policy
  applied in various retroactive enrollment scenarios. We could face an unknown
  amount of liability as a result of complying with this special transition
  policy on retroactive enrollment, which could negatively affect our business.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">7</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Financial accounting for the Medicare Part&nbsp;D benefits
  is complex.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The accounting and
  regulatory guidance regarding the proper method of accounting for Medicare Part&nbsp;D,
  particularly as it relates to the timing of revenue and expense recognition and
  calculation of the risk corridor, taken together with the complexity of the
  Medicare Part&nbsp;D product and challenges in reconciling CMS Medicare Part&nbsp;D
  membership data with our records, may lead to variability in our reporting of
  quarter-to-quarter earnings and to uncertainty among investors and research
  analysts following us as to the impacts of our Medicare PDPs on our full year
  results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We rely on the accuracy of information provided by CMS
  regarding the eligibility of an individual to participate in our Medicare Part&nbsp;D
  plans, and any inaccuracies in those lists could cause CMS to recoup premium
  payments from us with respect to members who turn out not to be ours, which
  could reduce our revenue and profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Premium payments that we
  receive from CMS are based upon eligibility lists produced by Federal and local
  governments. From time to time, CMS requires us to reimburse it for premiums
  that we received from CMS based on eligibility and dual-eligibility lists that
  CMS later discovers contained individuals who were not in fact residing in our
  service areas or eligible for any government-sponsored program or were eligible
  for a different premium category or a different program. We may have already
  provided services to these individuals and reimbursement of amounts paid on
  behalf of services provided to them may be unrecoverable. In addition to
  recoupment of premiums previously paid, we also face the risk that CMS could
  fail to pay us for members for whom we are entitled to payment. Our
  profitability would be reduced as a result of this failure to receive payment
  from CMS if we had made related payments to providers and were unable to recoup
  these payments from them.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The mail-order pharmacy and pharmacy benefit management
  components of our business are subject to significant additional regulation.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The mail order pharmacy
  business is subject to extensive Federal, state and local regulation, such as
  the application of state laws related to the operation of internet and
  mail-service pharmacies. In addition, our PBM operations will be subject to a
  variety of Federal and state laws. Medicare Part&nbsp;D regulations, such as
  anti-kickback issues and compliance requirements under Federal employee
  benefits laws, also govern the treatment of related entities. CMS has indicated
  that it will apply greater scrutiny to arrangements between PDPs and related
  parties, especially to rebate retention arrangements. Federal and state
  legislative proposals regarding PBMs&nbsp;are frequently introduced, and these
  proposals, if adopted, could affect a variety of industry practices, such as
  the receipt of rebates and administrative fees from pharmaceutical
  manufacturers.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition, changes in
  existing Federal or state laws or regulations or in their interpretation by
  courts and agencies, or the adoption of new laws or regulations relating to
  patent term extensions, purchase discount, administrative fee and rebate
  arrangements with pharmaceutical manufacturers, as well as some of the
  formulary and other services provided to pharmaceutical manufacturers, could
  reduce the discounts, rebates or other fees received by PBMs&nbsp;and could
  adversely impact our business, financial condition, liquidity and operating
  results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If we are unable to develop and maintain satisfactory
  relationships with the providers of care to our members, our profitability
  could be adversely affected and we may be precluded from operating in some
  markets.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We contract with
  physicians, hospitals and other providers to deliver health care to our
  members. Our Medicare Advantage products encourage or require our customers to
  use these contracted providers. In some circumstances, these providers may
  share medical cost risk with us or have financial incentives to deliver quality
  medical services in a cost-effective manner. Our operations and profitability
  are significantly dependent upon our ability to enter into appropriate
  cost-effective contracts with hospitals, physicians and other healthcare
  providers that have convenient locations for our members in our geographic
  markets.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In the long term, our
  ability to contract successfully with a sufficiently large number of providers
  in a particular geographic market will affect the relative attractiveness of
  our Medicare Advantage and managed care products in that market and could
  preclude us from renewing our Medicare contracts in those markets or from entering
  into new markets. We will be required to establish acceptable provider networks
  prior to entering new markets. We may be unable to maintain our relationships
  with our network providers or enter into agreements with providers in new
  markets on a timely basis or under favorable terms. In any particular market,
  providers could refuse to contract with us, demand to contract with us, demand
  higher payments, or take other actions that could result in higher health care
  costs for us, less desirable products for customers and members, disruption of
  benefits to our members, or difficulty meeting regulatory or accreditation
  requirements. In some markets, some providers, particularly hospitals,
  physician specialty groups, physician/hospital organizations or multi-specialty
  physician groups, may have significant market positions and negotiating power.
  In addition, physician or practice management companies, which aggregate
  physician practices for administrative efficiency and marketing leverage, may
  compete directly with us. In our southeastern Texas HMO market, one of our
  significant provider groups recently has formed a health plan. If this provider
  group refuses to contract with us, uses its market position to negotiate
  favorable contracts or otherwise places us at a competitive disadvantage, our
  ability to market products or to be profitable in that market could be
  adversely affected.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In some situations, we
  have contracts with individual or groups of primary care physicians for an
  actuarially determined, fixed, per-member-per-month fee under which physicians
  are paid an amount to provide all required medical services to our members.
  This type of contract is referred to as a &#147;capitation&#148; contract. The inability
  of providers to properly manage costs under these </font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">8</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">capitation arrangements can result in the financial
  instability of these providers and the termination of their relationship with
  us. In addition, payment or other disputes between a primary care provider and
  specialists with whom the primary care provider contracts can result in a
  disruption in the provision of services to our members or a reduction in the
  services available to our members. The financial instability or failure of a
  primary care provider to pay other providers for services rendered could lead
  those other providers to demand payment from us even though we have made our
  regular fixed payments to the primary provider. There can be no assurance that
  providers with whom we contract will properly manage the costs of services,
  maintain financial solvency or avoid disputes with other providers. Any of
  these events could have an adverse effect on the provision of services to our
  members and our operations, resulting in loss of membership or higher healthcare
  costs or other adverse effects.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Corporate practice of medicine and fee-splitting laws may
  govern our business operations, and violation of these laws could result in
  penalties and adversely affect our arrangements with contractors and our profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Several states have laws
  commonly known as &#147;corporate practice of medicine&#148; that prohibit a business
  corporation from practicing medicine, employing physicians to practice
  medicine, or exercising control over medical treatment decisions by physicians.
  In these states, typically only medical professionals or a professional
  corporation in which the shares are held by licensed physicians or other
  medical professionals may provide medical care to patients. Many states also
  have some form of fee-splitting law prohibiting business arrangements that
  involve the splitting or sharing of medical professional fees earned by a
  physician or another medical professional for the delivery of healthcare
  services.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We perform only
  non-medical administrative and business services for physicians and physician
  groups. We do not represent that we offer medical services, and we do not
  exercise control over the practice of medical care by providers with whom we
  contract. We do, however, monitor medical services to ensure they are provided
  and reimbursed within the appropriate scope of licensure. In addition, we have
  developed close relationships with our network providers under which we review
  and monitor the coding of medical services provided by those providers, among other
  services we provide.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Regulatory authorities
  may assert that we are engaged in the corporate practice of medicine or that
  our contractual arrangements with providers constitute unlawful fee-splitting.
  Moreover, we cannot predict whether changes will be made to existing laws or if
  new ones will be enacted, which could cause us to be out of compliance with
  these requirements. If our arrangements are found to violate corporate practice
  of medicine or fee-splitting laws, our provider or independent physician
  association management contracts could be found to be legally invalid and
  unenforceable, which could adversely affect our operations and profitability,
  and we could be subject to civil or, in some cases, criminal, penalties.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may not have adequate intellectual property rights in our
  brand names for our health plans, and we may be unable to adequately enforce
  these rights.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our success depends, in
  part, upon our ability to market our health plans under the brand names that we
  own or license, such as Today&#146;s Options<sup>&#174;</sup>, Prescription Pathway<sup>SM</sup>,
  Senior Solutions<sup>&#174;</sup>, and Texan Plus<sup>&#174;</sup> family of products,
  and our MemberHealth&#153;, MHRx&#153;, and CommunityCCRx<sup>SM</sup> family of
  products. As part of a 2007 settlement in a litigation matter in Federal court
  in the State of Oklahoma, MemberHealth agreed to cease using, effective at the
  end of the 2007 Medicare Part&nbsp;D coverage year, the brand name Community
  Care Rx<sup>SM</sup> in all 49 states, the District of Columbia, Puerto Rico
  and the U.S. Virgin Islands where it marketed its PDP under that brand name,
  and to cease using the brand name Community Pharmacists Care Rx<sup>SM</sup> in
  the State of Oklahoma where it marketed its PDP under that brand name. We have
  marketed our PDP offering for 2008 under the CommunityCCRx<sup>SM</sup> brand
  name. We may not have taken enforcement action to prevent infringement of our
  marks and may not have secured registrations of the other brand names that we
  use in our business. Unauthorized parties may attempt to copy or otherwise
  obtain and use our products or technology. Policing unauthorized use of our
  intellectual property is difficult, and we cannot be certain that the steps we
  have taken will prevent misappropriation of our intellectual property rights.
  Other businesses may have prior rights in our brand names or in similar names,
  which could cause market confusion or limit or prevent our ability to use these
  marks or prevent others from using similar marks. If we are unable to prevent
  others from using our brand names, or if others prohibit us from using them,
  our revenues could be adversely affected. Even if we are able to protect our
  intellectual property rights in our brands, we could incur significant costs in
  doing so.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Competition in the insurance, healthcare, PBM and pharmacy
  industries is intense, and if we do not design and price our products properly
  and competitively, our membership and profitability could decline.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We operate in a highly
  competitive industry. Some of our competitors are more established in the
  insurance, health care and PBM industries, with larger market share and greater
  financial resources than we have in some markets. In addition, other companies
  may enter our markets in the future. We believe that barriers to entry in many
  markets are not substantial, so the addition of new competitors can occur
  relatively easily, and customers enjoy significant flexibility in moving
  between competitors. Contracts for the sale of commercial products are
  generally bid upon or renewed annually. We compete for members in our health
  plans and PBM on the basis of the following and other factors:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>price,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the size,
  location, quality and depth of provider networks,</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">9</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='9',FILE='C:\JMS\dchen\08-14082-1\task2933364\14082-1-ba-01.htm',USER='dchen',CD='May 12 10:32 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>benefits
  provided,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>quality of
  service and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>reputation.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition to the
  challenge of controlling PBM and health care costs, we face intense competitive
  pressure to contain premium prices. Factors such as business consolidations,
  strategic alliances, legislative reform and marketing practices create pressure
  to contain premium rate increases, despite being faced with increasing medical
  costs. Premium increases, introduction of new product designs, our relationship
  with our providers in various markets, and our possible exit from or entrance
  into additional markets, among other issues, could also affect our membership
  levels.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We compete based on
  innovation and service, as well as on price and benefit offering. To attract
  new clients and retain existing clients, we must continually develop new
  products and services to assist clients in managing their pharmacy benefit
  programs. We may not be able to develop innovative products and services, such
  as new Medicare Part&nbsp;D offerings, which are attractive to clients.
  Moreover, although we need to continue to expend significant resources to
  develop or acquire new products and services in the future, we may not be able
  to do so. We cannot be sure that we will continue to remain competitive, nor
  can we be sure that we will be able to market our products and services to
  clients successfully at current levels of profitability.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Consolidation within the
  PBM industry, as well as the acquisition of any of our competitors by larger
  companies, may lead to increased competition. In March&nbsp;2007, CVS
  Corporation and Caremark Rx,&nbsp;Inc. announced that they had consummated the
  merger of the two companies which merged the pharmacy chains with the Caremark
  PBM. This and other strategic combinations could have an adverse effect on our
  business or results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">If we do not compete
  effectively in our markets, if we set rates too high or too low in highly
  competitive markets to maintain or increase our market share, if membership and
  customers do not increase as we expect, if membership declines, or if we lose
  accounts with favorable medical cost experience while retaining or increasing
  membership in accounts with unfavorable medical cost experience, our business
  and results of operations could be materially adversely affected.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If the PBM that supports our business does not continue to
  earn and retain purchase discounts and rebates from manufacturers at current
  levels, our gross margins may decline.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We have contractual
  relationships with pharmaceutical manufacturers that provide us with purchase
  discounts on drugs dispensed from our mail-order pharmacies and rebates on
  brand-name prescription drugs dispensed through mail order and retail. These
  discounts and rebates are generally passed on to clients in the form of steeper
  price discounts and rebate pass-backs. Manufacturer rebates often depend on our
  ability to meet contractual market share or other requirements. Pharmaceutical
  manufacturers have also increasingly made rebate payments dependent upon our
  agreement to include a broad array of their products in our formularies.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Competitive pressures in
  the PBM industry have also caused us and many other PBMs&nbsp;to share with
  clients a larger portion of the rebates received from pharmaceutical manufacturers
  and to increase the discounts offered to clients.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Changes in existing
  Federal or state laws or regulations or in their interpretation by courts and
  agencies or the adoption of new laws or regulations relating to patent term
  extensions, purchase discount, administrative fee and rebate arrangements with
  pharmaceutical manufacturers, as well as some of the formulary and other
  services we provide to pharmaceutical manufacturers, could also reduce the
  discounts or rebates we receive and adversely impact our business, financial
  condition, liquidity and operating results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Changes in industry pricing benchmarks could adversely
  affect our financial performance.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Contracts in the
  prescription drug industry generally use published benchmarks to establish
  pricing for prescription drugs. The principal benchmarks are average wholesale
  price, known as AWP, average selling price, known as ASP, wholesale acquisition
  cost, known as WAC, and average manufacturer price, known as AMP.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Recent events have raised
  uncertainties as to whether payors, pharmacy providers, PBMs&nbsp;and others in
  the prescription drug industry will continue to utilize AWP as it has
  previously been calculated, or whether they will adopt other pricing benchmarks
  for establishing prices within the industry. Specifically, in the proposed
  settlement in the case of <i>New England
  Carpenters Health Benefits Fund, et al. v. First DataBank, et al.</i>, a
  civil class action case brought against McKesson Corporation and First
  DataBank, known as FDB, which is one of several companies that report data on
  prescription drug prices, FDB has agreed to reduce the reported AWP of
  specified drugs by 4% at a future time as contemplated by the settlement. At
  this time, the proposed settlement has not received final court approval. We
  cannot precisely predict the long-term effect of the proposed settlement or the
  timing of any impact it may have on our PBM business.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">10</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='10',FILE='C:\JMS\dchen\08-14082-1\task2933364\14082-1-ba-01.htm',USER='dchen',CD='May 12 10:32 2008' -->
  
  
  
  <br clear="all" style="page-break-before:always;">
  <div style="font-family:Times New Roman;">
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Demands by our clients for enhanced service levels or
  possible loss or unfavorable modification of contracts with our clients could
  negatively affect our profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As our clients 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.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our results of operations could suffer if we lose our
  pharmacy network affiliations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">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
  clients and 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 clients and 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&nbsp;or could attempt to acquire or enter into these kinds
  of relationships in the future. Ownership of, or alliances with, PBMs&nbsp;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.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our PBM, could be subject to claims under ERISA if it is
  found to be a fiduciary of health benefit plans governed by ERISA.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">PBMs&nbsp;typically
  provide services to corporations and other sponsors of health benefit plans.
  These plans are subject to the Employee Retirement Income Security Act of 1974,
  as amended, known as ERISA, which regulates health and medical plans and other
  employee pension benefit plans and employee welfare benefit plans. The U.S. Department
  of Labor, which is the agency that enforces ERISA, could assert that the
  fiduciary obligations imposed by the statute apply to some or all of the
  services provided by a PBM If a court were to determine, in litigation brought
  by a private party or in a proceeding arising out of a position taken by the
  Department of Labor, that MemberHealth was a fiduciary in connection with
  services it provides, MemberHealth could potentially be subject to claims for
  breaching fiduciary duties and/or entering into specified &#147;prohibited
  transactions&#148; under ERISA. In addition, claims also might be made against our
  PBM under common law and state fiduciary obligation theories.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We are subject to extensive government regulation;
  compliance with laws and regulations is complex and expensive, and any
  violation of the laws and regulations applicable to us could reduce our
  revenues and profitability and otherwise adversely affect our operating
  results.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">There is substantial
  Federal and state governmental regulation of our business. Several laws and
  regulations adopted by the Federal government, such as the Sarbanes-Oxley Act
  of 2002, the Gramm-Leach-Bliley Act, the Health Insurance Portability and
  Accountability Act, known as HIPAA, MMA, the USA PATRIOT Act, the False Claims
  Act, anti-kickback laws and &#147;Do Not Call&#148; regulations, have created
  administrative and compliance requirements for us. The requirements of these
  laws and regulations are still evolving, and the cost of compliance may have an
  adverse effect on our profitability. If we fail to comply with existing or
  future applicable laws and regulations, we could suffer civil, criminal or
  administrative penalties. 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.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Laws in each of the
  states in which we operate our health plans and insurance companies also
  regulate our sales practices, operations, the scope of benefits, rate formulas,
  delivery systems, utilization review procedures, quality assurance, complaint
  systems, enrollment requirements, claim payments, marketing, and advertising.
  These state regulations generally require, among other things, prior approval
  or notice of new products, premium rates, benefit changes and specified
  material transactions, such as dividend payments, purchases or sales of assets,
  inter-company agreements, and the filing of various financial and operational
  reports.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We are also subject to
  various governmental reviews, audits and investigations to verify our
  compliance with our contracts and applicable laws and regulations. State
  departments of insurance audit our health plans and insurance companies for
  financial and contractual compliance. State departments of health audit our
  health plans for compliance with health services. State attorneys general, CMS,
  the Office of the Inspector General of Health and Human Services, the Office of
  Personnel Management, the Department of Justice, the Department of Labor, the Government
  Accountability Office, and state departments of insurance and departments of
  health also conduct audits and investigations of us. Several state attorneys
  general, state departments of insurance and Congressional committees are
  currently investigating practices used by companies in the health care industry
  and insurance brokers generally.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Any adverse review, audit
  or investigation could result in:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>repayment of
  amounts we have been paid pursuant to our government contracts;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>imposition of
  civil or criminal penalties, fines or other sanctions on us;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>loss of
  licensure or the right to participate in Medicare and other
  government-sponsored programs;</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">11</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='11',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>damage to our
  reputation in various markets; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increased
  difficulty in marketing our products and services.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Any of these events could
  make it more difficult for us to sell our products and services, reduce our
  revenues and profitability and otherwise adversely affect our operating
  results. For more information on governmental regulation of our business, see
  the section captioned &#147;Regulation&#148; in Part&nbsp;I, Item&nbsp;1 of this annual
  report on Form&nbsp;10-K for the year ended December&nbsp;31, 2007.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">CMS has recently released
  proposed regulations that, if adopted, would, among other things, place tighter
  restrictions on marketing processes relative to the Medicare Advantage program
  and prescription drug benefit program.&#160;
  Depending upon the final content of these regulations, if CMS adopts
  them, compliance with and enforcement of the regulations could have a material
  adverse effect on our results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We are required to comply with laws governing the
  transmission, security and privacy of health information that require
  significant compliance costs, and any failure to comply with these laws could
  result in material criminal and civil penalties.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Regulations under HIPAA
  require us to comply with standards regarding the exchange of health
  information within our company and with third parties, such as healthcare
  providers, business associates and our members. These regulations impose
  standards for common healthcare transactions, such as</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims information,
  plan eligibility, and payment information;</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>unique
  identifiers for providers and employers;</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>security;</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>privacy; and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>enforcement.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">HIPAA also provides that to the extent that state laws
  impose stricter privacy standards than HIPAA privacy regulations, HIPAA does
  not preempt the state standards and laws.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Given the complexity of
  the HIPAA regulations, the possibility that the regulations may change, and the
  fact that the regulations are subject to changing and, at times, conflicting
  interpretation, our ability to comply with the HIPAA requirements is uncertain.
  Furthermore, a state&#146;s ability to promulgate stricter laws, and uncertainty
  regarding many aspects of state requirements, make compliance more difficult.
  To the extent that we submit electronic healthcare claims and payment
  transactions that do not comply with the electronic data transmission standards
  established under HIPAA, payments to us may be delayed or denied. Additionally,
  the costs of complying with any changes to the HIPAA regulations may have a
  negative impact on our operations. We could be subject to criminal penalties
  and civil sanctions for failing to comply with the HIPAA health information
  provisions, which could result in the incurrence of significant monetary
  penalties. In addition, our failure to comply with state health information
  laws that may be more restrictive than the regulations issued under HIPAA could
  result in additional penalties.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Compliance with HIPAA
  regulations requires significant systems enhancements, training and
  administrative effort. HIPAA could also expose us to additional liability for
  violations by our business associates. A business associate is a person or
  entity, other than a member of the work force, who on behalf of an entity
  subject to HIPAA performs or assists in the performance of a function or
  activity involving the use or disclosure of individually identifiable health
  information, or provides legal, accounting, consulting, data aggregation,
  management, administrative, accreditation or financial services.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Changes in governmental regulation or legislative reform
  could increase our costs of doing business and adversely affect our
  profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The Federal government
  and the states in which we operate extensively our regulate health plans, insurance
  companies and other business. The laws and regulations governing our operations
  are generally intended to benefit and protect policyholders, health plan
  members and providers rather than shareholders. From time to time, Congress has
  considered various forms of &#147;Patients&#146; Bill of Rights&#148; legislation, which, if
  adopted, could alter the treatment of coverage decisions under applicable
  federal employee benefits laws. There have also been legislative attempts at
  the state level to limit the preemptive effect of Federal employee benefits
  laws on state laws. If adopted, these types of limitations could increase our
  liability exposure and could permit greater state regulation of our operations.
  The government agencies administering these laws and regulations have broad
  latitude to enforce them. These laws and regulations, along with the terms of
  our government contracts, regulate how we do business, what services we offer,
  and how we interact with our policyholders, members, providers and the public.
  Healthcare laws and regulations are subject to frequent change and differing
  interpretations. Changes in the political climate or in existing laws or
  regulations, or their interpretations, or the enactment of new laws or the
  issuance of new regulations could adversely affect our business by, among other
  things:</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">12</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='12',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>imposing
  additional license, registration, or capital reserve requirements;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increasing our
  administrative and other costs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>forcing us to
  undergo a corporate restructuring;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increasing
  mandated benefits without corresponding premium increases;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>limiting our
  ability to engage in inter-company transactions with our affiliates and
  subsidiaries;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>adversely
  affecting our ability to operate under the Medicare program and to continue to
  serve our members and attract new members;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>forcing us to
  alter or restructure our relationships with providers and agents, such as
  making changes to the &#147;deeming&#148; rules&nbsp;for Private Fee for Service Medicare
  Advantage products;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>restricting our
  ability to market our products;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increasing
  governmental regulation of healthcare and PBM services, such as potential
  regulation of the PBM industry by the U.S. Food and Drug Administration, or
  direct regulation of pharmacies by regulatory and quasi-regulatory bodies;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>requiring that
  health plan members have greater access to non-formulary drugs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>expanding the
  ability of health plan members to sue their plans;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>requiring us to
  implement additional or different programs and systems;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increasing
  antitrust lawsuits challenging PBM pricing practices;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>instituting
  state legislation regulating PBMs&nbsp;or imposing fiduciary status on PBMs;
  and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>instituting drug
  pricing &#147;most favored nation&#148; pricing and &#147;unitary pricing&#148; legislation or
  other drug pricing legislationsuch as .</p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">While it is not possible
  to predict when and whether fundamental policy changes would occur, policy
  changes on the local, state and federal level could fundamentally change the
  dynamics of our industry, such as policy changes mandating a much larger role
  of the government in the health care arena. Changes in public policy could
  materially affect our profitability, our ability to retain or grow business, or
  our financial condition. State and federal governmental authorities are
  continually considering changes to laws and regulations applicable to us and are
  currently considering regulations relating to:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>health insurance
  access and affordability;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>disclosure of
  provider quality information;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>electronic
  access to pharmacy and medical records;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>formation of
  regional or national association health plans for small employers;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>universal health
  coverage; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>disclosure of
  provider fee schedules and other data about payments to providers, sometimes
  called transparency.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">All of these proposals could apply to us and could
  result in new regulations that increase the cost of our operations. Healthcare
  organizations also may reduce or delay the purchase of PBM services, and
  manufacturers may reduce administrative fees and rebates or reduce supplies of
  some products. There can be no assurance that legislative or regulatory change
  will not affect our ability to negotiate rebate and administrative fee
  arrangements with manufacturers and will not have a material adverse effect on
  our business.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">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 members have greater access to drugs not
  included on a plan&#146;s formulary and give health plan members 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 limit our
  business practices and impair our ability to serve our clients.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">13</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='13',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition, CMS has
  recently released proposed regulations that, if adopted, would, among other
  things, place tighter restrictions on marketing processes relative to the
  Medicare Advantage program and prescription drug benefit program.&#160; Depending upon the final content of these
  regulations, if CMS adopts them, compliance with and enforcement of the
  regulations could have a material adverse effect on our results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our reliance upon third party administrators may disrupt or
  adversely affect our operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We depend on independent
  third parties for significant portions of our data center operations, data
  network, voice communication services and pharmacy data processing and other
  systems-related support, equipment, facilities and data. This dependence makes
  our operations vulnerable to the third parties&#146; failure to perform adequately
  under the contract, due to internal or external factors.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We have outsourced the
  operation of our data center, call centers and new business processing services
  to independent third parties and may from time to time obtain additional
  services or facilities from other independent third parties. Dependence on
  third parties for these services and facilities may make our operations
  vulnerable to their failure to perform as agreed. We also rely upon data from
  CMS and our joint venture partner Caremark for information relating to Medicare
  Part&nbsp;D and Medicare Advantage membership and claims administration,
  respectively. MemberHealth also relies upon Computer Sciences Corporation,
  known as CSC, and SXC Health Solutions,&nbsp;Inc. for information relating to
  Medicare Part&nbsp;D membership and claims administration, respectively.
  Incorrect information from these entities could generate inaccurate or
  incomplete membership and payment reports concerning our Medicare eligibility
  and enrollment, and claims information used by CMS to determine plan benefit
  subsidies and risk corridor payments. This could cause us to incur additional
  expense to utilize additional resources to validate, reconcile and correct the
  information. We have not been able to independently test and verify some of
  these third party systems and data. There can be no assurance that future third
  party data will not disrupt or adversely affect our plans&#146; relationships with
  our members or our results of operations. Additionally, as of November&nbsp;2006,
  we ceased to utilize a third party administrator, TMG Health, to manage our
  private fee-for-service claims, and brought this function in-house. This has
  put additional administrative burdens on us. A change in service providers
  could result in a decline in service quality and effectiveness, increased cost
  or less favorable contract terms which could adversely affect our operating
  results. Some of our outsourced services are being performed overseas. For
  2008, CMS will require approval of the performance of services overseas.
  Failing to obtain this approval could have a material adverse effect on our
  results of operations and financial condition.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Reductions in funding for Medicare programs could materially
  reduce our profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We generated
  approximately 83% of our total revenue for the fiscal year ended December&nbsp;31,
  2007 (89% of our total revenue on a pro forma basis assuming the MemberHealth
  acquisition had been consummated on January&nbsp;1, 2007) by the operation of
  our Medicare Advantage HMO, Medicare Advantage private fee-for-service plans
  and Medicare Part&nbsp;D PDPs. As a result, our revenue and profitability are
  dependent, in part, on government funding levels for these programs. The rates
  paid to Medicare Advantage health plans like ours are established by contract,
  although the rates differ depending on a combination of factors, such as upper
  payment limits established by CMS, a member&#146;s health profile and status, age,
  gender, county or region, benefit mix, member eligibility categories and the
  plan&#146;s risk scores. Future Medicare rate levels may be affected by continuing
  government efforts to contain prescription drug costs and other medical
  expenses, and other federal budgetary constraints. The government is currently
  examining Medicare Advantage health plans like ours in comparison to Medicare
  fee-for-service payments, and this examination could result in a reduction in
  payments to Medicare Advantage health plans like ours. Changes in the Medicare
  program or Medicare funding may affect our ability to operate under the
  Medicare program or lead to reductions in the amount of reimbursement,
  elimination of coverage for some benefits or reductions in the number of
  persons enrolled in or eligible for Medicare.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The MMA made changes to the Medicare program that will materially
  impact our operations and could reduce our profitability and increase
  competition for existing and prospective members.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The MMA substantially
  changed the Medicare program and caused us to modify how we operate our
  business. Although many of these changes are designed to benefit Medicare
  Advantage plans generally, some provisions of the MMA may increase competition,
  create challenges for us with respect to educating our existing and potential
  members about the changes, and create other risks and substantial and
  potentially adverse uncertainties.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">Increased
  competition could adversely affect our enrollment and results of operations.</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>The MMA
  increased reimbursement rates for Medicare Advantage plans. Higher
  reimbursement rates may induce the establishment of new plans that participate
  in the Medicare program, creating new competition that could adversely affect
  our profitability and cause increased lapsation in our Medicare Supplement in
  force as policyholders choose to enroll in a competitor&#146;s plan.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>As of 2006, the
  MMA mandated a new regional Medicare preferred provider organization, or
  Medicare PPO, program and private fee-for-service plans. Medicare PPOs and
  private fee-for-service plans allow their members more flexibility to select
  physicians than the current plans, which are health plans that require members
  to coordinate with a primary care physician. The regional Medicare PPO program
  and private fee-for-service plans compete with local Medicare Advantage
  programs and have affected, and may continue to affect, our Medicare Advantage
  business.</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">14</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='14',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">The
  competitive bidding process may adversely affect our profitability.</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As of January&nbsp;1,
  2006, the payments for the local Medicare Advantage health plan and regional
  Medicare Advantage PPO programs are based on a competitive bidding process that
  may decrease the amount of premiums paid to us or cause us to increase the
  benefits we offer.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">The
  limited annual enrollment process may adversely affect our growth and ability
  to market our products.</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Beginning in 2006,
  Medicare beneficiaries generally have a more limited annual enrollment period
  during which they can choose to participate in a Medicare Advantage plan or
  receive benefits under the traditional fee-for-service Medicare program. After
  the annual enrollment period, most Medicare beneficiaries will not be permitted
  to change their Medicare benefits until the next enrollment period. The new
  annual enrollment process and subsequent &#147;lock-in&#148; provisions of the MMA may
  adversely affect our growth as it will limit our ability to enter new service
  areas and market to or enroll new members in our established service areas
  outside of the annual enrollment period.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">The
  limited annual enrollment period may make it difficult to retain an adequate
  sales force.</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As a result of the
  limited annual enrollment period and the subsequent &#147;lock-in&#148; provisions of the
  MMA, our internal and external sales force may be limited in its ability to
  market some of our products year-round. Our agents rely substantially on sales
  commissions for their income. Given the limited annual sales window, it may
  become more difficult to find agents to market and promote our products.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may be responsible for the actions of our independent and
  career agents, and restrictions on our ability to market would adversely affect
  our revenue.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In litigation against our
  subsidiaries, our members sometimes claim that agents failed to comply with
  applicable laws, regulations and rules, or acted improperly in other ways, and
  that we are responsible for the alleged failure. We may be liable for
  contractual and extra-contractual damages on these claims. We cannot assure you
  that any future claim will not result in material liability in the future.
  Federal and state regulators increasingly scrutinize the marketing practices of
  insurers, such as Medicare Advantage and private fee-for-service plans, MA-PDs
  and PDPs and their marketing agents, and there is no guarantee that regulators
  will not scrutinize the practices of our Medicare Advantage plans, PDPs and our
  marketing agents, and will not expose us to liability.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We rely on our marketing
  and sales efforts for a significant portion of our premium revenue growth. The
  Federal government and state governments in the states in which we currently
  operate permit marketing but impose strict requirements and limitations as to
  the types of marketing activities that we may conduct. If our marketing efforts
  were to be prohibited or curtailed, our ability to increase or sustain
  membership would be significantly harmed, which would adversely affect our
  revenue.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Similarly, Federal and
  state governments and regulatory agencies have recently placed an increased
  focus on the sales and marketing of private fee-for-service plans. Concerns
  over the growing number of market conduct complaints regarding improprieties in
  the sales of private fee-for-service planes have spawned stricter marketing
  standards by CMS relating to these plans. This heightened focus on market
  conduct and stricter standards in the marketing and sales of private
  fee-for-service plans could require us to modify our systems, increase our
  costs and change our agent training requirements, which could result in a
  material adverse effect on our results of operations and financial condition.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">For example, in 2005, the
  Wisconsin Office of the Commissioner of Insurance, known as WI OCI, initiated
  an investigation into the sales practices of the Pennsylvania Life sales agents
  in the state. We cannot provide assurance that we will resolve the issues
  raised by the Wisconsin OCI without adversely affecting our results of
  operations or financial condition, or that other state insurance regulators
  will not initiate similar investigations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If our government contracts are not renewed or are
  terminated, our business could be substantially impaired.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We provide our Medicare
  and other services through a limited number of contracts with Federal
  government agencies. These contracts generally have terms of one or two years
  and are subject to non-renewal by the applicable agency. All of our government
  contracts are terminable for cause if we breach a material provision of the
  contract or violate relevant laws or regulations. In addition, a government
  agency may suspend our right to add new members if it finds deficiencies in our
  provider network or operations. If we are unable to renew, or to successfully
  re-bid or compete for any of our government contracts, or if any of our
  contracts are terminated, our business could be substantially impaired. If any
  of those circumstances were to occur, we would likely pursue one or more
  alternatives, such as</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>seeking to enter
  into contracts in other geographic markets,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>seeking to enter
  into contracts for other services in our existing markets, or</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>seeking to
  acquire other businesses with existing government contracts.</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">15</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='15',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">If we were unable to do so, we could be forced to
  cease conducting business. In this event, our revenues and profits would
  decrease materially.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We have a significant amount of debt outstanding that
  contains restrictive covenants, and we may be unable to service and repay our
  debt obligations if our subsidiaries cannot pay sufficient dividends or make
  other cash payments to us.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As of December&nbsp;31,
  2007, we had $349&nbsp;million of debt outstanding under the term portion of
  our credit agreement, of which we have agreed to prepay $25&nbsp;million of
  term debt in April&nbsp;2008. We have available borrowing capacity under the
  revolving portion of our credit facility of $150&nbsp;million. In March&nbsp;2007,
  we issued $50&nbsp;million of our trust preferred securities. In December&nbsp;2007,
  we redeemed $15&nbsp;million and had $110&nbsp;million of trust preferred
  securities outstanding at December&nbsp;31, 2007. Our credit agreement provides
  that upon the occurrence of specified events all of the capital stock of the
  guarantor subsidiaries under the credit agreement will be pledged to our bank
  lenders; those events have occurred and we have pledged this stock. Because our
  principal outstanding indebtedness has been incurred by our parent company, our
  ability to make interest and principal payments on our outstanding debt is
  dependent upon the ability of our subsidiaries to pay cash dividends or make
  other cash payments to our parent company. Our subsidiaries will be able to pay
  dividends to our parent company only if they earn sufficient profits and, in
  the case of our insurance company and health plan subsidiaries, they satisfy
  the requirements of the state insurance laws relating to dividend payments and
  the maintenance of required surplus.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our debt service
  obligations will require us to use a portion of our operating cash flow to pay
  interest and principal on indebtedness before use for other corporate purposes,
  such as funding future expansion of our business and ongoing capital
  expenditures. If our operating cash flow and capital resources are insufficient
  to service our debt obligations, we may be forced to sell assets, seek
  additional equity or debt capital or restructure our debt. However, these
  measures might be unsuccessful or inadequate in permitting us to meet scheduled
  debt service obligations. We may also incur additional indebtedness in the
  future. Our indebtedness could have additional adverse consequences, such as:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increasing our
  vulnerability to adverse economic, regulatory and industry conditions, and
  placing us at a disadvantage compared to our competitors that are less
  leveraged;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>limiting our
  ability to compete and our flexibility in planning for, or reacting to, changes
  in our business and the industry in which we operate;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>limiting our
  ability to borrow additional funds for working capital, capital expenditures,
  acquisitions and general corporate or other purposes; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>exposing us to
  greater interest rate risk since the interest rate on borrowings under our
  senior credit facilities is variable.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Capital constraints could restrict our ability to support
  our premium growth.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our continued growth is
  dependent upon our ability to support premium revenue growth through the
  expansion of our markets and our network of agents while at the same time
  maintaining sufficient levels of capital and surplus to support that growth.
  Our new business growth typically results in reduced income caused by costs
  related to new market expansion and, on some insurance products, net losses
  during the early years of a policy, called statutory surplus strain. The
  resulting reduction in capital and surplus can limit our ability to generate
  new business due to statutory restrictions on premium to surplus ratios and
  other required statutory surplus parameters. In addition, some states, such as
  Florida and Texas, limit an insurer&#146;s ability to write specified lines of
  business if gross or net premiums written would exceed a specified percentage
  of capital and surplus. Likewise, we are required to maintain adequate risk
  based capital ratios as prescribed by each state. Moreover, we need
  substantially more capital than the statutory minimums to support our level of
  premium growth and to finance acquisitions. If we cannot generate sufficient
  capital and statutory surplus to maintain minimum statutory requirements and to
  support our growth, we could be restricted in our ability to generate new
  premium revenue.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If we are required to maintain higher statutory capital
  levels for our existing operations or if we are subject to additional capital
  reserve requirements as we pursue new business opportunities, our ability to
  obtain funds from our subsidiaries may be restricted and our cash flows and liquidity
  may be adversely affected.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Because Universal
  American operates as a holding company, it is dependent upon dividends and
  administrative expense reimbursements from its subsidiaries to fund its
  obligations, such as payment of principal and interest on its debt obligations.
  These subsidiaries generally are regulated by state departments of insurance.
  Our health plan and insurance company subsidiaries are subject to laws and
  regulations that limit the amount of dividends and distributions they can pay
  for purposes other than to pay income taxes related to their earnings. These
  laws and regulations also limit the amount of management fees our subsidiaries
  may pay to our management subsidiaries and their other affiliates without prior
  notification to, or in some cases approval of, state regulators.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We are also required by
  law to maintain specific prescribed minimum amounts of capital in these
  subsidiaries. The levels of capitalization required depend primarily upon the
  volume of premium generated. A significant increase in premium volume will
  require additional capitalization from our parent company. In most states, we
  are required to seek prior approval by these state regulatory authorities
  before we transfer money or pay dividends that exceed specified amounts from
  these subsidiaries, or, in some states, any amount. The pre-approval and notice
  requirements vary from state to state, and the discretion of the state
  regulators, if any, </font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">16</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
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  <br clear="all" style="page-break-before:always;">
  
  
  <div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">in approving or disapproving a dividend is not always
  clearly defined. Subsidiaries that declare non-extraordinary dividends must
  usually provide notice to the regulators in advance of the intended
  distribution date. If the regulators were to deny or significantly restrict our
  subsidiaries&#146; requests to pay dividends to us or to pay management and other
  fees to affiliates, the funds available to us would be limited, which could
  impair our ability to implement our business and growth strategy and satisfy
  our debt obligations, or we could be required to incur additional indebtedness
  to fund these strategies.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition, one or more
  of these states could increase the statutory capital level from time to time.
  States have also adopted risk-based capital requirements based on guidelines
  adopted by the National Association of Insurance Commissioners, which tend to
  be, although are not necessarily, higher than existing statutory capital
  requirements. Regardless of whether the states in which we operate maintain or
  adopt risk-based capital requirements, the state departments of insurance can
  require our subsidiaries to maintain minimum levels of statutory capital in
  excess of amounts required under the applicable state laws if they determine
  that maintaining additional statutory capital is in the best interests of our
  members. Any increases in these requirements could materially increase our
  reserve requirements. In addition, as we continue to expand our plan offerings
  in new states or pursue new business opportunities, such as our recent
  offerings of PDPs and expansion of private fee for service products and health
  plans in new markets, we may be required to maintain additional statutory
  capital reserves. In either case, our available funds could be materially
  reduced, which could harm our ability to implement our business strategy.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In the event that we are
  unable to provide sufficient capital to fund the debt obligations of Universal
  American, our operations or financial position may be adversely affected.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Downgrades in our debt ratings, should they occur, may
  adversely affect our business, financial condition and results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Increased public and
  regulatory concerns regarding the financial stability of insurance companies
  and health plans have resulted in consumers placing greater emphasis upon
  financial strength ratings. Claims paying ability, financial strength, and debt
  ratings by recognized rating organizations are increasingly important factors
  in establishing the competitive position of insurance companies and health
  plans. Ratings information is broadly disseminated and generally used
  throughout the industry. Our ability to expand and to attract new business is
  affected by the financial strength ratings assigned to our subsidiaries by
  independent industry rating agencies, such as&nbsp;A.M. Best Company,&nbsp;Inc.
  Some distributors such as financial institutions, unions, associations and
  affinity groups may not sell our products to these groups unless the rating of
  our subsidiary writing the business improves to at least an &#147;A-&#148; from its &#147;B++.&#148;
  The lack of higher&nbsp;A.M. Best ratings for our subsidiaries could adversely
  affect sales of our products.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our debt ratings affect
  both the cost and availability of future borrowings. Each of the rating
  agencies reviews its ratings periodically and there can be no assurance that
  current ratings will be maintained in the future. Our ratings reflect each
  rating agency&#146;s opinion of our financial strength, operating performance, and
  ability to meet our debt obligations or obligations to policyholders, but are
  not evaluations directed toward the protection of investors in our common stock
  and should not be relied upon as such. Following announcement on March&nbsp;5,
  2008 of the revision of our estimate of MemberHealth&#146;s revenue for 2008,
  Standard&nbsp;&amp; Poor&#146;s indicated that it will reduce its BBB- investment
  grade rating on our debt to BB+, which is below investment grade, and&nbsp;A.M.
  Best indicated that it will maintain its B++ rating on our core insurance
  subsidiaries. There is no assurance that the rating agencies will maintain
  these ratings in the future. Any future downgrade in our ratings may cause our
  policyholders and members to lapse, and may cause some of our agents to sell
  less of our products or to cease selling our products altogether. Increased lapse
  rates would reduce our premium revenue and net income. Thus, downgrades in our
  ratings, should they occur, may adversely affect our business, financial
  condition and results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If we fail to properly maintain the integrity of our data
  and information systems, our business could be materially adversely affected.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our business depends
  significantly on efficient, effective and secure information systems and the
  integrity and timeliness of the data we use to run our business. We have
  various information systems which support our operating segments. The
  information gathered and processed by our management information systems
  assists us in, among other things, marketing and sales tracking, underwriting,
  billing, claims processing, medical management, medical care cost and
  utilization trending, financial and management accounting, reporting, planning
  and analysis and e-commerce. These systems also support on-line customer
  service functions, provider and member administrative functions and support tracking
  and extensive analyses of medical expenses and outcome data.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our information systems
  and applications require an ongoing commitment of significant resources to
  maintain, protect and enhance existing systems and develop new systems to keep
  pace with continuing changes in information processing technology, evolving
  industry and regulatory standards, and changing customer preferences. If the
  information we rely upon to run our businesses were to be found to be
  inaccurate or unreliable, if we fail to properly maintain our information
  systems and data integrity, or if we fail to successfully update or expand
  processing capability or develop new capabilities to meet our business needs in
  a timely manner, we could have operational disruptions, have problems in
  determining medical cost estimates and establishing appropriate pricing, have
  customer and physician and other health care provider disputes, lose our
  ability to produce timely and accurate reports, have regulatory or other legal
  problems, have increases in operating and administrative expenses, lose
  existing customers, have difficulty in attracting new customers or in
  implementing our growth strategies, or suffer other adverse consequences.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">17</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='17',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">To the extent we fail to
  maintain effective information systems, we may need to contract for these
  services with third-party management companies, which may be on less favorable
  terms to us and significantly disrupt our operations and information flow. In
  addition, we have outsourced the operation of our data centers to independent
  third parties and may from time to time obtain additional services or
  facilities from other independent third parties. Dependence on third parties
  for these services and facilities may make our operations vulnerable to their
  failure to perform as agreed.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Furthermore, our business
  requires the secure transmission of confidential information over public
  networks. Because of the confidential health information we store and transmit,
  security breaches could expose us to a risk of regulatory action, litigation,
  possible liability and loss. Our security measures may be inadequate to prevent
  security breaches, and our business operations and profitability would be
  adversely affected by cancellation of contracts, loss of members and potential
  criminal and civil sanctions if they are not prevented.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">There can be no assurance
  that our process of improving existing systems, developing new systems to
  support our expanding operations, integrating new systems, protecting our
  proprietary information, and improving service levels will not be delayed or
  that additional systems issues will not arise in the future. Failure to
  adequately protect and maintain the integrity of our information systems and
  data may result in a material adverse effect on our financial positions,
  results of operations and cash flows.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Any failure by us to manage our growing operations or to
  successfully integrate acquisitions and other significant transactions could
  harm our financial results, business and prospects.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As part of our business
  strategy, we frequently engage in discussions with third parties regarding
  possible investments, acquisitions, strategic alliances, joint ventures and
  outsourcing transactions and often enter into agreements relating to these
  transactions that are designed to enhance our business objectives. In order to
  pursue this strategy successfully, we must identify suitable candidates for,
  and successfully complete, transactions as well as effectively integrate any
  acquired companies into our operations. If we fail to identify and successfully
  complete transactions that further our strategic objectives, we may be required
  to expend resources to develop products and technology internally, we may be
  unable to sustain our historical growth rates, we may be put at a competitive
  disadvantage or we may be adversely affected by negative market perceptions,
  any of which may have a material adverse effect on our results of operations,
  financial position or cash flows.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">Acquisition
  risk</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The rapid growth in the
  size and complexity of our operations has placed, and will continue to place,
  significant demands on our management, operations systems, accounting systems,
  internal control systems and financial resources. As part of our strategy, we
  have experienced, and expect to continue to experience, considerable growth
  through acquisitions.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Acquisitions involve
  numerous additional risks, some of which we have experienced in the past, such
  as:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>difficulties in
  the integration of operations, technologies, products, systems and personnel of
  the acquired company;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>diversion of
  financial and management resources from existing operations;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>potential
  increases in policy lapses;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>potential losses
  from unanticipated litigation, undiscovered or undisclosed liabilities or
  unanticipated levels of claims;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>inability to
  generate sufficient revenue to offset acquisition costs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>loss of key
  customer accounts: and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>loss of key
  provider contracts or renegotiation of existing contracts on less favorable
  terms.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In addition, we generally
  are required to obtain regulatory approval from one or more governmental
  agencies when making acquisitions, which may require a public hearing,
  regardless of whether we already operate a plan in the state in which the
  business to be acquired is located. We may be unable to comply with these
  regulatory requirements for an acquisition in a timely manner, or at all.
  Moreover, some sellers may insist on selling assets that we may not want, such
  as commercial lines of business, or transferring their liabilities to us as
  part of the sale of their companies or assets. Even if we identify suitable
  acquisition targets, we may be unable to complete acquisitions or obtain the
  necessary financing for acquisitions on terms favorable to us, or at all.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">To the extent we complete
  an acquisition, we may be unable to realize the anticipated benefits from it
  because of operational factors or difficulties in integrating the following or
  other aspects of acquisitions with our existing businesses</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>additional
  employees who are not familiar with our operations;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>new provider
  networks, which may operate on terms different from our existing networks;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">18</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='18',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>additional
  members, who may decide to transfer to other healthcare providers or health
  plans;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>disparate
  information technology, claims processing, and record keeping systems; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>accounting
  policies, some of which require a high degree of judgment or complex estimation
  processes, such as estimates of reserves, IBNR claims, valuation and accounting
  for goodwill and intangible assets, stock-based compensation, and income tax
  matters.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">For all of the above
  reasons, we may not be able to implement our acquisition strategy successfully.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Furthermore, in the event
  of an acquisition or investment, you should be aware that we may issue stock
  that would dilute stock ownership, incur debt that would restrict our cash
  flow, assume liabilities, incur large and immediate write-offs, incur
  unanticipated costs, divert management&#146;s attention from our existing business,
  experience risks associated with entering markets in which we have no or
  limited prior experience, or lose key employees from the acquired entities or
  our historical business.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;">Internal
  growth and expansion risk</font></i></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Additionally, we are
  likely to incur additional costs if we develop new product offerings or enter
  new service areas or states where we do not currently operate, which may limit
  our ability to expand to, or further expand in, those areas. Our rate of
  expansion into new geographic areas may also be limited by:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our inability to
  raise sufficient capital;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the time and
  costs associated with designing and filing new product forms and recruiting
  related sales forces to offer products in the new area;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the time and
  costs associated with obtaining regulatory approval to operate in the new area
  or expanding our licensed service area, as the case may be;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our inability to
  develop a network of physicians, hospitals, and other healthcare providers that
  meets our requirements and those of the applicable regulators;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>competition,
  which could increase the costs of recruiting members, reduce the pool of
  available members, or increase the cost of attracting and maintaining our
  providers;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the cost of
  providing healthcare services in those areas;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the cost of
  implementation and on-going administration of newly developed programs and
  services;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our inability to
  achieve sufficient scale of operations to cover the administration and
  marketing costs associated with entering new markets, and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>demographics and
  population density.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our ability to manage our
  growth and compete effectively will depend, in part, on our success in
  addressing these demands and risks. Any failure by us to effectively manage our
  growth could have a material adverse effect on our business, financial
  condition or results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Any failure to manage sales and administrative costs could
  impair profitability.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The level of our sales
  and administrative expenses affects our profitability. While we proactively
  attempt to manage these expenses effectively, increases in the cost of sales
  and marketing, staff-related expenses, investment in new products, greater
  emphasis on small group and individual health insurance products, acquisitions,
  and implementation of regulatory requirements, among others, may occur from
  time to time.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">There can be no assurance
  that we will be able to contain our sales expenses in line with our actual
  levels of production and our administrative expenses in line with our
  membership base. This may result in a material adverse effect on our financial
  position, results of operations and cash flows.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Most of our assets are invested in fixed income securities
  and are subject to market fluctuations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our investment portfolio
  consists almost entirely of fixed income securities. The fair market value of
  these assets and the investment income from these assets fluctuate depending on
  general economic and market conditions. The fair market value of our
  investments in fixed income securities generally increases or decreases in an
  inverse relationship with fluctuations in interest rates, </font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">19</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='19',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">while net investment income realized by us from future
  investments in fixed income securities will generally increase or decrease with
  interest rates. In addition, actual net investment income or cash flows from
  investments that carry prepayment risk, such as mortgage-backed and other
  asset-backed securities, may differ from those anticipated at the time of
  investment as a result of interest rate fluctuations. Because substantially all
  of our fixed income securities are classified as available for sale, changes in
  the market value of our securities are reflected in our balance sheet. Similar
  treatment is not available for liabilities. Therefore, interest rate
  fluctuations could adversely affect our results of operations and financial
  condition.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Further deterioration in the mortgage-backed securities
  market or significant deterioration in the mortgage-backed securities we hold
  could adversely affect our results of operations or financial condition.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">As of December&nbsp;31,
  2007, we held securities with a par value of approximately $147&nbsp;million
  with exposure to Subprime mortgages. The market value of these securities was
  $100&nbsp;million at December&nbsp;31, 2007, representing approximately 6% of
  our cash and invested assets. During the fourth quarter of 2007, we recognized
  other than temporary impairment in the value of some of our securities with
  exposure to subprime mortgages totaling $41.0&nbsp;million. As the economy in
  general and the market for mortgage-backed securities with exposure to Subprime
  mortgages have deteriorated over the last year, these securities have become
  increasingly illiquid. If the mortgage-backed securities with exposure to
  Subprime mortgages in our portfolio experience significant rates of default, if
  the market for these securities continues to experience lack of liquidity or
  otherwise deteriorates or this lack of liquidity worsens, we might need to
  continue to impair the value of these securities, which could adversely effect
  our results of operations or financial condition.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Additionally,
  mortgage-backed securities are subject to prepayment risks that vary with
  interest rates, among other things. During periods of declining interest rates,
  mortgage-backed securities generally prepay faster as the underlying mortgages
  are prepaid or refinanced by borrowers in order to take advantage of lower
  rates. Mortgage-backed securities that have an amortized cost greater than par
  because we purchased them at a premium may incur a reduction in yield or a loss
  as a result of these prepayments.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Legal and regulatory investigations and actions are
  increasingly common in the insurance and managed care business and may result
  in financial losses and harm our reputation.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We face a significant
  risk of class action lawsuits and other litigation and regulatory
  investigations and actions in the ordinary course of operating our businesses.
  Due to the nature of our businesses, we are subject to a variety of legal and
  regulatory actions relating to our business operations, such as the design,
  management and offering of products and services. The following are examples of
  the types of potential litigation and regulatory investigations we face:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to sales or underwriting practices;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to the methodologies for calculating premiums;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to the denial or delay of health care benefit payments;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to claims payments and procedures;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>additional
  premium charges for premiums paid on a periodic basis;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to the denial, delay or rescission of insurance coverage;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>challenges to
  the use of software products used in administering claims;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to our administration of our Medicare Part&nbsp;D and other healthcare and
  insurance offerings and PBM;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims by
  government agencies relating to compliance with laws and regulations;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>medical
  malpractice or negligence actions based on our medical necessity decisions or
  brought against us on the theory that we are liable for our providers&#146; alleged
  malpractice or negligence;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to product design;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>allegations of
  anti-competitive and unfair business activities;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>provider
  disputes over compensation and termination of provider contracts;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>allegations of
  discrimination;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims related
  to the failure to disclose business practices;</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">20</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='20',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>allegations of
  breaches of duties to customers;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to inadequate or incorrect disclosure or accounting in our public filings;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>allegations of
  agent misconduct;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to suitability of annuity products;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to customer audits and contract performance; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>claims relating
  to dispensing of drugs associated with our in-house mail order pharmacy.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Plaintiffs in class
  action and other lawsuits against us may seek very large or indeterminate amounts,
  and punitive and treble damages, which may remain unknown for substantial
  periods of time. We are also subject to various regulatory inquiries, such as
  information requests, formal and informal inquiries, subpoenas and books and
  record examinations, from state, Federal and international regulators and other
  authorities. A substantial legal liability or a significant regulatory action
  against us could have an adverse effect on our business, financial condition
  and results of operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Items headed &#147;Legal
  Proceedings&#148; and &#147;Commitments and Contingencies&#148; in &#160;the notes&nbsp;to the consolidated financial
  statements included in the reports into which this report may be incorporated
  by reference may contain a description of material legal actions in which we are
  currently involved.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We cannot predict the
  outcome of actions we face with certainty, and we are incurring expenses in the
  defense of our current matters. We also may be subject to additional litigation
  in the future. Litigation could materially adversely affect our business or
  results of operations because of the costs of defending these cases, the costs
  of settlement or judgments against us, or the changes in our operations that
  could result from litigation. The defense of any these actions may be time-consuming
  and costly, and may distract our management&#146;s attention. In addition, we could
  suffer significant harm to our reputation, which could have an adverse effect
  on our business, financial condition and results of operations. As a result, we
  may incur significant expenses and may be unable to effectively operate our
  business.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Potential liabilities may
  not be covered by insurance or indemnity, insurers or indemnifying parties may
  dispute coverage or may be unable to meet their obligations or the amount of
  our insurance or indemnification coverage may be inadequate. In addition, some
  types of damages, like punitive damages or damage for willful acts, may not be
  covered by insurance. The cost of business insurance coverage has increased
  significantly. Insurance coverage for all or some forms of liability may become
  unavailable or prohibitively expensive in the future. We cannot assure you that
  we will be able to obtain insurance coverage in the future, or that insurance
  will continue to be available on a cost-effective basis, if at all.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">The health care industry
  continues to receive significant negative publicity regarding the public&#146;s
  perception of it. This publicity and public perception have been accompanied by
  increased litigation, in some cases resulting in</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>large jury
  awards,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>legislative
  activity,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>regulation and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>governmental
  review of industry practices.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">These factors, as well as any negative publicity about
  us in particular, could adversely affect our ability to market our products or
  services and to attract and retain members, may require us to change our
  products or services, may increase the regulatory burdens under which we
  operate and may require us to pay large judgments or fines. Any combination of
  these factors could further increase our cost of doing business and adversely
  affect our financial position, results of operations and cash flows.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The occurrence of natural or man-made disasters could
  adversely affect our financial condition and results of operation.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We are exposed to various
  risks arising out of natural disasters, such as</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>earthquakes,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>hurricanes,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>floods,
  tornadoes,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>pandemic health
  events such as avian influenza, and</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">21</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='21',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>man-made
  disasters, such as acts of terrorism and military actions.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">For example, a natural or man-made disaster could lead
  to unexpected changes in persistency rates as policyholders and members who are
  affected by the disaster may be unable to meet their contractual obligations,
  such as payment of premiums on our insurance policies. The continued threat of
  terrorism and ongoing military actions may cause significant volatility in
  global financial markets, and a natural or man-made disaster could trigger an
  economic downturn in the areas directly or indirectly affected by the disaster.
  These consequences could, among other things, result in a decline in business
  and increased claims from those areas. Disasters also could disrupt
  communications and financial services and other aspects of public and private
  infrastructure, which could disrupt our normal business operations.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">A natural or man-made
  disaster also could disrupt the operations of our counterparties or result in
  increased prices for the products and services they provide to us. In addition,
  a disaster could adversely affect the value of the assets in our investment
  portfolio if it affects companies&#146; ability to pay principal or interest on
  their securities.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our business may suffer if we are not able to hire and
  retain sufficient qualified personnel or if we lose our key personnel.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our future success
  depends partly on the continued contribution of our senior management and other
  key employees. While we currently have employment agreements with key
  executives, these do not guarantee that the services of these executives will
  continue to be available to us. The loss of the services of any of our senior
  management, or other key employees, could harm our business. In addition,
  recruiting and retaining the personnel we require to effectively compete in our
  markets may be difficult. If we fail to hire and retain qualified employees, we
  may not be able to maintain and expand our business.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If we fail to effectively execute our Medicare initiatives
  and our other operational and strategic initiatives, our business could be
  materially adversely affected.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our future performance
  depends in large part upon our management team&#146;s ability to execute our
  strategy to position us for the future. This strategy relies to a significant
  extent on opportunities created by the MMA. The MMA offers new opportunities in
  our plan and private fee-for-service Medicare Advantage products and
  otherMedicare programs, as well as Medicare Part&nbsp;D plans. We have made
  substantial investments in our Medicare programs to enhance our ability to
  participate in these programs. Over the past few years we have increased the
  size of our Medicare geographic reach since the enactment of the MMA through
  expanded Medicare product offerings. We offer both stand-alone Medicare Part&nbsp;D
  plans and Medicare Advantage plans with prescription drug coverage in addition
  to our other product offerings. For 2008, we offer Medicare Part&nbsp;D plans
  in 50 states as well as the District of Columbia, Puerto Rico and the U.S.
  Virgin Island. We offer private fee-for-service plans in 47 states, up from 35
  states in 2007. The growth in our Medicare membership and revenues, as well as
  the timing of membership enrollment and the speed with which the individual
  members meet their deductibles and cost-sharing obligations, impacts the
  pattern of our quarterly earnings.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our contracts with CMS,
  as well as applicable Medicare Part&nbsp;D regulations and federal and state
  laws, requires us to, among other obligations:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>comply with
  disclosure, filing, record-keeping and marketing rules;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>operate quality
  assurance, drug utilization management and medication therapy management
  programs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>support
  e-prescribing initiatives;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>implement
  grievance, appeals and formulary exception processes;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>comply with
  payment protocols, such as the return of overpayments to CMS and, in specified
  circumstances, coordination with state pharmacy assistance programs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>use approved
  networks and formularies, and provide access to these networks to any willing
  pharmacy;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>provide
  emergency out-of-network coverage; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>adopt a
  comprehensive Medicare and Fraud, Waste and Abuse compliance program.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Any contractual or regulatory non-compliance on our
  part could entail significant sanctions and monetary penalties.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">CMS has announced that
  the 2008 PFFS selling season will run from November&nbsp;15, 2007 through March&nbsp;31,
  2008, which is shorter than the 2007 selling season, which was extended by CMS
  beyond March&nbsp;31, 2007. The shorter than anticipated 2008 selling season
  could have a material adverse effect on our business and results of operations.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">22</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='22',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-03.htm',USER='dtodman',CD='May 10 15:04 2008' -->
  
  
  
  <br clear="all" style="page-break-before:always;">
  <div style="font-family:Times New Roman;">
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Because our Medicare Advantage premiums, which generate most
  of our Medicare Advantage revenues, are fixed by contract, we are unable to
  increase our Medicare Advantage premiums during the contract term if our
  corresponding medical benefits expense exceeds our estimates.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Most of our Medicare
  Advantage revenues are generated by premiums consisting of fixed monthly
  payments per member. We use a significant portion of our revenues to pay the
  costs of health care services delivered to our members. The principal costs
  consist of claims payments, capitation payments and other costs incurred to
  provide health insurance coverage to our members. Generally, premiums in the
  health care business are fixed on an annual basis by contract, and we are
  obligated during the contract period to provide or arrange of the provision of
  healthcare services as established by the Federal government.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We are unable to increase
  the premiums we receive under these contracts during the then-current terms. If
  our medical expenses exceed our estimates, except in very limited circumstances
  or as a result of risk score adjustments for member acuity, we generally cannot
  recover costs we incur in excess of our medical cost projections in the
  contract year through higher premiums. As a result, our profitability depends,
  to a significant degree, on our ability to adequately predict and effectively
  manage our medical expenses related to the provision of healthcare services.
  Accordingly, the failure to adequately predict and control medical expenses and
  to make reasonable estimates and maintain adequate accruals for incurred but
  not reported, claims, known as IBNR, may have a material adverse effect on our
  financial condition, results of operations, or cash flows. If our estimates of
  reserves are inaccurate, our ability to take timely correction actions or to
  otherwise establish appropriate premium pricing could be adversely affected.
  Failure to adequately price our products or to estimate sufficient medical
  claim reserves may result in a material adverse effect on our financial
  position, results of operations and cash flows. In addition, to the extent that
  CMS or Congress takes action to reduce the levels of payments to Medicare
  Advantage providers, our revenues would be adversely affected.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We estimate the costs of
  our future medical claims and other expenses using actuarial methods and
  assumptions based upon claim payment patterns, cost trends, product mix,
  seasonality, medical inflation, historical developments, such as claim
  inventory levels and claim receipt patterns, and other relevant factors. We
  continually review estimates of future payments relating to medical claims
  costs for services incurred in the current and prior periods and make necessary
  adjustments to our reserves. However, historically, our medical expenses as a
  percentage of premium revenue have fluctuated. The principal factors that may
  cause medical expenses to exceed our estimates are:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increased
  utilization of medical facilities and services and prescription drugs;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>increased cost
  of services;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our membership
  mix;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>variances in
  actual versus estimated levels of cost associated with new products, benefits
  or lines of business, product changes or benefit level changes;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>periodic
  renegotiation of hospital, physician and other provider contracts, or the
  consolidation of these entities;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>membership in
  markets lacking adequate provider networks;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>changes in the
  demographics of our members and medical trends affecting them;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>termination of
  capitation arrangements resulting in the transfer of membership to
  fee-for-service arrangements;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>possible changes
  in our pharmacy rebate program with drug manufacturers;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the occurrence
  of acts of terrorism, public health epidemics, severe weather events or other
  catastrophes;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the introduction
  of new or costly treatments and technologies;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>medical cost
  inflation;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>government
  mandated benefits or other regulatory changes; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>contractual
  disputes with hospitals, physicians and other providers.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Because of the
  relatively high average age of the Medicare population, medical expenses for
  our Medicare Advantage plans may be particularly difficult to control. We may
  not be able to continue to manage these expenses effectively in the future. If
  our medical expenses increase, our profits could be reduced or we may not
  remain profitable.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">23</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='23',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We derive a substantial portion of our Medicare Advantage
  health plan revenues and profits from Medicare Advantage health plan operations
  in Texas, and legislative actions, economic conditions or other factors that
  adversely affect those operations could materially reduce our revenues and
  profits.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We derive a substantial
  portion of our Medicare Advantage health plan revenues and profits from
  Medicare Advantage health plan operations in Texas. If we are unable to
  continue to operate in Texas, or if we must significantly curtail our current
  operations in any portion of Texas, our revenues will decrease materially. Our
  reliance on our operations in Texas could cause our revenues and profitability
  to change suddenly and unexpectedly, depending on legislative actions, economic
  conditions and similar factors. In addition, our market share in Texas may make
  it more difficult for us to expand our membership in existing markets in Texas.
  Our inability to continue to operate in Texas, or a decrease in the revenues or
  profitability of our Texas operations, would harm our overall operating
  results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our net income may decline if our insurance premium rates
  are not adequate.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We set the premium rates
  on our insurance policies based on facts and circumstances known at the time we
  issue the policies and on assumptions about numerous variables, such as</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the actuarial
  probability of a policyholder incurring a claim,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the severity and
  duration of the claim,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the mortality
  rate of our policyholder base,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the persistency
  or renewal rate of our policies in force,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our commission
  and policy administration expenses, and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>the interest
  rate earned on our investment of premiums.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">In setting premium rates, we consider historical
  claims information, industry statistics and other factors. If our actual claims
  experience proves to be less favorable than we assumed and we are unable to
  raise our premium rates, our net income may decrease. We generally cannot raise
  our premiums in any state unless we first obtain the approval of the insurance
  regulator in that state. We review the adequacy of our accident and health
  premium rates regularly and file rate increases on our products when we believe
  permitted premium rates are too low. When determining whether to approve or
  disapprove our rate increase filings, the various state insurance departments
  take into consideration</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our actual
  claims experience compared to expected claims experience,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>policy
  persistency, which means the percentage of policies that are in-force at
  specified intervals from the issue date compared to the total amount originally
  issued,</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>investment
  income and</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>medical cost
  inflation.</p>
  
  <p style="margin:0in 0in .0001pt 1.0in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">If the regulators do not believe these factors warrant
  a rate increase, it is possible that we will not be able to obtain approval for
  premium rate increases from currently pending requests or requests filed in the
  future. If we are unable to raise our premium rates because we fail to obtain
  approval for rate increases in one or more states, our net income may decrease.
  If we are successful in obtaining regulatory approval to raise premium rates,
  the increased premium rates may reduce the volume of our new sales and cause
  existing policyholders to let their policies lapse. This would reduce our
  premium income in future periods. Increased lapse rates also could require us
  to expense all or a portion of the deferred policy costs relating to lapsed
  policies in the period in which those policies lapse, reducing our net income
  in that period.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We hold reserves for expected claims, which are estimated,
  and these estimates involve an extensive degree of judgment; if actual claims
  exceed reserve estimates, our results could be materially adversely affected.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Our benefits incurred
  expense includes estimates of IBNR. We, together with our internal and external
  consulting actuaries, estimate our claim liabilities using actuarial methods
  based on historical data adjusted for payment patterns, cost trends, product
  mix, seasonality, utilization of healthcare services and other relevant
  factors. Actual conditions, however, could differ from those assumed in the
  estimation process, and those differences could be material. Due to the
  uncertainties associated with the factors used in these assumptions, the actual
  amount of benefit expense that we incur may be materially more or less than the
  amount of IBNR originally estimated, and materially different amounts could be
  reported in our financial statements for a particular period under different
  conditions or using different assumptions. We make adjustments, if necessary,
  to benefits incurred expense when the criteria used to determine IBNR change
  and when we ultimately determine actual claim costs. If our estimates of IBNR
  are inadequate in the future, </font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">24</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='24',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">our reported results of operations will be adversely
  affected. Further, our inability to estimate IBNR accurately may also affect
  our ability to take timely corrective actions or otherwise establish
  appropriate premium pricing, further exacerbating the extent of any adverse
  effect on our results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our reserves for future insurance policy benefits and claims
  may prove to be inadequate, requiring us to increase liabilities and resulting
  in reduced net income and shareholders&#146; equity.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We calculate and maintain
  reserves for the estimated future payment of claims to our insurance policyholders
  using the same actuarial assumptions that we use to set our premiums. For our
  accident and health insurance business, we establish active life reserves for
  expected future policy benefits, plus a liability for due and unpaid claims,
  claims in the course of settlement, and incurred but not reported claims. Many
  factors can affect these reserves and liabilities, such as economic and social
  conditions, inflation, hospital and medical costs, changes in doctrines of
  legal liability and extra-contractual damage awards. Therefore, we necessarily
  base our reserves and liabilities on extensive estimates, assumptions and prior
  years&#146; statistics. When we acquire other insurance companies or blocks of
  insurance, our assessment of the adequacy of acquired policy liabilities is
  subject to similar estimates and assumptions. Establishing reserves involves
  inherent uncertainties, and it is possible that actual claims could materially
  exceed our reserves and have a material adverse effect on our results of
  operations and financial condition. Our net income depends significantly upon
  the extent to which our actual claims experience is consistent with the
  assumptions we used in setting our reserves and pricing our policies. If our
  assumptions with respect to future claims are incorrect, and our reserves are
  insufficient to cover our actual losses and expenses, we would be required to
  increase our liabilities resulting in reduced net income, statutory surplus and
  shareholders&#146; equity.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">The availability of reinsurance on acceptable terms and the
  financial stability of our reinsurers could impact our ability to manage risk
  and increase the volume of insurance that we sell.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We utilize reinsurance
  agreements with larger, financially sound and highly- rated reinsurers to
  mitigate insurance risks that we underwrite. We enter into reinsurance
  arrangements with unaffiliated reinsurance companies to limit our exposure on
  individual claims and to limit or eliminate risk on our non-core or
  under-performing blocks of business. As of December&nbsp;31, 2007, we ceded to
  reinsurers approximately 16% of our gross annualized insurance premium in
  force, excluding the State of Connecticut employee business, which is 100%
  ceded to PharmaCare Re. Reinsurance arrangements leave us exposed to two risks:
  Credit risk and replacement risk. Credit risk exists because reinsurance does
  not relieve us of our direct liability to our insureds for the portion of the
  risks ceded to reinsurers. We are exposed to the risk of a reinsurer&#146;s failure
  to pay in full and in a timely manner the claims we make against them in
  accordance with the terms of our reinsurance agreements, which could expose our
  insurance company subsidiaries to liabilities in excess of their reserves and
  surplus and could expose them to insolvency proceedings. The failure of a
  reinsurer to make timely claims payments to us could materially and adversely
  affect our results of operations and financial condition and our ability to
  make payments to our policyholders. Replacement risk exists because a reinsurer
  may cancel its participation on new business issued on advance notice. As a
  result, we would need to find reinsurance from another source to support our
  level of new business. The amount and cost of reinsurance available to us is
  subject, in large part, to prevailing market conditions beyond our control.
  Because our current reinsurance agreements are non-cancelable for business in
  force, non-renewal or cancellation of a reinsurance arrangement affects only
  new business and the reinsurer remains liable on business reinsured prior to
  non-renewal or cancellation. In the event that current reinsurers cancel their
  participation on new business, we would seek to replace them, possibly at
  higher rates. If we are not able to reinsure our life insurance products on
  acceptable terms, we would consider limiting the amount of this new business we
  issue. A failure to obtain reinsurance on acceptable terms would allow us to
  underwrite new business only to the extent that we are willing and able to bear
  the exposure to the new business on our own.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may experience future lapsation in our Medicare
  supplement business, requiring faster amortization of the deferred acquisition
  costs.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We experienced higher
  than expected lapsation in our Medicare supplement business beginning in the
  third quarter of 2005, which continued through the second quarter of 2007 and
  returned to the lower level thereafter. We believe competitive pressure from
  other Medicare supplement companies and Medicare Advantage products, as well as
  the departure of some of our sales managers, and other factors, contribute to
  the level of lapsation. This excess lapsation required us to accelerate the
  amortization of the deferred acquisition cost and present value of future
  profits assets associated with the business that lapsed. We cannot give
  assurances that lapsation of our Medicare supplement business will decline from
  the levels experienced from 2005 to 2007, requiring faster amortization of the
  deferred costs.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may experience higher than expected loss ratios in our
  Medicare supplement business, which could materially adversely affect our
  results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We may experience higher
  than expected loss ratios on our Medicare supplement business. In the past, as
  a result of higher than anticipated Part&nbsp;B costs, relating to outpatient
  doctors, and skilled nursing facility incidence, we did not see our historical
  pattern of seasonal reduction in loss ratios in the latter part of the year. We
  actively seek to obtain appropriate rate action in an effort to reverse the
  trend in these numbers; however, we can make no assurances that future rate
  increases will be obtained, or if obtained, will be sufficient. We also cannot
  give assurance that our Medicare supplement loss ratio will not continue to
  increase beyond what we currently anticipate.</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">25</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='25',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may not be able to compete successfully if we cannot
  recruit and retain insurance agents, which could materially adversely affect
  our business and ability to compete.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We distribute our
  products principally through career agents and independent agents who we
  recruit and train to market and sell our products. We also engage managing
  general agents from time to time to recruit agents and develop networks of
  agents in various states. We compete with other insurance companies for
  productive agents, primarily on the basis of our financial position, support
  services, compensation and product features. It can be difficult to
  successfully compete for productive agents with larger insurance companies that
  have higher financial strength ratings than we do. Our business and ability to
  compete will suffer if we are unable to recruit and retain insurance agents or
  if we lose the services provided by our managing general agents.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We may be required to refund or reduce premiums if our
  premium rates are determined to be too high.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Insurance regulators
  require that we maintain minimum statutory loss ratios on some of the insurance
  products that we sell. We must therefore pay out, on average, a specified
  minimum percentage of premiums as benefits to policyholders. State regulations
  also mandate the manner in which insurance companies may compute loss ratios
  and the manner in which compliance is measured and enforced. If our insurance
  products are not in compliance with state mandated minimum loss ratios, state
  regulators may require us to refund or reduce premiums.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We have stopped selling annuities and long term care
  insurance and the premiums that we charge for the long term care policies that
  remain in force may not be adequate to cover the claims expenses that we incur.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We have concluded that
  the sale of long term care insurance and annuities does not fit within our
  strategic or financial goals.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We began to curtail the
  sale of new long-term care business in 2003, and stopped all new sales at the
  end of 2004. As of December&nbsp;31, 2007, approximately, $35.1&nbsp;million of
  annualized premium remains in force, of which we retain approximately
  $22.8&nbsp;million. The overall block of business continues to generate losses;
  a portion of the losses we have incurred relates to a specific block of Florida
  home health care business that we stopped selling in 1999. There can be no
  assurance that current premiums we charge will be adequate to cover the claims
  expenses that we will incur in the future. There is also no assurance that rate
  increases that we may seek will be approved by the applicable state regulators
  or, if approved, will be adequate to fully mitigate adverse loss experience.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">We stopped selling annuity
  products in 2006. As a result of not offering new products, our agents and
  policyholders might seek to move their deposits to insurance companies that are
  active in this business, causing an increase in the lapsation of our in force
  annuity deposits. This could require us to amortize a higher than expected
  amount of deferred acquisition costs associated with the terminated policies
  and might also require us to sell bonds that were purchased to provide an
  appropriate interest spread to these interest sensitive products, and would
  negatively impact our operating results.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">A reduction in the number of members in our health plans
  could adversely affect our results of operations.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">A reduction in the number
  of members in our health plans could adversely affect our results of
  operations. The principal factors that could contribute to the loss of
  membership are:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>competition in
  premium or plan benefits from other health care benefit companies;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>reductions in
  the number of employers offering health care coverage;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>competition from
  physicians or other provider groups who may elect to form their own health
  plans;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>inability to
  develop and maintain satisfactory relationships with the providers of care to
  our members;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>reductions in
  work force by existing customers;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our increases in
  premiums or benefit changes;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>our exit from a
  market or the termination of a health plan;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>negative
  publicity and news coverage relating to our company or the managed health care
  industry generally; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>catastrophic
  events, such as epidemics, natural disasters and man-made catastrophes, and
  other unforeseen occurrences.</p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">26</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='26',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div style="font-family:Times New Roman;">
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">We have incurred and may in the future incur significant
  expenses in connection with the implementation and expansion of our new
  Medicare Advantage plans, which could adversely affect our operating results.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">For the 2008 selling
  season, we expanded the markets in which we offer our Medicare Advantage
  products. We expanded our private fee-for-service plans from 35 to 47 states
  and our HealthPlans to new markets in North Texas and Wisconsin. We expect to
  expand the number of markets for 2009 as well. In connection with this
  expansion, we have incurred expenses to upgrade and improve our infrastructure,
  technology, and systems to manage these products, and will in the future incur
  additional expenses. In particular, we incurred the following expenses in
  connection with the implementation and expansion of our Medicare Advantage
  program:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>hiring and
  training of personnel to establish and manage systems, operations, regulatory
  relationships, and materials;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>systems
  development and upgrade costs, such as hardware, software and development
  resources;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>marketing and
  sales;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>enrolling new
  members;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>developing and
  distributing member materials such as ID cards and member handbooks; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>handling sales
  inquiry and customer service calls.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">There can be no
  assurance that we will recoup these expenditures or that they will result in
  profitable operations, currently, or in the future.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">Our stock price and trading volume may be volatile, which
  could result in a decrease in the price of our common stock.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">From time to time, the
  price and trading volume of our common stock may experience periods of
  significant volatility. Company-specific issues and developments generally in
  the health care and insurance industries, the regulatory environment and the
  capital markets may cause this volatility. The principal events and factors
  that we have identified that may cause our stock price and trading volume to
  fluctuate are:</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>variations in
  our operating results;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>changes in the
  market&#146;s expectations about our future operating results;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>changes in
  financial estimates and recommendations by securities analysts concerning our
  company or the health care or insurance industries generally;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>operating and
  stock price performance of other companies that investors may deem comparable;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>news reports
  relating to trends in our markets;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>changes in the
  laws and regulations affecting our business;</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>acquisitions and
  financings by us or others in our industry; and</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="font-size:10.0pt;margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Symbol" style="font-size:10.0pt;">&#183;</font><font size="1" style="font-size:3.0pt;">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; </font>sales of
  substantial amounts of our common stock by our directors and executive officers
  or principal shareholders, or the perception that these sales could occur.</p>
  
  <p style="margin:0in 0in .0001pt .75in;text-autospace:none;text-indent:-.25in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">If we are unable to maintain effective internal controls
  over financial reporting, investors could lose confidence in the reliability of
  our financial statements, which could result in a decrease in the price of our
  common stock.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Because of our status as
  a public company, we are required to test our financial, internal, and
  management control systems to meet obligations imposed by the Sarbanes-Oxley
  Act of 2002. These control systems relate to our corporate governance,
  corporate control, internal audit, disclosure controls and procedures, and
  financial reporting and accounting systems. Our disclosure controls and
  procedures and our internal control over financial reporting may not prevent or
  detect all errors and all fraud. A control system, no matter how well designed
  and operated, can provide only reasonable, not absolute, assurance that the
  objectives of the control system are met. The design of a control system must
  reflect the fact that there are resource constraints, and the benefits of
  controls must be considered relative to their costs. Further, because of the
  inherent limitations in all control systems, no evaluation of controls can
  provide absolute assurance that misstatements due to error or fraud will not
  occur or that all control issues and instances of fraud, if any, within the
  Company have been detected. Among these inherent limitations are the realities
  that judgments in decision-making can be faulty and that breakdowns can occur
  because of simple error or mistake. The individual acts of some persons or the
  collusion of two or more people can circumvent controls. The design of any
  system of controls is based in part on assumptions about the likelihood of
  future events, and there can be no assurance that any design will succeed in
  achieving its stated goals under all potential future </font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">27</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='27',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  <br clear="all" style="page-break-before:always;">
  
  
  <div>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">conditions. Projections of any evaluation of controls
  effectiveness to future periods are subject to risks. Over time, controls may
  become inadequate because of changes in conditions or deterioration in the
  degree of compliance with policies or procedures.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">If we conclude that we do
  not have effective internal controls over financial reporting or if our
  independent auditors are unable to conclude that our internal controls over
  financial reporting are effective, investors could lose confidence in the
  reliability of our financial statements, which could result in a decrease in
  the value of our common stock. Our assessment of our internal controls over
  financial reporting may also uncover material weaknesses, significant
  deficiencies or other issues with these controls that could also result in
  adverse investor reaction. These results may also subject us to adverse
  regulatory consequences.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><b><i><font size="2" face="Times New Roman" style="font-size:10.0pt;font-style:italic;font-weight:bold;">State insurance laws and anti-takeover provisions in our
  organizational documents could make an acquisition of us more difficult and may
  prevent attempts by our shareholders to replace or remove our current
  management.</font></i></b></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Provisions of state
  insurance laws, the business corporation law of the State of New York, where we
  are incorporated, and our certificate of incorporation and bylaws, as well as
  the percentage of our common stock owned by our management, directors and
  equity investors may delay or prevent an acquisition of us or a change in our
  management or similar change in control transaction, such as transactions in
  which shareholders might otherwise receive a premium for their shares over then
  current prices or that shareholders may otherwise deem to be in their best
  interests. In addition, these provisions may frustrate or prevent any attempts
  by our shareholders to replace or remove our current management by making it
  more difficult for shareholders to replace members of our board of directors.
  Because our board of directors is responsible for appointing the members of our
  management team, these provisions could in turn affect any attempt by our
  shareholders to replace current members of our management team.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><b><font size="2" face="Times New Roman" style="font-size:10.0pt;font-weight:bold;">SIGNATURES</font></b></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;text-indent:.5in;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Pursuant to the requirements of the Securities
  Exchange Act of 1934, the registrant has duly caused this report to be signed
  on its behalf by the undersigned hereunto duly authorized.</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <table border="0" cellspacing="0" cellpadding="0" width="100%" style="border-collapse:collapse;width:100.0%;">
   <tr>
    <td width="45%" valign="top" style="padding:0in .7pt 0in .7pt;width:45.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="54%" colspan="2" valign="top" style="padding:0in .7pt 0in .7pt;width:54.16%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">UNIVERSAL AMERICAN CORP.</font></p>
    </td>
   </tr>
   <tr>
    <td width="45%" valign="top" style="padding:0in .7pt 0in .7pt;width:45.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="4%" valign="top" style="padding:0in .7pt 0in .7pt;width:4.32%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">By:</font></p>
    </td>
    <td width="49%" valign="top" style="border:none;border-bottom:solid windowtext 1.0pt;padding:0in .7pt 0in .7pt;width:49.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">/s/ Mitchell J. Stier</font></p>
    </td>
   </tr>
   <tr>
    <td width="45%" valign="top" style="padding:0in .7pt 0in .7pt;width:45.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="4%" valign="top" style="padding:0in .7pt 0in .7pt;width:4.32%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="49%" valign="top" style="padding:0in .7pt 0in .7pt;width:49.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Mitchell J. Stier</font></p>
    </td>
   </tr>
   <tr>
    <td width="45%" valign="top" style="padding:0in .7pt 0in .7pt;width:45.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="4%" valign="top" style="padding:0in .7pt 0in .7pt;width:4.32%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="49%" valign="top" style="padding:0in .7pt 0in .7pt;width:49.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Senior Vice President and </font></p>
    </td>
   </tr>
   <tr>
    <td width="45%" valign="top" style="padding:0in .7pt 0in .7pt;width:45.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="4%" valign="top" style="padding:0in .7pt 0in .7pt;width:4.32%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:1.0pt;">&nbsp;</font></p>
    </td>
    <td width="49%" valign="top" style="padding:0in .7pt 0in .7pt;width:49.84%;">
    <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;General Counsel</font></p>
    </td>
   </tr>
  </table>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p style="margin:0in 0in .0001pt;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">Date:&nbsp;May&nbsp;12, 2008</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">&nbsp;</font></p>
  
  <p align="center" style="margin:0in 0in .0001pt;text-align:center;text-autospace:none;"><font size="2" face="Times New Roman" style="font-size:10.0pt;">28</font></p>
  
  <div style="margin:0in 0in .0001pt;text-autospace:none;"><hr size="3" width="100%" noshade color="#010101" align="left"></div>
  
  </div>
  <!-- SEQ.=1,FOLIO='28',FILE='C:\JMS\dtodman\08-14082-1\task2931752\14082-1-ba-05.htm',USER='dtodman',CD='May 10 15:05 2008' -->
  
  
  </body>
  
  </html>
metadata_documents: [{"type": "8-K", "sequence": "1", "filename": "a08-14082_18k.htm", "description": "8-K", "secsgml_size_bytes": 341137}]
metadata_filer: {"company-data": {"conformed-name": "UNIVERSAL AMERICAN FINANCIAL CORP", "cik": "0000709878", "assigned-sic": "6324", "irs-number": "112580136", "state-of-incorporation": "NY", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "8-K", "act": "34", "file-number": "001-08506", "film-number": "08823511"}, "business-address": {"street1": "SIX INTERNATIONAL DRIVE", "street2": "SUITE 190", "city": "RYE BROOK", "state": "NY", "zip": "10573-1068", "phone": "9149345200X319"}, "mail-address": {"street1": "SIX INTERNATIONAL DRIVE", "street2": "SUITE 190", "city": "RYE BROOK", "state": "NY", "zip": "10573-1068"}, "former-company": {"former-conformed-name": "UNIVERSAL HOLDING CORP", "date-changed": "19920703"}}
text: UNITED
  STATES
  SECURITIES
  AND EXCHANGE COMMISSION
  Washington,
  D.C. 20549
  FORM 8-K
  CURRENT
  REPORT
  Pursuant
  to Section 13 or 15(d) of the
  Securities
  Exchange Act of 1934
  Date of Report (Date of
  earliest event reported):
  May 12,
  2008
  UNIVERSAL
  AMERICAN CORP.
  (Exact name of Registrant
  as Specified in Charter)
  New
    York
  0-11321
  11-2580136
  (State of incorporation
    or
  (Commission File
    Number)
  (I.R.S. Employer
  organization)
  Identification No.)
  Six
  International Drive, Suite 190
  Rye
  Brook, New York 10573
  (Address of Principal
  Executive Offices) (Zip Code)
  (914)
  934-5200
  (Registrant's telephone
  number, including area code)
  N/A
  (Former Name or Former
  Address, if Changed Since Last Report)
  Check the appropriate box below if the Form 8-K filing is intended
  to simultaneously satisfy the filing obligation of the registrant under any of
  the following provisions:
  o
  Written communications pursuant to Rule 425
  under the Securities Act (17 CFR 230.425)
  o
  Soliciting material pursuant to Rule 14a-12
  under the Exchange Act (17 CFR 240.14a-12)
  o
  Pre-commencement communications pursuant
  to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
  o
  Pre-commencement communications pursuant
  to Rule 13e-4(c) under the Exchange Act (17 CFR 24013e-4(c))
  Item 8.01.
  Other Events
  (a)
  Litigation Settlement
  . On July 25,
  2007, plaintiffs filed a purported class action entitled
  Elizabeth A. Conolly, Thomas McCormack, Shelly Z.
  Zhang, Green Meadows Partners, James Stellato and Rocco Sorrentino vs.
  Universal American Financial Corporation, Richard A. Barasch, Lee Equity
  Partners LLC, Perry Capital LLC, Union Square Partners
  Management LLC, Welsh, Carson, Anderson & Stowe, Barry Averill,
  Bradley E. Cooper, Mark M. Harmeling, Bertram Harnett, Linda H. Lamel, Eric W.
  Leathers, Patrick J. McLaughlin, Robert A. Spass, and Robert F. Wright
  in the Supreme Court for New York State, Westchester County. The complaint
  alleges that
  ·
  the
  defendants who are our directors allegedly breached fiduciary duties they owed
  to our shareholders in connection with our entering into the merger agreement
  to acquire MemberHealth and concurrent agreements with equity investors for
  these equity investors to acquire our securities, and the defendants who are
  equity investors purportedly aided and abetted that breach; and
  ·
  the
  defendants who are our directors allegedly breached their duty of candor to our
  shareholders by failing to disclose material information concerning these
  transactions.
  The plaintiffs sought,
  among other things, an injunction against the consummation of the transactions
  and damages in an amount to be determined.
  On May 6, 2008, the
  parties entered into a stipulation of settlement dated as of May 1, 2008,
  pursuant to which they have agreed to settle this action. The settlement
  stipulation provides for the amendment of our by-laws to require specified
  procedures in the event of related party transactions described in the
  amendment, and to require that we maintain a committee that includes at least
  one independent member of our board of directors to oversee the process of
  preparing bids for the MemberHealth Part D plans. The stipulation also
  provides for the payment of the plaintiffs' legal fees in an amount not to
  exceed $800,000. Our directors and officers insurance carrier has provisionally
  agreed to pay 75% of this amount. The payment of the plaintiffs' legal fees and
  other terms of the settlement are subject to the approval of the Court.
  Shareholders who are members of the class proposed to be certified in the
  settlement will receive notice describing the full terms of the settlement.
  (b)
  Risk Factors
  . On March 17, 2008,
  we filed with the Securities and Exchange Commission our annual report on Form 10-K
  for the fiscal year ended December 31, 2007. The annual report contains
  risk factors related to our business. These risk factors are included in this
  report below.
  Unless the context
  otherwise requires, references in this report to Universal American, our, we or
  us means Universal American Corp., together with its subsidiaries.
  Risk
  Factors
  This report contains both
  historical and forward-looking statements. We are making the forward-looking
  statements within the meaning of Section 27A of the Securities Act of
  1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
  as amended. We intend the forward-looking statements in this report or made by
  us elsewhere to be covered by the safe harbor provisions for forward-looking
  statements contained in the Private Securities Litigation Reform Act of 1995,
  and we are including this statement for purposes of complying with and relying
  upon these safe harbor provisions. We have based these forward-looking
  statements on our current expectations and projections about future events,
  trends and uncertainties. These forward-looking statements are not guarantees
  of future performance and are subject to risks, uncertainties and assumptions,
  such as, among other things, the information discussed below. If any of the
  following risks or uncertainties develops into actual events, this could
  significantly and adversely affect our business, prospects, financial condition
  or operating results. The risks and uncertainties described below are not the
  only ones that we face. Additional risks and uncertainties not presently known
  to us or that we currently believe to be immaterial also may adversely affect
  our business. In making these statements, we are not undertaking to address or
  update each factor in future filings or communications regarding our business
  or results. Our business is highly complicated, regulated and competitive with
  many different factors affecting results. If any of the following risks or
  uncertainties develops into actual events, this could significantly and
  adversely affect our business, prospects, financial condition and operating
  results. In that case, the trading price of our common stock could decline
  materially.
  The integration of MemberHealth and any future acquisition
  with our current business may not be successful, which could have a material
  adverse effect on our business, financial condition and results of operations.
  Our management will be
  required to devote a significant amount of time and attention to the process of
  integrating the operations of MemberHealth's business and any future
  acquisition with our historical business. This may decrease the time they will
  have to service existing customers, attract new customers and develop new
  services or strategies. The integration of the businesses may present
  significant systems and operational integration risks. We may be unable to
  integrate any acquired business into our
  2
  historical operations in an efficient, timely and
  effective manner, which could have a material adverse effect on our business,
  financial condition and results of operations.
  We may fail to realize the anticipated synergies, cost
  savings and growth opportunities we anticipate from the MemberHealth
  acquisition and any future acquisition, which could result in a material
  adverse effect on our financial position, results of operations and cash flows.
  The success of the
  MemberHealth acquisition and any future acquisition will depend, in part, on
  our ability to realize synergies, cost savings and growth opportunities that we
  anticipate from integrating our historical businesses with those of the
  acquired business. Our success in realizing these synergies, cost savings and
  growth opportunities, and the timing of this realization, depends on the
  successful integration of the businesses and operations. Even if we are able to
  integrate the businesses and operations successfully, there can be no assurance
  that this integration will result in the realization of the full benefits of
  synergies, cost savings and growth opportunities that we would expect from this
  integration or that these benefits will be achieved within the time frame we
  anticipate. For example, the elimination of duplicative costs may not be possible
  or may take longer than anticipated, the benefits from the acquisition may be
  offset by costs incurred or delays in integrating the businesses and regulatory
  authorities could impose conditions on the combined company's business.
  The growth of our Medicare
  Advantage and Medicare Part D business is an important part of our
  business strategy. Any failure to achieve this growth may have a material
  adverse effect on our financial position, results of operations or cash flows.
  In addition, the expansion of our Medicare Advantage and Medicare Part D
  business in relation to our other businesses may intensify the regulatory and
  other risks to us inherent in the Medicare Advantage and Medicare Part D
  business, which we describe elsewhere in this document. These expansion efforts
  may result in less diversification of our revenue stream.
  There can be no assurance
  that we will be able to successfully implement our operational and strategic
  initiatives that are intended to position us for future growth, or that the
  products we design will be accepted or adopted in the time periods assumed. We
  also make no assurance that investments in these initiatives will recoup their
  costs or be profitable in the future. Failure to implement this strategy may
  result in a material adverse effect on our financial position, results of
  operations and cash flows.
  The completion of the MemberHealth acquisition or any future
  acquisition could impact or cause disruptions in our businesses, which could
  have an adverse effect on our results of operations and financial condition.
  Specifically:
  ·
  our employees
  may experience uncertainty about their future roles with the combined company,
  which might adversely affect the combined company's ability to retain and hire
  key managers and other employees;
  ·
  the potential
  availability of "change in control" benefits could result in increased costs
  for us and difficulties in retaining our officers and employees;
  ·
  the direction of
  the attention of our management toward the completion of the acquisition and
  transaction-related considerations during the pendency of the transaction may
  prove to have diverted their attention from the day-to-day business operations
  of their respective companies, and the direction of the attention of our
  management toward the integration of the acquisition may currently and in the
  future divert their attention from the day-to-day business operations of their
  respective companies; and
  ·
  pharmaceutical
  manufacturers, retail pharmacies, pharmacy benefit management, or PBM,
  companies or other vendors or suppliers may seek to modify or terminate their
  business relationships with us.
  Following the MemberHealth acquisition, we may not be able
  to continue for an indefinite period, all of the prescription drug plans that
  we currently operate.
  Current rules promulgated
  by the Centers for Medicare and Medicaid Services, or CMS, will allow us to
  operate both our and MemberHealth's historical Part D plans for a period
  of up to the following three years for which contract bids may be submitted to
  CMS to operate Part D Plans. After that we will only be allowed to offer
  up to two basic benefit plans in each region. We may be allowed to offer up to
  four plans in a given region if the four plans include two plans with gap
  coverage and at least one plan that offers coverage of all generics and all
  preferred brands through the entire gap period. The restriction on the number
  of plans we may offer could adversely affect our results of operations.
  Sales of our common stock and the ownership of common stock
  by the former shareholders of MemberHealth and by the equity investors, or by
  the former shareholders of or the investors who finance any future acquisitions,
  may negatively affect the market price of our common stock.
  The market price of our
  common stock could decline as a result of sales of increased number of shares
  of our common stock in the market after the completion of the MemberHealth
  acquisition and any future acquisition or upon the sale of shares by the equity
  investors who finance any acquisition, or the perception that these sales could
  occur. All shares of our common stock received by an
  3
  acquired company's shareholders in the acquisition and
  not otherwise subject to the contractual restrictions are freely transferable
  following the consummation of the acquisition. All shares of our series A
  preferred stock and series B preferred stock received by the equity
  investors pursuant to the securities purchase agreements entered into in
  connection with the MemberHealth acquisition, and common shares issuable upon
  the direct or indirect conversion of those shares of preferred stock, will be
  transferable after a period of one year following the acquisition of the
  series A preferred stock and series B preferred stock by the equity
  investors. Shares of our stock issued to finance any future acquisition may be
  similarly transferable. These sales, or the possibility that these sales may
  occur, may also make it more difficult for us to obtain additional capital by
  selling equity securities in the future at a time and at a price that we deem
  appropriate.
  Following the
  MemberHealth acquisition and the completion of the transactions contemplated by
  the securities purchase agreements entered into in connection with the
  acquisition, the former shareholders of MemberHealth and the equity investors
  own a significant block of our voting shares and have the ability to appoint
  six of our thirteen directors. A similar situation could arise following a
  future acquisition. This may negatively affect the market price of our common
  stock.
  The MemberHealth acquisition may not be accretive and may
  cause dilution to our earnings per share, which may harm the market price of
  our common stock.
  Prior to the consummation
  of the MemberHealth acquisition, we anticipated that the acquisition would be
  accretive to earnings per share during the first full calendar year after the
  acquisition. This expectation was based on preliminary estimates and
  assumptions which may materially change after the completion of the
  acquisition.
  The combined businesses
  could encounter additional transaction and integration-related costs or other
  factors such as the failure to realize all of the benefits anticipated in the
  acquisition. These or other factors could cause dilution to our earnings per
  share or decrease the expected accretive effect of the acquisition and cause a
  decrease in the price of our common stock.
  Some of our directors and executive officers may have
  interests that are different from, or in addition to, the interests of our
  shareholders generally.
  Some of our directors and executive officers may have
  significant equity ownership in us, employment, indemnification and severance
  benefit arrangements, potential rights to other benefits on a change in control
  and rights to ongoing indemnification and insurance that provide them with
  interests that may differ from the interests of our shareholders generally. The
  receipt of compensation or other benefits by our directors or executive
  officers in connection with the MemberHealth acquisition or any future
  acquisition may make it more difficult for the combined company to retain their
  services after the acquisition, or require the combined company to expend
  additional sums to continue to retain their services. In addition, consistent
  with our compensation philosophy of senior executives being awarded
  approximately 5% of our aggregate equity ownership, some of our executives are
  likely to receive additional equity grants as a result of the increase in our
  outstanding shares due to the acquisition and the investment by the equity
  investors.
  We may be unable to continue to provide Medicare Advantage or
  Medicare Part D plans profitably.
  Beginning in 2006,
  organizations that offer Medicare Advantage plans of the type we currently
  offer were required to offer a prescription drug benefit, as defined by CMS,
  and Medicare Advantage enrollees were required to obtain their drug benefit
  from their Medicare Advantage plan. These combined managed care plans offering
  drug benefits are, under the new law, called MA-PDs. Current enrollees may
  prefer a stand-alone drug plan and may disenroll from the Medicare Advantage
  plan altogether in order to participate in another drug plan, which could
  reduce our profitability and membership enrollment.
  Some enrollees may have
  chosen our Medicare Advantage plan in the past rather than a competitor's
  Medicare Advantage plan because of the added drug benefit that we offer with
  our Medicare Advantage plans. Effective January 1, 2006, Medicare
  beneficiaries began having the opportunity to obtain a drug benefit without
  joining a managed care plan. Additionally, Medicare beneficiaries who
  participate in a Medicare Advantage plan and enroll in a stand-alone
  Prescription Drug Plan, known as a PDP, will be automatically disenrolled from
  their Medicare Advantage plan. Accordingly, the existence of PDPs in the
  regions in which we sell Medicare Advantage plans could result in our members
  intentionally disenrolling or automatically being disenrolled from our Medicare
  Advantage plans and reduce our membership and profitability.
  We began marketing our
  MA-PDs and PDPs in October 2005 and began enrolling members on November 15,
  2005, effective as of January 1, 2006, as did MemberHealth with its PDPs.
  Our ability to operate our MA-PDs and PDPs profitably will depend on our
  ability to attract members, to continue to develop the necessary core systems
  and processes and to manage our medical expenses related to these plans, and
  other factors. Because there has only been two full years and one partial year
  of experience with CMS's Medicare Part D program, there remains
  uncertainty as to the ultimate market size, consumer demand, and related
  medical loss ratio. Accordingly, we are uncertain whether we will be able to
  operate our MA-PDs or PDPs profitably or competitively in the future, and our
  failure to do so could have a material adverse effect on our results of
  operations and financial condition; even if we are able to operate our MA-PDs
  or PDPs profitably and competitively in the future, our margins on these
  products may decline over time.
  The Medicare Prescription
  Drug, Improvement and Modernization Act of 2003, known as the MMA, provides for
  "risk corridors" that are expected to limit to some extent the losses MA-PDs or
  PDPs would incur if their costs turned out to be higher than those in the per
  member per month bids submitted to CMS in excess of specified ranges. For
  example, for 2006 and 2007 drug plans
  4
  will bear all gains and losses up to 2.5% of their
  expected costs, but will be reimbursed for 75% of the losses between 2.5% and
  5%, and 80% of losses in excess of 5%. We anticipate that the initial risk
  corridors in 2006 and 2007 will provide more protection against excess losses
  than will be available beginning in 2008 and future years as the thresholds
  increase and the reimbursement percentages decrease or disappear.
  In addition, we expect
  there will be a delay in obtaining reimbursement from CMS for reimbursable
  losses pursuant to the risk corridors. In that event, we expect there would be
  a negative impact on our results of operation, cash flows and financial
  condition as a result of being required to finance excess losses until we
  receive reimbursement. In addition, as the risk corridors are designed to be
  symmetrical, a plan whose actual costs fall below its expected costs would be
  required to reimburse CMS based on a similar methodology as set forth above.
  Furthermore, reconciliation payments for estimated upfront Federal reinsurance
  payments and payments for low income cost sharing subsidies, are made
  retroactively on an annual basis, which could expose plans to upfront costs in
  providing the benefit. Accordingly, it may be difficult to accurately predict
  or report the operating results associated with our drug benefits. We
  anticipate settling with CMS on amounts related to the risk corridor adjustment
  and subsidies for a given plan year in the following year.
  CMS's risk adjustment payment system and budget neutrality
  factors make our revenue and profitability difficult to predict and could
  result in material retroactive adjustments to our results of operations.
  All of the Medicare
  Advantage programs we offer are offered through Medicare. As a result, our
  profitability is dependent, in large part, on continued funding for government
  healthcare programs at or above current levels. The reimbursement rates paid to
  health plans like ours by the Federal government are established by contract,
  although the rates differ depending on a combination of factors such as a
  member's health status, age, gender, county or region, benefit mix, member
  eligibility categories, and the plans' risk scores.
  CMS has implemented a
  risk adjustment model that apportions premiums paid to Medicare health plans
  according to health severity. A risk adjustment model pays more for enrollees
  with predictably higher costs. CMS has completely phased in this payment
  methodology with a risk adjustment model that bases a portion of the total CMS
  reimbursement payments on various clinical and demographic factors such as
  ·
  hospital
  inpatient diagnoses,
  ·
  diagnosis data
  from ambulatory treatment settings, such as hospital outpatient facilities and
  physician visits,
  ·
  gender,
  ·
  age, and
  ·
  Medicaid
  eligibility.
  Under the risk adjustment
  methodology, all Medicare health plans must capture, collect and submit the
  necessary diagnosis code information from inpatient and ambulatory treatment
  settings to CMS within prescribed deadlines. The CMS risk adjustment model uses
  this diagnosis data to calculate the risk adjusted premium payment to Medicare
  health plans. As a result of this process, it is difficult to predict with
  certainty our future revenue or profitability. In addition, our own risk scores
  for any period may result in favorable or unfavorable adjustments to the payments
  we receive from CMS and our Medicare premium revenue. Because diagnosis coding
  is a manual process, there is the potential for human error in the recording of
  codings, and there can be no assurance that our contracting physicians and
  hospitals will be successful in improving the accuracy of recording diagnosis
  code information, thereby enhancing our risk scores.
  Coincident with phase-in
  of the risk-adjustment methodology, CMS also adjusted payments to Medicare
  Advantage plans by a "budget neutrality" factor. CMS implemented the budget
  neutrality factor to prevent overall health plan payments from being reduced
  during the transition to the risk-adjustment payment model. CMS first developed
  the payment adjustments for budget neutrality in 2002 and began to use them
  with the 2003 payments. CMS will begin phasing out the budget neutrality
  adjustment in 2007 and will fully eliminate it by 2011. The risk adjustment
  methodology and phase-out of the budget neutrality factor will reduce our plans'
  premiums unless our risk scores increase. We do not know if our risk scores
  will increase in the future or, if they do, that they will be large enough to
  offset the elimination of this adjustment. As a result of the CMS payment
  methodology described previously, the amount and timing of our CMS monthly
  premium payments per member may change materially, either favorably or
  unfavorably. In addition, there exists the possibility that CMS may reduce
  revenues in 2009 or thereafter for plans whose risk scores have increased significantly
  greater than the general Medicare average increase in risk scores. If our risk
  scores increase significantly greater than the general Medicare average
  increase, and CMS introduces this approach, it could adversely affect our
  results of operations.
  5
  Our ability to market some of our Part D plans is
  substantially dependent on two of our strategic relationships with third
  parties.
  Our ability to market
  some of our Part D plans is substantially dependent on our strategic
  alliance with the National Community Pharmacists Association, known as the
  NCPA, which provides outreach and communications for our CCRx Part D plans
  to NCPA's independent pharmacy membership. NCPA member pharmacies make up over
  one-third of MemberHealth's pharmacy network and, in 2007, accounted for
  approximately 60% of the prescriptions filled under MemberHealth's Part D
  plans. Additionally, we are substantially dependent on its strategic
  relationship with Community Care Outreach Services LLC, or CCOS, an
  insurance marketing operation that provides the historical MemberHealth
  business its primary "outsourced" sales force. If either of these strategic
  relationships are terminated, or do not provide us with the services and
  benefits we anticipate, our ability to market CCRx Part D plans could be
  materially and adversely affected. Further, to the extent that CMS or other
  regulatory authorities determine that any provisions of our agreements with
  NCPA or CCOS conflict with any applicable law, regulation or policy, we may not
  be able to realize fully the benefits we anticipate from the acquisition, and
  we could potentially incur regulatory liability.
  There are significant risks associated with our
  participation in the Medicare Part D program, the occurrence of which
  could have an adverse effect on our results of operations.
  Effective January 1,
  2006, we began offering Medicare-approved PDPs to Medicare-eligible
  beneficiaries. MemberHealth's business consists primarily of Medicare Part D
  members. Our actual results may differ from our assumptions regarding the
  Medicare Part D program. Our participation in the Medicare Part D
  program involves the following risks, the occurrence of any or all of which
  could have an adverse effect on our financial condition, results of operations
  and cash flows:
  ·
  CMS continues to
  release regulations on Medicare Part D, including important requirements
  related to the implementation and marketing of the Medicare Part D
  prescription drug benefit plan. This may create challenges for planning,
  implementing and operating the Medicare Part D program, and we can provide
  no assurance that Congress or CMS will not alter the program in a manner that
  will be detrimental to us.
  ·
  CMS has released
  call letters on Medicare Part D that impact the revenue that can be earned
  by our strategic alliance, PDMS, in 2008, the last year of its existence, or by
  our successor Part D plans in 2009 and thereafter.
  ·
  We anticipate
  that the level of earnings of our successor Part D plans to PDMS will be
  significantly reduced beginning in 2009 resulting from CMS's indication in its
  recent call letter that amounts paid by the PDP sponsor's PBM to the retail
  pharmacy, rather than the amounts paid by the PDP sponsor to its PBM, be
  reported as part of the risk corridor calculation. We presently report only our
  share of this difference in our risk corridor calculation but not the Caremark
  share. This expected change in risk corridor reporting methodology is likely to
  reduce our revenues in 2009 and beyond.
  ·
  Our contracts
  with CMS, as well as applicable Medicare Part D regulations and Federal
  and state laws, require us, among other obligations, to:
  ·
  comply with
  specified disclosure, filing, record-keeping and marketing rules;
  ·
  operate quality
  assurance, drug utilization management and medication therapy management
  programs;
  ·
  support
  e-prescribing initiatives;
  ·
  implement
  grievance, appeals and formulary exception processes;
  ·
  comply with
  payment protocols, which require the return of overpayments to CMS and, in
  specified circumstances, coordination with state pharmacy assistance programs;
  ·
  use approved
  networks and formularies, and provide access to these networks to any willing
  pharmacy;
  ·
  provide
  emergency out-of-network coverage; and
  ·
  adopt a comprehensive
  Medicare and fraud, waste and abuse compliance program.
  Any contractual or
  regulatory non-compliance on our part could entail significant sanctions and
  monetary penalties, which in turn could negatively affect the market price of
  our common stock.
  ·
  We cannot be
  certain that other regulatory changes, such as a restructuring of the Medicare Part D
  program, will not affect our ability to operate under the Part D program
  or increase our costs or reduce our reimbursements.
  ·
  We cannot be
  certain that our products will be competitive with the products offered by
  other PDPs. We cannot be certain that our future bids will be competitive with
  the bids submitted by other PDPs. We cannot be certain that our future bids
  will be under the benchmark bids calculated by CMS.
  ·
  PDP bids are
  submitted annually, no less than six months in advance of the corresponding
  benefit year. We endeavor to use the best available member eligibility, claims
  and risk score data at the time of developing the bid. Futhermore, we are
  making actuarial assumptions about the utilization of benefits in our PDPs.
  Because Medicare Part D is a relatively new program, there is little
  historical basis for these assumptions, and we cannot be assured that the data
  and assumptions used at the time of bid development will prove to be correct
  and that premiums will be sufficient to cover benefits.
  6
  ·
  We may
  experience higher benefit expenses as a result of an increase in the cost of
  pharmaceuticals, possible changes in our pharmacy rebate program with drug
  manufacturers, higher than expected utilization and new mandated benefits or
  other regulatory changes that increase our costs.
  ·
  As of December 31,
  2007, CMS had automatically assigned dual eligibles to our PDPs in regions
  where our premiums for our standard plans were under the CMS established
  regional benchmarks. We cannot guarantee that all of these dual eligibles
  assigned to us will continue to participate in our PDPs in the future because
  dual eligible beneficiaries can change their PDP each month. Moreover, we also
  cannot guarantee whether dual eligibles will be auto assigned to us in the future
  for a region since we are required to bid anew each year and there exists the
  possibility that our bid for the region could be above the CMS established
  benchmark; if our bid is below the benchmark, we cannot predict the number of
  dual eligibles that will be assigned to us.
  ·
  Medicare Part D
  is a relatively new program and the competitive landscape is uncertain. We
  expect to encounter competition from other PDP sponsors, some of which may have
  significantly greater resources and brand recognition than we do. Our marketing
  arrangement with CVS Caremark will end after the 2008 plan year, and we cannot
  predict whether we will enter into other marketing arrangements with
  competitors. We cannot predict whether we will be able to effectively compete
  in this new market.
  ·
  If our current
  pharmacy and other providers terminate their contracts, we will have to
  contract with other providers to take their place.
  ·
  CMS and other
  service providers may not be able to deliver or process information completely,
  timely and accurately relating to our PDP, which could negatively impact our
  operations.
  ·
  There is
  uncertainty as to whether the dual eligibles auto-assigned to us for 2008 will
  be re-assigned to our PDPs in 2009 and beyond if our bids are not below the
  benchmark bids calculated by CMS.
  ·
  There is
  uncertainty as to whether marketing practices will be restricted, which could
  negatively impact our ability to market and sell our product.
  ·
  There may be
  other unforeseen occurrences that could negatively impact our PDP operations.
  Our inability to collect receivables owed to us by other
  Medicare Part D PDPs may disrupt or adversely affect our PDPs.
  During 2006, we incurred
  Medicare Part D prescription expenses on behalf of Medicare beneficiaries
  who were not members of our PDPs. Likewise, we received notice of claims from
  other plans that paid claims on behalf of our members. CMS established a
  plan-to-plan, known as P2P, reconciliation process to address this condition
  and provide a means of settlement between plans. Additionally, CMS recently
  published its state-to-plan, known as S2P, reconciliation process whereby
  health plans will settle with state Medicaid programs that paid claims on
  behalf of Medicare beneficiaries. We have recorded our estimated liabilities
  under P2P and S2P as of December 31, 2007. Ultimate resolution of the P2P
  and S2P reconciliation processes could result in adjustments, positive or
  negative, to the amounts currently estimated and recoverable.
  Although CMS has
  initiated a process for reconciling these errors in membership and drug costs,
  there can be no assurance that we will be fully reimbursed for these costs by
  CMS or another PDP sponsor. Although we intend to actively pursue amounts due
  us in the CMS reconciliation process, we cannot assure you that we will receive
  reimbursements from any other plan. Any amounts not collectible will be
  reported as additional claim costs and are subject to both reinsurance and the
  risk corridor adjustment.
  Our liabilities related to the CMS policy regarding the special
  transition period for retroactive enrollment may result in an unknown amount of
  liability, which could adversely affect our PDPs.
  On May 25, 2007, CMS
  issued a memorandum to clarify Medicare Part D sponsors' obligations under
  the Prescription Drug Benefit Manual on Coordination of Benefits,
  Chapter 14, Section 50.10, entitled "Special Transition for
  Retroactive Enrollment Situations." Under Section 50.10, Part D plans
  must provide a special transition period in 2007 to accommodate specified
  claims incurred by or on behalf of beneficiaries whom CMS has retroactively
  enrolled in a Part D plan. Part D plans must accommodate claims
  incurred by or on behalf of these beneficiaries during a no greater than
  seven-month retroactive eligibility period, which may extend into 2006.
  In the May 25, 2007
  memorandum CMS emphasized that Part D sponsors may not use the March 31,
  2007 coverage year deadline, which is the cut-off date for the submission of
  claims associated with payment reconciliation, to deny requests for
  reimbursement of claims incurred during retroactive enrollment periods. Indeed,
  CMS noted that Part D plans are liable for claims received after March 31st even
  if retroactive enrollment is not an issue, subject to contractual provisions
  regarding timely claims filing for network pharmacies. To ensure that third
  party payors have the opportunity to request reimbursement for claims incurred
  during a retroactive enrollment period on behalf of dual eligible
  beneficiaries, CMS stated that Part D sponsors must use the date of
  Medicaid notification to establish a new timely claims filing period. CMS also
  provided an attachment describing how the special transition period policy
  applied in various retroactive enrollment scenarios. We could face an unknown
  amount of liability as a result of complying with this special transition
  policy on retroactive enrollment, which could negatively affect our business.
  7
  Financial accounting for the Medicare Part D benefits
  is complex.
  The accounting and
  regulatory guidance regarding the proper method of accounting for Medicare Part D,
  particularly as it relates to the timing of revenue and expense recognition and
  calculation of the risk corridor, taken together with the complexity of the
  Medicare Part D product and challenges in reconciling CMS Medicare Part D
  membership data with our records, may lead to variability in our reporting of
  quarter-to-quarter earnings and to uncertainty among investors and research
  analysts following us as to the impacts of our Medicare PDPs on our full year
  results.
  We rely on the accuracy of information provided by CMS
  regarding the eligibility of an individual to participate in our Medicare Part D
  plans, and any inaccuracies in those lists could cause CMS to recoup premium
  payments from us with respect to members who turn out not to be ours, which
  could reduce our revenue and profitability.
  Premium payments that we
  receive from CMS are based upon eligibility lists produced by Federal and local
  governments. From time to time, CMS requires us to reimburse it for premiums
  that we received from CMS based on eligibility and dual-eligibility lists that
  CMS later discovers contained individuals who were not in fact residing in our
  service areas or eligible for any government-sponsored program or were eligible
  for a different premium category or a different program. We may have already
  provided services to these individuals and reimbursement of amounts paid on
  behalf of services provided to them may be unrecoverable. In addition to
  recoupment of premiums previously paid, we also face the risk that CMS could
  fail to pay us for members for whom we are entitled to payment. Our
  profitability would be reduced as a result of this failure to receive payment
  from CMS if we had made related payments to providers and were unable to recoup
  these payments from them.
  The mail-order pharmacy and pharmacy benefit management
  components of our business are subject to significant additional regulation.
  The mail order pharmacy
  business is subject to extensive Federal, state and local regulation, such as
  the application of state laws related to the operation of internet and
  mail-service pharmacies. In addition, our PBM operations will be subject to a
  variety of Federal and state laws. Medicare Part D regulations, such as
  anti-kickback issues and compliance requirements under Federal employee
  benefits laws, also govern the treatment of related entities. CMS has indicated
  that it will apply greater scrutiny to arrangements between PDPs and related
  parties, especially to rebate retention arrangements. Federal and state
  legislative proposals regarding PBMs are frequently introduced, and these
  proposals, if adopted, could affect a variety of industry practices, such as
  the receipt of rebates and administrative fees from pharmaceutical
  manufacturers.
  In addition, changes in
  existing Federal or state laws or regulations or in their interpretation by
  courts and agencies, or the adoption of new laws or regulations relating to
  patent term extensions, purchase discount, administrative fee and rebate
  arrangements with pharmaceutical manufacturers, as well as some of the
  formulary and other services provided to pharmaceutical manufacturers, could
  reduce the discounts, rebates or other fees received by PBMs and could
  adversely impact our business, financial condition, liquidity and operating
  results.
  If we are unable to develop and maintain satisfactory
  relationships with the providers of care to our members, our profitability
  could be adversely affected and we may be precluded from operating in some
  markets.
  We contract with
  physicians, hospitals and other providers to deliver health care to our
  members. Our Medicare Advantage products encourage or require our customers to
  use these contracted providers. In some circumstances, these providers may
  share medical cost risk with us or have financial incentives to deliver quality
  medical services in a cost-effective manner. Our operations and profitability
  are significantly dependent upon our ability to enter into appropriate
  cost-effective contracts with hospitals, physicians and other healthcare
  providers that have convenient locations for our members in our geographic
  markets.
  In the long term, our
  ability to contract successfully with a sufficiently large number of providers
  in a particular geographic market will affect the relative attractiveness of
  our Medicare Advantage and managed care products in that market and could
  preclude us from renewing our Medicare contracts in those markets or from entering
  into new markets. We will be required to establish acceptable provider networks
  prior to entering new markets. We may be unable to maintain our relationships
  with our network providers or enter into agreements with providers in new
  markets on a timely basis or under favorable terms. In any particular market,
  providers could refuse to contract with us, demand to contract with us, demand
  higher payments, or take other actions that could result in higher health care
  costs for us, less desirable products for customers and members, disruption of
  benefits to our members, or difficulty meeting regulatory or accreditation
  requirements. In some markets, some providers, particularly hospitals,
  physician specialty groups, physician/hospital organizations or multi-specialty
  physician groups, may have significant market positions and negotiating power.
  In addition, physician or practice management companies, which aggregate
  physician practices for administrative efficiency and marketing leverage, may
  compete directly with us. In our southeastern Texas HMO market, one of our
  significant provider groups recently has formed a health plan. If this provider
  group refuses to contract with us, uses its market position to negotiate
  favorable contracts or otherwise places us at a competitive disadvantage, our
  ability to market products or to be profitable in that market could be
  adversely affected.
  In some situations, we
  have contracts with individual or groups of primary care physicians for an
  actuarially determined, fixed, per-member-per-month fee under which physicians
  are paid an amount to provide all required medical services to our members.
  This type of contract is referred to as a "capitation" contract. The inability
  of providers to properly manage costs under these
  8
  capitation arrangements can result in the financial
  instability of these providers and the termination of their relationship with
  us. In addition, payment or other disputes between a primary care provider and
  specialists with whom the primary care provider contracts can result in a
  disruption in the provision of services to our members or a reduction in the
  services available to our members. The financial instability or failure of a
  primary care provider to pay other providers for services rendered could lead
  those other providers to demand payment from us even though we have made our
  regular fixed payments to the primary provider. There can be no assurance that
  providers with whom we contract will properly manage the costs of services,
  maintain financial solvency or avoid disputes with other providers. Any of
  these events could have an adverse effect on the provision of services to our
  members and our operations, resulting in loss of membership or higher healthcare
  costs or other adverse effects.
  Corporate practice of medicine and fee-splitting laws may
  govern our business operations, and violation of these laws could result in
  penalties and adversely affect our arrangements with contractors and our profitability.
  Several states have laws
  commonly known as "corporate practice of medicine" that prohibit a business
  corporation from practicing medicine, employing physicians to practice
  medicine, or exercising control over medical treatment decisions by physicians.
  In these states, typically only medical professionals or a professional
  corporation in which the shares are held by licensed physicians or other
  medical professionals may provide medical care to patients. Many states also
  have some form of fee-splitting law prohibiting business arrangements that
  involve the splitting or sharing of medical professional fees earned by a
  physician or another medical professional for the delivery of healthcare
  services.
  We perform only
  non-medical administrative and business services for physicians and physician
  groups. We do not represent that we offer medical services, and we do not
  exercise control over the practice of medical care by providers with whom we
  contract. We do, however, monitor medical services to ensure they are provided
  and reimbursed within the appropriate scope of licensure. In addition, we have
  developed close relationships with our network providers under which we review
  and monitor the coding of medical services provided by those providers, among other
  services we provide.
  Regulatory authorities
  may assert that we are engaged in the corporate practice of medicine or that
  our contractual arrangements with providers constitute unlawful fee-splitting.
  Moreover, we cannot predict whether changes will be made to existing laws or if
  new ones will be enacted, which could cause us to be out of compliance with
  these requirements. If our arrangements are found to violate corporate practice
  of medicine or fee-splitting laws, our provider or independent physician
  association management contracts could be found to be legally invalid and
  unenforceable, which could adversely affect our operations and profitability,
  and we could be subject to civil or, in some cases, criminal, penalties.
  We may not have adequate intellectual property rights in our
  brand names for our health plans, and we may be unable to adequately enforce
  these rights.
  Our success depends, in
  part, upon our ability to market our health plans under the brand names that we
  own or license, such as Today's Options
  ®
  , Prescription Pathway
  SM
  ,
  Senior Solutions
  ®
  , and Texan Plus
  ®
  family of products,
  and our MemberHealth™, MHRx™, and CommunityCCRx
  SM
  family of
  products. As part of a 2007 settlement in a litigation matter in Federal court
  in the State of Oklahoma, MemberHealth agreed to cease using, effective at the
  end of the 2007 Medicare Part D coverage year, the brand name Community
  Care Rx
  SM
  in all 49 states, the District of Columbia, Puerto Rico
  and the U.S. Virgin Islands where it marketed its PDP under that brand name,
  and to cease using the brand name Community Pharmacists Care Rx
  SM
  in
  the State of Oklahoma where it marketed its PDP under that brand name. We have
  marketed our PDP offering for 2008 under the CommunityCCRx
  SM
  brand
  name. We may not have taken enforcement action to prevent infringement of our
  marks and may not have secured registrations of the other brand names that we
  use in our business. Unauthorized parties may attempt to copy or otherwise
  obtain and use our products or technology. Policing unauthorized use of our
  intellectual property is difficult, and we cannot be certain that the steps we
  have taken will prevent misappropriation of our intellectual property rights.
  Other businesses may have prior rights in our brand names or in similar names,
  which could cause market confusion or limit or prevent our ability to use these
  marks or prevent others from using similar marks. If we are unable to prevent
  others from using our brand names, or if others prohibit us from using them,
  our revenues could be adversely affected. Even if we are able to protect our
  intellectual property rights in our brands, we could incur significant costs in
  doing so.
  Competition in the insurance, healthcare, PBM and pharmacy
  industries is intense, and if we do not design and price our products properly
  and competitively, our membership and profitability could decline.
  We operate in a highly
  competitive industry. Some of our competitors are more established in the
  insurance, health care and PBM industries, with larger market share and greater
  financial resources than we have in some markets. In addition, other companies
  may enter our markets in the future. We believe that barriers to entry in many
  markets are not substantial, so the addition of new competitors can occur
  relatively easily, and customers enjoy significant flexibility in moving
  between competitors. Contracts for the sale of commercial products are
  generally bid upon or renewed annually. We compete for members in our health
  plans and PBM on the basis of the following and other factors:
  ·
  price,
  ·
  the size,
  location, quality and depth of provider networks,
  9
  ·
  benefits
  provided,
  ·
  quality of
  service and
  ·
  reputation.
  In addition to the
  challenge of controlling PBM and health care costs, we face intense competitive
  pressure to contain premium prices. Factors such as business consolidations,
  strategic alliances, legislative reform and marketing practices create pressure
  to contain premium rate increases, despite being faced with increasing medical
  costs. Premium increases, introduction of new product designs, our relationship
  with our providers in various markets, and our possible exit from or entrance
  into additional markets, among other issues, could also affect our membership
  levels.
  We compete based on
  innovation and service, as well as on price and benefit offering. To attract
  new clients and retain existing clients, we must continually develop new
  products and services to assist clients in managing their pharmacy benefit
  programs. We may not be able to develop innovative products and services, such
  as new Medicare Part D offerings, which are attractive to clients.
  Moreover, although we need to continue to expend significant resources to
  develop or acquire new products and services in the future, we may not be able
  to do so. We cannot be sure that we will continue to remain competitive, nor
  can we be sure that we will be able to market our products and services to
  clients successfully at current levels of profitability.
  Consolidation within the
  PBM industry, as well as the acquisition of any of our competitors by larger
  companies, may lead to increased competition. In March 2007, CVS
  Corporation and Caremark Rx, Inc. announced that they had consummated the
  merger of the two companies which merged the pharmacy chains with the Caremark
  PBM. This and other strategic combinations could have an adverse effect on our
  business or results of operations.
  If we do not compete
  effectively in our markets, if we set rates too high or too low in highly
  competitive markets to maintain or increase our market share, if membership and
  customers do not increase as we expect, if membership declines, or if we lose
  accounts with favorable medical cost experience while retaining or increasing
  membership in accounts with unfavorable medical cost experience, our business
  and results of operations could be materially adversely affected.
  If the PBM that supports our business does not continue to
  earn and retain purchase discounts and rebates from manufacturers at current
  levels, our gross margins may decline.
  We have contractual
  relationships with pharmaceutical manufacturers that provide us with purchase
  discounts on drugs dispensed from our mail-order pharmacies and rebates on
  brand-name prescription drugs dispensed through mail order and retail. These
  discounts and rebates are generally passed on to clients in the form of steeper
  price discounts and rebate pass-backs. Manufacturer rebates often depend on our
  ability to meet contractual market share or other requirements. Pharmaceutical
  manufacturers have also increasingly made rebate payments dependent upon our
  agreement to include a broad array of their products in our formularies.
  Competitive pressures in
  the PBM industry have also caused us and many other PBMs to share with
  clients a larger portion of the rebates received from pharmaceutical manufacturers
  and to increase the discounts offered to clients.
  Changes in existing
  Federal or state laws or regulations or in their interpretation by courts and
  agencies or the adoption of new laws or regulations relating to patent term
  extensions, purchase discount, administrative fee and rebate arrangements with
  pharmaceutical manufacturers, as well as some of the formulary and other
  services we provide to pharmaceutical manufacturers, could also reduce the
  discounts or rebates we receive and adversely impact our business, financial
  condition, liquidity and operating results.
  Changes in industry pricing benchmarks could adversely
  affect our financial performance.
  Contracts in the
  prescription drug industry generally use published benchmarks to establish
  pricing for prescription drugs. The principal benchmarks are average wholesale
  price, known as AWP, average selling price, known as ASP, wholesale acquisition
  cost, known as WAC, and average manufacturer price, known as AMP.
  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 they will adopt other pricing benchmarks
  for establishing prices within the industry. Specifically, in the proposed
  settlement in the case of
  New England
  Carpenters Health Benefits Fund, et al. v. First DataBank, et al.
  , a
  civil class action case brought against McKesson Corporation and First
  DataBank, known as FDB, which is one of several companies that report data on
  prescription drug prices, FDB has agreed to reduce the reported AWP of
  specified drugs by 4% at a future time as contemplated by the settlement. At
  this time, the proposed settlement has not received final court approval. We
  cannot precisely predict the long-term effect of the proposed settlement or the
  timing of any impact it may have on our PBM business.
  10
  Demands by our clients for enhanced service levels or
  possible loss or unfavorable modification of contracts with our clients could
  negatively affect our profitability.
  As our clients 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.
  Our results of operations could suffer if we lose our
  pharmacy network affiliations.
  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
  clients and 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 clients and 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.
  Our PBM, could be subject to claims under ERISA if it is
  found to be a fiduciary of health benefit plans governed by ERISA.
  PBMs typically
  provide services to corporations and other sponsors of health benefit plans.
  These plans are subject to the Employee Retirement Income Security Act of 1974,
  as amended, known as ERISA, which regulates health and medical plans and other
  employee pension benefit plans and employee welfare benefit plans. The U.S. Department
  of Labor, which is the agency that enforces ERISA, could assert that the
  fiduciary obligations imposed by the statute apply to some or all of the
  services provided by a PBM If a court were to determine, in litigation brought
  by a private party or in a proceeding arising out of a position taken by the
  Department of Labor, that MemberHealth was a fiduciary in connection with
  services it provides, MemberHealth could potentially be subject to claims for
  breaching fiduciary duties and/or entering into specified "prohibited
  transactions" under ERISA. In addition, claims also might be made against our
  PBM under common law and state fiduciary obligation theories.
  We are subject to extensive government regulation;
  compliance with laws and regulations is complex and expensive, and any
  violation of the laws and regulations applicable to us could reduce our
  revenues and profitability and otherwise adversely affect our operating
  results.
  There is substantial
  Federal and state governmental regulation of our business. Several laws and
  regulations adopted by the Federal government, such as the Sarbanes-Oxley Act
  of 2002, the Gramm-Leach-Bliley Act, the Health Insurance Portability and
  Accountability Act, known as HIPAA, MMA, the USA PATRIOT Act, the False Claims
  Act, anti-kickback laws and "Do Not Call" regulations, have created
  administrative and compliance requirements for us. The requirements of these
  laws and regulations are still evolving, and the cost of compliance may have an
  adverse effect on our profitability. If we fail to comply with existing or
  future applicable laws and regulations, we could suffer civil, criminal or
  administrative penalties. 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.
  Laws in each of the
  states in which we operate our health plans and insurance companies also
  regulate our sales practices, operations, the scope of benefits, rate formulas,
  delivery systems, utilization review procedures, quality assurance, complaint
  systems, enrollment requirements, claim payments, marketing, and advertising.
  These state regulations generally require, among other things, prior approval
  or notice of new products, premium rates, benefit changes and specified
  material transactions, such as dividend payments, purchases or sales of assets,
  inter-company agreements, and the filing of various financial and operational
  reports.
  We are also subject to
  various governmental reviews, audits and investigations to verify our
  compliance with our contracts and applicable laws and regulations. State
  departments of insurance audit our health plans and insurance companies for
  financial and contractual compliance. State departments of health audit our
  health plans for compliance with health services. State attorneys general, CMS,
  the Office of the Inspector General of Health and Human Services, the Office of
  Personnel Management, the Department of Justice, the Department of Labor, the Government
  Accountability Office, and state departments of insurance and departments of
  health also conduct audits and investigations of us. Several state attorneys
  general, state departments of insurance and Congressional committees are
  currently investigating practices used by companies in the health care industry
  and insurance brokers generally.
  Any adverse review, audit
  or investigation could result in:
  ·
  repayment of
  amounts we have been paid pursuant to our government contracts;
  ·
  imposition of
  civil or criminal penalties, fines or other sanctions on us;
  ·
  loss of
  licensure or the right to participate in Medicare and other
  government-sponsored programs;
  11
  ·
  damage to our
  reputation in various markets; and
  ·
  increased
  difficulty in marketing our products and services.
  Any of these events could
  make it more difficult for us to sell our products and services, reduce our
  revenues and profitability and otherwise adversely affect our operating
  results. For more information on governmental regulation of our business, see
  the section captioned "Regulation" in Part I, Item 1 of this annual
  report on Form 10-K for the year ended December 31, 2007.
  CMS has recently released
  proposed regulations that, if adopted, would, among other things, place tighter
  restrictions on marketing processes relative to the Medicare Advantage program
  and prescription drug benefit program. 
  Depending upon the final content of these regulations, if CMS adopts
  them, compliance with and enforcement of the regulations could have a material
  adverse effect on our results of operations.
  We are required to comply with laws governing the
  transmission, security and privacy of health information that require
  significant compliance costs, and any failure to comply with these laws could
  result in material criminal and civil penalties.
  Regulations under HIPAA
  require us to comply with standards regarding the exchange of health
  information within our company and with third parties, such as healthcare
  providers, business associates and our members. These regulations impose
  standards for common healthcare transactions, such as
  ·
  claims information,
  plan eligibility, and payment information;
  ·
  unique
  identifiers for providers and employers;
  ·
  security;
  ·
  privacy; and
  ·
  enforcement.
  HIPAA also provides that to the extent that state laws
  impose stricter privacy standards than HIPAA privacy regulations, HIPAA does
  not preempt the state standards and laws.
  Given the complexity of
  the HIPAA regulations, the possibility that the regulations may change, and the
  fact that the regulations are subject to changing and, at times, conflicting
  interpretation, our ability to comply with the HIPAA requirements is uncertain.
  Furthermore, a state's ability to promulgate stricter laws, and uncertainty
  regarding many aspects of state requirements, make compliance more difficult.
  To the extent that we submit electronic healthcare claims and payment
  transactions that do not comply with the electronic data transmission standards
  established under HIPAA, payments to us may be delayed or denied. Additionally,
  the costs of complying with any changes to the HIPAA regulations may have a
  negative impact on our operations. We could be subject to criminal penalties
  and civil sanctions for failing to comply with the HIPAA health information
  provisions, which could result in the incurrence of significant monetary
  penalties. In addition, our failure to comply with state health information
  laws that may be more restrictive than the regulations issued under HIPAA could
  result in additional penalties.
  Compliance with HIPAA
  regulations requires significant systems enhancements, training and
  administrative effort. HIPAA could also expose us to additional liability for
  violations by our business associates. A business associate is a person or
  entity, other than a member of the work force, who on behalf of an entity
  subject to HIPAA performs or assists in the performance of a function or
  activity involving the use or disclosure of individually identifiable health
  information, or provides legal, accounting, consulting, data aggregation,
  management, administrative, accreditation or financial services.
  Changes in governmental regulation or legislative reform
  could increase our costs of doing business and adversely affect our
  profitability.
  The Federal government
  and the states in which we operate extensively our regulate health plans, insurance
  companies and other business. The laws and regulations governing our operations
  are generally intended to benefit and protect policyholders, health plan
  members and providers rather than shareholders. From time to time, Congress has
  considered various forms of "Patients' Bill of Rights" legislation, which, if
  adopted, could alter the treatment of coverage decisions under applicable
  federal employee benefits laws. There have also been legislative attempts at
  the state level to limit the preemptive effect of Federal employee benefits
  laws on state laws. If adopted, these types of limitations could increase our
  liability exposure and could permit greater state regulation of our operations.
  The government agencies administering these laws and regulations have broad
  latitude to enforce them. These laws and regulations, along with the terms of
  our government contracts, regulate how we do business, what services we offer,
  and how we interact with our policyholders, members, providers and the public.
  Healthcare laws and regulations are subject to frequent change and differing
  interpretations. Changes in the political climate or in existing laws or
  regulations, or their interpretations, or the enactment of new laws or the
  issuance of new regulations could adversely affect our business by, among other
  things:
  12
  ·
  imposing
  additional license, registration, or capital reserve requirements;
  ·
  increasing our
  administrative and other costs;
  ·
  forcing us to
  undergo a corporate restructuring;
  ·
  increasing
  mandated benefits without corresponding premium increases;
  ·
  limiting our
  ability to engage in inter-company transactions with our affiliates and
  subsidiaries;
  ·
  adversely
  affecting our ability to operate under the Medicare program and to continue to
  serve our members and attract new members;
  ·
  forcing us to
  alter or restructure our relationships with providers and agents, such as
  making changes to the "deeming" rules for Private Fee for Service Medicare
  Advantage products;
  ·
  restricting our
  ability to market our products;
  ·
  increasing
  governmental regulation of healthcare and PBM services, such as potential
  regulation of the PBM industry by the U.S. Food and Drug Administration, or
  direct regulation of pharmacies by regulatory and quasi-regulatory bodies;
  ·
  requiring that
  health plan members have greater access to non-formulary drugs;
  ·
  expanding the
  ability of health plan members to sue their plans;
  ·
  requiring us to
  implement additional or different programs and systems;
  ·
  increasing
  antitrust lawsuits challenging PBM pricing practices;
  ·
  instituting
  state legislation regulating PBMs or imposing fiduciary status on PBMs;
  and
  ·
  instituting drug
  pricing "most favored nation" pricing and "unitary pricing" legislation or
  other drug pricing legislationsuch as .
  While it is not possible
  to predict when and whether fundamental policy changes would occur, policy
  changes on the local, state and federal level could fundamentally change the
  dynamics of our industry, such as policy changes mandating a much larger role
  of the government in the health care arena. Changes in public policy could
  materially affect our profitability, our ability to retain or grow business, or
  our financial condition. State and federal governmental authorities are
  continually considering changes to laws and regulations applicable to us and are
  currently considering regulations relating to:
  ·
  health insurance
  access and affordability;
  ·
  disclosure of
  provider quality information;
  ·
  electronic
  access to pharmacy and medical records;
  ·
  formation of
  regional or national association health plans for small employers;
  ·
  universal health
  coverage; and
  ·
  disclosure of
  provider fee schedules and other data about payments to providers, sometimes
  called transparency.
  All of these proposals could apply to us and could
  result in new regulations that increase the cost of our operations. Healthcare
  organizations also may reduce or delay the purchase of PBM services, and
  manufacturers may reduce administrative fees and rebates or reduce supplies of
  some products. There can be no assurance that legislative or regulatory change
  will not affect our ability to negotiate rebate and administrative fee
  arrangements with manufacturers and will not have a material adverse effect on
  our business.
  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 members have greater access to drugs not
  included on a plan's formulary and give health plan members 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 limit our
  business practices and impair our ability to serve our clients.
  13
  In addition, CMS has
  recently released proposed regulations that, if adopted, would, among other
  things, place tighter restrictions on marketing processes relative to the
  Medicare Advantage program and prescription drug benefit program.  Depending upon the final content of these
  regulations, if CMS adopts them, compliance with and enforcement of the
  regulations could have a material adverse effect on our results of operations.
  Our reliance upon third party administrators may disrupt or
  adversely affect our operations.
  We depend on independent
  third parties for significant portions of our data center operations, data
  network, voice communication services and pharmacy data processing and other
  systems-related support, equipment, facilities and data. This dependence makes
  our operations vulnerable to the third parties' failure to perform adequately
  under the contract, due to internal or external factors.
  We have outsourced the
  operation of our data center, call centers and new business processing services
  to independent third parties and may from time to time obtain additional
  services or facilities from other independent third parties. Dependence on
  third parties for these services and facilities may make our operations
  vulnerable to their failure to perform as agreed. We also rely upon data from
  CMS and our joint venture partner Caremark for information relating to Medicare
  Part D and Medicare Advantage membership and claims administration,
  respectively. MemberHealth also relies upon Computer Sciences Corporation,
  known as CSC, and SXC Health Solutions, Inc. for information relating to
  Medicare Part D membership and claims administration, respectively.
  Incorrect information from these entities could generate inaccurate or
  incomplete membership and payment reports concerning our Medicare eligibility
  and enrollment, and claims information used by CMS to determine plan benefit
  subsidies and risk corridor payments. This could cause us to incur additional
  expense to utilize additional resources to validate, reconcile and correct the
  information. We have not been able to independently test and verify some of
  these third party systems and data. There can be no assurance that future third
  party data will not disrupt or adversely affect our plans' relationships with
  our members or our results of operations. Additionally, as of November 2006,
  we ceased to utilize a third party administrator, TMG Health, to manage our
  private fee-for-service claims, and brought this function in-house. This has
  put additional administrative burdens on us. A change in service providers
  could result in a decline in service quality and effectiveness, increased cost
  or less favorable contract terms which could adversely affect our operating
  results. Some of our outsourced services are being performed overseas. For
  2008, CMS will require approval of the performance of services overseas.
  Failing to obtain this approval could have a material adverse effect on our
  results of operations and financial condition.
  Reductions in funding for Medicare programs could materially
  reduce our profitability.
  We generated
  approximately 83% of our total revenue for the fiscal year ended December 31,
  2007 (89% of our total revenue on a pro forma basis assuming the MemberHealth
  acquisition had been consummated on January 1, 2007) by the operation of
  our Medicare Advantage HMO, Medicare Advantage private fee-for-service plans
  and Medicare Part D PDPs. As a result, our revenue and profitability are
  dependent, in part, on government funding levels for these programs. The rates
  paid to Medicare Advantage health plans like ours are established by contract,
  although the rates differ depending on a combination of factors, such as upper
  payment limits established by CMS, a member's health profile and status, age,
  gender, county or region, benefit mix, member eligibility categories and the
  plan's risk scores. Future Medicare rate levels may be affected by continuing
  government efforts to contain prescription drug costs and other medical
  expenses, and other federal budgetary constraints. The government is currently
  examining Medicare Advantage health plans like ours in comparison to Medicare
  fee-for-service payments, and this examination could result in a reduction in
  payments to Medicare Advantage health plans like ours. Changes in the Medicare
  program or Medicare funding may affect our ability to operate under the
  Medicare program or lead to reductions in the amount of reimbursement,
  elimination of coverage for some benefits or reductions in the number of
  persons enrolled in or eligible for Medicare.
  The MMA made changes to the Medicare program that will materially
  impact our operations and could reduce our profitability and increase
  competition for existing and prospective members.
  The MMA substantially
  changed the Medicare program and caused us to modify how we operate our
  business. Although many of these changes are designed to benefit Medicare
  Advantage plans generally, some provisions of the MMA may increase competition,
  create challenges for us with respect to educating our existing and potential
  members about the changes, and create other risks and substantial and
  potentially adverse uncertainties.
  Increased
  competition could adversely affect our enrollment and results of operations.
  ·
  The MMA
  increased reimbursement rates for Medicare Advantage plans. Higher
  reimbursement rates may induce the establishment of new plans that participate
  in the Medicare program, creating new competition that could adversely affect
  our profitability and cause increased lapsation in our Medicare Supplement in
  force as policyholders choose to enroll in a competitor's plan.
  ·
  As of 2006, the
  MMA mandated a new regional Medicare preferred provider organization, or
  Medicare PPO, program and private fee-for-service plans. Medicare PPOs and
  private fee-for-service plans allow their members more flexibility to select
  physicians than the current plans, which are health plans that require members
  to coordinate with a primary care physician. The regional Medicare PPO program
  and private fee-for-service plans compete with local Medicare Advantage
  programs and have affected, and may continue to affect, our Medicare Advantage
  business.
  14
  The
  competitive bidding process may adversely affect our profitability.
  As of January 1,
  2006, the payments for the local Medicare Advantage health plan and regional
  Medicare Advantage PPO programs are based on a competitive bidding process that
  may decrease the amount of premiums paid to us or cause us to increase the
  benefits we offer.
  The
  limited annual enrollment process may adversely affect our growth and ability
  to market our products.
  Beginning in 2006,
  Medicare beneficiaries generally have a more limited annual enrollment period
  during which they can choose to participate in a Medicare Advantage plan or
  receive benefits under the traditional fee-for-service Medicare program. After
  the annual enrollment period, most Medicare beneficiaries will not be permitted
  to change their Medicare benefits until the next enrollment period. The new
  annual enrollment process and subsequent "lock-in" provisions of the MMA may
  adversely affect our growth as it will limit our ability to enter new service
  areas and market to or enroll new members in our established service areas
  outside of the annual enrollment period.
  The
  limited annual enrollment period may make it difficult to retain an adequate
  sales force.
  As a result of the
  limited annual enrollment period and the subsequent "lock-in" provisions of the
  MMA, our internal and external sales force may be limited in its ability to
  market some of our products year-round. Our agents rely substantially on sales
  commissions for their income. Given the limited annual sales window, it may
  become more difficult to find agents to market and promote our products.
  We may be responsible for the actions of our independent and
  career agents, and restrictions on our ability to market would adversely affect
  our revenue.
  In litigation against our
  subsidiaries, our members sometimes claim that agents failed to comply with
  applicable laws, regulations and rules, or acted improperly in other ways, and
  that we are responsible for the alleged failure. We may be liable for
  contractual and extra-contractual damages on these claims. We cannot assure you
  that any future claim will not result in material liability in the future.
  Federal and state regulators increasingly scrutinize the marketing practices of
  insurers, such as Medicare Advantage and private fee-for-service plans, MA-PDs
  and PDPs and their marketing agents, and there is no guarantee that regulators
  will not scrutinize the practices of our Medicare Advantage plans, PDPs and our
  marketing agents, and will not expose us to liability.
  We rely on our marketing
  and sales efforts for a significant portion of our premium revenue growth. The
  Federal government and state governments in the states in which we currently
  operate permit marketing but impose strict requirements and limitations as to
  the types of marketing activities that we may conduct. If our marketing efforts
  were to be prohibited or curtailed, our ability to increase or sustain
  membership would be significantly harmed, which would adversely affect our
  revenue.
  Similarly, Federal and
  state governments and regulatory agencies have recently placed an increased
  focus on the sales and marketing of private fee-for-service plans. Concerns
  over the growing number of market conduct complaints regarding improprieties in
  the sales of private fee-for-service planes have spawned stricter marketing
  standards by CMS relating to these plans. This heightened focus on market
  conduct and stricter standards in the marketing and sales of private
  fee-for-service plans could require us to modify our systems, increase our
  costs and change our agent training requirements, which could result in a
  material adverse effect on our results of operations and financial condition.
  For example, in 2005, the
  Wisconsin Office of the Commissioner of Insurance, known as WI OCI, initiated
  an investigation into the sales practices of the Pennsylvania Life sales agents
  in the state. We cannot provide assurance that we will resolve the issues
  raised by the Wisconsin OCI without adversely affecting our results of
  operations or financial condition, or that other state insurance regulators
  will not initiate similar investigations.
  If our government contracts are not renewed or are
  terminated, our business could be substantially impaired.
  We provide our Medicare
  and other services through a limited number of contracts with Federal
  government agencies. These contracts generally have terms of one or two years
  and are subject to non-renewal by the applicable agency. All of our government
  contracts are terminable for cause if we breach a material provision of the
  contract or violate relevant laws or regulations. In addition, a government
  agency may suspend our right to add new members if it finds deficiencies in our
  provider network or operations. If we are unable to renew, or to successfully
  re-bid or compete for any of our government contracts, or if any of our
  contracts are terminated, our business could be substantially impaired. If any
  of those circumstances were to occur, we would likely pursue one or more
  alternatives, such as
  ·
  seeking to enter
  into contracts in other geographic markets,
  ·
  seeking to enter
  into contracts for other services in our existing markets, or
  ·
  seeking to
  acquire other businesses with existing government contracts.
  15
  If we were unable to do so, we could be forced to
  cease conducting business. In this event, our revenues and profits would
  decrease materially.
  We have a significant amount of debt outstanding that
  contains restrictive covenants, and we may be unable to service and repay our
  debt obligations if our subsidiaries cannot pay sufficient dividends or make
  other cash payments to us.
  As of December 31,
  2007, we had $349 million of debt outstanding under the term portion of
  our credit agreement, of which we have agreed to prepay $25 million of
  term debt in April 2008. We have available borrowing capacity under the
  revolving portion of our credit facility of $150 million. In March 2007,
  we issued $50 million of our trust preferred securities. In December 2007,
  we redeemed $15 million and had $110 million of trust preferred
  securities outstanding at December 31, 2007. Our credit agreement provides
  that upon the occurrence of specified events all of the capital stock of the
  guarantor subsidiaries under the credit agreement will be pledged to our bank
  lenders; those events have occurred and we have pledged this stock. Because our
  principal outstanding indebtedness has been incurred by our parent company, our
  ability to make interest and principal payments on our outstanding debt is
  dependent upon the ability of our subsidiaries to pay cash dividends or make
  other cash payments to our parent company. Our subsidiaries will be able to pay
  dividends to our parent company only if they earn sufficient profits and, in
  the case of our insurance company and health plan subsidiaries, they satisfy
  the requirements of the state insurance laws relating to dividend payments and
  the maintenance of required surplus.
  Our debt service
  obligations will require us to use a portion of our operating cash flow to pay
  interest and principal on indebtedness before use for other corporate purposes,
  such as funding future expansion of our business and ongoing capital
  expenditures. If our operating cash flow and capital resources are insufficient
  to service our debt obligations, we may be forced to sell assets, seek
  additional equity or debt capital or restructure our debt. However, these
  measures might be unsuccessful or inadequate in permitting us to meet scheduled
  debt service obligations. We may also incur additional indebtedness in the
  future. Our indebtedness could have additional adverse consequences, such as:
  ·
  increasing our
  vulnerability to adverse economic, regulatory and industry conditions, and
  placing us at a disadvantage compared to our competitors that are less
  leveraged;
  ·
  limiting our
  ability to compete and our flexibility in planning for, or reacting to, changes
  in our business and the industry in which we operate;
  ·
  limiting our
  ability to borrow additional funds for working capital, capital expenditures,
  acquisitions and general corporate or other purposes; and
  ·
  exposing us to
  greater interest rate risk since the interest rate on borrowings under our
  senior credit facilities is variable.
  Capital constraints could restrict our ability to support
  our premium growth.
  Our continued growth is
  dependent upon our ability to support premium revenue growth through the
  expansion of our markets and our network of agents while at the same time
  maintaining sufficient levels of capital and surplus to support that growth.
  Our new business growth typically results in reduced income caused by costs
  related to new market expansion and, on some insurance products, net losses
  during the early years of a policy, called statutory surplus strain. The
  resulting reduction in capital and surplus can limit our ability to generate
  new business due to statutory restrictions on premium to surplus ratios and
  other required statutory surplus parameters. In addition, some states, such as
  Florida and Texas, limit an insurer's ability to write specified lines of
  business if gross or net premiums written would exceed a specified percentage
  of capital and surplus. Likewise, we are required to maintain adequate risk
  based capital ratios as prescribed by each state. Moreover, we need
  substantially more capital than the statutory minimums to support our level of
  premium growth and to finance acquisitions. If we cannot generate sufficient
  capital and statutory surplus to maintain minimum statutory requirements and to
  support our growth, we could be restricted in our ability to generate new
  premium revenue.
  If we are required to maintain higher statutory capital
  levels for our existing operations or if we are subject to additional capital
  reserve requirements as we pursue new business opportunities, our ability to
  obtain funds from our subsidiaries may be restricted and our cash flows and liquidity
  may be adversely affected.
  Because Universal
  American operates as a holding company, it is dependent upon dividends and
  administrative expense reimbursements from its subsidiaries to fund its
  obligations, such as payment of principal and interest on its debt obligations.
  These subsidiaries generally are regulated by state departments of insurance.
  Our health plan and insurance company subsidiaries are subject to laws and
  regulations that limit the amount of dividends and distributions they can pay
  for purposes other than to pay income taxes related to their earnings. These
  laws and regulations also limit the amount of management fees our subsidiaries
  may pay to our management subsidiaries and their other affiliates without prior
  notification to, or in some cases approval of, state regulators.
  We are also required by
  law to maintain specific prescribed minimum amounts of capital in these
  subsidiaries. The levels of capitalization required depend primarily upon the
  volume of premium generated. A significant increase in premium volume will
  require additional capitalization from our parent company. In most states, we
  are required to seek prior approval by these state regulatory authorities
  before we transfer money or pay dividends that exceed specified amounts from
  these subsidiaries, or, in some states, any amount. The pre-approval and notice
  requirements vary from state to state, and the discretion of the state
  regulators, if any,
  16
  in approving or disapproving a dividend is not always
  clearly defined. Subsidiaries that declare non-extraordinary dividends must
  usually provide notice to the regulators in advance of the intended
  distribution date. If the regulators were to deny or significantly restrict our
  subsidiaries' requests to pay dividends to us or to pay management and other
  fees to affiliates, the funds available to us would be limited, which could
  impair our ability to implement our business and growth strategy and satisfy
  our debt obligations, or we could be required to incur additional indebtedness
  to fund these strategies.
  In addition, one or more
  of these states could increase the statutory capital level from time to time.
  States have also adopted risk-based capital requirements based on guidelines
  adopted by the National Association of Insurance Commissioners, which tend to
  be, although are not necessarily, higher than existing statutory capital
  requirements. Regardless of whether the states in which we operate maintain or
  adopt risk-based capital requirements, the state departments of insurance can
  require our subsidiaries to maintain minimum levels of statutory capital in
  excess of amounts required under the applicable state laws if they determine
  that maintaining additional statutory capital is in the best interests of our
  members. Any increases in these requirements could materially increase our
  reserve requirements. In addition, as we continue to expand our plan offerings
  in new states or pursue new business opportunities, such as our recent
  offerings of PDPs and expansion of private fee for service products and health
  plans in new markets, we may be required to maintain additional statutory
  capital reserves. In either case, our available funds could be materially
  reduced, which could harm our ability to implement our business strategy.
  In the event that we are
  unable to provide sufficient capital to fund the debt obligations of Universal
  American, our operations or financial position may be adversely affected.
  Downgrades in our debt ratings, should they occur, may
  adversely affect our business, financial condition and results of operations.
  Increased public and
  regulatory concerns regarding the financial stability of insurance companies
  and health plans have resulted in consumers placing greater emphasis upon
  financial strength ratings. Claims paying ability, financial strength, and debt
  ratings by recognized rating organizations are increasingly important factors
  in establishing the competitive position of insurance companies and health
  plans. Ratings information is broadly disseminated and generally used
  throughout the industry. Our ability to expand and to attract new business is
  affected by the financial strength ratings assigned to our subsidiaries by
  independent industry rating agencies, such as A.M. Best Company, Inc.
  Some distributors such as financial institutions, unions, associations and
  affinity groups may not sell our products to these groups unless the rating of
  our subsidiary writing the business improves to at least an "A-" from its "B++."
  The lack of higher A.M. Best ratings for our subsidiaries could adversely
  affect sales of our products.
  Our debt ratings affect
  both the cost and availability of future borrowings. Each of the rating
  agencies reviews its ratings periodically and there can be no assurance that
  current ratings will be maintained in the future. Our ratings reflect each
  rating agency's opinion of our financial strength, operating performance, and
  ability to meet our debt obligations or obligations to policyholders, but are
  not evaluations directed toward the protection of investors in our common stock
  and should not be relied upon as such. Following announcement on March 5,
  2008 of the revision of our estimate of MemberHealth's revenue for 2008,
  Standard & Poor's indicated that it will reduce its BBB- investment
  grade rating on our debt to BB+, which is below investment grade, and A.M.
  Best indicated that it will maintain its B++ rating on our core insurance
  subsidiaries. There is no assurance that the rating agencies will maintain
  these ratings in the future. Any future downgrade in our ratings may cause our
  policyholders and members to lapse, and may cause some of our agents to sell
  less of our products or to cease selling our products altogether. Increased lapse
  rates would reduce our premium revenue and net income. Thus, downgrades in our
  ratings, should they occur, may adversely affect our business, financial
  condition and results of operations.
  If we fail to properly maintain the integrity of our data
  and information systems, our business could be materially adversely affected.
  Our business depends
  significantly on efficient, effective and secure information systems and the
  integrity and timeliness of the data we use to run our business. We have
  various information systems which support our operating segments. The
  information gathered and processed by our management information systems
  assists us in, among other things, marketing and sales tracking, underwriting,
  billing, claims processing, medical management, medical care cost and
  utilization trending, financial and management accounting, reporting, planning
  and analysis and e-commerce. These systems also support on-line customer
  service functions, provider and member administrative functions and support tracking
  and extensive analyses of medical expenses and outcome data.
  Our information systems
  and applications require an ongoing commitment of significant resources to
  maintain, protect and enhance existing systems and develop new systems to keep
  pace with continuing changes in information processing technology, evolving
  industry and regulatory standards, and changing customer preferences. If the
  information we rely upon to run our businesses were to be found to be
  inaccurate or unreliable, if we fail to properly maintain our information
  systems and data integrity, or if we fail to successfully update or expand
  processing capability or develop new capabilities to meet our business needs in
  a timely manner, we could have operational disruptions, have problems in
  determining medical cost estimates and establishing appropriate pricing, have
  customer and physician and other health care provider disputes, lose our
  ability to produce timely and accurate reports, have regulatory or other legal
  problems, have increases in operating and administrative expenses, lose
  existing customers, have difficulty in attracting new customers or in
  implementing our growth strategies, or suffer other adverse consequences.
  17
  To the extent we fail to
  maintain effective information systems, we may need to contract for these
  services with third-party management companies, which may be on less favorable
  terms to us and significantly disrupt our operations and information flow. In
  addition, we have outsourced the operation of our data centers to independent
  third parties and may from time to time obtain additional services or
  facilities from other independent third parties. Dependence on third parties
  for these services and facilities may make our operations vulnerable to their
  failure to perform as agreed.
  Furthermore, our business
  requires the secure transmission of confidential information over public
  networks. Because of the confidential health information we store and transmit,
  security breaches could expose us to a risk of regulatory action, litigation,
  possible liability and loss. Our security measures may be inadequate to prevent
  security breaches, and our business operations and profitability would be
  adversely affected by cancellation of contracts, loss of members and potential
  criminal and civil sanctions if they are not prevented.
  There can be no assurance
  that our process of improving existing systems, developing new systems to
  support our expanding operations, integrating new systems, protecting our
  proprietary information, and improving service levels will not be delayed or
  that additional systems issues will not arise in the future. Failure to
  adequately protect and maintain the integrity of our information systems and
  data may result in a material adverse effect on our financial positions,
  results of operations and cash flows.
  Any failure by us to manage our growing operations or to
  successfully integrate acquisitions and other significant transactions could
  harm our financial results, business and prospects.
  As part of our business
  strategy, we frequently engage in discussions with third parties regarding
  possible investments, acquisitions, strategic alliances, joint ventures and
  outsourcing transactions and often enter into agreements relating to these
  transactions that are designed to enhance our business objectives. In order to
  pursue this strategy successfully, we must identify suitable candidates for,
  and successfully complete, transactions as well as effectively integrate any
  acquired companies into our operations. If we fail to identify and successfully
  complete transactions that further our strategic objectives, we may be required
  to expend resources to develop products and technology internally, we may be
  unable to sustain our historical growth rates, we may be put at a competitive
  disadvantage or we may be adversely affected by negative market perceptions,
  any of which may have a material adverse effect on our results of operations,
  financial position or cash flows.
  Acquisition
  risk
  The rapid growth in the
  size and complexity of our operations has placed, and will continue to place,
  significant demands on our management, operations systems, accounting systems,
  internal control systems and financial resources. As part of our strategy, we
  have experienced, and expect to continue to experience, considerable growth
  through acquisitions.
  Acquisitions involve
  numerous additional risks, some of which we have experienced in the past, such
  as:
  ·
  difficulties in
  the integration of operations, technologies, products, systems and personnel of
  the acquired company;
  ·
  diversion of
  financial and management resources from existing operations;
  ·
  potential
  increases in policy lapses;
  ·
  potential losses
  from unanticipated litigation, undiscovered or undisclosed liabilities or
  unanticipated levels of claims;
  ·
  inability to
  generate sufficient revenue to offset acquisition costs;
  ·
  loss of key
  customer accounts: and
  ·
  loss of key
  provider contracts or renegotiation of existing contracts on less favorable
  terms.
  In addition, we generally
  are required to obtain regulatory approval from one or more governmental
  agencies when making acquisitions, which may require a public hearing,
  regardless of whether we already operate a plan in the state in which the
  business to be acquired is located. We may be unable to comply with these
  regulatory requirements for an acquisition in a timely manner, or at all.
  Moreover, some sellers may insist on selling assets that we may not want, such
  as commercial lines of business, or transferring their liabilities to us as
  part of the sale of their companies or assets. Even if we identify suitable
  acquisition targets, we may be unable to complete acquisitions or obtain the
  necessary financing for acquisitions on terms favorable to us, or at all.
  To the extent we complete
  an acquisition, we may be unable to realize the anticipated benefits from it
  because of operational factors or difficulties in integrating the following or
  other aspects of acquisitions with our existing businesses
  ·
  additional
  employees who are not familiar with our operations;
  ·
  new provider
  networks, which may operate on terms different from our existing networks;
  18
  ·
  additional
  members, who may decide to transfer to other healthcare providers or health
  plans;
  ·
  disparate
  information technology, claims processing, and record keeping systems; and
  ·
  accounting
  policies, some of which require a high degree of judgment or complex estimation
  processes, such as estimates of reserves, IBNR claims, valuation and accounting
  for goodwill and intangible assets, stock-based compensation, and income tax
  matters.
  For all of the above
  reasons, we may not be able to implement our acquisition strategy successfully.
  Furthermore, in the event
  of an acquisition or investment, you should be aware that we may issue stock
  that would dilute stock ownership, incur debt that would restrict our cash
  flow, assume liabilities, incur large and immediate write-offs, incur
  unanticipated costs, divert management's attention from our existing business,
  experience risks associated with entering markets in which we have no or
  limited prior experience, or lose key employees from the acquired entities or
  our historical business.
  Internal
  growth and expansion risk
  Additionally, we are
  likely to incur additional costs if we develop new product offerings or enter
  new service areas or states where we do not currently operate, which may limit
  our ability to expand to, or further expand in, those areas. Our rate of
  expansion into new geographic areas may also be limited by:
  ·
  our inability to
  raise sufficient capital;
  ·
  the time and
  costs associated with designing and filing new product forms and recruiting
  related sales forces to offer products in the new area;
  ·
  the time and
  costs associated with obtaining regulatory approval to operate in the new area
  or expanding our licensed service area, as the case may be;
  ·
  our inability to
  develop a network of physicians, hospitals, and other healthcare providers that
  meets our requirements and those of the applicable regulators;
  ·
  competition,
  which could increase the costs of recruiting members, reduce the pool of
  available members, or increase the cost of attracting and maintaining our
  providers;
  ·
  the cost of
  providing healthcare services in those areas;
  ·
  the cost of
  implementation and on-going administration of newly developed programs and
  services;
  ·
  our inability to
  achieve sufficient scale of operations to cover the administration and
  marketing costs associated with entering new markets, and
  ·
  demographics and
  population density.
  Our ability to manage our
  growth and compete effectively will depend, in part, on our success in
  addressing these demands and risks. Any failure by us to effectively manage our
  growth could have a material adverse effect on our business, financial
  condition or results of operations.
  Any failure to manage sales and administrative costs could
  impair profitability.
  The level of our sales
  and administrative expenses affects our profitability. While we proactively
  attempt to manage these expenses effectively, increases in the cost of sales
  and marketing, staff-related expenses, investment in new products, greater
  emphasis on small group and individual health insurance products, acquisitions,
  and implementation of regulatory requirements, among others, may occur from
  time to time.
  There can be no assurance
  that we will be able to contain our sales expenses in line with our actual
  levels of production and our administrative expenses in line with our
  membership base. This may result in a material adverse effect on our financial
  position, results of operations and cash flows.
  Most of our assets are invested in fixed income securities
  and are subject to market fluctuations.
  Our investment portfolio
  consists almost entirely of fixed income securities. The fair market value of
  these assets and the investment income from these assets fluctuate depending on
  general economic and market conditions. The fair market value of our
  investments in fixed income securities generally increases or decreases in an
  inverse relationship with fluctuations in interest rates,
  19
  while net investment income realized by us from future
  investments in fixed income securities will generally increase or decrease with
  interest rates. In addition, actual net investment income or cash flows from
  investments that carry prepayment risk, such as mortgage-backed and other
  asset-backed securities, may differ from those anticipated at the time of
  investment as a result of interest rate fluctuations. Because substantially all
  of our fixed income securities are classified as available for sale, changes in
  the market value of our securities are reflected in our balance sheet. Similar
  treatment is not available for liabilities. Therefore, interest rate
  fluctuations could adversely affect our results of operations and financial
  condition.
  Further deterioration in the mortgage-backed securities
  market or significant deterioration in the mortgage-backed securities we hold
  could adversely affect our results of operations or financial condition.
  As of December 31,
  2007, we held securities with a par value of approximately $147 million
  with exposure to Subprime mortgages. The market value of these securities was
  $100 million at December 31, 2007, representing approximately 6% of
  our cash and invested assets. During the fourth quarter of 2007, we recognized
  other than temporary impairment in the value of some of our securities with
  exposure to subprime mortgages totaling $41.0 million. As the economy in
  general and the market for mortgage-backed securities with exposure to Subprime
  mortgages have deteriorated over the last year, these securities have become
  increasingly illiquid. If the mortgage-backed securities with exposure to
  Subprime mortgages in our portfolio experience significant rates of default, if
  the market for these securities continues to experience lack of liquidity or
  otherwise deteriorates or this lack of liquidity worsens, we might need to
  continue to impair the value of these securities, which could adversely effect
  our results of operations or financial condition.
  Additionally,
  mortgage-backed securities are subject to prepayment risks that vary with
  interest rates, among other things. During periods of declining interest rates,
  mortgage-backed securities generally prepay faster as the underlying mortgages
  are prepaid or refinanced by borrowers in order to take advantage of lower
  rates. Mortgage-backed securities that have an amortized cost greater than par
  because we purchased them at a premium may incur a reduction in yield or a loss
  as a result of these prepayments.
  Legal and regulatory investigations and actions are
  increasingly common in the insurance and managed care business and may result
  in financial losses and harm our reputation.
  We face a significant
  risk of class action lawsuits and other litigation and regulatory
  investigations and actions in the ordinary course of operating our businesses.
  Due to the nature of our businesses, we are subject to a variety of legal and
  regulatory actions relating to our business operations, such as the design,
  management and offering of products and services. The following are examples of
  the types of potential litigation and regulatory investigations we face:
  ·
  claims relating
  to sales or underwriting practices;
  ·
  claims relating
  to the methodologies for calculating premiums;
  ·
  claims relating
  to the denial or delay of health care benefit payments;
  ·
  claims relating
  to claims payments and procedures;
  ·
  additional
  premium charges for premiums paid on a periodic basis;
  ·
  claims relating
  to the denial, delay or rescission of insurance coverage;
  ·
  challenges to
  the use of software products used in administering claims;
  ·
  claims relating
  to our administration of our Medicare Part D and other healthcare and
  insurance offerings and PBM;
  ·
  claims by
  government agencies relating to compliance with laws and regulations;
  ·
  medical
  malpractice or negligence actions based on our medical necessity decisions or
  brought against us on the theory that we are liable for our providers' alleged
  malpractice or negligence;
  ·
  claims relating
  to product design;
  ·
  allegations of
  anti-competitive and unfair business activities;
  ·
  provider
  disputes over compensation and termination of provider contracts;
  ·
  allegations of
  discrimination;
  ·
  claims related
  to the failure to disclose business practices;
  20
  ·
  allegations of
  breaches of duties to customers;
  ·
  claims relating
  to inadequate or incorrect disclosure or accounting in our public filings;
  ·
  allegations of
  agent misconduct;
  ·
  claims relating
  to suitability of annuity products;
  ·
  claims relating
  to customer audits and contract performance; and
  ·
  claims relating
  to dispensing of drugs associated with our in-house mail order pharmacy.
  Plaintiffs in class
  action and other lawsuits against us may seek very large or indeterminate amounts,
  and punitive and treble damages, which may remain unknown for substantial
  periods of time. We are also subject to various regulatory inquiries, such as
  information requests, formal and informal inquiries, subpoenas and books and
  record examinations, from state, Federal and international regulators and other
  authorities. A substantial legal liability or a significant regulatory action
  against us could have an adverse effect on our business, financial condition
  and results of operations.
  Items headed "Legal
  Proceedings" and "Commitments and Contingencies" in  the notes to the consolidated financial
  statements included in the reports into which this report may be incorporated
  by reference may contain a description of material legal actions in which we are
  currently involved.
  We cannot predict the
  outcome of actions we face with certainty, and we are incurring expenses in the
  defense of our current matters. We also may be subject to additional litigation
  in the future. Litigation could materially adversely affect our business or
  results of operations because of the costs of defending these cases, the costs
  of settlement or judgments against us, or the changes in our operations that
  could result from litigation. The defense of any these actions may be time-consuming
  and costly, and may distract our management's attention. In addition, we could
  suffer significant harm to our reputation, which could have an adverse effect
  on our business, financial condition and results of operations. As a result, we
  may incur significant expenses and may be unable to effectively operate our
  business.
  Potential liabilities may
  not be covered by insurance or indemnity, insurers or indemnifying parties may
  dispute coverage or may be unable to meet their obligations or the amount of
  our insurance or indemnification coverage may be inadequate. In addition, some
  types of damages, like punitive damages or damage for willful acts, may not be
  covered by insurance. The cost of business insurance coverage has increased
  significantly. Insurance coverage for all or some forms of liability may become
  unavailable or prohibitively expensive in the future. We cannot assure you that
  we will be able to obtain insurance coverage in the future, or that insurance
  will continue to be available on a cost-effective basis, if at all.
  The health care industry
  continues to receive significant negative publicity regarding the public's
  perception of it. This publicity and public perception have been accompanied by
  increased litigation, in some cases resulting in
  ·
  large jury
  awards,
  ·
  legislative
  activity,
  ·
  regulation and
  ·
  governmental
  review of industry practices.
  These factors, as well as any negative publicity about
  us in particular, could adversely affect our ability to market our products or
  services and to attract and retain members, may require us to change our
  products or services, may increase the regulatory burdens under which we
  operate and may require us to pay large judgments or fines. Any combination of
  these factors could further increase our cost of doing business and adversely
  affect our financial position, results of operations and cash flows.
  The occurrence of natural or man-made disasters could
  adversely affect our financial condition and results of operation.
  We are exposed to various
  risks arising out of natural disasters, such as
  ·
  earthquakes,
  ·
  hurricanes,
  ·
  floods,
  tornadoes,
  ·
  pandemic health
  events such as avian influenza, and
  21
  ·
  man-made
  disasters, such as acts of terrorism and military actions.
  For example, a natural or man-made disaster could lead
  to unexpected changes in persistency rates as policyholders and members who are
  affected by the disaster may be unable to meet their contractual obligations,
  such as payment of premiums on our insurance policies. The continued threat of
  terrorism and ongoing military actions may cause significant volatility in
  global financial markets, and a natural or man-made disaster could trigger an
  economic downturn in the areas directly or indirectly affected by the disaster.
  These consequences could, among other things, result in a decline in business
  and increased claims from those areas. Disasters also could disrupt
  communications and financial services and other aspects of public and private
  infrastructure, which could disrupt our normal business operations.
  A natural or man-made
  disaster also could disrupt the operations of our counterparties or result in
  increased prices for the products and services they provide to us. In addition,
  a disaster could adversely affect the value of the assets in our investment
  portfolio if it affects companies' ability to pay principal or interest on
  their securities.
  Our business may suffer if we are not able to hire and
  retain sufficient qualified personnel or if we lose our key personnel.
  Our future success
  depends partly on the continued contribution of our senior management and other
  key employees. While we currently have employment agreements with key
  executives, these do not guarantee that the services of these executives will
  continue to be available to us. The loss of the services of any of our senior
  management, or other key employees, could harm our business. In addition,
  recruiting and retaining the personnel we require to effectively compete in our
  markets may be difficult. If we fail to hire and retain qualified employees, we
  may not be able to maintain and expand our business.
  If we fail to effectively execute our Medicare initiatives
  and our other operational and strategic initiatives, our business could be
  materially adversely affected.
  Our future performance
  depends in large part upon our management team's ability to execute our
  strategy to position us for the future. This strategy relies to a significant
  extent on opportunities created by the MMA. The MMA offers new opportunities in
  our plan and private fee-for-service Medicare Advantage products and
  otherMedicare programs, as well as Medicare Part D plans. We have made
  substantial investments in our Medicare programs to enhance our ability to
  participate in these programs. Over the past few years we have increased the
  size of our Medicare geographic reach since the enactment of the MMA through
  expanded Medicare product offerings. We offer both stand-alone Medicare Part D
  plans and Medicare Advantage plans with prescription drug coverage in addition
  to our other product offerings. For 2008, we offer Medicare Part D plans
  in 50 states as well as the District of Columbia, Puerto Rico and the U.S.
  Virgin Island. We offer private fee-for-service plans in 47 states, up from 35
  states in 2007. The growth in our Medicare membership and revenues, as well as
  the timing of membership enrollment and the speed with which the individual
  members meet their deductibles and cost-sharing obligations, impacts the
  pattern of our quarterly earnings.
  Our contracts with CMS,
  as well as applicable Medicare Part D regulations and federal and state
  laws, requires us to, among other obligations:
  ·
  comply with
  disclosure, filing, record-keeping and marketing rules;
  ·
  operate quality
  assurance, drug utilization management and medication therapy management
  programs;
  ·
  support
  e-prescribing initiatives;
  ·
  implement
  grievance, appeals and formulary exception processes;
  ·
  comply with
  payment protocols, such as the return of overpayments to CMS and, in specified
  circumstances, coordination with state pharmacy assistance programs;
  ·
  use approved
  networks and formularies, and provide access to these networks to any willing
  pharmacy;
  ·
  provide
  emergency out-of-network coverage; and
  ·
  adopt a
  comprehensive Medicare and Fraud, Waste and Abuse compliance program.
  Any contractual or regulatory non-compliance on our
  part could entail significant sanctions and monetary penalties.
  CMS has announced that
  the 2008 PFFS selling season will run from November 15, 2007 through March 31,
  2008, which is shorter than the 2007 selling season, which was extended by CMS
  beyond March 31, 2007. The shorter than anticipated 2008 selling season
  could have a material adverse effect on our business and results of operations.
  22
  Because our Medicare Advantage premiums, which generate most
  of our Medicare Advantage revenues, are fixed by contract, we are unable to
  increase our Medicare Advantage premiums during the contract term if our
  corresponding medical benefits expense exceeds our estimates.
  Most of our Medicare
  Advantage revenues are generated by premiums consisting of fixed monthly
  payments per member. We use a significant portion of our revenues to pay the
  costs of health care services delivered to our members. The principal costs
  consist of claims payments, capitation payments and other costs incurred to
  provide health insurance coverage to our members. Generally, premiums in the
  health care business are fixed on an annual basis by contract, and we are
  obligated during the contract period to provide or arrange of the provision of
  healthcare services as established by the Federal government.
  We are unable to increase
  the premiums we receive under these contracts during the then-current terms. If
  our medical expenses exceed our estimates, except in very limited circumstances
  or as a result of risk score adjustments for member acuity, we generally cannot
  recover costs we incur in excess of our medical cost projections in the
  contract year through higher premiums. As a result, our profitability depends,
  to a significant degree, on our ability to adequately predict and effectively
  manage our medical expenses related to the provision of healthcare services.
  Accordingly, the failure to adequately predict and control medical expenses and
  to make reasonable estimates and maintain adequate accruals for incurred but
  not reported, claims, known as IBNR, may have a material adverse effect on our
  financial condition, results of operations, or cash flows. If our estimates of
  reserves are inaccurate, our ability to take timely correction actions or to
  otherwise establish appropriate premium pricing could be adversely affected.
  Failure to adequately price our products or to estimate sufficient medical
  claim reserves may result in a material adverse effect on our financial
  position, results of operations and cash flows. In addition, to the extent that
  CMS or Congress takes action to reduce the levels of payments to Medicare
  Advantage providers, our revenues would be adversely affected.
  We estimate the costs of
  our future medical claims and other expenses using actuarial methods and
  assumptions based upon claim payment patterns, cost trends, product mix,
  seasonality, medical inflation, historical developments, such as claim
  inventory levels and claim receipt patterns, and other relevant factors. We
  continually review estimates of future payments relating to medical claims
  costs for services incurred in the current and prior periods and make necessary
  adjustments to our reserves. However, historically, our medical expenses as a
  percentage of premium revenue have fluctuated. The principal factors that may
  cause medical expenses to exceed our estimates are:
  ·
  increased
  utilization of medical facilities and services and prescription drugs;
  ·
  increased cost
  of services;
  ·
  our membership
  mix;
  ·
  variances in
  actual versus estimated levels of cost associated with new products, benefits
  or lines of business, product changes or benefit level changes;
  ·
  periodic
  renegotiation of hospital, physician and other provider contracts, or the
  consolidation of these entities;
  ·
  membership in
  markets lacking adequate provider networks;
  ·
  changes in the
  demographics of our members and medical trends affecting them;
  ·
  termination of
  capitation arrangements resulting in the transfer of membership to
  fee-for-service arrangements;
  ·
  possible changes
  in our pharmacy rebate program with drug manufacturers;
  ·
  the occurrence
  of acts of terrorism, public health epidemics, severe weather events or other
  catastrophes;
  ·
  the introduction
  of new or costly treatments and technologies;
  ·
  medical cost
  inflation;
  ·
  government
  mandated benefits or other regulatory changes; and
  ·
  contractual
  disputes with hospitals, physicians and other providers.
  Because of the
  relatively high average age of the Medicare population, medical expenses for
  our Medicare Advantage plans may be particularly difficult to control. We may
  not be able to continue to manage these expenses effectively in the future. If
  our medical expenses increase, our profits could be reduced or we may not
  remain profitable.
  23
  We derive a substantial portion of our Medicare Advantage
  health plan revenues and profits from Medicare Advantage health plan operations
  in Texas, and legislative actions, economic conditions or other factors that
  adversely affect those operations could materially reduce our revenues and
  profits.
  We derive a substantial
  portion of our Medicare Advantage health plan revenues and profits from
  Medicare Advantage health plan operations in Texas. If we are unable to
  continue to operate in Texas, or if we must significantly curtail our current
  operations in any portion of Texas, our revenues will decrease materially. Our
  reliance on our operations in Texas could cause our revenues and profitability
  to change suddenly and unexpectedly, depending on legislative actions, economic
  conditions and similar factors. In addition, our market share in Texas may make
  it more difficult for us to expand our membership in existing markets in Texas.
  Our inability to continue to operate in Texas, or a decrease in the revenues or
  profitability of our Texas operations, would harm our overall operating
  results.
  Our net income may decline if our insurance premium rates
  are not adequate.
  We set the premium rates
  on our insurance policies based on facts and circumstances known at the time we
  issue the policies and on assumptions about numerous variables, such as
  ·
  the actuarial
  probability of a policyholder incurring a claim,
  ·
  the severity and
  duration of the claim,
  ·
  the mortality
  rate of our policyholder base,
  ·
  the persistency
  or renewal rate of our policies in force,
  ·
  our commission
  and policy administration expenses, and
  ·
  the interest
  rate earned on our investment of premiums.
  In setting premium rates, we consider historical
  claims information, industry statistics and other factors. If our actual claims
  experience proves to be less favorable than we assumed and we are unable to
  raise our premium rates, our net income may decrease. We generally cannot raise
  our premiums in any state unless we first obtain the approval of the insurance
  regulator in that state. We review the adequacy of our accident and health
  premium rates regularly and file rate increases on our products when we believe
  permitted premium rates are too low. When determining whether to approve or
  disapprove our rate increase filings, the various state insurance departments
  take into consideration
  ·
  our actual
  claims experience compared to expected claims experience,
  ·
  policy
  persistency, which means the percentage of policies that are in-force at
  specified intervals from the issue date compared to the total amount originally
  issued,
  ·
  investment
  income and
  ·
  medical cost
  inflation.
  If the regulators do not believe these factors warrant
  a rate increase, it is possible that we will not be able to obtain approval for
  premium rate increases from currently pending requests or requests filed in the
  future. If we are unable to raise our premium rates because we fail to obtain
  approval for rate increases in one or more states, our net income may decrease.
  If we are successful in obtaining regulatory approval to raise premium rates,
  the increased premium rates may reduce the volume of our new sales and cause
  existing policyholders to let their policies lapse. This would reduce our
  premium income in future periods. Increased lapse rates also could require us
  to expense all or a portion of the deferred policy costs relating to lapsed
  policies in the period in which those policies lapse, reducing our net income
  in that period.
  We hold reserves for expected claims, which are estimated,
  and these estimates involve an extensive degree of judgment; if actual claims
  exceed reserve estimates, our results could be materially adversely affected.
  Our benefits incurred
  expense includes estimates of IBNR. We, together with our internal and external
  consulting actuaries, estimate our claim liabilities using actuarial methods
  based on historical data adjusted for payment patterns, cost trends, product
  mix, seasonality, utilization of healthcare services and other relevant
  factors. Actual conditions, however, could differ from those assumed in the
  estimation process, and those differences could be material. Due to the
  uncertainties associated with the factors used in these assumptions, the actual
  amount of benefit expense that we incur may be materially more or less than the
  amount of IBNR originally estimated, and materially different amounts could be
  reported in our financial statements for a particular period under different
  conditions or using different assumptions. We make adjustments, if necessary,
  to benefits incurred expense when the criteria used to determine IBNR change
  and when we ultimately determine actual claim costs. If our estimates of IBNR
  are inadequate in the future,
  24
  our reported results of operations will be adversely
  affected. Further, our inability to estimate IBNR accurately may also affect
  our ability to take timely corrective actions or otherwise establish
  appropriate premium pricing, further exacerbating the extent of any adverse
  effect on our results.
  Our reserves for future insurance policy benefits and claims
  may prove to be inadequate, requiring us to increase liabilities and resulting
  in reduced net income and shareholders' equity.
  We calculate and maintain
  reserves for the estimated future payment of claims to our insurance policyholders
  using the same actuarial assumptions that we use to set our premiums. For our
  accident and health insurance business, we establish active life reserves for
  expected future policy benefits, plus a liability for due and unpaid claims,
  claims in the course of settlement, and incurred but not reported claims. Many
  factors can affect these reserves and liabilities, such as economic and social
  conditions, inflation, hospital and medical costs, changes in doctrines of
  legal liability and extra-contractual damage awards. Therefore, we necessarily
  base our reserves and liabilities on extensive estimates, assumptions and prior
  years' statistics. When we acquire other insurance companies or blocks of
  insurance, our assessment of the adequacy of acquired policy liabilities is
  subject to similar estimates and assumptions. Establishing reserves involves
  inherent uncertainties, and it is possible that actual claims could materially
  exceed our reserves and have a material adverse effect on our results of
  operations and financial condition. Our net income depends significantly upon
  the extent to which our actual claims experience is consistent with the
  assumptions we used in setting our reserves and pricing our policies. If our
  assumptions with respect to future claims are incorrect, and our reserves are
  insufficient to cover our actual losses and expenses, we would be required to
  increase our liabilities resulting in reduced net income, statutory surplus and
  shareholders' equity.
  The availability of reinsurance on acceptable terms and the
  financial stability of our reinsurers could impact our ability to manage risk
  and increase the volume of insurance that we sell.
  We utilize reinsurance
  agreements with larger, financially sound and highly- rated reinsurers to
  mitigate insurance risks that we underwrite. We enter into reinsurance
  arrangements with unaffiliated reinsurance companies to limit our exposure on
  individual claims and to limit or eliminate risk on our non-core or
  under-performing blocks of business. As of December 31, 2007, we ceded to
  reinsurers approximately 16% of our gross annualized insurance premium in
  force, excluding the State of Connecticut employee business, which is 100%
  ceded to PharmaCare Re. Reinsurance arrangements leave us exposed to two risks:
  Credit risk and replacement risk. Credit risk exists because reinsurance does
  not relieve us of our direct liability to our insureds for the portion of the
  risks ceded to reinsurers. We are exposed to the risk of a reinsurer's failure
  to pay in full and in a timely manner the claims we make against them in
  accordance with the terms of our reinsurance agreements, which could expose our
  insurance company subsidiaries to liabilities in excess of their reserves and
  surplus and could expose them to insolvency proceedings. The failure of a
  reinsurer to make timely claims payments to us could materially and adversely
  affect our results of operations and financial condition and our ability to
  make payments to our policyholders. Replacement risk exists because a reinsurer
  may cancel its participation on new business issued on advance notice. As a
  result, we would need to find reinsurance from another source to support our
  level of new business. The amount and cost of reinsurance available to us is
  subject, in large part, to prevailing market conditions beyond our control.
  Because our current reinsurance agreements are non-cancelable for business in
  force, non-renewal or cancellation of a reinsurance arrangement affects only
  new business and the reinsurer remains liable on business reinsured prior to
  non-renewal or cancellation. In the event that current reinsurers cancel their
  participation on new business, we would seek to replace them, possibly at
  higher rates. If we are not able to reinsure our life insurance products on
  acceptable terms, we would consider limiting the amount of this new business we
  issue. A failure to obtain reinsurance on acceptable terms would allow us to
  underwrite new business only to the extent that we are willing and able to bear
  the exposure to the new business on our own.
  We may experience future lapsation in our Medicare
  supplement business, requiring faster amortization of the deferred acquisition
  costs.
  We experienced higher
  than expected lapsation in our Medicare supplement business beginning in the
  third quarter of 2005, which continued through the second quarter of 2007 and
  returned to the lower level thereafter. We believe competitive pressure from
  other Medicare supplement companies and Medicare Advantage products, as well as
  the departure of some of our sales managers, and other factors, contribute to
  the level of lapsation. This excess lapsation required us to accelerate the
  amortization of the deferred acquisition cost and present value of future
  profits assets associated with the business that lapsed. We cannot give
  assurances that lapsation of our Medicare supplement business will decline from
  the levels experienced from 2005 to 2007, requiring faster amortization of the
  deferred costs.
  We may experience higher than expected loss ratios in our
  Medicare supplement business, which could materially adversely affect our
  results of operations.
  We may experience higher
  than expected loss ratios on our Medicare supplement business. In the past, as
  a result of higher than anticipated Part B costs, relating to outpatient
  doctors, and skilled nursing facility incidence, we did not see our historical
  pattern of seasonal reduction in loss ratios in the latter part of the year. We
  actively seek to obtain appropriate rate action in an effort to reverse the
  trend in these numbers; however, we can make no assurances that future rate
  increases will be obtained, or if obtained, will be sufficient. We also cannot
  give assurance that our Medicare supplement loss ratio will not continue to
  increase beyond what we currently anticipate.
  25
  We may not be able to compete successfully if we cannot
  recruit and retain insurance agents, which could materially adversely affect
  our business and ability to compete.
  We distribute our
  products principally through career agents and independent agents who we
  recruit and train to market and sell our products. We also engage managing
  general agents from time to time to recruit agents and develop networks of
  agents in various states. We compete with other insurance companies for
  productive agents, primarily on the basis of our financial position, support
  services, compensation and product features. It can be difficult to
  successfully compete for productive agents with larger insurance companies that
  have higher financial strength ratings than we do. Our business and ability to
  compete will suffer if we are unable to recruit and retain insurance agents or
  if we lose the services provided by our managing general agents.
  We may be required to refund or reduce premiums if our
  premium rates are determined to be too high.
  Insurance regulators
  require that we maintain minimum statutory loss ratios on some of the insurance
  products that we sell. We must therefore pay out, on average, a specified
  minimum percentage of premiums as benefits to policyholders. State regulations
  also mandate the manner in which insurance companies may compute loss ratios
  and the manner in which compliance is measured and enforced. If our insurance
  products are not in compliance with state mandated minimum loss ratios, state
  regulators may require us to refund or reduce premiums.
  We have stopped selling annuities and long term care
  insurance and the premiums that we charge for the long term care policies that
  remain in force may not be adequate to cover the claims expenses that we incur.
  We have concluded that
  the sale of long term care insurance and annuities does not fit within our
  strategic or financial goals.
  We began to curtail the
  sale of new long-term care business in 2003, and stopped all new sales at the
  end of 2004. As of December 31, 2007, approximately, $35.1 million of
  annualized premium remains in force, of which we retain approximately
  $22.8 million. The overall block of business continues to generate losses;
  a portion of the losses we have incurred relates to a specific block of Florida
  home health care business that we stopped selling in 1999. There can be no
  assurance that current premiums we charge will be adequate to cover the claims
  expenses that we will incur in the future. There is also no assurance that rate
  increases that we may seek will be approved by the applicable state regulators
  or, if approved, will be adequate to fully mitigate adverse loss experience.
  We stopped selling annuity
  products in 2006. As a result of not offering new products, our agents and
  policyholders might seek to move their deposits to insurance companies that are
  active in this business, causing an increase in the lapsation of our in force
  annuity deposits. This could require us to amortize a higher than expected
  amount of deferred acquisition costs associated with the terminated policies
  and might also require us to sell bonds that were purchased to provide an
  appropriate interest spread to these interest sensitive products, and would
  negatively impact our operating results.
  A reduction in the number of members in our health plans
  could adversely affect our results of operations.
  A reduction in the number
  of members in our health plans could adversely affect our results of
  operations. The principal factors that could contribute to the loss of
  membership are:
  ·
  competition in
  premium or plan benefits from other health care benefit companies;
  ·
  reductions in
  the number of employers offering health care coverage;
  ·
  competition from
  physicians or other provider groups who may elect to form their own health
  plans;
  ·
  inability to
  develop and maintain satisfactory relationships with the providers of care to
  our members;
  ·
  reductions in
  work force by existing customers;
  ·
  our increases in
  premiums or benefit changes;
  ·
  our exit from a
  market or the termination of a health plan;
  ·
  negative
  publicity and news coverage relating to our company or the managed health care
  industry generally; and
  ·
  catastrophic
  events, such as epidemics, natural disasters and man-made catastrophes, and
  other unforeseen occurrences.
  26
  We have incurred and may in the future incur significant
  expenses in connection with the implementation and expansion of our new
  Medicare Advantage plans, which could adversely affect our operating results.
  For the 2008 selling
  season, we expanded the markets in which we offer our Medicare Advantage
  products. We expanded our private fee-for-service plans from 35 to 47 states
  and our HealthPlans to new markets in North Texas and Wisconsin. We expect to
  expand the number of markets for 2009 as well. In connection with this
  expansion, we have incurred expenses to upgrade and improve our infrastructure,
  technology, and systems to manage these products, and will in the future incur
  additional expenses. In particular, we incurred the following expenses in
  connection with the implementation and expansion of our Medicare Advantage
  program:
  ·
  hiring and
  training of personnel to establish and manage systems, operations, regulatory
  relationships, and materials;
  ·
  systems
  development and upgrade costs, such as hardware, software and development
  resources;
  ·
  marketing and
  sales;
  ·
  enrolling new
  members;
  ·
  developing and
  distributing member materials such as ID cards and member handbooks; and
  ·
  handling sales
  inquiry and customer service calls.
  There can be no
  assurance that we will recoup these expenditures or that they will result in
  profitable operations, currently, or in the future.
  Our stock price and trading volume may be volatile, which
  could result in a decrease in the price of our common stock.
  From time to time, the
  price and trading volume of our common stock may experience periods of
  significant volatility. Company-specific issues and developments generally in
  the health care and insurance industries, the regulatory environment and the
  capital markets may cause this volatility. The principal events and factors
  that we have identified that may cause our stock price and trading volume to
  fluctuate are:
  ·
  variations in
  our operating results;
  ·
  changes in the
  market's expectations about our future operating results;
  ·
  changes in
  financial estimates and recommendations by securities analysts concerning our
  company or the health care or insurance industries generally;
  ·
  operating and
  stock price performance of other companies that investors may deem comparable;
  ·
  news reports
  relating to trends in our markets;
  ·
  changes in the
  laws and regulations affecting our business;
  ·
  acquisitions and
  financings by us or others in our industry; and
  ·
  sales of
  substantial amounts of our common stock by our directors and executive officers
  or principal shareholders, or the perception that these sales could occur.
  If we are unable to maintain effective internal controls
  over financial reporting, investors could lose confidence in the reliability of
  our financial statements, which could result in a decrease in the price of our
  common stock.
  Because of our status as
  a public company, we are required to test our financial, internal, and
  management control systems to meet obligations imposed by the Sarbanes-Oxley
  Act of 2002. These control systems relate to our corporate governance,
  corporate control, internal audit, disclosure controls and procedures, and
  financial reporting and accounting systems. Our disclosure controls and
  procedures and our internal control over financial reporting may not prevent or
  detect all errors and all fraud. A control system, no matter how well designed
  and operated, can provide only reasonable, not absolute, assurance that the
  objectives of the control system are met. The design of a control system must
  reflect the fact that there are resource constraints, and the benefits of
  controls must be considered relative to their costs. Further, because of the
  inherent limitations in all control systems, no evaluation of controls can
  provide absolute assurance that misstatements due to error or fraud will not
  occur or that all control issues and instances of fraud, if any, within the
  Company have been detected. Among these inherent limitations are the realities
  that judgments in decision-making can be faulty and that breakdowns can occur
  because of simple error or mistake. The individual acts of some persons or the
  collusion of two or more people can circumvent controls. The design of any
  system of controls is based in part on assumptions about the likelihood of
  future events, and there can be no assurance that any design will succeed in
  achieving its stated goals under all potential future
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  conditions. Projections of any evaluation of controls
  effectiveness to future periods are subject to risks. Over time, controls may
  become inadequate because of changes in conditions or deterioration in the
  degree of compliance with policies or procedures.
  If we conclude that we do
  not have effective internal controls over financial reporting or if our
  independent auditors are unable to conclude that our internal controls over
  financial reporting are effective, investors could lose confidence in the
  reliability of our financial statements, which could result in a decrease in
  the value of our common stock. Our assessment of our internal controls over
  financial reporting may also uncover material weaknesses, significant
  deficiencies or other issues with these controls that could also result in
  adverse investor reaction. These results may also subject us to adverse
  regulatory consequences.
  State insurance laws and anti-takeover provisions in our
  organizational documents could make an acquisition of us more difficult and may
  prevent attempts by our shareholders to replace or remove our current
  management.
  Provisions of state
  insurance laws, the business corporation law of the State of New York, where we
  are incorporated, and our certificate of incorporation and bylaws, as well as
  the percentage of our common stock owned by our management, directors and
  equity investors may delay or prevent an acquisition of us or a change in our
  management or similar change in control transaction, such as transactions in
  which shareholders might otherwise receive a premium for their shares over then
  current prices or that shareholders may otherwise deem to be in their best
  interests. In addition, these provisions may frustrate or prevent any attempts
  by our shareholders to replace or remove our current management by making it
  more difficult for shareholders to replace members of our board of directors.
  Because our board of directors is responsible for appointing the members of our
  management team, these provisions could in turn affect any attempt by our
  shareholders to replace current members of our management team.
  SIGNATURES
  Pursuant to the requirements of the Securities
  Exchange Act of 1934, the registrant has duly caused this report to be signed
  on its behalf by the undersigned hereunto duly authorized.
  UNIVERSAL AMERICAN CORP.
  By:
  /s/ Mitchell J. Stier
  Mitchell J. Stier
  Senior Vice President and
  General Counsel
  Date: May 12, 2008
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