10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2006

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-16477

COVENTRY HEALTH CARE, INC.

(Exact name of registrant as specified in its charter)

Delaware	52-2073000
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (301)581-0600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Common Stock purchase rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þNo o

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo o

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

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

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

The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant as of June 30, 2006 (computed by reference to the closing sales price of such stock on the NYSE® stock market on such date) was $8,729,678,553.

As of January 31, 2007, there were 159,475,200 shares of the registrant’s voting Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrant’s Proxy Statement for its 2007 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A subsequent to the filing of this Form 10-K Report are incorporated by reference in Items 10 through 14 of Part III hereof.

COVENTRY HEALTH CARE, INC.

FORM 10-K

TABLE OF CONTENTS

PART I.
	Item 1:        Business
	Item 1A:     Risk Factors
	Item 1B:     Unresolved Staff Comments
	Item 2:        Properties
	Item 3:        Legal Proceedings
	Item 4:        Submission of Matters to a Vote of Security Holders
PART II.
	Item 5:       Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6:       Selected Financial Data
	Item 7:       Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A:    Quantitative and Qualitative Disclosures About Market Risk
	Item 8:       Financial Statements and Supplementary Data
	Item 9:       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9a:     Controls and Procedures
	Item 9b:     Other Information
PART III.
	Item 10:     Directors, Executive Officers and Corporate Governance
	Item 11:   Executive Compensation
	Item 12:    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13:    Certain Relationships and Related Transactions and Director Independence
	Item 14:     Principal Accountant Fees and Services
PART IV.
	Item 15:    Exhibits, Financial Statement Schedules
SIGNATURES
INDEX TO EXHIBITS Ex-10.12    Summary of Non-Employee Directors’ Compensation. Ex-10.14    Summary of Named Executive Officer Compensation. Ex-10.28.3 Third Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement Plan (now known as the                               401(k) Restoration and Deferred Compensation Plan), effective as of December 1, 2006. Ex-10.29    Coventry Share Plan, as amended and restated, effective as of January 1, 2006. Ex-12        Computation of Ratio of Earnings to Fixed Charges. Ex-14        Code of Business Conduct and Ethics initially adopted by the Board of Directors of Coventry on February 20,                               2003, as amended on March 3, 2005 and November 1, 2006. Ex-21        Subsidiaries of the Registrant Ex-23        Consent of Ernst & Young LLP Ex-31.1     Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act                               of 2002. Ex-31.2     Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act                               of 2002. Ex-32       Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act                               of 2002.

PART I

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-K contains forward-looking statements which are subject to risks and uncertainties in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, typically include assumptions, estimates or descriptions of our future plans, strategies and expectations, and are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “intend,” “seek,” or other similar expressions. Examples of these include discussions regarding our operating and growth strategy, projections of revenue, income or loss and future operations. Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “our Company,” “the Company” or “us” as used in this Form 10-K refer to Coventry Health Care, Inc. and its subsidiaries as of December 31, 2006.

These forward-looking statements may be affected by a number of factors, including, but not limited to, the “Risk Factors” contained in Item 1A, “Risk Factors” in this Form 10-K. Actual operations and results may differ materially from those expressed in this Form 10-K. Among the factors that may materially affect our business are increases in medical costs, difficulties in increasing premiums due to competitive pressures, unanticipated revenue short falls in recently acquired companies, price restrictions under Medicaid and Medicare, problems in integrating or realizing efficiencies in acquired companies, issues related to product marketing and imposition of regulatory restrictions, costs, or penalties. Other factors that may materially affect the Company’s business include issues related to the inability in obtaining or maintaining favorable contracts with health care providers, credit risks on global capitation arrangements, financing costs and contingencies, the ability to increase membership and litigation risk.

Item 1: Business

General

We are a national managed health care company based in Bethesda, Maryland, operating health plans, insurance companies, network rental/managed care services companies, and workers’ compensation services companies. We provide a full range of risk and fee-based managed care products and services, including health maintenance organization (“HMO”), preferred provider organizations (“PPO”), point of service (“POS”), Medicare Advantage, Medicare Prescription Drug Plans, Medicaid, Workers’ Compensation and Network Rental to a broad cross section of individuals, employer and government-funded groups, government agencies and other insurance carriers and administrators in all 50 states, as well as the District of Columbia and Puerto Rico.

Coventry was incorporated under the laws of the State of Delaware on December 17, 1997 and is the successor to Coventry Corporation, which was incorporated on November 21, 1986. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, and recent press releases can be found, within one week of being filed with or furnished to the Securities and Exchange Commission (“SEC”) and free of charge, on the Internet at www.coventryhealth.com.

Coventry has two operating segments: Health Plans and First Health. Our Health Plans segment serves 17 markets, primarily in the Mid-Atlantic, Midwest and Southeast United States. Our health plans are operated under the names Altius Health Plans, Carelink Health Plans, Coventry Health Care, Coventry Health and Life, Group Health Plan, HealthAmerica, HealthAssurance, HealthCare USA, OmniCare, PersonalCare, Southern Health and WellPath. Our health plans generally are located in small to mid-sized metropolitan areas.

Our Health Plans segment offers a broad range of managed care products to a broad cross-section of employers including federal, state, and local governments. In selected markets, we participate in Medicaid and Medicare Advantage. In addition, we participate in Medicare Prescription Drug programs in all 34 CMS established regions. Our products include traditional HMO, PPO and POS. We offer these products on an underwritten or “risk” basis where we receive a monthly premium in exchange for assuming underwriting risks including all medical and administrative costs, as well as on a self-funded basis where we perform administrative services only for a fee and the customer assumes the risk for medical costs. Within these products, we also offer consumer-directed benefit options including health reimbursement accounts (“HRA”) and health savings accounts (“HSA”). The Medicare Advantage and Medicaid products offered through our health plans are risk products.

3

Our First Health segment serves the group health, workers’ compensation and state public program markets and assists a broad range of payor clients through a portfolio of both integrated and stand-alone managed care and administrative products. The components of First Health’s offerings include:

• A broad, national preferred provider organization of directly contracted, quality, cost-effective health care providers

• Clinical programs, including case management, disease management and return to work programs

• Administrative products, including group health claims administration and workers compensation business process outsourcing, including bill review, first report of injury and front end claim processing

• Pharmacy benefit management

• Fiscal agent services (generally for state entitlement programs)

• Group health insurance products

Health Plan Business

Health Plan Products

Commercial Risk

Our health plans offer individuals and employer groups a full range of commercial risk products, including HMO, PPO and POS products. Our health plans design their products to meet the needs and objectives of a wide range of employers and members and to comply with the regulatory requirements in the markets in which they operate. Our health plans had 1.5 million commercial risk members as of December 31, 2006 that accounted for $4.5 billion of revenue in 2006.

Our health plan products vary with respect to product features, the level of benefits provided, the costs to be paid by employers and members, including deductibles and co-payments, and our members’ access to providers without referral or preauthorization requirements.

Health Maintenance Organizations

Our health plan HMO products provide comprehensive health care benefits to members, including ambulatory and inpatient physician services, hospitalization, pharmacy, mental health and ancillary diagnostic and therapeutic services. In general, a fixed monthly premium covers all HMO services although some benefit plans require co-payments or deductibles in addition to the basic premium. A primary care physician assumes overall responsibility for the care of a member, including preventive and routine medical care and referrals to specialists and consulting physicians. While an HMO member’s choice of providers is limited to those within the health plan’s HMO network, the HMO member is typically entitled to coverage of a broader range of health care services than is covered by typical reimbursement or indemnity policies. Furthermore, many of our health plan HMO products have added features to more easily allow “direct access” to providers.

Preferred Provider Organizations and Point of Service

Our health plan risk-based PPO and POS products also provide comprehensive managed health care benefits to members, but allow members to choose their health care providers at the time medical services are required and use providers that do not participate in our health plan managed care networks. If a member chooses a non-participating provider, deductibles, co-payments and other out-of-pocket costs to the member generally are higher than if the member chooses a participating provider. Our health plans also offer high deductible health plan products in conjunction with our consumer directed products. Premiums for our health plan PPO and POS products typically are lower than HMO premiums due to the increased out-of-pocket costs borne by the members.

Medicare Advantage

As of December 31, 2006, our health plans operated four Medicare Advantage (“MA”) HMOs in four states covering 65,187 members and operated four Medicare demonstration PPOs in six states covering 14,531 members. The Medicare Advantage line of business accounted for $814.6 million of revenue in 2006.

4

The Centers for Medicare & Medicaid Services (“CMS”) pays a county-specific fixed premium per member per month (“PMPM”) under our health plan Medicare contracts. In 2006, 25% of the payment was based on demographic factors of the individual member and 75% is based on individually determined health risk adjusters. In 2007, and beyond it will be 100% health risk based. Our health plans also receive a monthly premium from most of their Medicare members and/or their employer. However, beginning in 2006, each Medicare market in which the health plan segment operates had at least one plan for which members do not pay a premium.

Commencing January 1, 2007, the Company will offer Medicare Advantage Private Fee for Service (PFFS) plans in 43 states under the name Advantra Freedom. These plans are offered under a contract with CMS and provide enrollees with all benefits they receive under Original Medicare plus additional benefits such as preventive care and eyeglasses/hearing aid coverage and pharmacy benefits. Enrollees are not limited to network providers, but may utilize any provider willing to accept the plan’s terms and conditions. Providers generally receive the same reimbursement as under original Medicare. The Company’s products will be underwritten by its health insurance subsidiaries.

Medicare Part D

The Medicare Part D program, which provides eligible beneficiaries access to prescription drug coverage, took effect January 1, 2006. As part of the Medicare Part D program, eligible Medicare recipients are able to select a prescription drug plan through Medicare Part D. Medicare Part D replaced the transitional prescription drug discount program and replaced Medicaid prescription drug coverage for dual-eligible beneficiaries. The Medicare Part D prescription drug benefit is largely subsidized by the federal government and is additionally supported by risk-sharing with the federal government through risk corridors designed to limit the profits or losses of the drug plans and through reinsurance for catastrophic drug costs. The government subsidy is based on the national weighted average monthly bid by Medicare region by participating plans for this coverage, adjusted for member demographics and risk factor payments. The beneficiary will be responsible for the difference between the government subsidy and his or her plan’s bid, together with the amount of his or her plan’s supplemental premium. Additional subsidies are provided for dual-eligible beneficiaries and specified low-income beneficiaries.

Our new Medicare Part D business, which began in 2006, accounted for $669.9 million of revenue in 2006 and had 687,000 members as of December 31, 2006. The Medicare Part D plans are marketed under the brand names of Advantra Rx, First Health Premier and First Health Select. For 2007, these plans include options with first dollar coverage (no deductible) and options for coverage within the “doughnut hole” or the coverage gap in which no insurance coverage under the standard Part D program is available. Products are underwritten by Coventry Health and Life Insurance Company, First Health Life and Health Insurance Company and Cambridge Life Insurance Company. We have established partnerships with Medicare Supplement insurance carriers and brokerage channels nationwide to sell Medicare Part D prescription drug products to Medicare beneficiaries.

Medicaid

Certain of our health plans offer health care coverage to Medicaid recipients in seven states which, as of December 31, 2006, covered 373,000 members and accounted for $762.1 million of revenue in 2006. These health plans enter into a Medicaid Management Care contract with each of these individual states. Under a Medicaid contract, the participating state pays a monthly premium per member based on the age, sex, eligibility category and in some states, county or region of the Medicaid member enrolled. In some states, these premiums are adjusted according to the health risk associated with the individual member. The majority of the Medicaid members are in the Michigan, Missouri and Pennsylvania markets, representing 84.9% of the total Medicaid membership.         

Management Services

Our health plans offer management services and access to their provider networks to employers that self-insure their employee health benefits. The management services provided under these Administrative Services Only (“ASO”) arrangements typically include network management, claims processing, utilization management and quality assurance. Other features commonly provided to fully insured customers (such as value-added wellness benefits) are most commonly also extended to ASO customers. Under the ASO arrangements, our health plans receive a fixed fee for management services and access to their provider networks and they assume no underwriting risk. As of December 31, 2006, the health plans had approximately 621,000 non-risk health plan members.

Health plan management and other administrative services accounted for $124.6 million of revenue for the year ended December 31, 2006.

5

Health Plan Markets

The geographic markets in which our health plans operate are described as follows:

• Delaware — commercial products in Delaware and Maryland; Medicaid products in the Baltimore metropolitan area.

• Georgia — commercial products in the greater Atlanta, Savannah and Macon metropolitan areas.

• Illinois — commercial products, primarily in the Western, Northern (exclusive of the Chicago Metropolitan area) and Central Illinois areas.

• Iowa — commercial products to members primarily in the Des Moines metro area; Medicaid products in the Waterloo area; and Medicare Advantage products in five counties.

• Kansas — commercial products in Kansas and portions of Western Missouri and Oklahoma; Medicare Advantage products in the Kansas City and Wichita metropolitan areas.

• Louisiana — commercial products, primarily in the New Orleans, Baton Rouge and Shreveport metropolitan areas.

• Michigan — Medicaid products in Wayne County, Michigan.

• Missouri— commercial and Medicare Advantage products to members in the St. Louis metropolitan area, including portions of Southern Illinois; Medicaid products also in the St. Louis metropolitan area and Central and Western Missouri.

• Nebraska — commercial products primarily in the Omaha metropolitan area with additional networks in Lincoln and rural Nebraska.

• North Carolina — commercial products in the Durham (primarily Charlotte and Raleigh) and Charleston, South Carolina metropolitan areas.

• Pennsylvania — commercial products primarily in Harrisburg, Lehigh Valley and the State College metropolitan areas comprising the Central Pennsylvania market; commercial products in the Philadelphia metropolitan area comprising the Eastern Pennsylvania market; commercial products in Pittsburgh, Erie and portions of Eastern Ohio comprising the Western Pennsylvania market; Medicaid products in the Harrisburg metropolitan area; and Medicare Advantage products in the Pittsburgh, Harrisburg and State College metropolitan areas.

• Utah — commercial products primarily in the Ogden, Salt Lake City and Provo metropolitan areas; commercial products also in Wyoming and Idaho.

• Virginia — commercial and Medicaid products primarily in the Richmond, Roanoke and Charlottesville metropolitan areas and the Shenandoah Valley.

• West Virginia — commercial, Medicaid and Medicare Advantage products to a service area covering a majority of the state’s population.

6

Health Plan Membership

The following tables show the total number of health plan members as of December 31, 2006 and 2005 (in thousands) and the percentage change in membership between these dates.

			December 31,		Percent
			2006	2005	Change
Membership by market:
	Delaware		148	119	24.4%
	Georgia		102	78	30.8%
	Illinois		103	93	10.8%
	Iowa		60	67	(10.4%)
	Kansas		227	218	4.1%
	Louisiana		55	64	(14.1%)
	Michigan		58	61	(4.9%)
	Missouri		432	449	(3.8%)
	Nebraska		63	54	16.7%
	North Carolina		117	133	(12.0%)
	Pennsylvania		683	739	(7.6%)
	Utah		222	208	6.7%
	Virginia		177	181	(2.2%)
	West Virginia		77	82	(6.1%)
		Total membership	2,524	2,546	(0.9%)
			December 31,		Percent
			2006	2005	Change
Risk membership:
	Commercial		1,450	1,486	(2.4%)
	Medicare Advantage		80	75	6.7%
	Medicaid		373	393	(5.1%)
		Total risk membership	1,903	1,954	(2.6%)
Non-risk membership			621	592	4.9%
		Total membership	2,524	2,546	(0.9%)

Health Plan Provider Networks

Our health plans maintain provider networks that furnish health care services through contractual arrangements with physicians, hospitals and other health care providers. All of our health plans currently offer an open panel delivery system. In an open panel structure, individual physicians or physician groups contract with the health plans to provide services to members but also maintain independent practices in which they provide services to individuals who are not members of our health plans.

Most of our health plan contracted primary care and specialist physicians are compensated under a discounted fee-for-service arrangement. The majority of our health plans contract with hospitals to provide for inpatient per diem or per case hospital rates. Outpatient services are contracted on a discounted fee-for-service or a per case basis. Our health plans pay ancillary providers on a fixed fee schedule or a capitation basis. Prescription drug benefits are provided through a formulary comprised of an extensive list of drugs. Drug prices are negotiated at discounted rates through a network of pharmacies in the markets in which our health plans operate.

Our health plans have capitation arrangements for certain ancillary health care services, such as mental health care, laboratory services and, in some cases, physician services. Under some capitated arrangements, physicians may also receive additional compensation from risk sharing and other incentive arrangements. Capitation arrangements limit our health plans’ exposure to the risk of increasing medical costs, but expose them to risk as to the adequacy of the financial and medical care resources of the provider organization. Our health plans are ultimately responsible for the coverage of their members pursuant to the customer agreements. To the extent that the respective provider organization faces financial difficulties or otherwise is unable to perform its obligations under the capitation arrangements, our health plans will be required to perform such obligations. Consequently, our health plans may have to incur costs in excess of the amounts they would otherwise have to pay under the original capitation arrangements. Medical costs associated with capitation arrangements made up approximately 6.1%, 6.5%, and 7.1% of our total medical costs for the years ended December 31, 2006, 2005 and 2004, respectively. Membership associated with global capitation arrangements was approximately 110,000, 116,000 and 127,000 as of December 31, 2006, 2005 and 2004, respectively. Based on our knowledge and experience, we do not consider the financial risk associated with our existing capitation arrangements to be material.

7

Health Plan Medical Management

Our health plans have established systems to monitor the availability, appropriateness and effectiveness of the patient care their network providers provide. Our health plans collect utilization data in each of our health plan markets that is used to analyze over-utilization or under-utilization of services and to assist our health plans in arranging for appropriate care for their members and improving patient outcomes in a cost efficient manner. Our corporate medical department monitors the medical management policies of our health plans and assists our health plans in implementing disease management programs, quality assurance programs and other medical management tools. In addition, our health plans have internal quality assurance review committees made up of practicing physicians and staff members whose responsibilities include periodic review of medical records, development and implementation of standards of care based on current medical literature and the collection of data relating to results of treatment.

Our health plans have developed a comprehensive disease management program that identifies those members having certain chronic diseases, such as asthma and diabetes. Our health plan case managers proactively work with members and their physicians to facilitate appropriate treatment, help to ensure compliance with recommended therapies and educate members on lifestyle modifications to manage the disease. We believe that our disease management program promotes the delivery of efficient care and helps to improve the quality of health care delivered.

Each of our health plans either employs or contracts with physicians as medical directors who monitor the quality and appropriateness of the medical services provided to our members. The medical directors supervise medical managers who review and approve, for coverage in accordance with the health benefit plan, requests by physicians to perform certain diagnostic and therapeutic procedures, using nationally recognized clinical guidelines developed based on nationwide benchmarks that maximize efficiency in health care delivery and InterQual, a nationally recognized evidence-based set of criteria developed through peer review medical literature. Medical managers also continually review the status of hospitalized patients and compare their medical progress with established clinical criteria, make hospital rounds to review patients’ medical progress and perform quality assurance and utilization functions.

Medical directors also monitor the utilization of diagnostic services and encourage the use of outpatient surgery and testing where appropriate. Data showing each physician’s utilization profile for diagnostic tests, specialty referrals and hospitalization are collected by each health plan and presented to the health plan’s physicians. The medical directors monitor these results in an attempt to ensure the use of cost-effective, medically appropriate services.

Our health plans also focus on the satisfaction of its members. They monitor appointment availability, member-waiting times, provider environments and overall member satisfaction. Our health plans continually conduct membership surveys of existing employer groups concerning the quality of services furnished and suggestions for improvement.

Health Plan Information Technology

We believe that integrated and reliable information technology systems are critical to our health plans’ success. We have implemented advanced information systems to improve the operating efficiency of our health plans, support medical management, underwriting and quality assurance decisions and effectively service our employer customers, members and providers. Each of our health plans operates on a single financial reporting system along with a common, fully integrated application which encompasses all aspects of our commercial, government and non-risk business, including enrollment, provider referrals, premium billing and claims processing. Our centralized data center processes approximately 26.0 million claims annually.

We have dedicated in-house teams providing infrastructure and application support services to our members. Our data warehouse collects information from all of our health plans and uses it in medical management to support our underwriting, product pricing, quality assurance, rates, marketing and contracting functions. We have dedicated in-house teams that convert acquired health plans to our information systems as soon as possible following the closing of the acquisition.

In 2006, approximately 72.9% of our claim transactions were received from providers in a HIPAA compliant electronic data interface format. In 2006, our claims system auto adjudicated 80.9% of all claims.

8

Health Plan Marketing

Our health plans market commercial HMO, POS and PPO products to individuals and employer group purchasers in their local markets. Employer groups are offered coverage on both a fully insured and self-funded basis, the latter occurring most commonly in the large group segment. Among small and medium size employers, our health plan commercial products are most commonly offered on an exclusive basis. In the large group segment, our health plan products may be made available to employees as one option among multiple carriers. In all size segments, employers generally pay a large part of their employees’ health care premiums, although we have witnessed a gradual trend toward a growing portion of that cost being assumed by employees. Typically our health plan employer group contracts are up for renewal annually.

To respond to market demand, our health plans have expanded the number of lower cost product options made available to employee group purchasers. These include Coventry FlexChoice products, a family of “consumer driven” products whereby the employee bears a substantially greater proportion of healthcare costs through mechanisms such as higher deductibles augmented by HRAs. In addition, our health plans offer HSAs which are tax-advantaged accounts for healthcare expenses. We continue to invest in an array of consumer-driven health plan alternatives.

Our health plans market their managed care products and services through their own direct sales staff and a network of several thousand independent brokers and agents. Our membership growth efforts are focused on both developing new business and retaining existing business. We compensate our direct sales staff through a combination of base salary and incentive arrangements. We compensate our independent brokers and agents on a commission basis.

Our products and services are most commonly marketed in a two-step process in which presentations are made first to employers to secure contracts to provide health benefits. In most instances, our health plan sales are made on a complete replacement basis. If they are co-existing in an employer account with another carrier, our health plan direct sales staff will then be involved in the solicitation of employees (subscribers) from the employee base during periodic open enrollments during which employees are permitted to change health care programs. In some markets, this second step of the marketing process incorporates workplace presentations, direct mail and mass media advertising to target prospective members.

Our health plan Medicaid products are marketed to Medicaid recipients by state Medicaid authorities. These contracts typically renew on an annual basis.

Our health plans commonly promote Medicare Advantage products through mass media and direct mail to both individuals and retirees of employer groups that provide benefits to retirees. Networks of independent brokers and agents are also used in the marketing of Medicare products. While Medicare enrollees are able to disenroll monthly, beginning in 2006, a “lock-in” period starting in May was introduced, in which specific criteria has to be met to disenroll.

Our health plans seek to enroll eligible Medicare members in plans covering both medical and pharmacy benefits. In 2006, we also began offering a stand alone prescription drug plan under the new CMS regulations. This product is marketed through our existing channels as well as through joint marketing arrangements with Medicare Supplement Health Insurers and third party payors and administrators (“TPAs”) and related broker distribution entities. Beginning in 2007, Medicare Private-Fee-For-Service (“PFFS”) products will be offered by our company. Products will be underwritten by Coventry Health and Life Insurance Company, First Health Life and Health Insurance Company and Cambridge Life Insurance Company. We have established partnerships with Medicare Supplement insurance carriers and brokerage channels nationwide to provide PFFS products to Medicare beneficiaries.

Our health plans maintain an active presence in the communities they serve through participation in health fairs, special children’s programs and other community activities, which we believe enhances our visibility and reputation in these communities.

Health Plan Significant Customers

Our health plan commercial business is diversified across a large customer base and there are no commercial groups that make up 10% or more of our managed care premiums. We received 21.6%, 11.8% and 10.9% of our managed care premiums for the years ended December 31, 2006, 2005 and 2004, respectively, from the federal Medicare program throughout our various health plan markets. We also received 11.1%, 13.2% and 11.7% of our managed care premiums for the years ended December 31, 2006, 2005 and 2004, respectively, from our state-sponsored Medicaid programs throughout our various health plan markets. In 2006, the State of Missouri accounted for almost half of our health plan Medicaid premiums.

9

Health Plan Competition

The managed care industry is highly competitive; both nationally and in the individual markets we serve. Generally, in each market, we compete against local health plans and nationally focused health insurers and managed care plans. We compete for employer groups and members primarily on the basis of the price of the benefit plans offered, locations of the health care providers, reputation for quality care and service, financial stability, comprehensiveness of coverage, diversity of product offerings and access to care. We also compete with other managed care organizations and indemnity insurance carriers in obtaining and retaining favorable contracts for health care services and supplies.

First Health Business

Our First Health segment is a collection of health benefits services companies that serve the Group Health and Specialty sectors.

Group Health Sector Overview

The Group Health business offers its managed care and administrative products to commercial payors in three customer classifications: National Accounts, Federal Employee Health Benefits Program (“FEHB Program”) and Network Rental.

National Accounts

First Health serves businesses with locations in several states that self-insure the health care benefits of their employees subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). A variety of stand-alone managed care services, as well as a portfolio of integrated health plan products, are generally offered to national, multi-site companies with 500 employees or more as well as to mid-size companies in regional and local markets.

Federal Employee Health Benefits Program

First Health has provided services to plans in the FEHB Program for nearly two decades. The FEHB Program is the largest employer-sponsored group health program in the United States. The FEHB Program sector is both a business-to-business and business-to-consumer sector where federal employees have the opportunity to choose a health benefits carrier from a number of offered plans each year. First Health provides a variety of managed care and administrative services and serves as the plan administrator to the Mail Handlers Benefit Plan (“MHBP”), First Health’s largest client. The MHBP offers health care benefits under the FEHB Program to federal employees and annuitants nationwide. First Health also provides a full range of managed care and administrative services to MHBP and, to a lesser degree, provides various managed care or administrative services to certain other FEHB Program Plans.

Network Rental

First Health offers its national PPO network and other managed care products to national, regional and local TPAs and insurance carriers. This business primarily operates on a business-to-business basis, focusing on delivering managed care and administrative solutions that increase client efficiency and improve their product offerings. Network services are supplemented with a variety of product offerings, including clinical management programs. A block of small group insured business underwritten by First Health Life and Health and supported by our provider network is included in the Group Health sector.

Specialty Sector Overview

The Specialty businesses offer network managed care and administrative services to Workers’ Compensation and Public/Medicaid customers.

10

Workers’ Compensation

First Health offers administrative services to workers’ compensation TPAs, state funds and insurance carriers who underwrite or administer workers’ compensation insurance programs. Workers’ Compensation insurance covers the cost of medical care and lost wages for workers injured on the job. First Health offers managed care services, and clinical management programs as well as business process outsourcing services which include bill review, imaging, work flow management and first report of injury. In general, workers’ compensation carriers and self-funded entities have experienced significant challenges in recent years due to increases in medical costs. As a result, there is a demand by payors for products that target high cost and/or high volume services. First Health believes it has one of the largest and most cost effective national workers’ compensation network and bill review system that creates a value proposition for its customers. In addition, First Health has developed other products to help its clients contain costs such as a subset point-of-entry network (smaller network of providers that are accessed for initial treatment by injured workers) and a Medicare set-aside program (when a payor determines that they want to settle a workers’ compensation claim, a Medicare set-aside program must be submitted to CMS, under certain conditions, to ensure that Medicare’s rights as the secondary payor are protected). Furthermore, First Health’s business process outsourcing provides customers with work flow and medical records value-added solutions.

Medicaid/Public

Our Medicaid/Public entity, First Health Services, provides integrated automation, administration, payment and health care management services to state and local governments (“Public Sector”) related to their pharmacy and health benefits programs. First Health Services offers the following categories of programs:

• Pharmacy benefit management

• Health care management

• Fiscal agent services

First Health Services has been able to utilize its Medicaid fiscal agent expertise, its base of experience in the public sector and its client relationships with over 27 state governments to provide new products and services as the public sector health programs (primarily Medicaid) move toward more efficient utilization of health care services.

Group Health Products

Provider Network

The national provider network incorporates both group health and workers’ compensation medical providers. The provider network is the core of our Group Health and Workers’ Compensation business, providing the foundation for all other Group Health products and services. We contract with hospitals, physicians and other health care providers that provide health care services at pre-negotiated rates to members and customers of various payors, including employee groups, workers’ compensation payors or other payors. Provider networks offer a means of managing health care costs by reducing the per-unit price of medical services accessed through the network while providing an increased number of patients to providers. Our provider network aggregates hospitals, physicians and other health care providers all across the country and allows First Health to offer services at pre-negotiated rates to a diverse group of payors, including group health and workers’ compensation insurance carriers, TPAs, HMOs, self-insured employers, union trusts and government employee plans.

Our provider network maximizes client savings through a combination of increased penetration to a broad network and discounted unit costs savings. The majority of the facility contracts feature fixed rate structures that ensure cost effectiveness while incentivizing providers to control utilization. The fixed rate structures include per diems based on the intensity of care and/or Diagnostic Related Group (“DRG”) based pricing for inpatient care. Hospital outpatient charges are typically controlled by fixed fee schedules. For facilities or procedures not covered by fixed pricing arrangements, charge master controls are generally negotiated to control attempts to increase charges by inflating the price list.

11

Pharmacy Benefits Management

First Health offers a comprehensive pharmacy benefit management program, including:

• A national, proprietary, point-of-sale, pharmacy network, consisting of more than 51,000 chain and independent pharmacies

• Formulary management

• Mail-order service through a third party vendor

• Prospective drug utilization review

• Online prescription claim adjudication

The single source combination of pharmacy benefits management and medical management is critical to managing and assessing the total medical cost. Pharmacy data sources are linked with other data sources to internally identify at-risk members for disease management.

Clinical Programs

First Health provides clinical programs including utilization review, case management, medication compliance and disease management through an internal staff consisting primarily of allied health professionals, registered nurses and physicians. This staff is supplemented by a nationwide network of consulting physicians with a full range of specialties. The in-house physician staff is a resource for the development of programs, as well as clinical policies and guidelines. The staff includes experienced, board-certified physicians in such specialties as internal medicine, psychology, psychiatry and family practice. The staff is crucial to the development and maintenance of evidence-based medical necessity guidelines and network quality assessment efforts.

First Health’s approach to clinical management is patient-centered, which means that it provides the level of support required to manage outcomes at an individual level. Its program focuses on proper management of illnesses and chronic conditions through early identification, intervention and education. Because First Health owns and operates the program, it is able to aggregate data to identify at-risk members at an early stage and to monitor individual claims data to identify high-risk patients. First Health connects these patients with network providers and sets appointments to facilitate compliance. First Health then works with the patients and their providers to identify and implement cost effective treatment alternatives. In all cases, the decision to proceed with these alternatives is made by the patient and the physician.

Medical Claims Administration and Health Plan Services

First Health provides comprehensive claims administration to group health clients who purchase its managed care services. First Health provides clients with an integrated package of health care benefits administration, including:

• Managed care administration

• Medical, dental and vision claims processing

• Prescription drug plan administration

• Flexible spending account administration

• Health care reimbursement account administration

• COBRA administration

• Health savings account administration

• Subrogation administration

• Access to member services representatives 24-hours-a-day, 7-days-a-week

First Health’s proprietary claims administration system, the First Claim system, was internally developed, and has the flexibility to support business functions in an efficient, effective manner. Because First Health controls the system, it can offer maximum flexibility for clients who require a variety of benefit plan options or who wish to implement a customized benefit plan. Virtually all of First Health’s clients have benefit plans that are unique to them and their business.

12

Stop-Loss Insurance

First Health’s stop-loss insurance capabilities enable it to serve as an integrated, single source for the managed care needs of its clients who are self-insured employers. Because its stop-loss rates are based on the savings and value generated through its various services, First Health is able to offer competitive rates and policies. Stop-loss policies are written through our wholly-owned insurance subsidiaries and can be written for specific and/or aggregate stop-loss insurance.

Workers’ Compensation Products

Bill Review

The First Health Bill Review system offers national and multi-regional workers’ compensation clients a single system to integrate and manage their workers’ compensation medical data. This means that clients can implement their workers’ compensation managed care strategies on a national basis, allowing them to capture data from multiple sources, analyze the information and use it to implement advanced managed care strategies.

First Health Bill Review provides its clients with an accurate and consistent application of state fee schedule pricing, including applicable rules, regulations and clinical guidelines. State fee schedules, which represent the maximum reimbursement for medical services provided to the injured worker, differ by state (and change as state laws and regulations are passed and/or amended). The system features full integration with our provider network and provides a seamless process for determining claim payment rates. As part of the bill adjudication process, First Health subjects bills to a sophisticated, proprietary process to detect duplicate bills and correct billing irregularities and inappropriate billing practices. First Health maintains and supports virtually all aspects of the system. Therefore, clients gain efficiencies when using its integrated services by decreasing the staff previously required to support bill processing systems. First Health has the capability to program and implement client-specific enhancements, which provides truly customized bill review systems for its clients.

The system supports a number of electronic data interchanges from front-end systems, including claim systems and bill entry systems. The system also supports electronic data interchange (“EDI”) output to populate back-end systems such as payment systems, claims systems, explanation of review production, state reporting and data warehousing.

In addition, its bill review system has a comprehensive reporting database that produces a standard set of client savings and management reports. Clients who lease the First Health Bill Review system have online access to their data and are able to create numerous reports at their desktops.

First Report of Injury

Early medical management intervention is important to achieving optimal outcomes in workers’ compensation cases. Prompt notification and initiation of medical management helps ensure that injured persons receive appropriate treatment that expedites their recovery and return to work.

The First Health First Report of Injury system is a quick and easy-to-use service that greatly simplifies the reporting process for workplace injuries, as well as non-occupational disability, property and general liability claims. The First Health First Report of Injury service promotes immediate intervention after such occurrences. The system can transmit a first report to a designated representative within hours of notification. In addition to expediting reporting, the system can serve as a gateway to medical management services and channeling work place injury patients to our provider network.

Medicaid/Public Products

Pharmacy Benefit Management

First Health Services’ pharmacy benefit management (“PBM”) program manages pharmacy benefit plans for Medicaid programs, state senior drug programs and state-funded specialty programs. This PBM program is one of the largest of its kind in the country and provides a full range of services, including:

• Pharmacy point-of-sale eligibility verification and claims processing

• Provider network development and management

• Case management programs

• Prospective and retrospective drug utilization reviews

• Prescriber and provider profiling

• Prescriber education, preferred drug list development and manufacturers’ rebate contracting and administration

• Prior authorization of pharmaceutical use

13

• First IQ™, a proprietary database and decision support system for drug utilization management (e.g., retrospective drug utilization review and clinical intervention management)

PBM services are increasingly required by both public and private third-party payors as prescription drug expenses grow. First Health Services believes its role as an independent provider of PBM services gives it a distinct competitive advantage in the growing number of state government plans where clinical autonomy is often a requirement. The PBM business model is completely transparent so that the benefit of all rebates and network discounts is passed directly and totally to the client. Furthermore, First Health Services is a national leader in this area with substantial experience managing pharmacy plans for Medicaid and state pharmaceutical assistance programs. This clinical and management expertise provides a competitive advantage in the rapidly growing market of managed care organizations serving the Medicaid/Public customers on a non-risk, fee basis.

First Health Services also offers clinical management programs to assist physicians and network pharmacies in the appropriate management of patients using pharmaceuticals. This program provides physicians with reviews of treatment appropriateness and preferred drug guidelines which have been developed by nationally recognized clinicians and medical authorities. First Health Services’ clinical management program focuses on those patients who experience preventable therapeutic problems such as non-compliance, inappropriate therapy and adverse drug reactions. The program includes prior authorization initiatives, prospective and retrospective drug utilization reviews and educational intervention initiatives, known as concurrent drug utilization review and prescriber education.

In exchange for providing its PBM services, First Health Services receives a predetermined, contractual fee that is based upon services rendered or the number of transactions processed plus added fees for additional time and materials and for change orders outside of contract perimeters. First Health Services neither derives any revenue from drug manufacturers or the pharmacy network contracts, nor does it provide any mail order services. First Health Services contracts with pharmaceutical companies on behalf of the individual state programs unless they belong to a collective purchasing group. The rebate discount rate structure can vary by state. All rebates are retained by the individual state programs.

Through the acquisition of Provider Synergies, L.L.C. (effective January 1, 2006), we expanded and enhanced our offering of customized clinical pharmacy management services, including preferred drug list management and drug rebate contracting services, to state Medicaid programs across the country.

Health Care Management

First Health Services’ Health Care Management program provides external quality of care evaluation, utilization review and long-term care review services to Medicaid programs, state mental health agencies and other public sector health care programs desiring to improve quality of care, contain costs, ensure appropriate care and measure outcomes. The utilization review services cover a variety of medical, surgical and behavioral health programs, including acute and chronic inpatient and outpatient treatment of children, adult and geriatric populations, residential services and other alternative services. Under the long-term care review services, First Health Services provides level-of-care determinations as well as pre-admission screenings and annual resident reviews to determine the need for specialized services for mental illness, mental retardation or related conditions. The Health Care Management program also provides on-site quality reviews and inspection of care for community mental health centers, residential treatment centers and inpatient psychiatric programs. As state Medicaid programs and state departments of mental health spend increasing portions of public funds on treatment for Medicaid and other needy populations, the need for utilization review services increases. Some states are moving toward capitated contracts with private sector firms to help manage care. However, many states are opting to maintain fee-for-service programs but contract for utilization review services to ensure appropriate health care.

Fiscal Agent

First Health Services’ Fiscal Agent program administers state Medicaid health plans and other state-funded health care programs by providing clients with fiscal agent operations and systems maintenance and enhancement.

First Health Services’ customers include state Medicaid agencies, state departments of human services and departments of health serving Medicaid populations and other public assistance health benefit programs. Typically, fiscal agent systems are modified to meet a specific state’s program policy and administration requirements so that services are offered for all claim types. First Health Services has developed and operates a CMS certified information system for each client. These systems are utilized to process and adjudicate eligibility, health care claims and encounters, pay providers under a full range of reimbursement methods and generate reports for use in managing the program.

14

First Health Marketing

Group Health Sector

We primarily market our services to national, multi-site direct accounts, including self-insured employers, government employee groups and multi-employer trusts with greater than 500 employees. In addition, we market our services to and through group health insurance carriers and TPAs.

In the case of insurance carriers, we typically enter into a master service agreement under which we agree to provide our cost management services to health care plans maintained by the carrier’s customers. Our services are offered not only to new insurance policyholders, but also to existing policyholders at the time group health policies are renewed.

For our National Accounts business, our target market generally consists of payors with 500 employees or more. In addition, we service mid-size, self-insured companies in local and regional markets with an integrated health plan offering, which may include stop-loss insurance coverage. Generally, marketing in this sector is done directly to payors and through relationships with select consultants and brokers.

For our Federal Employee Health Benefits business, we market directly to both health plan sponsors and federal employees to gain additional membership in the MHBP through direct mail and print. We expect to continue direct marketing as a means of increasing membership in the MHBP.

For our Network Rental business, we market on a business-to-business basis directly to TPAs and insurance carriers. In turn, our customers have primary responsibility for offering our services to their underlying clients, relieving us of significant marketing expense. We support these efforts through participation in the proposal process. The clients of our TPA and carrier customers typically are small in size and limited in geography.

Specialty Sector

For our Workers’ Compensation Services business, we solicit insurance carriers and TPAs, who in turn take responsibility for marketing our services to their prospects and clients. We also market directly to state funds, municipalities, self-insured payors and other distribution channels. For our Medicaid/Public business, we sell our government PBM, health care management and fiscal agent business lines through an internal sales team to state and local governments across the United States. While most contracts are ultimately awarded via request-for-proposals and a competitive bid process, pre-selling efforts are critical in targeting opportunities that best match our capabilities and service offerings. Through this pre-sell effort, we are also able to identify the particular needs of prospective clients and provide assistance in public and program policy development.

First Health Significant Customers

Our customer, the Mail Handlers Benefit Plan, represented 22.7% and 22.8% of our First Health revenues and 2.5% and 2.8% of Coventry’s consolidated revenues for the years ended December 31, 2006 and 2005, respectively. Our contract with the Mail Handlers Benefit Plan is up for renewal on December 31, 2007. No other customer represented 10% or more of our First Health business revenues for the years ended December 31, 2006 and 2005.

First Health Competition

Group Health Sector

We compete in a highly fragmented market with national, regional and local firms specializing in utilization review and PPO cost management services and with major insurance carriers and third party administrators that have implemented their own internal cost management services. In addition, other managed care programs, such as HMOs and group health insurers, compete for the enrollment of benefit plan participants. We are subject to intense competition in each market segment in which we compete. We distinguish ourselves on the basis of the quality and cost-effectiveness of our programs, our proprietary computer-based integrated information system, our emphasis on commitment to service with a high degree of physician involvement, our national provider network and its penetration into secondary and tertiary markets and our role as an integrated provider of PBM services.

15

Specialty Sector

Workers’ compensation competition includes regional and national managed care companies and other service providers with an emphasis on PPO, clinical programs or bill review. We differentiate ourselves based on our national PPO coverage and the ability to provide an integrated product, coupled with technology that reduces administrative cost. We compete with a multitude of PPOs, technology companies that provide bill review services, clinical case management companies and rehabilitation companies for the business of these insurers. While experience differs with various clients, obtaining a workers’ compensation insurer as a new client typically requires extended discussions and a significant investment of time. Given these characteristics of the competitive landscape, client relationships are critical to the success of our workers’ compensation products.

The Medicaid/Public business serves state and local governmental agencies in three distinct focus areas-fiscal agent, pharmacy, and healthcare management services. Each of these lines of business has varying competitive factors that affect entry into the market as a new competitor. Fiscal agent services are provided to state Medicaid programs by four major competitors, including First Health. The market for pharmacy services to states that have elected to outsource pharmacy benefit management services is served by a select group of major national competitors including First Health. The market for healthcare management services is more fragmented with no distinguishable market leader. In addition to national competitors including First Health, regional peer review organizations/quality improvement organizations also hold contracts in their individual states or a local market.

Financial Information

Required financial information related to our business segments is set forth in Note O of our consolidated financial statements.

Corporate Governance

Our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to the members of our Board of Directors and our officers, including our Chief Executive Officer, Chief Financial Officer, Controller and our employees. In addition, the Board of Directors has adopted Corporate Governance Guidelines and committee charters for our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. Our Code of Business Conduct and Ethics, Corporate Governance Guidelines and current committee charters can be accessed on our website at www.coventryhealth.com or may be requested by writing to the following address: Coventry Health Care, Inc., Attn: Corporate Secretary, 6705 Rockledge Drive, Suite 900, Bethesda, Maryland, 20817. Any amendments to our Code of Business Conduct and Ethics are posted and can be accessed on our website.

Government Regulation

As a managed health care company, we are subject to extensive government regulation of our products and services. The laws and regulations affecting our industry generally give state and federal regulatory authorities broad discretion in their exercise of supervisory, regulatory and administrative powers. These laws and regulations are intended primarily for the benefit of the members of the health plans. Managed care laws and regulations vary significantly from jurisdiction to jurisdiction and changes are frequently considered and implemented.

State Regulation

The states served by our health plans provide the principal legal and regulatory framework for the commercial risk products offered by our insurance companies and HMO subsidiaries. One of our insurance company subsidiaries, Coventry Health and Life Insurance Company (“CH&L”), offers managed care products, primarily PPO and POS products, in conjunction with our HMO subsidiaries in states where HMOs are not permitted to offer these types of health care benefits. CH&L does not currently offer traditional health indemnity insurance. In addition, one of our subsidiaries, First Health Life & Health Insurance Company, offers a small group PPO product in certain states.

Our regulated subsidiaries are required by state law to file periodic reports and to meet certain minimum capital and deposit and/or reserve requirements and may be restricted from paying dividends to the parent or making other distributions or payments under certain circumstances. They also are required to provide their members with certain mandated benefits. Our HMO subsidiaries are required to have quality assurance and educational programs for their professionals and enrollees. Certain states’ laws further require that representatives of the HMOs’ members have a voice in policy making. Most states impose requirements regarding the prompt payment of claims and several states permit “any willing provider” to join our network. Compliance with “any willing provider” laws could increase our costs of assembling and administering provider networks.

16

We also are subject to the insurance holding company regulations in the states in which our regulated subsidiaries operate. These laws and associated regulations generally require registration with the state department of insurance and the filing of reports describing capital structure, ownership, financial condition, certain inter-company transactions and business operations. Most state insurance holding company laws and regulations require prior regulatory approval or, in some states, prior notice, of acquisitions or similar transactions involving regulated companies, and of certain transactions between regulated companies and their parents. In connection with obtaining regulatory approvals of acquisitions, we may be required to agree to maintain capital of regulated subsidiaries at specified levels, to guarantee the solvency of such subsidiaries or to other conditions. Generally, our regulated subsidiaries are limited in their ability to pay dividends to their parent due to the requirements of state regulatory agencies that the subsidiaries maintain certain minimum capital balances.

Our First Health workers’ compensation business is also subject to state governmental regulation. Historically, governmental strategies to contain medical costs in the workers’ compensation field have been limited to legislation on a state-by-state basis. Many states have adopted guidelines for utilization management and have implemented fee schedules that list maximum reimbursement levels for health care procedures. In certain states that have not authorized the use of a fee schedule, we adjust bills to the usual and customary levels authorized by the payor.

Most states now impose risk-based or other net worth-based capital requirements on our regulated entities. These requirements assess the capital adequacy of the regulated subsidiary based upon the investment asset risks, insurance risks, interest rate risks and other risks associated with the subsidiary’s business. If a subsidiary’s capital level falls below certain required capital levels, it may be required to submit a capital corrective plan to regulatory authorities, and at certain levels may be subjected to regulatory orders, including regulatory control through rehabilitation or liquidation proceedings. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for more information.

Federal Regulation

Privacy, Security and other HIPAA Requirements

The use, disclosure and secure handling of individually identifiable health information by our business is regulated at the federal level, including the privacy provisions of the Gramm-Leach-Bliley Act and privacy and security regulations pursuant to HIPAA. Further, our privacy and security practices are subject to various state laws and regulations. These state and federal requirements change frequently as a result of legislation, regulations and judicial or administrative interpretation. Varying requirements and enforcement approaches in the different states may adversely affect our ability to standardize our products and services across state lines. Further, state and local authorities are increasingly focused on the importance of protecting individuals from identity theft, with a significant number of states enacting laws requiring businesses to notify individuals of security breaches involving personal information. The U.S. Congress also is considering similar or additional measures.

HIPAA includes administrative requirements directed at simplifying electronic data interchange through standardizing transactions and establishing uniform health care provider, payer and employer identifiers. Assignment of a unique national identifier for providers must be implemented by May 2007. We are implementing the administrative changes, systems enhancements and training necessary to satisfy this requirement.

HIPAA also imposes obligations for health insurance issuers and health benefit plan sponsors. HIPAA requires guaranteed health care coverage for small employers having 2 to 50 employees and for individuals who meet certain eligibility requirements. HIPAA also requires guaranteed renewability of health coverage for most employers and individuals and contains nondiscrimination requirements. HIPAA limits exclusions based on pre-existing conditions for individuals covered under group policies to the extent the individuals had prior creditable coverage.

Failure to comply with any of the statutory and regulatory HIPAA requirements, state privacy and security requirements and other similar federal requirements could subject us to significant penalties.

17

ERISA

The provision of services to certain employee health benefit plans is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. For instance, the U.S. Department of Labor regulations under ERISA (insured and self-insured) regulate the time allowed for health and disability plans to respond to claims and appeals, establish requirements for plan responses to appeals and expand required disclosures to participants and beneficiaries. In addition, some states require licensure or registration of companies providing third party claims administration services for benefit plans. We provide a variety of products and services to employee benefit plans that are covered by ERISA.

Medicare and Medicaid

Some of our health plans contract with CMS to provide services to Medicare beneficiaries pursuant to the Medicare program. Some of our health plans also contract with states to provide health benefits to Medicaid recipients. As a result, we are subject to extensive federal and state regulations. CMS may audit any health plan operating under a Medicare contract to determine the plan’s compliance with federal regulations and contractual obligations.

CMS and the appropriate state regulatory agency have the right to audit any health plan operating under a Medicaid managed care contract to determine the plan’s compliance with state and federal law. In some instances, states engage peer review organizations to perform quality assurance and utilization review oversight of Medicaid managed care plans. Our health plans are required to abide by the peer review organizations’ standards.

CMS rules require Medicaid managed care plans to have beneficiary protections and protect the rights of participants in the Medicaid program. Specifically, states must assure continuous access to care for beneficiaries with ongoing health care needs who transfer from one health plan to another. States and plans must identify enrollees with special health care needs and assess the quality and appropriateness of their care. These requirements have not had a material adverse effect on our business.

The federal anti-kickback statute imposes criminal and civil penalties for paying or receiving remuneration (which is deemed to include a kickback, bribe or rebate) in connection with any federal health care program, including the Medicare, Medicaid and FEHB Programs. The law and related regulations have been interpreted to prohibit the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal health care program patients or any item or service that is reimbursed, in whole or in part, by any federal health care program. Similar anti-kickback provisions have been adopted by many states, which apply regardless of the source of reimbursement.

With respect to the federal anti-kickback statute, there exists a statutory exception and two safe harbors addressing certain risk-sharing arrangements. A safe harbor is a regulation that describes relationships and activities that are deemed not to violate the federal anti-kickback statute. However, failure to satisfy each criterion of an applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that our risk agreements satisfy the requirements of these safe harbors. In addition, the Office of the Inspector General has adopted other safe harbor regulations that relate to managed care arrangements. We believe that the incentives offered by our health plans to Medicare and Medicaid beneficiaries and the discounts our plans receive from contracting health care providers satisfy the requirements of these safe harbor regulations. We believe that our arrangements do not violate the federal or similar state anti-kickback laws.

CMS has promulgated regulations that prohibit health plans with Medicare contracts from including any direct or indirect payment to physicians or other providers as an inducement to reduce or limit medically necessary services to a Medicare beneficiary. These regulations impose disclosure and other requirements relating to physician incentive plans such as bonuses or withholds that could result in a physician being at “substantial financial risk” as defined in Medicare regulations. Our ability to maintain compliance with such regulations depends, in part, on our receipt of timely and accurate information from our providers. Although we believe we are in compliance with all such Medicare regulations, we are subject to future audit and review.

18

The federal False Claims Act prohibits knowingly submitting false claims to the federal government. Private individuals known as relators or whistleblowers may bring actions on the government’s behalf under the False Claims Act and share in any settlement or judgment. Violations of the federal False Claims Act may result in treble damages and civil penalties of up to $11,000 for each false claim. In some cases, whistleblowers, the federal government and some courts have taken the position that providers who allegedly have violated other statutes such as the federal anti-kickback statute have thereby submitted false claims under the False Claims Act. Under the Deficit Reduction Act of 2006 (“DEFRA”), every entity that receives at least $5 million annually in Medicaid payments must establish, by January 1, 2007, written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal False Claims Act, and similar state laws. The Company has established written policies which it believes are in compliance with this provision of DEFRA.

A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. DEFRA creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act. From time to time, companies in the healthcare industry, including ours, may be subject to actions under the False Claims Act or similar state laws.

Federal Employees Health Benefits Program

Our health plans contract with the Office of Personnel Management (“OPM”) to provide managed health care services under the FEHB Program in their service area. These contracts with the OPM and applicable government regulations establish premium rating arrangements for this program. The OPM conducts periodic audits of its contractors to, among other things, verify that the premiums established under its contracts are in compliance with the community rating and other requirements under FEHB Program. The OPM may seek premium refunds or institute other sanctions against health plans that participate in the program if the health plan is found to be non-compliant with the program requirements.

Managed Care Legislative Proposals

Numerous proposals have been introduced in the U.S. Congress and various state legislatures relating to managed health care reform. The provisions of legislation that may be adopted at the state level can not be accurately and completely predicted at this time, and we therefore can not predict the effect of proposed legislation on our operations. On the federal level, it is possible that some form of managed health care reform may be enacted. At this time, it is unclear as to when any legislation might be enacted or the content of any new legislation, and we can not predict the effect on our operations of the proposed legislation or any other legislation that may be adopted.

Risk Management

In the normal course of business, we have been named as a defendant in various legal actions such as actions seeking payments for claims for medical services denied by the Company, medical malpractice actions, employment related claims and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 2006 may result in the assertion of additional claims. We maintain general liability, professional liability and employment practices liability insurances in amounts that we believe are appropriate, with varying deductibles for which we maintain reserves. The professional liability and employment practices liability insurances are carried through our captive subsidiary.

Employees

At January 31, 2007, we employed approximately 10,250 persons, none of whom are covered by a collective bargaining agreement.

19

Acquisition Growth

We began operations in 1987 with the acquisition of the American Service Companies entities, including Coventry Health and Life Insurance Company. We have grown substantially through acquisitions. The table below summarizes all of our significant acquisitions through December 31, 2006. See Note B to the consolidated financial statements for additional information on the most recent acquisitions.

Acquisition	Markets	Type of Business	Year Acquired
American Service Company entities	Multiple Markets	Multiple Products	1987
HealthAmerica Pennsylvania, Inc.	Pennsylvania	HMO	1988
Group Health Plan, Inc.	Missouri	HMO	1990
Southern Health Services, Inc.	Virginia	HMO	1994
HealthCare USA, Inc.	Multiple Markets	Medicaid	1995
Principal Health Care, Inc.	Multiple Markets	HMO	1998
Carelink Health Plans	West Virginia	HMO	1999
Kaiser Foundation Health Plan of North Carolina	North Carolina	HMO	1999
PrimeONE, Inc.	West Virginia	HMO	2000
Maxicare Louisiana, Inc.	Louisiana	HMO	2000
WellPath Community Health Plans	North Carolina	HMO	2000
Prudential Health Care Plan, Inc.	Missouri	Medicaid	2000
Blue Ridge Health Alliance, Inc.	Virginia	HMO	2001
Health Partners of the Midwest	Missouri	HMO	2001
Kaiser Foundation Health Plan of Kansas City, Inc.	Kansas	HMO	2001
NewAlliance Health Plan, Inc.	Pennsylvania	HMO	2002
Mid-America Health Partners, Inc.	Kansas	HMO	2002
PersonalCare Health Management, Inc.	Illinois	HMO	2003
Altius Health Plans, Inc.	Utah	HMO	2003
OmniCare Health Plan	Michigan	Medicaid	2004
First Health Group Corp.	Multiple Markets	Multiple Products	2005
Providers Synergies, L.L.C.	Multiple Markets	Rx Management Services	2006

Service Marks and Trademarks

We have the following federally registered service marks:

Advantra	First Health with heart logo	OmniCare Plus
Altius Health Plans blue logo	First Health Services Corporation (2 registrations)	Omni Perks
Babylove Program	First IQ	PersonalCare What You Want in a Health Plan logo
Be Sure	First SX	POW
C Torch logo	GHP	POW-Providers on the Web
Carelink	GHP logo	POW Providers on the Web logo
CCN	HealthAmerica	Powered by People
CCN with shadow logo	HealthAmericaOne	Sensicare
CCN logo without shadow	HealthAssurance (2 registrations)	Senior Life Management
CompAmerica	HealthAssurance Flex	SouthCare
Compare	Heart logo	SouthCare Medical Alliance logo
Coventry (2 registrations)	It’s That Simple	Strong Starts
Coventry FlexChoice	Making Health Care as Simple as 1, 2, 3	The Answer To Your Health Care Needs
Coventry Healthy Choices Program	Mid America Health logo	True to Life
Coventry USA	Mid America Health Access	WellPath
Cross logo	Mid America Health Access +	WellPath 65
DirectorEase	Mid-America Health Network	With You When It Matters
First Claim	OmniCare
First Health (3 registrations)	OmniCare Health Plan

We have pending applications for federal registration of the following service marks: “CHCCARES,” “CHCCARE,” “CoventryOne,” “HealthCare USA,” “HealthAssurance FlexChoice,” “WellFirst Gold,” and “WellFirst+Gold.”

We also have the right in perpetuity to use the “HealthCare USA” mark in Missouri, Illinois, Kansas and Florida.

20

Executive Officers of Our Company

The following table sets forth information with respect to our executive officers as of January 1, 2007:

Name	Age	Position
Dale B. Wolf	52	Chief Executive Officer and Director
Thomas P. McDonough	58	President
Harvey C. DeMovick, Jr	60	Executive Vice President, Customer Service Operations and Chief Information Officer
Shawn M. Guertin	43	Executive Vice President, Chief Financial Officer and Treasurer
Francis S. Soistman, Jr	50	Executive Vice President
Bernard J. Mansheim, M.D.	60	Senior Vice President and Chief Medical Officer
Harry “Skip” Creasey	52	Senior Vice President
Thomas C. Zielinski	55	Senior Vice President and General Counsel
Patrisha L. Davis	51	Vice President and Chief Human Resources Officer
John J. Ruhlmann	44	Senior Vice President and Corporate Controller

Dale B. Wolf was elected Chief Executive Officer of our Company effective January 2005. Prior to that he served as Executive Vice President, Chief Financial Officer and Treasurer of our Company from April 1998 to December 2004. He is a director and a member of the audit and compensation committees of HealthExtras, Inc., a provider of pharmacy benefit management services and supplemental benefits. Mr. Wolf is a Fellow of the Society of Actuaries.

Thomas P. McDonough was elected President of our Company effective January 2005. Prior to that he served as Executive Vice President of our Company from April 1998 to December 2004 and Chief Operating Officer from July 1998 to December 2004.

Harvey C. DeMovick, Jr. was elected Executive Vice President of our Company effective January 2005. Prior to that he served as Senior Vice President of our Company from April 1998 to December 2004. He has served as our Chief Information Officer since April 2001 and has been in charge of our Customer Service Operations since September 2001.

Shawn M. Guertin was elected Executive Vice President and Chief Financial Officer of our Company effective January 2005. Prior to that he served as Senior Vice President of our Company from February 2003 to December 2004. He has served as President of Coventry Health and Life Insurance Company since February 2002. From January 1998 to February 2003, he was Vice President of Finance of our Company. Mr. Guertin is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries.

Francis S. Soistman, Jr. was elected Executive Vice President, effective January 2005. Mr. Soistman is in charge of Individual Consumer Markets and State and Federal Government Programs and, previously was in charge of Health Plan Operations. Prior to that he served as Senior Vice President of our Company from April 1998 to December 2004. He was named President and Chief Executive Officer of HealthAmerica Pennsylvania, Inc. and HealthAssurance Pennsylvania, Inc., our Pennsylvania subsidiaries, in May 1998 and July 2001, respectively, to January 2005.

Bernard J. Mansheim, M.D. was elected Executive Vice President of our Company effective August 2006. Prior to that he served as Senior Vice President of our Company from April 1998 to August 2006. He has served as our Chief Medical Officer since April 1998. Dr. Mansheim is Board Certified in Internal Medicine and Infectious Diseases and is a Fellow of the American College of Physicians.

Thomas C. Zielinski was elected Senior Vice President and General Counsel of our Company in August 2001. Prior to that time, Mr. Zielinski worked for 19 years in various capacities for the law firm of Cozen and O’Connor, P.C., including as a senior member, shareholder and Chair of the firm’s Commercial Litigation Department.

Harry “Skip” Creasey was elected Senior Vice President, National Network Management of our Company in March 2005. From February 2003 to the time he joined our company, Mr. Creasey served as Chairman and Chief Executive Officer of Kelson Physician Partners, Inc., a provider of pediatric management services. From August 2001 to February 2003, he was the President of InterPlan Group, a health care network company. From February 2000 to July 2001, he was the Chief Executive Officer of AviaHealth, Inc., a health care internet content provider.

Patrisha L. Davis was elected Vice President and Chief Human Resources Officer of our Company in March 2005, and has served in that position since November 2000. Ms. Davis has been a Human Resources executive with our Company since April 1998.

John J. Ruhlmann was elected Senior Vice President of our Company in November 2006. Prior to that time he was Vice President of our Company from November 1999 to November 2006. He has served as our Corporate Controller since November 1999.

21

Item 1A: Risk Factors

The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.

Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Further, the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

Our results of operations may be adversely affected if we are unable to accurately estimate and control future health care costs.

Most of the premium revenue we receive is based upon rates set months before we deliver services. As a result, our results of operations largely depend on our ability to accurately estimate and control future health care costs. We base the premiums we charge, at least in part, on our estimate of expected health care costs over the applicable premium period. Factors that may cause health care costs to exceed our estimates include:

• an increase in the cost of health care services and supplies, including pharmaceuticals;

• higher than expected utilization of health care services;

• periodic renegotiations of hospital, physician and other provider contracts;

• the occurrence of epidemics and catastrophic events;

• changes in the demographics of our members and medical trends affecting them;

• general inflation or economic downturns;

• new mandated benefits or other regulatory changes that increase our costs; and

• other unforeseen occurrences.

In addition, medical liabilities in our financial statements include our estimated reserves for incurred but not reported and reported but not paid claims. The estimates for medical liabilities are made on an accrual basis. We believe that our reserves for medical liabilities are adequate, but we can not assure you of this. Any adjustments to our medical liabilities could adversely affect our results of operations.

Our results of operations will be adversely affected if we are unable to increase premiums to offset increases in our health care costs.

Our results of operations depend on our ability to increase premiums to offset increases in our health care costs. Although we attempt to base the premiums we charge on our estimate of future health care costs, we may not be able to control the premiums we charge as a result of competition, government regulations and other factors. Our results of operations could be adversely affected if we are unable to set premium rates at appropriate levels or adjust premium rates in the event our health care costs increase.

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. Factors that could contribute to the loss of membership include:

• competition in premium or plan benefits from other health care benefit companies;

• reductions in the number of employers offering health care coverage;

• 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, including natural disasters and man-made catastrophes, and other unforeseen occurrences.

22

Our growth strategy is dependent in part upon our ability to acquire additional managed care businesses and successfully integrate those businesses into our operations.

Part of our growth strategy is to grow through the acquisition of additional health plans and other managed care businesses. Historically, we have significantly increased our revenues through a number of acquisitions. We can not assure you that we will be able to continue to locate suitable acquisition candidates, successfully integrate the businesses we acquire and realize anticipated operational improvements and cost savings. The businesses we acquire also may not achieve our anticipated levels of profitability. Our future growth rate will be adversely affected if we are not able to successfully complete acquisitions.

Competition may limit our ability to attract new members or to increase or maintain our premium rates, which would adversely affect our results of operations.

We operate in a highly competitive environment that may affect our ability to attract new members and increase premium rates. We compete with other health plans for members. We believe the principal factors influencing the choice among health care options are:

• price of benefits offered and cost and risk of alternatives such as self-insurance;

• location and choice of health care providers;

• quality of customer service;

• comprehensiveness of coverage offered;

• reputation for quality care;

• financial stability of the plan; and

• diversity of product offerings.

We compete with other managed care companies that may have broader geographical coverage, more established reputations in our markets, greater market share, larger contracting scale, lower costs and/or greater financial and other resources. We also may face increased rate competition from certain Blue Cross plan competitors that might be required by state regulation to reduce capital surpluses that may be deemed excessive.

Competition in the multi-site, national account business may limit our ability to grow revenues which could adversely affect our results of operations.

First Health competes in a highly competitive environment against other major national managed care companies in its national account customers to provide administrative, network access, and medical management services to large, multi-site, self-insured employers. Among these competitors are Aetna, United Healthcare and “Blue Card” (a joint venture of major Blue Cross plans), all of which have greater resources, brand identity and provider contracting scale compared to First Health or Coventry.

We depend on the services of non-exclusive independent agents and brokers to market our products to employers, and we can not assure you that they will continue to market our products in the future.

We depend on the services of independent agents and brokers to market our managed care products and services, particularly to small employer group members. We do not have long term contracts with independent agents and brokers, who typically are not dedicated exclusively to us and frequently market the health care products of our competitors. We face intense competition for the services and allegiance of independent agents and brokers, and we can not assure you that agents and brokers will continue to market our products in a fair and consistent manner.

Our failure to obtain cost-effective agreements with a sufficient number of providers may result in higher medical costs and a decrease in our membership.

Our future results largely depend on our ability to enter into cost-effective agreements with hospitals, physicians and other health care providers. The terms of those provider contracts will have a material effect on our medical costs and our ability to control these costs. In addition, our ability to contract successfully with a sufficiently large number of providers in a particular geographic market will impact the relative attractiveness of our managed care products in those markets, and our ability to contract at competitive rates with our PPO and workers’ compensation related providers will affect the attractiveness and profitability of our products in the national account, network rental and workers’ compensation businesses.

23

In some of our markets, there are large provider systems that have a major presence. Some of these large provider systems have operated their own health plans in the past or may choose to do so in the future. These provider systems could adversely affect our product offerings and results of operations if they refuse to contract with us, place us at a competitive disadvantage or use their market position to negotiate contracts that are less favorable to us. Provider agreements are subject to periodic renewal and renegotiations. We can not assure you that these large provider systems will continue to contract with us or that they will contract with us on terms that are favorable to us.

We may incur significant expenses in connection with implementing our new Medicare Advantage Private Fee-For-Service (PFFS) plan, which may have an adverse effect on our near-term operating results.

We received approval from CMS to offer PFFS plans. We have begun to incur expenses to upgrade and improve our infrastructure, technology, and systems to manage our PFFS product. We incurred significant expenses in 2006 as we prepared to provide these PFFS benefits as of January 1, 2007, and will in the future incur additional expenses. In particular, our expenses incurred in connection with the implementation of our PFFS benefits related to the following:

• hiring and training of personnel to establish and manage systems, operations, regulatory relationships, and materials;

• systems development and upgrade costs, including 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.

Negative publicity regarding the managed health care industry generally or our Company in particular could adversely affect our results of operations or business.

Over the last several years, the managed health care industry has been subject to negative publicity. Negative publicity regarding the managed health care industry generally or our company in particular may result in increased regulation and legislative review of industry practices further increase our costs of doing business and adversely affect our results of operations by:

• requiring us to change our products and services;

• increasing the regulatory burdens under which we operate; or

• adversely affecting our ability to market our products or services.

Negative publicity relating to our company or the managed care industry generally also may adversely affect our ability to attract and retain members.

A failure of our information technology systems could adversely affect our business.

We depend on our information technology systems for timely and accurate information. Failure to maintain effective and efficient information technology systems or disruptions in our information technology systems could cause disruptions in our business operations, loss of existing customers, difficulty in attracting new customers, disputes with customers and providers, regulatory problems, increases in administrative expenses and other adverse consequences.

24

We conduct business in a heavily regulated industry and changes in laws or regulations or alleged violations of regulations could adversely affect our business and results of operations.

Our business is heavily regulated by federal, state and local authorities. Legislation or other regulatory reform that increases the regulatory requirements imposed on us or that changes the way we currently do business may in the future adversely affect our business and results of operations. Legislative or regulatory changes that could significantly harm us and our subsidiaries include changes that:

• impose increased liability for adverse consequences of medical decisions;

• limit premium levels;

• increase minimum capital, reserves and other financial viability requirements;

• impose fines or other penalties for the failure to pay claims promptly;

• impose fines or other penalties as a result of market conduct reviews;

• prohibit or limit rental access to health care provider networks;

• prohibit or limit provider financial incentives and provider risk-sharing arrangements;

• require health plans to offer expanded or new benefits;

• limit ability of health plans to manage care and utilization due to “any willing provider” and direct access laws that restrict or prohibit product features that encourage members to seek services from contracted providers or through referral by a primary care provider;

• limit contractual terms with providers, including audit, payment and termination provisions;

• implement mandatory third party review processes for coverage denials; and

• impose additional health care information privacy or security requirements.

We also may be subject to governmental investigations or inquiries from time to time. For example in 2004, several companies in the insurance industry have received subpoenas for information from the New York Attorney General and the Connecticut Attorney General with respect to an industry wide investigation into certain insurance brokerage practices, including broker compensation arrangements, bid quoting practices and potential antitrust violations. Insurance regulators in several states, including states in which our subsidiaries are domiciled, have sent letters of inquiry concerning similar matters to the companies subject to their jurisdiction, including our subsidiaries. We have furnished the information requested and have received no further inquiry or comment from the insurance regulatory authorities. The existence of such investigations in our industry could negatively impact the market value of all companies in our industry including our stock price. Any similar governmental investigations of Coventry could have a material adverse effect on our financial condition, results of operations or business or result in significant liabilities to the Company, as well as adverse publicity.

In addition, we are required to obtain and maintain various regulatory approvals to market many of our products. Delays in obtaining or failure to obtain or maintain these approvals could adversely impact our results of operations. Federal, state and local authorities frequently consider changes to laws and regulations that could adversely affect our business. We can not predict the changes that government authorities will approve in the future or assure you that those changes will not have an adverse effect on our business or results of operations.

25

We face periodic reviews, audits and investigations under our contracts with federal and state government agencies, and these audits could have adverse findings that may negatively affect our business.

We contract with various federal and state governmental agencies to provide managed health care services. Pursuant to these contracts, we are subject to various governmental reviews, audits and investigations to verify our compliance with the contracts and applicable laws and regulations. Any adverse review, audit or investigation could result in:

• refunding of amounts we have been paid pursuant to our government contracts;

• imposition of fines, penalties and other sanctions on us;

• loss of our right to participate in various federal programs;

• damage to our reputation in various markets;

• increased difficulty in selling our products and services; and

• loss of one or more of our licenses to act as an insurer or HMO or to otherwise provide a service.

We may be adversely affected by changes in government funding for Medicare and Medicaid.

The federal government and many states from time to time consider altering the level of funding for government healthcare programs, including Medicare and Medicaid. The Deficit Reduction Act of 2006, signed into law on February 8, 2006, included Medicaid cuts of approximately $4.8 billion over 5 years. In addition, proposed regulatory changes would, if implemented, further reduce federal Medicaid funding. We cannot predict future Medicare or Medicaid funding levels or ensure that changes to Medicare or Medicaid funding will not have an adverse effect on our business or results of operations.

We are subject to litigation in the ordinary course of our business, including litigation based on new or evolving legal theories that could adversely affect our results of operations.

Due to the nature of our business, we are subject to a variety of legal actions relating to our business operations including claims relating to:

• our denial of non-covered benefits;

• vicarious liability for medical malpractice claims filed against our providers;

• disputes with our providers alleging RICO and antitrust violations;

• disputes with our providers over reimbursement and termination of provider contracts;

• disputes related to our non-risk business, including actions alleging breach of fiduciary duties, claim administration errors and failure to disclose network rate discounts and other fee and rebate arrangements;

• disputes over our co-payment calculations;

• customer audits of our compliance with our plan obligations; and

• disputes over payments for out-of-network benefits.

In addition, plaintiffs continue to bring new types of legal claims against managed care companies. Recent court decisions and legislative activity increase our exposure to these types of claims. In some cases, plaintiffs may seek class action status and substantial economic, non-economic or punitive damages. The loss of even one of these claims, if it resulted in a significant damage award, could have an adverse effect on our financial condition or results of operations. In the event a plaintiff was to obtain a significant damage award it may make reasonable settlements of claims more difficult to obtain. We can not determine with any certainty what new theories of recovery may evolve or what their impact may be on the managed care industry in general or on us in particular.

26

We have, and expect to maintain, liability insurance coverage for some of the potential legal liabilities we may incur. Currently, professional liability and employment practices liability insurance is covered through our captive subsidiary. Potential liabilities that we incur may not, however, be covered by insurance, our insurers may dispute coverage or may be unable to meet their obligations or the amount of our insurance coverage may be inadequate. We can not 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.

Our stock price and trading volume may be volatile.

From time to time, the price and trading volume of our common stock, as well as the stock of other companies in the health care industry, may experience periods of significant volatility. Company-specific issues and developments generally in the health care industry (including the regulatory environment) and the capital markets may cause this volatility. Our stock price and trading volume may fluctuate in response to a number of events and factors, including:

• 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 industry 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 stockholders, or the perception that such sales could occur.

Our indebtedness imposes restrictions on our business and operations.

The indentures for our senior notes and bank credit agreement impose restrictions on our business and operations. These restrictions limit our ability to, among other things:

• incur additional debt;

• pay dividends or make other restricted payments;

• create or permit certain liens on our assets;

• sell assets;

• create or permit restrictions on the ability of certain of our restricted subsidiaries to pay dividends or make other distributions to us;

• enter into transactions with affiliates;

• enter into sale and leaseback transactions; and

• consolidate or merge with or into other companies or sell all or substantially all of our assets.

27

Our ability to generate sufficient cash to service our indebtedness will depend on numerous factors beyond our control.

Our ability to service our indebtedness will depend on our ability to generate cash in the future. Our ability to generate the cash necessary to service our indebtedness is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We can not assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs. In addition, we will be more vulnerable to economic downturns, adverse industry conditions and competitive pressures as a result of our significant indebtedness. We may need to refinance all or a portion of our indebtedness before maturity. We can not assure you that we will be able to refinance any of our indebtedness or that we will be able to refinance our indebtedness on commercially reasonable terms.

A substantial amount of our cash flow is generated by our regulated subsidiaries.

Our regulated subsidiaries conduct a substantial amount of our consolidated operations. Consequently, our cash flow and our ability to pay our debt and fund future acquisitions depends, in part, on the amount of cash that the parent company receives from our regulated subsidiaries. Our subsidiaries’ ability to make any payments to the parent company will depend on their earnings, business and tax considerations, legal and regulatory restrictions and economic conditions. Our regulated subsidiaries are subject to HMO and insurance regulations that require them to meet or exceed various capital standards and may restrict their ability to pay dividends or make cash transfers to the parent company. If our regulated subsidiaries are restricted from paying the parent company dividends or otherwise making cash transfers to the parent company, it could have material adverse effect on the parent company’s cash flow. For additional information regarding our regulated subsidiaries’ statutory capital requirements, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Statutory Capital Requirements.”

Our certificate of incorporation and bylaws and Delaware law could delay, discourage or prevent a change in control of our Company that our stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws and Delaware law may delay, discourage or prevent a merger, acquisition or change in control involving our company that our stockholders may consider favorable. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. Among other things, these provisions:

• provide for a classified board of directors with staggered three-year terms so that no more than one-third of our directors can be replaced at any annual meeting;

• provide that directors may be removed without cause only by the affirmative vote of the holders of two-thirds of our outstanding shares;

• provide that amendment or repeal of the provisions of our certificate of incorporation establishing our classified board of directors must be approved by the affirmative vote of the holders of three-fourths of our outstanding shares; and

• establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at a meeting.

These provisions of our certificate of incorporation and bylaws and Delaware law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock and also could limit the price that investors are willing to pay in the future for shares of our common stock.

Changes in general economic conditions could adversely affect our business and results of operations.

Changes in economic conditions could adversely affect our business and results of operations. The state of the economy could adversely affect our employer group renewal prospects and our ability to collect or increase premiums. The state of the economy could also adversely affect the states’ budgets, which could result in the states attempting to reduce payments to Medicaid plans in those states in which we offer Medicaid plans, and increase taxes and assessments on our activities. Although we could attempt to mitigate or cover our exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover all of such costs resulting from any budget cuts in states in which we operate. Although we have attempted to diversify our product offerings to address the changing needs of our membership, the effects of economic conditions could cause our existing membership to seek health coverage alternatives that we do not offer or could result in significant membership loss, lower average premium yields or decreased margins on continuing membership.

Our efforts to capitalize on Medicare business opportunities could prove to be unsuccessful.

Medicare programs represent a significant portion of our business, accounting for approximately 19.2% of our total revenue in 2006 and is expected to exceed 26.0% in 2007. In connection with the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Drug Act”) and the Drug Act’s implementing regulations adopted in 2005, we have significantly expanded our Medicare health plans, restructured our Medicare program management team and operations to enhance our ability to pursue business opportunities presented by the Drug Act and the Medicare program generally.

Particular risks associated with our providing Medicare Part D prescription drug benefits under the Drug Act include potential uncollectability of receivables, inadequacy of underwriting assumptions, inability to receive and process information and increased pharmaceutical costs (as well as the underlying seasonality of this business).

28

In 2007, we expect that our Medicare programs will expand. Specifically, we will be introducing PFFS Medicare Advantage plans, expanding our Medicare Part D prescription drug benefits plans to all states, and enhancing our HMO/PPO product offerings. All of these growth activities require substantial administrative and operational capabilities which we are in the process of developing. If the transition and implementation of these key operational functions does not occur as scheduled, or we are unable to develop administrative capabilities to address the additional needs of our growing Medicare programs, it could have a material adverse effect on our Medicare business and operating results.

In addition, if the cost or complexity of the recent Medicare changes exceed our expectations or prevent effective program implementation, if the government alters or reduces funding of Medicare programs, if we fail to design and maintain programs that are attractive to Medicare participants or if we are not successful in winning contract renewals or new contracts under the Drug Act’s competitive bidding process, our current Medicare business and our ability to expand our Medicare operations could be materially and adversely affected, and we may not be able to realize any return on our investments in Medicare initiatives.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

As of December 31, 2006, we leased approximately 60,000 square feet of space for our corporate office in Bethesda, Maryland. We also leased approximately 1,696,000 aggregate square feet for office space, subsidiary operations and customer service centers for the various markets where our health plans and other subsidiaries operate, of which approximately 7% is subleased. Our leases expire at various dates from 2007 through 2018. We also own eight buildings throughout the country with approximately 727,000 square feet, which is used for administrative services related to our health plan and other operations, of which less than one percent is subleased. We believe that our facilities are adequate for our operations.

Item 3: Legal Proceedings

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Legal Proceedings” which is incorporated herein by reference.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year 2006.

29

PART II

Item 5: Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock

Our common stock is traded on the New York Stock Exchange (“NYSE”) stock market under the ticker symbol “CVH.” The following table sets forth the quarterly range of the high and low sales prices of the common stock on the NYSE stock markets during the calendar period indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions:

	2006		2005
	High	Low	High	Low
First Quarter	$ 61.88	$ 53.70	$ 45.77	$ 34.21
Second Quarter	55.46	45.37	48.39	42.11
Third Quarter	57.66	50.29	58.07	44.33
Fourth Quarter	52.29	44.33	60.31	49.57

On January 31, 2007, we had approximately 629 stockholders of record, not including beneficial owners of shares held in nominee name. On January 31, 2007, our closing price was $51.55.

We have not paid any cash dividends on our common stock and expect for the foreseeable future to retain all of our earnings to finance the development of our business. Our ability to pay dividends is limited by certain covenants and restrictions contained in our debt obligations and by insurance regulations applicable to our subsidiaries. Subject to the terms of such insurance regulations and debt covenants, any future decision as to the payment of dividends will be at the discretion of our Board of Directors and will depend on our earnings, financial position, capital requirements and other relevant factors. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

In February 2006, our Board of Directors approved an increase to the share repurchase program in an amount equal to 5% of our outstanding common stock, thus increasing our repurchase authorization by 8.1 million shares. Stock repurchases may be made from time to time at prevailing prices on the open market, by block purchase or in private transactions. Under the share repurchase program, we purchased 4.6 million shares of our common stock in 2006 at an aggregate cost of $256.1 million. We did not repurchase any shares in 2005 under this program. As of December 31, 2006, the total remaining common shares we are authorized to repurchase under this program is 6.2 million.

Issuer Purchases of Equity Securities

The following table shows our purchases of our common stock during the quarter ended December 31, 2006 (in thousands, except per share information).

	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares That May Yet Be Purchased Under The Plan or Program
October 1-31, 2006	3	$ 50.60	-	6,169
November 1-30, 2006	-	$         -	-	6,169
December 1-31, 2006	7	$ 49.50	-	6,169
Totals	10	$ 50.23	-	6,169

(1) Purchased in connection with the vesting of restricted stock awards to satisfy employees’ minimum statutory tax withholding obligations.

30

Item 6: Selected Financial Data

(in thousands, except per share and membership data)

	December 31,
	2006	2005	2004	2003	2002
Operations Statement Data (1)
Operating revenues	$ 7,733,756	$ 6,611,246	$ 5,311,969	$ 4,535,143	$ 3,576,905
Operating earnings	841,003	791,818	496,671	366,197	200,670
Earnings before income taxes	896,348	799,425	526,991	393,064	225,741
Net earnings	560,045	501,639	337,117	250,145	145,603
Basic earnings per share	3.53	3.18	2.55	1.89	1.09
Diluted earnings per share	3.47	3.10	2.48	1.83	1.05
Dividends declared per share	-	-	-	-	-
Balance Sheet Data (1)
Cash and investments	$ 2,793,800	$ 2,062,893	$ 1,727,737	$ 1,405,922	$ 1,119,120
Total assets	5,665,107	4,895,172	2,340,600	1,981,736	1,643,440
Total medical liabilities	1,121,151	752,774	660,475	597,190	558,599
Long-term liabilities	309,616	309,742	25,854	27,358	21,691
Debt	760,500	770,500	170,500	170,500	175,000
Stockholders’ equity	2,953,002	2,554,703	1,212,426	928,998	646,037
Operating Data (1)
Medical loss ratio	79.3%	79.4%	80.5%	81.2%	83.3%
Operating earnings ratio	10.9%	12.0%	9.4%	8.1%	5.6%
Administrative expense ratio	17.3%	17.9%	11.5%	12.0%	12.2%
Basic weighted average shares outstanding	158,601	157,965	132,188	132,170	133,203
Diluted weighted average shares outstanding	161,434	161,716	135,884	136,148	137,797
Health Plan Risk membership	1,903,000	1,954,000	1,949,000	1,899,000	1,640,000
Health Plan Non-risk membership	621,000	592,000	560,000	484,000	395,000
(1) Operations Statement Data include the results of operations of acquisitions since the date of acquisition. Balance Sheet Data reflect acquisitions as of December 31, of the year of acquisition. See the notes to consolidated financial statements for detail on our acquisitions.

31

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto. The organization of our Management’s Discussion and Analysis of Financial Condition and Results of Operations is as follows.

• Executive-Level Overview

• Critical Accounting Policies

• New Accounting Standards

• Acquisitions

• Membership

• Results of Operations

• Medicare Private Fee For Service

• Liquidity and Capital Resources

• Other Disclosures

• Risk Factors

Executive-Level Overview

General Operations

We are a national managed health care company based in Bethesda, Maryland operating health plans, insurance companies, network rental/managed care services companies, and workers’ compensation services companies. We provide a full range of risk and fee-based managed care products and services, including health maintenance organization (“HMO”), preferred provider organization (“PPO”), point of service (“POS”), Medicare Advantage, Medicare Prescription Drug Plans, Medicaid, Workers’ Compensation and Network Rental to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators in all 50 states as well as the District of Columbia and Puerto Rico.

Summary of 2006 Performance

• Health Plan membership decreased .9% over the prior year, excluding the new Medicare Part D business.

• Medicare Part D revenues of $669.9 million and membership of 687,000.

• Revenue increased 17% over the prior year.

• Health Plan medical loss ratio of 78.9% improved 60 basis points over the prior year.

• Selling, general and administrative expenses were 17.3% of operating revenues, a decrease of 60 basis points from the prior year.

• Operating margin of 10.9% declined 110 basis points over the prior year.

• Diluted earnings per share increased 11.9% over the prior year.

• Cash flows from operations were $1,066 million (including $348.6 million related to the new Medicare Part D business), a 32.6% increase over the prior year.

• Total cash and investments was $2.8 billion, a 35.4% increase over the prior year.

32

Operating Revenue and Products

We generate our operating revenues from premiums and fees from a broad range of managed care and management service products. Premiums for our risk products, for which we assume full underwriting risk, can vary. For example, premiums for our commercial PPO and commercial POS products are typically lower than our commercial HMO premiums due to medical underwriting and higher deductibles and co-payments that are typically required of the commercial PPO and commercial POS members. Premium rates for our government programs, Medicare and state-sponsored managed Medicaid, are largely established by governmental regulatory agencies in conjunction with competitive bidding processes. Medicare products, including Part D, have risk adjusted premium rates at the member level to help align expected cost and reimbursement. These government products are offered in selected markets where we believe we can achieve profitable growth based upon favorable reimbursement levels, provider costs and regulatory climates.

Revenue for our management services products (“non-risk”) is generally a fixed administrative fee, provided on a predetermined contractual basis or on a percentage-of-savings basis, for access to our health care provider networks and health care management services, for which we do not assume underwriting risk. The management services we provide typically include health care provider network management, clinical management, pharmacy benefit management (“PBM”), bill review, claims repricing, fiscal agent services (generally for state entitlement programs), claims processing, utilization review and quality assurance.

Operating Expenses

Our medical costs include medical claims paid under contractual relationships with a wide variety of providers and capitation arrangements. Medical costs also include an estimate of claims incurred but not reported.

We maintain provider networks that furnish health care services through contractual arrangements with physicians, hospitals and other health care providers. Prescription drug benefits are provided through a formulary comprised of an extensive list of drugs. Drug prices are negotiated at discounted rates through a national network of pharmacies.

We have capitation arrangements for certain ancillary heath care services, such as mental health care, and a small percentage of our membership is covered by global capitation arrangements. Under the typical arrangement, the provider receives a fixed percentage of premium to cover costs of all medical care or of the specified ancillary services provided to the globally capitated members. Under some capitated arrangements, physicians may also receive additional compensation from risk sharing and other incentive arrangements. Global capitation arrangements limit our exposure to the risk of increasing medical costs, but expose us to risk as to the adequacy of the financial and medical care resources of the provider organization. We are ultimately responsible for the coverage of our members pursuant to the customer agreements. To the extent that the respective provider organization faces financial difficulties or otherwise is unable to perform its obligations under the capitation arrangements, we will be required to perform such obligations. Consequently, we may have to incur costs in doing so in excess of the amounts we would otherwise have to pay under the original global or ancillary capitation through our contracted network arrangements.

We have established systems that monitor the availability, appropriateness and effectiveness of the patient care we provide. We collect utilization data in each of our markets that we use to analyze over-utilization or under-utilization of services and assist our health plans in arranging for appropriate care for their members and improving patient outcomes in a cost efficient manner. Medical directors also monitor the utilization of diagnostic services and encourage the use of outpatient surgery and testing where appropriate. Each health plan collects data showing each physician’s utilization profile for diagnostic tests, specialty referrals and hospitalization and presents such data to the health plan’s physicians. The medical directors monitor these results in an effort to ensure the use of medically, cost-effective appropriate services.

We operate regional service centers that perform claims processing, premium billing and collection, enrollment and customer service functions for our health plans. Our regional service centers enable us to take advantage of economies of scale, implement standardized management practices at each of our plans and capitalize on the benefits of our integrated information technology systems. We centralize the underwriting and product pricing functions for our health plans, which allows us to utilize our underwriting expertise and a disciplined pricing strategy at each of our health plans. First Health operating expenses consist primarily of salaries and related costs for personnel involved in the administrative services offered by the Company. To a lesser extent, the operating expenses include facility expenses and information processing costs needed to provide those administrative services.

Cash Flows

We generate cash through operations. As a profitable company in an industry that is not capital equipment intensive, we have not needed to use financing methods to fund operations. While we did incur debt (as described in Note I to our consolidated financial statements in this Form 10-K), the entire proceeds were used to finance an acquisition and were not used to fund operations. Our primary use of cash is to pay medical claims. Any excess cash has historically been used for acquisitions, to prepay indebtedness and for repurchases of our common stock.

Critical Accounting Policies

We consider the accounting policies described below critical in preparing our consolidated financial statements. Critical accounting policies are ones that require difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The judgments and uncertainties affecting the application of these policies include significant estimates and assumptions made by us using information available at the time the estimates are made. Actual results could differ materially from those estimates.

33

Revenue Recognition

Managed care premiums are recorded as revenue in the month in which members are entitled to service. Premiums are based on both a per-subscriber contract rate and the number of subscribers in our records at the time of billing. Premium billings are generally sent to employers in the month preceding the month of coverage. Premium billings may be subsequently adjusted to reflect changes in membership as a result of retroactive terminations, additions, or other changes. Due to early timing of the premium billing, we are able to identify in the current month the retroactive adjustments for two subsequent months billings. Current period revenues are adjusted to reflect these retroactive adjustments.

Based on information received subsequent to generating premium billings, historical trends, bad debt write-offs and the collectibility of specific accounts, we estimate, on a monthly basis, the amount of bad debt and future membership retroactivity and adjust our revenue and allowances accordingly.

As of December 31, 2006, we maintained allowances for retroactive billing adjustments of approximately $20.1 million compared with approximately $20.6 million at December 31, 2005. We also maintained allowances for doubtful accounts of approximately $1.9 million and $3.6 million as of December 31, 2006 and 2005, respectively. The calculation for these allowances is based on a percentage of the gross accounts receivable with the allowance percentage increasing for the older receivables.

We also receive premium payments from the Centers for Medicare and Medicaid Services (“CMS”) on a monthly basis for our Medicare membership. Membership and category eligibility are periodically reconciled with CMS and can result in adjustments to revenue. Premiums collected in advance are recorded as deferred revenue.

We contract with the United States Office of Personnel Management (“OPM”) and with various federal employee organizations to provide health insurance benefits under the Federal Employees Health Benefits Program. These contracts are subject to government regulatory oversight by the Office of the Inspector General (“OIG”) of OPM who perform periodic audits of these benefit program activities to ensure that contractors meet their contractual obligations with OPM.  For our managed care contracts, the OIG conducts periodic audits to, among other things, verify that premiums established under its contracts are in compliance with community rating requirements under the FEHB Program.  The OPM may seek premium refunds or institute other sanctions against health plans that participate in the program.  For our experience-rated plans, the OIG focuses on the appropriateness of contract charges, the effectiveness of claims processing, financial and cost accounting systems, and the adequacy of internal controls to ensure proper contract charges and benefits payments.  The OIG may seek refunds of costs charged under these contracts or institute other sanctions against health plans.  These audits are generally a number of years in arrears.  We record reserves, on an estimated basis annually, for audit and other contract adjustments based on appropriate guidelines.  Any differences between actual results and estimates are recorded in the year the audits are finalized.

We enter into performance guarantees with employer groups where we pledge that we will meet certain standards. These standards vary widely and could involve customer service, member satisfaction, claims processing, claims accuracy, telephone on-hold time, etc. We also enter into financial guarantees which can take various forms including, among others, achieving an annual aggregate savings threshold, achieving a targeted level of savings per-member per-month or achieving overall network penetration in defined demographic markets. For each guarantee, we estimate and record performance based revenue after considering the relevant contractual terms and the data available for the performance based revenue calculation. Pro-rata performance based revenue is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts.

Medical Claims Expense and Liabilities

Medical liabilities consist of actual claims reported but not paid and estimates of health care services incurred but not reported. Medical liabilities estimates are developed using actuarial principles and assumptions that consider, among other things, historical claims payment patterns, provider reimbursement changes, historical utilization trends, current levels of authorized inpatient days, other medical cost inflation factors, membership levels, benefit design changes, seasonality, demographic mix change and other relevant factors.

34

We employ a team of actuaries that have used a set of reserve models that are based on a consistent methodology. Although the calculation is consistent, we adjust our estimates of medical utilization and components of medical cost trends to amounts we estimate to be appropriate. The medical liabilities are an accumulation of the results from many individual models, each calculated at the statutory level and representing different markets and/or products. These reserve models do not calculate separate amounts for reported but not paid and incurred but not reported, but rather a single estimate of medical claims liabilities. These reserve models make use of both historical claim payment patterns as well as emerging medical cost trends to project our best estimate of claim liabilities. Within these models, historical data of paid claims is formatted into claim triangles which compare claim incurred dates to the claim payment dates. This information is analyzed to create “completion factors” that represent the average percentage of total incurred claims that have been paid through a given date after being incurred. Completion factors are applied to claims paid through the financial statement date to estimate the ultimate claim expense incurred for the current period. Actuarial estimates of claim liabilities are then determined by subtracting the actual paid claims from the estimate of the ultimate incurred claims.

Actuarial standards of practice generally require the actuarial developed medical claims estimates to cover obligations under an assumption of moderately adverse conditions. Adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims. In many situations, the claims paid amount experienced will be less than the estimate that satisfies the actuarial standards of practice. Medical claims liabilities are recorded at an amount we estimate to be appropriate. Adjustments of prior years estimates may result in additional medical costs or, as we have experienced during the last several years, a reduction in medical costs in the period an adjustment was made. Our reserve models have historically developed favorably suggesting that the accrued liabilities calculated from the models were more than adequate to cover our ultimate liability for unpaid claims. We believe that this favorable development is a result of good communications between our health plans and our actuarial staff regarding medical utilization, mix of provider rates and other components of medical cost trend.

The following table presents the components of the change in medical claims liabilities for the years ended December 31, 2006, 2005 and 2004, respectively (in thousands).

		2006	2005	2004
Medical liabilities, beginning of period		$   752,774	$  660,475	$  597,190
Acquisitions (1)		--	41,895	--
Reported Medical Costs
	Current year	5,570,872	4,672,009	4,257,942
	Prior year developments	(130,908)	(121,138)	(72,047)
Total reported medical costs		5,439,964	4,550,871	4,185,895
Claim Payments
	Payments for current year	4,852,359	4,030,685	3,691,092
	Payments for prior year	542,571	469,782	431,518
Total claim payments		5,394,930	4,500,467	4,122,610
Part D Related Subsidy Liabilities		323,343	--	--
Medical liabilities, end of period		$ 1,121,151	$ 752,774	$ 660,475
Supplemental Information:
	Prior year development (2)	2.9%	2.9%	2.0%
	Current year paid percent (3)	87.1%	86.3%	86.7%
(1) Acquisition balances represent medical liabilities of the acquired company as of the applicable acquisition date.
(2) Prior year reported medical costs in the current year as a percentage of prior year reported medical costs.
(3) Current year claim payments as a percentage of current year reported medical costs.

35

The negative amounts noted as “prior year” medical costs are favorable adjustments for claim estimates being settled for amounts less than originally anticipated. As noted above, these favorable restatements from original estimates occur due to changes in medical utilization, mix of provider rates and other components of medical cost trends. Medical claim liabilities are generally paid within several months of the member receiving service from the provider. Accordingly, the 2006 prior year medical costs relate almost entirely to claims incurred in calendar year 2005 and the increase in prior year medical cost was driven primarily by lower than anticipated medical cost increases, growth in the medical cost base and uncertainties at the prior year-end regarding our Louisiana operations and the effects of Hurricane Katrina.

The Medicare Part D related subsidy liabilities identified in the table above represent subsidy amounts received from CMS for reinsurance and for cost sharing related to low income individuals. These subsidies are recorded in medical liabilities and we do not recognize premium revenue or claims expense for these subsidies. Following the final settlement in 2007 related to the 2006 plan year, any remaining balances from these subsidy payments will be refunded to CMS.

For the more recent incurred months, the percentage of claims paid to claims incurred in those months is generally low. As a result, the completion factor methodology is less reliable for such months. For that reason, incurred claims for recent months are not projected solely from historical completion and payment patterns. Instead, they are projected by estimating the claims expense for those months based upon recent claims expense levels and health care trend levels, or “trend factors.” As these months mature over time, the two estimates (completion factor and trend) are blended with completion factors being used exclusively for older months.

Within the reserve setting methodologies for inpatient and non-inpatient services, we use certain assumptions. For inpatient services, authorized days are used for utilization factors, while cost trend assumptions are incorporated into per diem amounts. The per diem estimates reflect anticipated effects of changes in reimbursement structure and severity mix. For non-inpatient services, a composite trend assumption is applied which reflects anticipated changes in cost per service, provider contracts, utilization, and other factors.

Changes in the completion factors, trend factors and utilization factors can have a significant effect on the claim liability. The following example provides the estimated effect to our December 31, 2006 unpaid claims liability assuming hypothetical changes in the completion, trend, and inpatient day factors. While we believe the selection of factors and ranges provided are reasonable, certain factors and actual results may differ.

Completion Factor			Claims Trend Factor			Inpatient Day Factor
Increase (Decrease) in Completion Factor		(Decrease) Increase in Unpaid Claims Liabilities	(Decrease) Increase in Claims Trend Factor		(Decrease) Increase in Unpaid Claims Liabilities	(Decrease) Increase in Inpatient Day Factor		(Decrease) Increase in Unpaid Claims Liabilities
3.3	%	$                  (21,471)	(5.0)	%	$                 (57,723)	(5.0)	%	$                (13,127)
2.0	%	$                  (13,196)	(2.5)	%	$                 (28,861)	(2.5)	%	$                  (6,564)
1.0	%	$                    (6,671)	(1.0)	%	$                 (11,545)	(1.0)	%	$                  (2,625)
(1.0)	%	$                      6,820	1.0	%	$                   11,545	1.0	%	$                    2,625
(2.0)	%	$                    13,796	2.5	%	$                   28,861	2.5	%	$                    6,564
(3.3)	%	$                    23,104	5.0	%	$                   57,723	5.0	%	$                  13,127

We also establish reserves, if required, for the probability that anticipated future health care costs and contract maintenance costs under the group of existing contracts will exceed anticipated future premiums and reinsurance recoveries on those contracts.

Accruals are continually monitored and reviewed, and as settlements are made or accruals adjusted, differences are reflected in current operations. Changes in assumptions for medical costs caused by changes in actual experience could cause these estimates to change in the near term. Certain situations require judgment in setting reserves, such as system conversions, processing interruptions, environmental changes or other factors.

We believe that the amount of medical liabilities is adequate to cover our ultimate liability for unpaid claims as of December 31, 2006 however, actual claim payments and other items may differ from established estimates.

36

Investments

We account for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 - “Accounting for Certain Investments in Debt and Equity Securities.” We invest primarily in fixed income securities and classify all of our investments as available-for-sale. Investments are evaluated on an individual security basis at least quarterly to determine if declines in value are other-than-temporary. In making that determination, we consider all available evidence relating to the realizable value of a security. This evidence includes, but is not limited to, the following:

• adverse financial conditions of a specific issuer, segment, industry, region or other variables;

• the length of the time and the extent to which the fair value has been less than cost;

• the financial condition and near-term prospects of the issuer;

• our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value;

• elimination or reduction in dividend payments, or scheduled interest and principal;

• rating agency downgrade of a debt security; and

• expected cash flows of a debt security.

Temporary declines in value of investments classified as available-for-sale are netted with unrealized gains and reported as a net amount in a separate component of stockholders’ equity. A decline in fair value below amortized cost that is judged to be other–than–temporary is accounted for as a realized loss and the write down is included in earnings. Realized gains and losses on the sale of investments are determined on a specific identification basis.

The following table shows our investments’ gross unrealized losses and fair value, at December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands).

	Less than 12 months		12 months or more		Total
Description of Securities	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss	Fair Value	Unrealized Loss
State and municipal bonds	$  67,946	$  (275)	$ 202,849	$   (3,240)	$ 270,795	$   (3,515)
U.S. Treasury & agency securities	25,535	(77)	57,171	(750)	82,706	(827)
Mortgage-backed securities	40,021	(140)	126,151	(2,920)	166,172	(3,060)
Asset-backed securities	12,909	(26)	33,239	(734)	46,148	(760)
Corporate debt and other securities	9,045	(46)	123,032	(2,918)	132,077	(2,964)
	$ 155,456	$ (564)	$ 542,442	$ (10,562)	$ 697,898	$ (11,126)

The securities presented in this table do not meet the criteria for an other-than-temporarily impaired investment. The unrealized loss is almost exclusively the result of interest rate increases and not unfavorable changes in the credit ratings associated with these securities. These investments are not in high risk industries or sectors and we intend to hold these investments for a period of time sufficient to allow for a recovery in market value, which may be maturity.

Goodwill and Other Long-lived Assets

Goodwill and other intangible assets that have indefinite lives are subject to a periodic assessment for impairment by applying a fair-value-based test. For our impairment analysis of the Health Plan segment goodwill, we used three approaches to identify the fair value of our goodwill and other intangible assets: a market approach, a market capitalization approach and an income approach. The market approach estimates a business’s fair value by analyzing the recent sales of similar companies. The market capitalization approach is based on the market value of our total shares outstanding. The income approach is based on the present value of expected future cash flows. The income approach involves estimating the present value of the company’s estimated future cash flows, and discounting these cash flows at a given rate of return. All three approaches were reviewed together for consistency and commonality.

For our impairment analysis of the First Health segment goodwill and indefinite lived intangible asset, we engaged an independent business valuation firm to assist us in our analysis.  For the First Health goodwill impairment analysis, we relied primarily on the income approach and secondarily on the market approach. For the First Health indefinite lived asset, we relied on two separate variations of the income approach. Each approach was reviewed together for consistency and commonality.

37

Under the income approach, we assumed certain growth rates, capital expenditures, discount rates and terminal growth rates in our calculations. If the assumptions used in our fair-value-based tests differ from actual results, the estimates underlying our goodwill impairment tests could be adversely affected. Any impairment charges that may result will be recorded in the period in which the impairment is identified. We have not incurred an impairment charge related to goodwill or indefinite lived intangibles. See Note C to the consolidated financial statements for additional disclosure related to intangible assets.

Our remaining long-lived assets consist of property and equipment and other finite-lived intangible assets. These assets are depreciated or amortized over their estimated useful life, and are subject to impairment reviews. In accordance with Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the cost of internally developed software is capitalized and included in property and equipment. We capitalize costs incurred during the application development stage for the development of internal-use software. These costs primarily relate to payroll and payroll-related costs for employees along with costs incurred for external consultants who are directly associated with the internal-use software project. We periodically review long-lived assets whenever adverse events or changes in circumstances indicate the carrying value of the asset may not be recoverable. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors to determine if an impairment loss may exist, and, if so, estimate fair value. We also must estimate and make assumptions regarding the useful life we assign to our long-lived assets. If these estimates or their related assumptions change in the future, we may be required to record impairment losses or change the useful life, including accelerating depreciation for these assets.

Stock-Based Compensation Expense

We account for share based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Shared-Based Payment" ("FAS 123R"). Under the fair value recognition provisions of FAS 123R, determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. We have determined that a blend of the implied volatility of our tradeable options and the historical volatility of the Company’s share price is a better indicator of expected volatility and future stock price trends than historical volatility alone. Therefore, the expected volatility in 2006 was based on a blend of market-based implied volatility and the historical volatility of our stock. The assumptions used in calculating the fair value of share-based payment awards represent our best estimates. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note F to the Consolidated Financial Statements in Item 8 for a further discussion on stock-based compensation.

New Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued "Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109", which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial position already taken or expected to be taken in a tax return. For a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by applicable taxing authorities. The benefit recognized is the amount that has a greater than 50% likelihood of being realized upon final settlement of the tax position. FIN 48 was effective for the Company as of January 1, 2007. The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings. The Company’s evaluation of the impact of adoption of FIN 48 is ongoing, and it is anticipated that the adoption of FIN 48 will not have a material impact on the Company’s January 1, 2007 balance of retained earnings.

Acquisitions

During the three years ended December 31, 2006, we completed two business combinations and a membership purchase. These business combinations are all accounted for using the purchase method of accounting and, accordingly, the operating results of each acquisition have been included in our consolidated financial statements since their effective date of acquisition. The purchase price for each business combination was allocated to the assets, including the identifiable intangible assets, and liabilities based on estimated fair values. The excess of the purchase price over the net identifiable assets acquired was allocated to goodwill. The purchase price of our membership purchases is allocated to identifiable intangible assets and is being amortized over a useful life of ten to twenty years.

38

The following table summarizes all business combinations and membership purchases for the three years ended December 31, 2006. The purchase price of each business combination includes the payment for net worth and estimated transition costs. The purchase price shown for recent acquisitions, in millions, is inclusive of all retroactive balance sheet settlements and transaction cost adjustments.

			Purchase
	Effective Date	Market	Price
Business Combinations
First Health Group Corp. ("First Health")	January 28, 2005	Multiple Markets	$  1,695
Provider Synergies, L.L.C. ("Provider Synergies")	January 1, 2006	Multiple Markets	$       22
Membership Purchases
OmniCare Health Plan ("OmniCare")	October 1, 2004	Michigan	$      13

Effective January 28, 2005, we completed our acquisition of First Health. First Health is a full service national health benefits services company that serves the group health, workers’ compensation and state public program markets. Each outstanding share of First Health common stock was converted into a right to receive $9.375 cash and 0.2687 shares of Coventry common stock. As a result of the merger, we paid $863.1 million in cash and issued approximately 24.7 million shares of our common stock to stockholders of First Health.The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of First Health have been included in our consolidated financial statements since the date of acquisition. The purchase price for First Health was allocated to the assets, including identifiable intangible assets and liabilities, based on estimated fair values. For additional information regarding the First Health acquisition, please refer to Note B to our consolidated financial statements.

Effective January 1, 2006, we completed the acquisition of Provider Synergies, an Ohio limited liability company. Provider Synergies manages preferred drug lists and negotiates rebates on behalf of state government and commercial clients. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of Provider Synergies have been included in our consolidated financial statements since the date of acquisition. The pro forma effects of this acquisition were not material to the Company’s consolidated financial statements.

Membership

The following table presents our Health Plan membership as of December 31, 2006 and 2005 (in thousands) and the percentage change in membership between these dates.

			December 31,		Percent
			2006	2005	Change
Risk membership:
	Commercial		1,450	1,486	(2.4%)
	Medicare		80	75	6.7%
	Medicaid		373	393	(5.1%)
		Total risk membership	1,903	1,954	(2.6%)
Non-risk membership			621	592	4.9%
		Total membership	2,524	2,546	(0.9%)

Commercial insured membership decreased over the prior year end due to losses experienced in our Pennsylvania market and the expected loss of commercial insured members in our Louisiana operations during the first half of 2006, primarily due to Hurricane Katrina. Additionally, there were a few large groups changing from a risk product to a non-risk product. These losses were partially offset by gains in employer group business in other markets such as Delaware, Kansas and Georgia and also by growth in individual business across multiple markets.

Medicaid membership decreased over the prior year end due to changes in the eligibility requirements for Medicaid beneficiaries throughout the Missouri market as well as the state of North Carolina’s termination of its existing managed care program during the third quarter resulting in a loss of approximately 7,400 members.

The increase in non-risk membership was attributable to organic growth in various markets as well as a few large groups changing from a risk product to a non-risk product.

39

Results of Operations

The following table is provided to facilitate a more meaningful discussion regarding the comparison of our operations for each of the three years in the period ended December 31, 2006 (in thousands, except earnings per share and membership data).

					Increase			Increase
			2006	2005	(Decrease)	2005	2004	(Decrease)
Consolidated Business
	Total operating revenues		$      7,733,756	$     6,611,246	17.0%	$      6,611,246	$      5,311,969	24.5%
	Operating earnings		$         841,003	$        791,818	6.2%	$         791,818	$         496,671	59.4%
	Operating earnings as a % of revenue		10.9%	12.0%	(1.1%)	12.0%	9.4%	2.6%
	Net earnings		$         560,045	$        501,639	11.6%	$         501,639	$         337,117	48.8%
	Diluted earnings per share		$               3.47	$              3.10	11.9%	$               3.10	$               2.48	25.0%
	Selling, general and administrative		17.3%	17.9%	(0.6%)	17.9%	11.5%	6.4%
		as a percentage of revenue
Health Plan Business
Managed Care Premium Yields (per member per month):
	Commercial		$           259.52	$          246.46	5.3%	$           246.46	$           226.59	8.8%
	Medicare Advantage		$           857.28	$          765.58	12.0%	$           765.58	$           695.96	10.0%
	Medicaid		$           167.30	$          157.52	6.2%	$           157.52	$           145.23	8.5%
	Medicare Part D		$             90.48	n/a	n/a	n/a	n/a	n/a
Medical Costs (per member per month):
	Commercial		$           201.66	$          193.37	4.3%	$           193.37	$           179.21	7.9%
	Medicare Advantage		$           681.07	$          614.55	10.8%	$           614.55	$           579.92	6.0%
	Medicaid		$           143.18	$          133.32	7.4%	$           133.32	$           126.88	5.1%
	Medicare Part D		$             76.42	n/a	n/a	n/a	n/a	n/a
Medical Loss Ratios:
	Commercial		77.7%	78.5%	(0.8%)	78.5%	79.1%	(0.6%)
	Medicare Advantage		79.4%	80.3%	(0.9%)	80.3%	83.3%	(3.0%)
	Medicaid		85.6%	84.6%	1.0%	84.6%	87.4%	(2.8%)
	Total		78.9%	79.5%	(0.6%)	79.5%	80.5%	(1.0%)
	Medicare Part D		84.5%	n/a	n/a	n/a	n/a	n/a
Administrative Statistics:
	Selling, general and administrative		11.7%	11.4%	0.3%	11.4%	11.5%	(0.1%)
		as a percentage of revenue
	Days in medical liabilities (1)		55.0	55.6	(0.6)	55.6	55.8	(0.2)
First Health Business (2)
Membership
	National Accounts
		On-going accounts	460,000	669,000		669,000	n/a
		Run-out (3)	32,000	90,000		90,000	n/a
	Total National Accounts		492,000	759,000		759,000	n/a
	Mail Handlers		406,000	462,000		462,000	n/a
Revenue by product lines
	National Accounts		$         113,990	$        141,283		$         141,283	n/a
	Federal Employees Health Benefit Plan		208,177	204,678		204,678	n/a
	Network Rental		126,573	89,442		89,442	n/a
		Group Health Subtotal	448,740	435,403		435,403	n/a
	Medicaid/Public Sector		184,503	183,197		183,197	n/a
	Workers' Compensation		206,220	193,714		193,714	n/a
		Specialty Business Subtotal	390,723	376,911		376,911	n/a
	Total First Health Revenues		$         839,463	$        812,314		$         812,314	n/a
Administrative Statistics:
	Selling, general and administrative		64.6%	64.9%		64.9%	n/a
		as a percentage of revenue
	(1) Excludes Medicare Part D; (2) Results of Operations includes First Health since January 28, 2005, the date of acquisition; and (3) Company is still providing services to terminated customers.

40

Comparison of 2006 to 2005

Managed care premium revenue increased as a result of new business related to our Medicare Part D products and as a result of rate increases that occurred throughout all markets. Medicare Part D business accounted for $669.9 million of managed care premium revenue in 2006 which excludes $32.6 million attributable to the estimated CMS risk-sharing payments that will be due to CMS upon the final settlement in 2007 for the 2006 plan year.

Additionally, we have quota share reinsurance arrangements with two of our Medicare Part D distribution partners. As a result of the quota sharing arrangements, we ceded Medicare Part D premium revenue to these partners of $65.8 million. This amount is excluded from the $669.9 million of reported Medicare Part D revenue. Before subtracting the quota share ceded revenue, the premium yield, per member per month, for Medicare Part D business would have been $8.88 higher than the $90.48 reported. When reviewing the premium yield for Medicare Part D business, adjusting for the ceded revenue is useful for comparisons to competitors that may not have similar ceding arrangements.

Commercial premium yields (premium per member per month) increased as a result of rate increases that occurred throughout all markets. The reported commercial premium yield increase of 5.3% is lower than the rate increases on renewing business due to a mix change in the types of plans being purchased as new business (such as a change to lower benefit plans); the types of plans being selected by renewing members when they have a choice among multiple options (such as a change to higher deductible, lower premium plans); and the termination of certain large groups which had high costs and high premium yields. Medicare Advantage premium yields increased as a result of the rate increases from the annual Competitive Bid filings. Medicaid premium yields increased as a result of rate increases effective January 1 and July 1, 2006 in Missouri, our largest Medicaid market.

Management services revenue decreased partially as a result of declines in membership in the National Accounts and Federal Employees Health Benefit Plan sectors of the First Health segment. Additionally, the implementation of Medicare Part D resulted in a decline of First Health pharmacy administration fee based revenue compared to the prior year, although this decline is more than offset by the increased revenue from our new Medicare Part D business discussed above in the managed care premium revenue section. These decreases are partially offset by reporting a full year of First Health results in 2006. First Health was acquired on January 28, 2005 and therefore only results from January 28, 2005 through December 31, 2005 are included in our 2005 results of operations.

Medical costs have increased as a result of new business related to our Medicare Part D products and as a result of medical trend. Medicare Part D medical costs totaled $565.9 million. Excluding Medicare Part D business, Health Plan medical costs as a percentage of premium revenue have declined 0.6% compared with the prior year period. The decline is primarily a result of premium increases and better than expected cost trends. The better than expected cost trends were primarily attributed to lower inpatient and outpatient utilization and the uncertainties at the prior year-end regarding our Louisiana operations and the effects from Hurricane Katrina. Days in total medical claims liabilities decreased slightly from the prior year due primarily to faster claim receipts and continually improved processing cycle times.

Selling, general and administrative expense increased primarily as a result of costs related to the new Medicare Part D business in 2006, reporting a full year of First Health results in 2006, recognizing stock option expense related to the adoption of SFAS 123(R) and increased salary expenses due to annual compensation increases. However, these increases are partially offset by synergies gained subsequent to the acquisition of First Health. Selling, general and administrative expenses as a percentage of revenue have improved as a result of these achieved synergies, continuing revenue growth and success in controlling overall administrative costs.

Depreciation and amortization increased as a result of reporting a full year of First Health results in 2006 and as a result of an increase in property and equipment over the past two years, primarily computer equipment and software related to our First Health business.

Interest expense was higher in the prior year as a result of the refinancing of our credit facilities during the prior year second quarter. As a result of the refinancing, we wrote off $5.4 million of deferred financing costs in the prior year second quarter related to the original credit facilities associated with the First Health acquisition. Additionally, our debt has declined over the last two years and, as a result, interest expense related to the indebtedness has also declined.

Other income increased as a result of a larger investment portfolio and a rise in interest rates during 2005 and 2006.

Our provision for income taxes increased almost exclusively due to an increase in earnings. The effective tax rate remained relatively flat at 37.5% in 2006 compared to 37.3% in 2005.

41

Comparison of 2005 to 2004

Managed care premium revenue increased as a result of rate increases that occurred throughout all markets and as a result of acquisitions. Commercial yields (premium per member per month) increased as a result of rate increases on renewals. Medicare yields increased as a result of the rate increases on January 1, 2005 from the annual Adjusted Community Rating filings. Medicaid yields increased as a result of a rate increase of 6.5% effective January 1, 2005 in Missouri, our largest Medicaid market, and as a result of the OmniCare acquisition which has a higher yield than our historical Medicaid membership. The acquisition of OmniCare effective October 1, 2004 and First Health effective January 28, 2005 accounted for $151.9 million of the increase in managed care premium revenue over the prior year. The First Health acquisition closed January 28, 2005 and, therefore, only results from January 28, 2005 through December 31, 2005 are included in our results of operations.

Management services revenue increased almost entirely due to the acquisition of First Health. The acquisition of First Health accounted for $764.0 million of the increase in management services revenue over the prior year.

Medical costs have increased due to medical trend and acquisitions. However, Health Plan medical expense as a percentage of managed care premium revenue has improved to 79.5% compared to 80.5% in the prior year. This favorable change was attributable to premium rate increases discussed above outpacing medical trend in each of our Health Plan lines of business. The favorable change was also attributable to favorable inpatient utilization during 2005, particularly in the third and fourth quarters, and a flu season in the first quarter of 2005 that was not as severe as it has been in previous years.  Total reported commercial medical trend (per member per month), net of buydowns, was 7.9% in 2005. Days in total medical claims liabilities decreased slightly from the prior year due primarily to faster claim receipts and continually improved processing cycle times.

Selling, general and administrative expenses increased primarily due to normal operating costs of First Health, which accounted for $523.7 million of the increase in selling, general and administrative expense. Additional increases include an increase in salary expense, Medicare Part D implementation costs and a full twelve months of normal operating costs of OmniCare. Salary expenses, excluding acquisitions, have increased due to annual compensation increases and additional amortization expense related to restricted shares of common stock granted in 2004 and 2005. However, Health Plan selling, general and administrative expenses as a percentage of revenue have improved as a result of continuing revenue growth and success in controlling administrative costs.

Depreciation and amortization increased almost exclusively as a result of the acquisition of First Health. Depreciation expense for First Health, primarily for computer equipment and software, was $36.8 million and amortization of intangibles associated with the acquisition of First Health was $27.7 million.

Interest expense increased as a result of the indebtedness incurred with the acquisition of First Health. Additionally, we refinanced our credit facilities during the second quarter. As a result, we wrote off $5.4 million of deferred financing costs related to the original credit facilities.

Other income increased as a result of a larger investment portfolio and a rise in short term rates during the year.

Our provision for income taxes increased primarily due to an increase in earnings. The effective tax rate increased to 37.3% in 2005 from 36.0% in 2004 primarily as a result of the First Health acquisition and a related change in the relative mix of states with income tax provisions.

Medicare Private Fee For Service

Coventry submitted bids as a Medicare Private Fee For Service (“PFFS”) sponsor in 2006 for the 2007 benefit year. The bids are designed to provide solutions for individuals and employer group populations. Our primary distribution strategy for the Medicare PFFS program is through marketing alliances with other insurers and brokerage channels.

During the third quarter of 2006, we received approval to offer PFFS products in 43 states. The PFFS plans will be marketed under the brand name of Advantra Freedom. These plans include options with pharmacy benefits or stand alone medical benefits. In addition, there are benefit plans available at a zero premium option in most states.

Products will be underwritten by Coventry Health and Life Insurance Company, First Health Life and Health Insurance Company and Cambridge Life Insurance Company. We have established partnerships with Medicare Supplement insurance carriers and brokerage channels nationwide to provide Medicare Private Fee For Service to Medicare beneficiaries.

42

Liquidity and Capital Resources

Liquidity

The nature of a vast majority of our operations is such that cash receipts from premium revenues are typically received up to two months prior to the expected cash payment for related medical costs. Premium revenues are typically received at the beginning of the month in which they are earned, and the corresponding incurred medical expenses are paid in a future time period, typically 15 to 60 days after the date such medical services are rendered. The lag between premium receipts and claims payments creates positive cash flow and overall cash growth. As a result, we typically hold approximately two months of “float”. In addition, accumulated earnings provide further positive cash flow. In addition to ample current liquidity, our long-term investment portfolio is available for further liquidity needs.

Our investment guidelines require our fixed income securities to be investment grade in order to provide liquidity to meet future payment obligations and minimize the risk to the principal. The fixed income portfolio includes government and corporate securities with an average quality rating of “AA+” and an average contractual duration of 2.8 years as of December 31, 2006. Typically, the amount and duration of our short-term assets are more than sufficient to pay for our short-term liabilities and we do not anticipate that sales of our long-term investment portfolio will be necessary to fund our claims liabilities.

Our cash and investments, consisting of cash and cash equivalents and short-term and long-term investments, but excluding deposits of $56.4 million restricted under state regulations, increased $723.9 million to $2.7 billion at December 31, 2006 from $2.0 billion at December 31, 2005.

On February 8, 2007, the Company announced it has signed a definitive agreement to acquire Concentra, Inc.’s workers’ compensation managed care services businesses. The Company will acquire the Concentra businesses for $387.5 million in an all-cash transaction expected to close in 90 to 180 days, subject to closing conditions, regulatory and other customary approvals. We anticipate the funds for payment of the acquisition will be provided by existing cash, additional bank borrowings or a new bond offering.

On February 15, 2007, we redeemed all $170.5 million of our outstanding 8.125% Senior Notes. We redeemed the Senior Notes at a redemption price equal to 104.1% of the principal amount plus interest accrued on the redemption date. We will record a charge, including the write-off of previously paid unamortized issuance costs, of approximately $9.1 million before tax, or $0.04 per diluted share in the first quarter of 2007. The funds for payment of the redemption price were provided by existing cash.

The demand for our products and services is subject to many economic fluctuations, risks and uncertainties that could materially affect the way we do business. See Part I, Item 1A, “Risk Factors,” in this Form 10-K for more information. Management believes that the combination of our ability to generate cash flows from operations, cash and investments on hand and the excess funds held in certain of our regulated subsidiaries will be sufficient to fund continuing operations, capital expenditures, debt interest costs, debt principal repayments and any other reasonably likely future cash requirements.

Cash Flows

Operating Activities

Net cash from operating activities is primarily driven by net earnings and an increase in medical liabilities. The increase in medical liabilities was driven by the addition of approximately $363.5 million related to the Part D program. Total cash inflows from Medicare Part D totaled $348.6 million. This amount included a net receipt of claim reinsurance subsidies from CMS of approximately $234.7 million. Following the final settlement in 2007 related to the 2006 plan year, any remaining balances from reinsurance and other subsidy payments will be returned to CMS. Accounts payable and other liabilities increased primarily due to CMS risk sharing payment accruals, attributable largely to the Part D program; an increase in income taxes payable; and other normal operating activities. Accounts receivable decreased during the year as a result of strong collections. Offsetting these operating cash inflows was an increase in other receivables which was primarily a result of pharmacy rebate receivables recorded related to the Part D program.

43

Financing and Investing Activities

Proceeds from the issuance of debt include indebtedness incurred in 2005 related to the acquisition of First Health, less payments made for debt issuance costs. The issuance of debt includes $500 million of new senior notes, unsecured credit facilities consisting of a $300 million five-year term loan and $65 million from a revolving credit facility drawn at closing on January 28, 2005. Proceeds also include new credit facilities the Company entered into on June 30, 2005 providing for a revolving credit facility in the principal amount of $350 million, of which $117.5 million was drawn at closing, and a term loan in the principal amount of $100 million. Payments for retirement of debt include the repayment of a $200 million long-term credit facility assumed from the acquisition of First Health, repayment of the $365 million original credit facilities and the $117.5 million repayment of the new revolving credit facility.

The senior notes and credit facilities require compliance with specified financial ratios and contain certain covenants and restrictions regarding incurring additional debt, limiting dividends or other restricted payments, and restricting sales of assets above a certain threshold and consolidations or mergers in the context of a change of control. We have complied with all ratios and covenants under the senior notes and credit facilities.

Capital expenditures in 2006 of approximately $72.6 million consist primarily of computer hardware, software and related costs associated with the development and implementation of improved operational and communication systems. Projected capital expenditures in 2007 of approximately $65-$70 million consist primarily of computer hardware, software and other equipment.

Our Board of Directors has approved a program to repurchase our outstanding common stock. Stock repurchases may be made from time to time at prevailing prices on the open market, by block purchase or in private transactions. In February 2006, our Board of Directors approved an increase to the share repurchase program in an amount equal to 5% of our outstanding common stock, thus increasing our repurchase authorization by 8.1 million shares. As a part of this program, 3.0 million shares were purchased during the first quarter of 2004 at an aggregate cost of $84.6 million, no shares were purchased in 2005 and 4.6 million shares of our common stock were purchased in 2006 at an aggregate cost of $256.1 million. As of December 31, 2006, the total remaining common shares we are authorized to repurchase under this program is 6.2 million. We intend to repurchase approximately $200 million of our shares during the first quarter of 2007 under this program.

Health Plans

Our regulated HMO and insurance company subsidiaries are required by state regulatory agencies to maintain minimum surplus balances, thereby limiting the dividends the parent may receive from our regulated entities. During 2006, we received $297 million in dividends from our regulated subsidiaries.

The National Association of Insurance Commissioners (“NAIC”) has proposed that states adopt risk-based capital (“RBC”) standards that, if adopted, would generally require higher minimum capitalization requirements for HMOs and other risk-bearing health care entities. RBC is a method of measuring the minimum amount of capital appropriate for a managed care organization to support its overall business operations in consideration of its size and risk profile. The managed care organization’s RBC is calculated by applying factors to various assets, premiums and reserve items. The factor is higher for those items with greater underlying risk and lower for less risky items. The adequacy of a managed care organization’s actual capital can then be measured by a comparison to its RBC as determined by the formula. Our health plans are required to submit an RBC report to the NAIC and their domiciled state’s department of insurance with their annual filing.

Regulators will use the RBC results to determine if any regulatory actions are required. Regulatory actions that could take place, if any, range from filing a financial action plan explaining how the plan will increase its statutory net worth to the approved levels, to the health plan being placed under regulatory control.

44

The majority of states in which we operate health plans have adopted a risk-based capital (“RBC”) policy that recommends the health plans maintain statutory reserves at or above the ‘Company Action Level’ which is currently equal to 200% of their RBC. We have adopted an internal policy to maintain all of our regulated subsidiaries’ statutory capital and surplus at or above 250% of their RBC and a level of 300% in aggregate (referred to below as “300% of RBC”). Some states in which our regulated subsidiaries operate require deposits to be maintained with the respective states’ departments of insurance. The table below summarizes our statutory reserve information, as of December 31, 2006 and 2005 (in millions, except percentage data).

	2006	2005
Regulated capital and surplus	$ 1,070.6 (a)	$ 897.4
300% of RBC	$    666.5 (a)	$ 555.3 (a)
Excess capital and surplus above 300% of RBC	$    404.1 (a)	$ 342.1 (a)
Capital and surplus as percentage of RBC	481% (a)	485% (a)
Statutory deposits	$     56.4	$   49.4
(a) unaudited

The increase in capital and surplus for our regulated subsidiaries is a result of net earnings partially offset by dividends paid to the parent company.

We believe that all subsidiaries which incur medical claims maintain more than adequate liquidity and capital resources to meet these short-term obligations as a matter of both Company policy and multiple Department of Insurance regulations.

Excluding funds held by entities subject to regulation and excluding our investment in an equipment leasing limited liability company, we had cash and investments of approximately $563.1 million and $347.2 million at December 31, 2006 and December 31, 2005, respectively. The increase was primarily due to the dividends received from our regulated subsidiaries and earnings from our non-regulated First Health business offset, in part, by the share repurchases discussed previously.

Other

As of December 31, 2006, we were contractually obligated to make the following payments within the next five years and thereafter (in thousands):

		Payments Due by Period
Contractual Obligations	Total	Less than 1 Year	1 - 3 Years	3 - 5 Years	More than 5 years
Senior notes	$   670,500	$           -	$              -	$              -	$ 670,500
Interest payable on senior notes	287,129	43,853	87,706	87,706	67,864
Credit Facilities	90,000	10,000	20,000	60,000	-
Interest payable on credit facilities	13,670	4,517	7,533	1,620	-
Software purchases	9,000	3,000	1,000	5,000	-
Operating leases	125,407	26,993	47,533	30,579	20,302
Total contractual obligations	1,195,706	88,363	163,772	184,905	758,666
Less sublease income	(8,129)	(1,716)	(2,831)	(2,146)	(1,436)
Net contractual obligations	$ 1,187,577	$ 86,647	$ 160,941	$ 182,759	$ 757,230

Refer to Note J to our consolidated financial statements for disclosure related to our operating leases.

We have typically paid 90% to 95% of medical claims within 6 months of the date incurred and approximately 99% of medical claims within 9 months of the date incurred. Accordingly, we believe medical claims liabilities are short-term in nature and therefore do not meet the listed criteria for classification as contractual obligations and have been excluded from the table above.

45

Other Disclosure

Legal Proceedings

In the normal course of business, we have been named as a defendant in various legal actions such as actions seeking payments for claims denied by us, medical malpractice actions, employment related claims and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 2006 may result in the assertion of additional claims. We maintain general liability, professional liability and employment practices liability insurances in amounts that we believe are appropriate, with varying deductibles for which we maintain reserves. The professional liability and employment practices liability insurances are carried through our captive subsidiary. Although the results of pending litigation are always uncertain, we do not believe the results of such actions currently threatened or pending, including those described below, will individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.

We are a defendant in the provider track of the In Re: Managed Care Litigation filed in the United States District Court for the Southern District of Florida, Miami Division, Multi-District Litigation (“MDL”), No. 1334, in the action captioned, Charles B. Shane., et al., vs. Humana, Inc., et al. This lawsuit was filed by a group of physicians as a class action against Coventry and nine other companies in the managed care industry. The plaintiffs alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO and aiding and abetting a scheme to violate RICO. In addition to these federal law claims, the complaint included state law claims for breach of contract, violations of various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit. The trial court dismissed several of the state law claims and ordered all physicians who had an arbitration provision in their provider contracts to submit their direct RICO claims and their remaining state law claims to arbitration. As a consequence of this ruling, the plaintiffs who had arbitration provisions voluntarily dismissed their claims that were subject to arbitration. In its order, the trial court also held that the plaintiffs’ claims of (1) conspiracy to violate RICO and (2) aiding and abetting violations of RICO were not subject to arbitration. The trial court then certified various subclasses of plaintiffs with respect to these two federal law claims.

Seven defendants have entered into settlement agreements with the plaintiffs, which have received final approval from the trial court. On June 16, 2006, the trial court filed an order in the Shane lawsuit which granted summary judgment on all claims in favor of Coventry. The trial court also granted summary judgment on all claims in favor of two other defendants. The plaintiffs have appealed the trial court’s summary judgment order to the Eleventh Circuit Court of Appeals. The Shane lawsuit has triggered the filing of copycat class action complaints by other health care providers such as chiropractors, podiatrists, acupuncturists and other licensed health care professionals. Each of these actions has been transferred to the MDL and have been designated as “tag-along” actions. The court has entered an order which stays all proceedings in the tag-along actions until all pre-trial proceedings in the Shane action have been concluded. Although we can not predict the outcome, we believe that the Shane and the tag-along actions will not have a material adverse effect on our financial position or our results of operations. Management also believes that the claims asserted in these lawsuits are without merit and the Company intends to defend its position.

Legislation and Regulation

As a managed health care company, we are subject to extensive government regulation of our products and services. The laws and regulations affecting our industry generally give state and federal regulatory authorities broad discretion in their exercise of supervisory, regulatory and administrative powers. These laws and regulations are intended primarily for the benefit of the members of the health plans. Managed care laws and regulations vary significantly from jurisdiction to jurisdiction and changes are frequently considered and implemented. Likewise, interpretations of these laws and regulations are also subject to change.

Although the provisions of any legislation adopted at the state or federal level can not be accurately predicted at this time, management believes that the ultimate outcome of currently proposed legislation should not have a material adverse effect on the results of our operations in the short-term. Nevertheless, it is possible that future legislation or regulation could have a significant effect on our operations.

Inflation

In recent years, health care cost inflation has exceeded the general inflation rate. To reduce the effect of health care cost inflation on our business operations we have, where possible, increased premium rates and implemented cost control measures in our patient care management and provider contracting. We can not be certain that we will be able to increase future premium rates at a rate that equals or exceeds the health care cost inflation rate or that our other cost control measures will be effective.

46

2007 Outlook

In 2007, we are expecting our total Health Plan commercial risk membership to ultimately remain approximately flat with 2006 year-end results. We expect Health Plan non-risk membership to be up 5% to 6% compared to 2006 year-end membership. We expect Medicare Advantage (excluding PFFS) membership to grow in the range of 5% to 10% during 2007, and expect Health Plan Medicaid membership to be up over 10% for the year, the majority of which resulting from the acquisition of approximately 31,000 members in our Missouri market in February 2007. In the aggregate, we expect total Health Plan membership to be flat to slightly down in Q1 2007, including the impact of the Medicaid acquisition.

For 2007, we will offer a new Medicare Advantage PFFS plan in 43 states. Through the combined efforts of our various distribution channels, we expect to generate between 90,000 to 100,000 new PFFS members during 2007 with associated revenue of approximately $700 million.

Risk Factors

See Part I, Item 1A, “Risk Factors,” which is incorporated herein by reference.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

Under an investment policy approved by our Board of Directors, we invest primarily in marketable U.S. government and agency, state, municipal, mortgage-backed and asset-backed securities and corporate debt obligations that are investment grade. Prior to the acquisition of First Health, our Investment Policy and Guidelines did not permit equity-type investments or fixed income securities that are below investment grade. As described in the notes to the financial statements, we acquired investments in an equipment leasing limited liability company through our acquisition of First Health. The Board approved modifications to our investment guidelines by adopting a permitted exception to allow for such investments if, in our best interest, such investments were not disposed within 90 days after acquisition. We determined it would not be in our best interest to liquidate this investment and therefore the investment in the equipment leasing limited liability company was approved as a permitted exception. We have classified all of our investments as available-for-sale. We are exposed to certain market risks including interest rate risk and credit risk.

We have established policies and procedures to manage our exposure to changes in the fair value of our investments. Our policies include an emphasis on credit quality and the management of our portfolio’s duration and mix of securities. We believe our investment portfolio is diversified and currently expect no material loss to result from the failure to perform by the issuers of the debt securities we hold. The mortgage-backed securities are insured by several associations, including Government National Mortgage Administration, Federal National Mortgage Administration and the Federal Home Loan Mortgage Corporation.

We invest primarily in fixed income securities and classify all our investments as available-for-sale. Investments are evaluated on an individual security basis at least quarterly to determine if declines in value are other-than-temporary. In making that determination, we consider all available evidence relating to the realizable value of a security. This evidence includes, but is not limited to, the following:

• adverse financial conditions of a specific issuer, segment, industry, region or other variables;

• the length of the time and the extent to which the fair value has been less than cost;

• the financial condition and near-term prospects of the issuer;

• our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value;

• elimination or reduction in dividend payments, or scheduled interest and principal;

• rating agency downgrade of a debt security; and

• expected cash flows of a debt security.

Temporary declines in value of investments classified as available-for-sale are netted with unrealized gains and reported as a net amount in a separate component of stockholders’ equity. A decline in fair value below amortized cost that is judged to be other–than–temporary is accounted for as a realized loss and the write down is included in earnings. Realized gains and losses on the sale of investments are determined on a specific identification basis. The current unrealized loss is almost exclusively the result of interest rate increases and not unfavorable changes in the credit ratings associated with these securities. These investments are not in high risk industries or sectors and we intend to hold these investments for a period of time sufficient to allow for a recovery in market value, which may be maturity. See Note E to our consolidated financial statements in this Form 10-K for more information concerning other-than-temporary impaired investments.

47

Our investments at December 31, 2006 mature according to their contractual terms, as follows, in thousands (actual maturities may differ because of call or prepayment rights):

		Amortized	Fair
As of December 31, 2006		Cost	Value
Maturities:
	Within 1 year	$    369,983	$    369,455
	1 to 5 years	380,325	377,011
	5 to 10 years	262,409	262,573
	Over 10 years	361,737	359,847
Total		$ 1,374,454	1,368,886
	Equity investment		54,078
Total short-term and long-term securities			$ 1,422,964

Our projections of hypothetical net gains in fair value of our market rate sensitive instruments, should potential changes in market rates occur, are presented below. The projection is based on a model, which incorporates effective duration, convexity and price to forecast hypothetical instantaneous changes in interest rates of positive and negative 100, 200 and 300 basis points. The model only takes into account the fixed income securities in the portfolio and excludes all cash. While we believe that the potential market rate change is reasonably possible, actual results may differ.

Increase (decrease) in fair value of portfolio
given an interest rate (decrease) increase of X basis points
As of December 31, 2006
(in thousands)
(300)	(200)	(100)	100	200	300
$  101,456	$  66,067	$  33,501	$  (35,098)	$  (70,631)	$  (105,456)

48

Item 8: Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Coventry Health Care, Inc.

We have audited the accompanying consolidated balance sheets of Coventry Health Care, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coventry Health Care, Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Coventry Health Care, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon.

As discussed in Note F to the consolidated financial statements, on January 1, 2006, Coventry Health Care, Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

Baltimore, Maryland

February 28, 2007

49

Coventry Health Care, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	December 31,	December 31,
	2006	2005
ASSETS
Current assets:
Cash and cash equivalents	$  1,370,836	$    391,646
Short-term investments	292,392	545,615
Accounts receivable, net of allowance of $1,906 and $3,583
as of December 31, 2006 and 2005, respectively	209,180	228,028
Other receivables, net	164,829	76,462
Deferred income taxes	59,339	57,666
Other current assets	37,806	26,285
Total current assets	2,134,382	1,325,702
Long-term investments	1,130,572	1,125,632
Property and equipment, net	315,105	351,427
Goodwill	1,620,272	1,612,390
Other intangible assets, net	388,400	419,352
Other long-term assets	76,376	60,669
Total assets	$ 5,665,107	$ 4,895,172
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical liabilities	$ 1,121,151	$    752,774
Accounts payable and other accrued liabilities	460,489	442,785
Deferred revenue	60,349	64,668
Current portion of long-term debt	10,000	10,000
Total current liabilities	1,651,989	1,270,227
Long-term debt	750,500	760,500
Other long-term liabilities	309,616	309,742
Total liabilities	2,712,105	2,340,469
Stockholders’ equity:
Common stock, $.01 par value; 570,000 authorized
187,630 issued and 159,441 outstanding in 2006
186,253 issued and 162,717 outstanding in 2005	1,876	1,863
Treasury stock, at cost; 28,189 in 2006; 23,536 in 2005	(563,909)	(299,001)
Additional paid-in capital	1,571,101	1,468,176
Accumulated other comprehensive loss	(3,519)	(3,743)
Retained earnings	1,947,453	1,387,408
Total stockholders’ equity	2,953,002	2,554,703
Total liabilities and stockholders’ equity	$ 5,665,107	$ 4,895,172

See accompanying notes to the consolidated financial statements.

50

Coventry Health Care, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

	Years Ended December 31,
	2006	2005	2004
Operating revenues:
Managed care premiums	$ 6,857,301	$ 5,728,162	$ 5,198,599
Management services	876,455	883,084	113,370
Total operating revenues	7,733,756	6,611,246	5,311,969
Operating expenses:
Medical costs	5,439,964	4,550,871	4,185,895
Selling, general and administrative	1,339,522	1,182,381	611,801
Depreciation and amortization	113,267	86,176	17,602
Total operating expenses	6,892,753	5,819,428	4,815,298
Operating earnings	841,003	791,818	496,671
Interest expense	52,446	58,414	14,301
Other income, net	107,791	66,021	44,621
Earnings before income taxes	896,348	799,425	526,991
Provision for income taxes	336,303	297,786	189,874
Net earnings	$   560,045	$   501,639	$   337,117
Net earnings per share:
Basic earnings per share	$         3.53	$         3.18	$         2.55
Diluted earnings per share	$         3.47	$         3.10	$         2.48
Weighted average common shares outstanding:
Basic	158,601	157,965	132,188
Effect of dilutive options and restricted stock	2,833	3,751	3,696
Diluted	161,434	161,716	135,884

See accompanying notes to the consolidated financial statements.

51

Coventry Health Care, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2006, 2005 and 2004

(in thousands)

					Accumulated
					Other
			Treasury	Additional	Comprehensive		Total
		Common	Stock, at	Paid-In	Income	Retained	Stockholders’
		Stock	Cost	Capital	Accumulated (loss)	Earnings	Equity
Balance, December 31, 2003		$ 1,572	$(204,274)	$ 565,210	$ 17,838	$ 548,652	$ 928,998
Comprehensive income:
Net earnings						337,117	337,117
Other comprehensive income:
	Holding loss, net				(15,424)
	Reclassification adjustment				(576)
							(16,000)
	Deferred tax effect				6,164		6,164
Comprehensive income							327,281
Employee stock plans activity		20	10,062	42,907			52,989
Treasury shares acquired			(96,842)				(96,842)
Balance, December 31, 2004		1,592	(291,054)	608,117	8,002	885,769	1,212,426
Comprehensive income:
Net earnings						501,639	501,639
Other comprehensive income:
	Holding loss, net				(17,413)
	Reclassification adjustment				(2,019)
							(19,432)
	Deferred tax effect				7,687		7,687
Comprehensive income							489,894
Issuance of stock related to      First Health acquisition		247		783,943			784,190
Employee stock plans activity		24	9,094	76,116			85,234
Treasury shares acquired			(17,041)				(17,041)
Balance, December 31, 2005		1,863	(299,001)	1,468,176	(3,743)	1,387,408	2,554,703
Comprehensive income:
Net earnings						560,045	560,045
Other comprehensive income:
	Holding loss, net				(61)
	Reclassification adjustment				429
							368
	Deferred tax effect				(144)		(144)
Comprehensive income							560,269
Employee stock plans activity		13	4,296	102,925			107,234
Treasury shares acquired			(269,204)				(269,204)
Balance, December 31, 2006		$ 1,876	$(563,909)	$1,571,101	$ (3,519)	$1,947,453	$ 2,953,002

See accompanying notes to the consolidated financial statements.

52

Coventry Health Care, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

			Years Ended December 31,
			2006	2005	2004
Cash flows from operating activities:
	Net earnings		$ 560,045	$ 501,639	$ 337,117
	Adjustments to reconcile net earnings to
	cash provided by operating activities:
		Depreciation and amortization	113,267	86,176	17,602
		Amortization of stock compensation	55,197	21,992	15,488
		Deferred income tax (benefit) provision	(14,908)	15,094	(2,319)
		Other adjustments	3,011	5,611	15,032
	Changes in assets and liabilities,
	net of effects of the purchase of subsidiaries:
		Accounts receivable	21,164	(101)	(15,158)
		Other receivables	(88,367)	18,450	(1,735)
		Medical liabilities	368,377	50,531	63,285
		Accounts payable and other accrued liabilities	63,606	105,101	46,782
		Interest payable	455	13,919	-
		Other changes in assets and liabilities	(15,376)	(13,943)	(22,189)
Net cash from operating activities			1,066,471	804,469	453,905
Cash flows from investing activities:
	Capital expenditures, net		(72,573)	(71,393)	(14,972)
	Proceeds from sales of investments		1,098,111	553,711	330,961
	Proceeds from maturities of investments		577,506	447,422	290,039
	Purchases of investments		(1,420,604)	(1,273,557)	(807,985)
	Payments for acquisitions, net of cash acquired		(35,392)	(877,249)	(6,852)
Net cash from investing activities			147,048	(1,221,066)	(208,809)
Cash flows from financing activities:
	Proceeds from issuance of stock		23,023	24,162	16,184
	Payments for repurchase of stock		(269,204)	(17,550)	(96,975)
	Proceeds from issuance of debt, net		-	1,066,495	-
	Excess tax benefit from stock compensation		21,852	-	-
	Repayment of long-term debt		(10,000)	(682,500)	-
Net cash from financing activities			(234,329)	390,607	(80,791)
Net change in cash and cash equivalents			979,190	(25,990)	164,305
Cash and cash equivalents at beginning of period			391,646	417,636	253,331
Cash and cash equivalents at end of period			$ 1,370,836	$ 391,646	$ 417,636
Supplemental disclosure of cash flow information:
	Cash paid for interest		$      49,745	$   36,581	$   13,853
	Income taxes paid, net		$    290,763	$ 221,727	$ 150,311

See accompanying notes to the consolidated financial statements.

53

COVENTRY HEALTH CARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Coventry Health Care, Inc. (together with its subsidiaries, the “Company” or “Coventry”) is a national managed health care company based in Bethesda, Maryland operating health plans, insurance companies, network rental/managed care services companies, and workers’ compensation services companies. The Company provides a full range of risk and fee-based managed care products and services, including HMO, PPO, POS, Medicare Advantage, Medicare Prescription Drug Plans, Medicaid, Workers’ Compensation and Network Rental to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators in all 50 states as well as the District of Columbia and Puerto Rico.

Since the Company began operations in 1987 with the acquisition of the American Service Companies entities, including Coventry Health and Life Insurance Company (“CH&L”), the Company has grown substantially through acquisitions. See Note B to these consolidated financial statements for information on the Company’s most recent acquisitions.

Significant Accounting Policies

Basis of Presentation - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries, all of which are 100% owned. All significant inter-company transactions have been eliminated.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those amounts.

Reclassifications – Certain 2005 and 2004 amounts have been reclassified to conform to the 2006 presentation.

Significant Customers - The Company’s commercial business is diversified across a large customer base and there are no commercial groups that make up 10% or more of Coventry’s managed care premiums. The Company received 21.6%, 11.8% and 10.9% of its managed care premiums for the years ended December 31, 2006, 2005 and 2004, respectively, from the federal Medicare program throughout its various markets. The Company also received 11.1%, 13.2% and 11.7% of its managed care premiums for the years ended December 31, 2006, 2005 and 2004, respectively, from its state-sponsored Medicaid programs throughout its various markets. For the years ended December 31, 2006 and 2005, the State of Missouri accounted for almost half the Company’s Medicaid premiums. The Company received 19.3% and 22.1% of its management services revenue from a single customer, Mail Handlers Benefit Plan, for the years ended December 31, 2006 and 2005, respectively. The Company’s contract with the Mail Handlers Benefit Plan is up for renewal on December 31, 2007.

Cash and Cash Equivalents - Cash and cash equivalents consist principally of money market funds, commercial paper and certificates of deposit. The Company considers all highly liquid securities purchased with an original maturity of three months or less to be cash equivalents. The carrying amounts of cash and cash equivalents reported in the accompanying consolidated balance sheets approximate fair value.

54

Investments - The Company accounts for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 - “Accounting for Certain Investments in Debt and Equity Securities” and in accordance with FASB Staff Position Number FAS 115-1, “The meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Company invests primarily in fixed income securities and classifies all of its investments as available-for-sale. Investments are evaluated on an individual security basis at least quarterly to determine if declines in value are other-than-temporary. In making that determination, the Company considers all available evidence relating to the realizable value of a security. This evidence is reviewed at the individual security level and includes, but is not limited to, the following:

• adverse financial conditions of a specific issuer, segment, industry, region or other variables;

• the length of the time and the extent to which the fair value has been less than cost;

• the financial condition and near-term prospects of the issuer;

• the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value;

• elimination or reduction in dividend payments, or scheduled interest and principal;

• rating agency downgrade of a debt security; and

• expected cash flows of a debt security.

Temporary declines in value of investments classified as available-for-sale are netted with unrealized gains and reported as a net amount in a separate component of stockholders’ equity. A decline in fair value below amortized cost that is judged to be other–than–temporary is accounted for as a realized loss and the write down is included in earnings. Realized gains and losses on the sale of investments are determined on a specific identification basis.

Investments with original maturities in excess of three months and less than one year are classified as short-term investments and generally consist of corporate bonds, U.S. Treasury notes and commercial paper. Long-term investments have original maturities in excess of one year and primarily consist of fixed income securities.

Other Receivables - Other receivables include interest receivables, pharmacy rebate receivables, Office of Personnel Management (“OPM”) receivables, receivables from providers and suppliers and any other receivables that do not relate to premiums.

Property and Equipment - Property, equipment and leasehold improvements are recorded at cost. In accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the cost of internally developed software is capitalized and included in property and equipment. We capitalize costs incurred during the application development stage for the development of internal-use software. These costs primarily relate to payroll and payroll-related costs for employees along with costs incurred for external consultants who are directly associated with the internal-use software project. Depreciation is computed using the straight-line method over the estimated lives of the related assets or, if shorter, over the terms of the respective leases.

Long-term Assets - Long-term assets primarily include assets associated with the 401(k) Restoration and Deferred Compensation Plan, senior note issuance costs and reinsurance recoveries. The reinsurance recoveries were obtained with the acquisition of First Health Group Corp. (“First Health”) and are related to certain life insurance receivables from a third party insurer for liabilities that have been ceded to that third party insurer.

Business Combinations, Accounting for Goodwill and Other Intangibles - The Company accounts for business combinations, goodwill and other intangibles in accordance with SFAS No. 141 - “Business Combinations,” SFAS No. 142 - “Goodwill and Other Intangible Assets” and SFAS No. 144 - “Accounting for the Impairment or Disposal of Long-Lived Assets.” Acquired intangible assets are separately recognized upon meeting certain criteria. Such intangible assets include, but are not limited to, trade and service marks, non-compete agreements, customer lists and licenses. An intangible asset that is subject to amortization shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Goodwill and other intangible assets that have indefinite lives are subject to a periodic assessment for impairment by applying a fair-value-based test. The Company considers multiple approaches to identifying the fair value of its goodwill and other intangible assets. Those approaches include the market approach, the market capitalization approach, the income approach and the cost approach. The market approach estimates a business’s fair value by analyzing the recent sales of similar companies. The market capitalization approach is based on market value of the Company’s total shares outstanding. The income approach is based on the present value of expected future cash flows. The cost approach is based on the cost to reconstruct or replace an asset with another of like utility. As impairment charges occur, write-down charges will be recorded in the period in which the impairment took place. See Note C to consolidated financial statements for disclosure related to intangible assets.

55

Medical Liabilities and Expense - Medical liabilities consist of actual claims reported but not paid and estimates of health care services incurred but not reported. The estimated claims incurred but not reported are based on historical data, current enrollment, health service utilization statistics and other related information. In determining medical liabilities, the Company employs standard actuarial reserve methods that are specific to each market’s membership, product characteristics, geographic territories and provider network. The Company also considers utilization frequency and unit costs of inpatient, outpatient, pharmacy and other medical expenses, as well as claim payment backlogs and the timing of provider reimbursements. The Company also establishes reserves, if required, for the probability that anticipated future health care costs and contract maintenance costs under the group of existing contracts will exceed anticipated future premiums and reinsurance recoveries on those contracts. These accruals are continually monitored and reviewed, and as settlements are made or accruals adjusted, differences are reflected in current operations. Changes in assumptions for medical costs caused by changes in actual experience could cause these estimates to change in the near term.

The following table shows the components of the change in medical liabilities for the years ended December 31, 2006, 2005 and 2004, respectively:

		2006	2005	2004
Medical liabilities, beginning of period		$   752,774	$  660,475	$  597,190
Acquisitions (1)		--	41,895	--
Reported Medical Costs
	Current year	5,570,872	4,672,009	4,257,942
	Prior year developments	(130,908)	(121,138)	(72,047)
Total reported medical costs		5,439,964	4,550,871	4,185,895
Claim Payments
	Payments for current year	4,852,359	4,030,685	3,691,092
	Payments for prior year	542,571	469,782	431,518
Total claim payments		5,394,930	4,500,467	4,122,610
Part D Related Subsidy Liabilities		323,343	--	--
Medical liabilities, end of period		$ 1,121,151	$  752,774	$  660,475
Supplemental Information:
	Prior year development (2)	2.9%	2.9%	2.0%
	Current year paid percent (3)	87.1%	86.3%	86.7%
(1) Acquisition balances represent medical liabilities of the acquired company as of the applicable acquisition date.
(2) Prior year reported medical costs in the current year as a percentage of prior year reported medical costs.
(3) Current year claim payments as a percentage of current year reported medical costs.

The negative amounts noted as “prior year” medical costs are favorable adjustments for claim estimates being settled for amounts less than originally anticipated. As noted above, these favorable changes from original estimates occur due to changes in medical utilization, mix of provider rates and other components of medical cost trends.

The Medicare Part D related subsidy liabilities identified in the table above represent subsidy amounts received from the Centers for Medicare and Medicaid Services (“CMS”) for reinsurance and for cost sharing related to low income individuals. These subsidies are recorded in medical liabilities and we do not recognize premium revenue or claims expense for these subsidies. Following the final settlement in 2007 related to the 2006 plan year, any remaining balances from these subsidy payments will be refunded to CMS.

Other Long-term Liabilities - Other long-term liabilities consist primarily of liabilities associated with the 401(k) Restoration and Deferred Compensation Plan and the deferred tax liabilities associated with both intangible assets and a limited partnership investment.

56

Comprehensive Income – Comprehensive income includes net income and the unrealized net gains and losses on investment securities. Other comprehensive income is net of reclassification adjustments to adjust for items currently included in net income, such as realized gains and losses on investment securities. The deferred tax benefit for unrealized holding losses arising from investment securities during the years ended December 31, 2006, 2005 and 2004 was $0.02 million, $6.9 million and $6.0 million, respectively. The deferred tax benefit for reclassification adjustments for loss included in net income on investment securities during the year ended December 31, 2006 was $0.2 million. The deferred tax provision for reclassification adjustments for gains included in net income on investment securities during the years ended December 31, 2005 and 2004 was $0.8 million and $0.2 million, respectively.

Revenue Recognition - Managed care premiums are recorded as revenue in the month in which members are entitled to service. Premiums are based on a per subscriber contract rate and the subscribers in the Company’s records at the time of billing. Premium billings are generally sent to employers in the month proceeding the month of coverage. Premium billings may be subsequently adjusted to reflect changes in membership as a result of retroactive terminations, additions, or other changes. The Company also receives premium payments from CMS on a monthly basis for its Medicare membership. Membership and category eligibility are periodically reconciled with CMS and such reconciliations could result in adjustments to revenue. The Company also receives premium payments on a monthly basis from the state Medicaid programs with which we contract for the Medicaid members for whom we provide health coverage. Membership and category eligibility are periodically reconciled with the state Medicaid programs and such reconciliations could result in adjustments to revenue. Premiums collected in advance are recorded as deferred revenue. Employer contracts are typically on an annual basis, subject to cancellation by the employer group or by the Company upon 30 days notice.

The Medicare Part D program, which gives beneficiaries access to prescription drug coverage, took effect January 1, 2006. Coventry has been awarded contracts by the Centers for Medicare & Medicaid Services (“CMS”) to offer various Medicare Part D plans on a nationwide basis, in accordance with guidelines put forth by the agency. Payments from CMS under these contracts include amounts for premiums, amounts for risk corridor adjustments and amounts for reinsurance and low-income cost subsidies.

The Company recognizes premium revenue ratably over the contract period for providing insurance coverage. Regarding the CMS risk corridor provision, an estimated risk sharing receivable or payable is recognized based on activity-to-date. Activity for CMS risk sharing is accumulated at the contract level and recorded within the consolidated balance sheet in other receivables or other accrued liabilities depending on the net contract balance at the end of the reporting period with corresponding adjustments to premium revenue. Costs for covered prescription drugs are expensed as incurred.

Subsidy amounts received for reinsurance and for cost sharing related to low income individuals are recorded in medical liabilities and will offset medical costs when paid. We do not recognize premium revenue or claims expense for these subsidies as the Company does not incur any risk with this part of the program.

A reconciliation of the final risk sharing, low-income subsidy, and reinsurance subsidy amounts is performed following the end of the contract year. As of December 31, 2006, the CMS risk sharing payable was $32.6 million and is included in accounts payable and other accrued liabilities and the CMS risk sharing receivable was $3.8 million and is included in other receivables. As of December 31, 2006, the subsidy amounts payable totaled $323.3 million and is included in medical liabilities.

The Company has quota share arrangements with two of its Medicare Part D distribution partners. As a result of the quota share sharing arrangements, the Company ceded Medicare Part D premium and medical costs to these partners. The ceded amounts are excluded from the Company’s results of operations.

Management services revenue is generally a fixed administrative fee, provided on a predetermined contractual basis or on a percentage-of-savings basis, for access to our health care provider networks and health care management services, for which we do not assume underwriting risk. Percentage of savings revenue is determined using the difference between charges billed by contracted medical providers and the contracted reimbursement rates for the services billed and is recognized based on claims processed. The management services we provide typically include health care provider network management, clinical management, pharmacy benefit management (“PBM”), bill review, claims repricing, fiscal agent services (generally for state entitlement programs), claims processing, utilization review and quality assurance.

The Company enters into performance guarantees with employer groups where it pledges to meet certain standards. These standards vary widely and could involve customer service, member satisfaction, claims processing, claims accuracy, telephone on-hold time, etc. The Company also enters into financial guarantees which can take various forms including, among others, achieving an annual aggregate savings threshold, achieving a targeted level of savings per-member, per-month or achieving overall network penetration in defined demographic markets. For each guarantee, the Company estimates and records performance based revenue after considering the relevant contractual terms and the data available for the performance based revenue calculation. Pro-rata performance based revenue is recognized on an interim basis pursuant to the rights and obligations of each party upon termination of the contracts.

57

Revenue for pharmacy benefit management services in both the Group Health and Medicaid/Public sectors is derived on a pre-negotiated contractual amount per claim. Revenue is recorded when a pharmacy transaction is processed by the Company. The Company does not record any revenue or expense related to the sale of pharmaceuticals. In the Group Health business, revenue associated with pharmacy rebates is recorded based on the contractual rebates received from the formulary less the pre-negotiated rebates paid to clients. No rebate revenue is collected or recorded related to the Company’s Medicaid/Public business.

Based on information received subsequent to premium billings being sent, historical trends, bad debt write-offs and the collectibility of specific accounts, the Company estimates, on a monthly basis, the amount of bad debt and future retroactivity and adjusts its revenue and reserves accordingly.

Premiums for services to federal employee groups are subject to audit and review by the OPM on a periodic basis. Such audits are usually a number of years in arrears. Adjustments are recorded as additional information regarding the audits and reviews becomes available. Any differences between actual results and estimates are recorded in the period the audits are finalized.       

Contract Acquisition Costs – Costs related to the acquisition of customer contracts, such as commissions paid to outside brokers, are paid on a monthly basis and expensed as incurred. Regarding the Company’s new Medicare Private Fee for Service business, we advance funded commissions and have deferred amortization of these costs until 2007, when this new business begins.

Income Taxes – The Company files a consolidated federal tax return for the Company and its subsidiaries. The Company accounts for income taxes in accordance with SFAS No. 109 - “Accounting for Income Taxes.” The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. See Note G to consolidated financial statements for disclosures related to income taxes.

Earnings Per Share - Basic earnings per share based on the weighted average number of common shares outstanding during the year. Diluted earnings per share assume the exercise of all options and the vesting of all restricted stock using the treasury stock method. Potential common stock equivalents to purchase 0.7 million, 0.2 million and 1.1 million shares for the years ended December 31, 2006, 2005 and 2004, respectively, were excluded from the computation of diluted earnings per share because the potential common stock equivalents were anti-dilutive.

Other Income - Other income includes interest income, net of fees, of approximately $101.5 million, $59.8 million and $44.1 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued "Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109", which clarifies the accounting for uncertainty in incomes taxes recognized in the financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial position already taken or expected to be taken in a tax return. For a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by applicable taxing authorities. The benefit recognized is the amount that has a greater than 50% likelihood of being realized upon final settlement of the tax position. FIN 48 was effective for the Company as of January 1, 2007. The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings. The Company’s evaluation of the impact of adoption of FIN 48 is ongoing, and it is anticipated that the adoption of FIN 48 will not have a material impact on the Company’s January 1, 2007 balance of retained earnings.

B. ACQUISITIONS

During the three years ended December 31, 2006, the Company completed two business combinations and one membership purchase. The Company’s business combinations are all accounted for using the purchase method of accounting and, accordingly, the operating results of each acquisition have been included in the Company’s consolidated financial statements since their effective date of acquisition. The purchase price for each business combination was allocated to the assets, including the identifiable intangible assets, and liabilities based on estimated fair values. The excess of the purchase price over the net identifiable assets acquired was allocated to goodwill. The purchase price of the Company’s membership purchases is allocated to identifiable intangible assets and is being amortized over a useful life of ten to twenty years.

58

The following table summarizes all business combinations and membership purchases for the three years ended December 31, 2006. The purchase price of each business combination includes the payment for net worth and estimated transition costs. The purchase price, inclusive of all retroactive balance sheet settlements to date and transition cost adjustments, is presented below (millions):

			Purchase
	Effective Date	Market	Price
Business Combinations
First Health Group Corp. ("First Health")	January 28, 2005	Multiple Markets	$  1,695
Provider Synergies, L.L.C. ("Provider Synergies")	January 1, 2006	Multiple Markets	$       22
Membership Purchase
OmniCare Health Plan ("OmniCare")	October 1, 2004	Michigan	$      13

Effective January 28, 2005, the Company completed the acquisition of First Health. First Health is a full service national health benefits services company that serves the group health, workers’ compensation and state public program markets. The Company believes the combination of Coventry and First Health creates a leading health benefits company with the size, scale and product breadth to be a market leader with significant growth opportunities. The Company paid a premium (i.e., goodwill) over the fair value of the net tangible and identifiable intangible assets acquired for a number of reasons, including but not limited to:

• significantly expands the Company’s geographic presence;

• diversifies the Company’s product offerings and client base; and

• significantly increases the Company’s fee-based, non-regulated cash flows

Each outstanding share of First Health common stock was converted into a right to receive $9.375 cash and 0.2687 shares of Coventry common stock. As a result of the merger, the Company paid $863.1 million in cash and issued approximately 24.7 million shares of its common stock to stockholders of First Health. A value of $784.2 million was assigned to the shares issued based on the average closing price of Coventry common stock for the two days before, the day of and the two days after the acquisition announcement date of October 14, 2004.

The total purchase price, including estimated transition costs, for First Health of $1.7 billion was allocated to the assets, including identifiable intangible assets and liabilities based on estimated fair values. The estimated transition costs of $46.4 million include estimated costs for involuntary employee termination of $25.6 million, of which $24.8 million has been paid, estimated costs for exiting certain leased building space of $10.0 million, of which $5.6 million has been paid, and other transition cost accruals of which all has been paid. Deferred tax liabilities associated with the acquisition were $168.4 million. The following table lists the assigned value of the intangible assets as of the acquisition date (in millions) and the associated amortization period:

	Estimated	Amortization
	Fair Value	Period (Yrs)
Goodwill	$ 1,323.3
Unamortized tradename	85.8
Customer lists	272.5	10
Provider network	52.5	20
Amortized tradename	1.2	4
Total intangible assets	$ 1,735.3

59

The Company has allocated the excess purchase price over the fair value of the net assets acquired of approximately $1.3 billion to goodwill. The acquired goodwill is not deductible for income tax purposes. The intangible assets acquired, which are subject to amortization, consist of customer lists, tradenames, and a provider network and have a weighted-average useful life of approximately 10.8 years. The following table lists the Company’s estimate of the fair value of the tangible assets and liabilities as of the acquisition date (in millions):

Cash, cash equivalents, investments	$    170.8
Property, equipment, capitalized software, other assets	493.7
Medical costs payable	(41.8)
Other current liabilities	(148.9)
Long-term debt	(200.0)
Other long-term liabilities	(145.5)
Net tangible assets acquired	$    128.3

The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of First Health have been included in the Company’s consolidated financial statements since January 28, 2005, the date of acquisition. The following unaudited pro forma condensed consolidated results of operations assumes the First Health acquisition occurred on January 1, 2005 and 2004 (in millions, except per share data):

	Year ended December 31,
	2005	2004
	(Proforma unaudited)
Operating revenues	$                    6,674.6	$             6,192.7
Net earnings	$                       507.9	$                428.5
Earnings per share, basic	$                         3.18	$                  2.73
Earnings per share, diluted	$                         3.11	$                  2.67

The pro forma amounts represent historical operating results of the Company and First Health and include the pro forma effect of Coventry shares issued in the acquisition, the amortization of finite lived intangible assets arising from the purchase price allocation, interest expense related to financing the acquisition and the associated income tax effects of the pro forma adjustments. The 2004 pro forma amounts assume that debt pay down and debt cost write-offs related to debt refinancing would have occurred at the same period in 2004 as they occurred in 2005. The pro forma amounts exclude material, nonrecurring items including the expense related to the purchase of outstanding options of $27.2 million net of tax. The pro forma amounts are presented for comparison purposes and are not necessarily indicative of the operating results that would have occurred if the acquisition had been completed at the beginning of the periods presented nor are they necessarily indicative of operating results in future periods.

Effective January 1, 2006, the Company completed the acquisition of Provider Synergies, L.L.C. (“Provider Synergies”), an Ohio limited liability company. Provider Synergies manages preferred drug lists and negotiates rebates on behalf of state government and commercial clients. The acquisition was accounted for using the purchase method of accounting and, accordingly, the operating results of Provider Synergies have been included in the Company’s consolidated financial statements since the date of acquisition. The pro forma effects of this acquisition were not material to the Company’s consolidated financial statements.

C. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of costs in excess of the fair value of the net tangible assets of subsidiaries or operations acquired through December 31, 2006.

60

Goodwill

The Company completed its impairment test of goodwill and has determined that there was no impairment of goodwill as of October 1, 2006, the Company’s annual impairment test date. The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 were as follows (in thousands):

	Health Plans	First Health	Total
Balance, December 31, 2004	$          280,615	$              -	$       280,615
Acquisition of First Health	-	1,331,941	1,331,941
Impairment loss	-	-	-
Other adjustments	(166)	-	(166)
Balance, December 31, 2005	280,449	1,331,941	1,612,390
Acquisition of Provider Synergies	-	16,736	16,736
Impairment loss	-	-	-
Other adjustments	(195)	(8,659)	(8,854)
Balance, December 31, 2006	$          280,254	$ 1,340,018	$   1,620,272

Other Intangible Assets

The other intangible asset balances are as follows (in thousands):

	Gross		Net
	Carrying	Accumulated	Carrying	Amortization
	Amount	Amortization	Amount	Period
As of December 31, 2006
Amortized other intangible assets:
Customer Lists	$ 313,496	$ 66,094	$  247,402	3-15 Years
HMO Licenses	12,600	5,291	$      7,309	15-20 Years
Provider Network	52,500	5,031	$    47,469	20 Years
Trade Name	1,200	880	$         320	3 Years
Total amortized other intangible assets	$ 379,796	$ 77,296	$  302,500
Unamortized other intangible assets:
Trade Names	$   85,900	$      -	$    85,900	---
Total unamortized other intangible assets	$   85,900	$      -	$    85,900
Total other intangible assets	$ 465,696	$ 77,296	$  388,400
As of December 31, 2005
Amortized other intangible assets:
Customer Lists	$ 309,080	$ 34,598	$  274,482	10-15 Years
HMO Licenses	12,600	4,649	$      7,951	15-20 Years
Provider Network	52,500	2,406	$    50,094	20 Years
Trade Name	1,200	275	$         925	4 Years
Total amortized other intangible assets	$ 375,380	$ 41,928	$  333,452
Unamortized other intangible assets:
Trade Names	$   85,900	$      -	$    85,900	---
Total unamortized other intangible assets	$   85,900	$      -	$    85,900
Total other intangible assets	$ 461,280	$ 41,928	$  419,352

Other intangible amortization expense for the years ended December 31, 2006, 2005 and 2004 was $35.4 million, $31.1 million and $2.7 million, respectively. The increase in other intangible assets and the related amortization is a result of the other intangible assets obtained with the acquisition of First Health. Estimated intangible amortization expense is $34.3 million for the year ending December 31, 2007, $33.9 million for the year ending December 31, 2008, $32.4 million for the year ending December 31, 2009, $32.2 million for the year ending December 31, 2010 and $32.1million for the year ending December 31, 2011. The weighted-average amortization period is approximately 11 years for other intangible assets.

61

D. PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following (in thousands):

	December 31,		Depreciation
	2006	2005	Period
Land	$     23,864	$     23,864	---
Buildings and leasehold improvements	123,387	115,691	5-40 Years
Developed software	134,818	131,140	1-9 Years
Equipment	246,830	217,898	3-7 Years
Sub-total	528,899	488,593
Less accumulated depreciation and amortization	(213,794)	(137,166)
Property and equipment, net	$  315,105	$   351,427

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was $77.9 million, $55.1 million and $14.9 million, respectively. Included in the depreciation expense for the years ended December 31, 2006, 2005 and 2004 is $26.9 million, $13.1 million and $0, respectively, of expense for developed software. The increase in depreciation expense in 2005 was a result of the property and equipment obtained with the acquisition of First Health.

E. INVESTMENTS

The Company considers all of its investments as available-for-sale securities and, accordingly, records unrealized gains and losses, except for those determined to be other-than-temporary impairments, as other comprehensive income (loss) in the stockholders’ equity section of its consolidated balance sheets.

The amortized cost, gross unrealized gain or loss and estimated fair value of short-term and long-term investments by security type were as follows at December 31, 2006 and 2005 (in thousands):

	Amortized	Unrealized	Unrealized	Fair
	Cost	Gain	Loss	Value
As of December 31, 2006
State and municipal bonds	$    515,399	$ 3,520	$    (3,515)	$     515,404
US Treasury & agency securities	108,928	303	(827)	108,404
Mortgage-backed securities	233,670	687	(3,060)	231,297
Asset-backed securities	64,730	223	(760)	64,193
Corporate debt and other securities	451,727	825	(2,964)	449,588
	$ 1,374,454	$ 5,558	$ (11,126)	$ 1,368,886
Equity investment				54,078
				$ 1,422,964
As of December 31, 2005
State and municipal bonds	$    502,166	$ 3,811	$   (3,585)	$    502,392
US Treasury & agency securities	125,231	271	(1,073)	124,429
Mortgage-backed securities	183,989	384	(2,832)	181,541
Asset-backed securities	78,203	439	(951)	77,691
Corporate debt and other securities	736,342	1,411	(4,233)	733,520
	$ 1,625,931	$ 6,316	$ (12,674)	$ 1,619,573
Equity investment				51,674
				$ 1,671,247

62

The amortized cost and estimated fair value of short-term and long-term investments by contractual maturity were as follows at December 31, 2006 and December 31, 2005 (in thousands):

	Amortized	Fair
As of December 31, 2006	Cost	Value
Maturities
Within 1 year	$        369,983	$          369,455
1 to 5 years	380,325	377,011
5 to 10 years	262,409	262,573
Over 10 years	361,737	359,847
	$     1,374,454	1,368,886
Equity investment		54,078
Total short-term and long-term securities		$      1,422,964

		Amortized	Fair
As of December 31, 2005		Cost	Value
Maturities:
	Within 1 year	$           625,864	$         625,481
	1 to 5 years	405,591	401,310
	5 to 10 years	256,240	256,752
	Over 10 years	338,236	336,030
Total		$        1,625,931	$      1,619,573
	Equity investment		51,674
Total short-term and long-term securities			$      1,671,247

Gross investment gains of $0.2 million and gross investment losses of $0.7 million were realized on sales of investments for the year ended December 31, 2006. This compares to gross investment gains of $3.0 million and gross investment losses of $1.1 million on these sales for the year ended December 31, 2005, and gross investment gains of $2.0 million and gross investment losses of $1.3 million on these sales for the year ended December 31, 2004.

The following table shows the Company’s investments’ gross unrealized losses and fair value, at December 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands).

	Less than 12 months		12 months or more		Total
Description of Securities	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
State and municipal bonds	$   67,946	$ (275)	$ 202,848	$   (3,240)	$  270,794	$   (3,515)
US Treasury & agency securities	25,535	(77)	57,171	(750)	82,706	(827)
Mortgage-backed securities	40,021	(140)	126,151	(2,920)	166,172	(3,060)
Asset-backed securities	12,909	(26)	33,239	(734)	46,148	(760)
Corporate debt and other securities	9,045	(46)	123,032	(2,918)	132,077	(2,964)
Total	$ 155,456	$ (564)	$ 542,441	$ (10,562)	$ 697,897	$ (11,126)

The unrealized loss reflected on each category of the Company’s investments is almost exclusively the result of interest rate increases subsequent to the purchase of the investments and not deteriorating credit quality. The Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity. As a result, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.

63

Through its acquisition of First Health on January 28, 2005, the Company acquired eight separate investments (tranches) in a limited liability company that invests in equipment that is leased to third parties. The total investment as of December 31, 2006 was $54.1 million and is accounted for using the equity method. The Company’s proportionate share of the partnership’s income since the date of the acquisition was $6.7 and $4.6 million for the periods ended December 31, 2006 and 2005, respectively, and is included in other income. The Company has between a 20% and 25% interest in the limited partners share of each individual tranche of the partnership (approximately 10% of the total partnership).

F. STOCK-BASED COMPENSATION

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective method. Under this method, the fair value of awards granted after the date of adoption and the unvested portion of previously granted awards outstanding at the date of adoption are included in operating expenses over the vesting period during which an employee provides service in exchange for the award. In accordance with the modified prospective method, prior period amounts presented herein have not been restated to reflect the adoption of SFAS 123R.

As a result of adopting SFAS 123R, the Company recorded $30.7 million of compensation expense related to stock options, or $18.8 million after-tax, in its statement of operations for the year ended December 31, 2006. As required in prior years under APB No. 25, the Company recognized forfeitures related to stock awards as they occurred. SFAS 123R requires an entity to estimate expected forfeitures at the grant date. As a result, the Company recorded a favorable $0.5 million ($0.3 million after tax) cumulative effect of a change in accounting principle upon the adoption of SFAS 123R as it relates to estimated forfeitures. This one time benefit applies to compensation cost recognized in prior periods for awards that are unvested on the adoption date and represents an estimate of the number of outstanding instruments upon adoption of SFAS 123R for which the requisite service is not expected to be rendered. The net increase of SFAS 123R for stock-based compensation expense reduced both basic and diluted earnings per share by $0.11 for year ended December 31, 2006. In accordance with SFAS 123R, the Company estimates forfeitures and is recognizing compensation expense only for those share-based awards that are expected to vest.

In accordance with SFAS 123R, for the period beginning January 1, 2006, excess tax benefits from stock awards are presented as financing cash flows. The excess tax benefits totaled $21.9 million for the year ended December 31, 2006. Such benefits were $38.0 million and $21.4 million for the years ended December 31, 2005 and 2004, respectively, and are presented as a component of operating cash flows.

As of December 31, 2006, the Company had one stock incentive plan, the Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”) under which shares of the Company’s common stock were authorized for issuance to key employees, consultants and directors in the form of stock options, restricted stock and other stock-based awards. In May 2006, the Stock Incentive Plan was amended to increase the number of shares authorized for issuance by an additional 9.0 million shares. Shares available for issuance under the Stock Incentive Plan were 9.9 million as of December 31, 2006.

Stock Options

Under the Stock Incentive Plan, the terms and conditions of option grants are established on an individual basis with the exercise price of the options being equal to not less than 100% of the fair value of the underlying stock at the date of grant. Options generally become exercisable after one year in 25% increments per year and expire ten years from the date of grant. At December 31, 2006, the Stock Incentive Plan had outstanding options representing 11.3 million shares of common stock.

64

The following table summarizes stock option activity for the year ended December 31, 2006:

	Shares	Weighted-Average	Aggregate Intrinsic Value
	(in thousands)	Exercise Price	(in thousands)
Outstanding at January 1, 2006	10,511	$ 29.52
Granted	2,650	$ 51.21
Exercised	(1,356)	$ 16.42
Cancelled and expired	(504)	$ 34.66
Outstanding at December 31, 2006	11,301	$ 35.56	$ 167,613
Exercisable at December 31, 2006	4,445	$ 24.42	$ 114,160

The Company has elected to continue to use the Black-Scholes-Merton option pricing model and straight-line amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of the Black-Scholes-Merton model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.

The following weighted-average assumptions were used for option grants:

	2006	2005	2004
Dividend yield	0.0%	0.0%	0.0%
Risk-free interest rate	4.9%	3.8%	3.9%
Expected volatility	33.5%	32.0%	41.2%
Expected life (in years)	4.0	4.2	5.0

The Company has not paid dividends in the past nor does it expect to pay dividends in the future. As such, the Company used a dividend yield percentage of zero. The Company uses a risk-free interest rate consistent with the yield available on a U.S. Treasury note with a term equal to the expected term of the underlying grants. The expected volatility was estimated based upon a blend of the implied volatility of the Company’s tradeable options and the historical volatility of the Company’s share price. The expected life was estimated based upon exercise experience of option grants made in the past to Company employees.

The Black-Scholes-Merton weighted-average value of options granted was $ 17.24, $14.96 and $13.37 per share for the years ended December 31, 2006, 2005 and 2004, respectively. The total intrinsic value of options exercised was $52.4 million, $83.8 million and $50.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2006, there was $73.1 million of total unrecognized compensation cost (net of expected forfeitures) related to nonvested stock option grants which is expected to be recognized over a weighted average period of 2.6 years.

Information with respect to stock options outstanding and stock options exercisable at December 31, 2006 was as follows:

Options Outstanding (in thousands)				Options Exercisable (in thousands)
		Weighted
	Number	Average	Weighted	Number	Weighted
Range of	Outstanding at	Remaining	Average	Exercisable at	Average
Exercise Prices	12/31/2006	Contractual Life	Exercise Price	12/31/2006	Exercise Price
$ 2.22 - $31.80	2,963	5.1	$ 14.67	2,314	$ 12.56
$31.80 - $47.14	3,627	7.7	$ 34.11	1,538	$ 33.02
$47.14 - $48.25	2,307	8.5	$ 47.90	561	$ 47.91
$48.25 - $59.01	2,404	9.4	$ 51.67	32	$ 56.96
$2.22 - $59.01	11,301	7.5	$ 35.56	4,445	$ 24.42

65

Restricted Stock Awards

The value of the restricted shares is amortized over various vesting periods through 2010. The Company recorded compensation expense related to restricted stock grants, including restricted stock granted in prior periods, of approximately $25.0 million, $21.9 million and $15.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. The total unrecognized compensation cost related to the restricted stock was $39.9 million at December 31, 2006, and is expected to be recognized over a weighted average period of 2.4 years. The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004 was $36.1 million, $42.7 million and $ 29.4 million, respectively.

The following table summarizes restricted stock award activity for the year ended December 31, 2006:

		Weighted-Average
	Shares	Grant-Date Fair
	(in thousands)	Value Per Share
Nonvested, January 1, 2006	1,769	$ 38.96
Granted	309	$ 50.75
Vested	(689)	$ 30.17
Forfeited	(111)	$ 45.69
Nonvested, December 31, 2006	1,278	$ 40.91

Pro Forma Disclosures

The following table illustrates the effect on net earnings and earnings per common share (“EPS”) as if we had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the years ended December 31, 2005 and 2004 (in thousands, except per share amounts):

	Year Ended December 31,
	2005	2004
Net earnings, as reported	$ 501,639	$ 337,117
Add: Stock-based employee compensation expense
included in reported net earnings, net of tax	13,635	9,603
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of tax	(29,033)	(18,383)
Net earnings, pro-forma	$ 486,241	$ 328,337
EPS, basic - as reported	$       3.18	$       2.55
EPS, basic - pro-forma	$       3.08	$       2.48
EPS, diluted - as reported	$       3.10	$       2.48
EPS, diluted - pro-forma	$       3.02	$       2.42

66

G. INCOME TAXES

The provision (benefit) for income taxes consisted of the following (in thousands):

		Years ended December 31,
		2006	2005	2004
Current provision:
	Federal	$ 314,219	$ 245,304	$ 175,671
	State	36,992	37,388	16,522
Deferred (benefit) provision:
	Federal	(13,510)	17,815	(3,908)
	State	(1,398)	(2,721)	1,589
Income Tax Provision Expense		$ 336,303	$ 297,786	$ 189,874

The Company’s effective tax rate differs from the federal statutory rate of 35% as a result of the following:

		Years ended December 31,
		2006	2005	2004
Statutory federal tax rate		35.00%	35.00%	35.00%
Effect of:
	State income taxes, net of federal benefit	2.71%	2.85%	2.48%
	Release of state NOL valuation allowance	-	-	-0.16%
	Tax exempt investment income	-0.60%	-0.59%	-0.76%
	Remuneration disallowed	0.35%	0.17%	0.49%
	Other	0.06%	-0.18%	-1.02%
Income tax provision (benefit)		37.52%	37.25%	36.03%

The effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below (in thousands):

			December 31,
			2006	2005
Deferred tax assets:
	Net operating loss carryforward		$    22,228	$     21,751
	Deferred compensation		32,791	27,086
	Deferred revenue		3,621	3,901
	Medical liabilities		10,094	6,868
	Accounts receivable		898	6,286
	Other accrued liabilities		35,233	38,400
	Other assets		5,867	3,663
	Unrealized loss on securities		2,048	2,615
		Gross deferred tax assets	112,780	110,570
		Less valuation allowance	-	-
	Deferred tax asset		112,780	110,570
Deferred tax liabilities:
	Other liabilities		(339)	11,346
	Depreciation		(32,009)	(29,117)
	Intangibles		(125,084)	(132,797)
	Internally developed software		(15,520)	(22,192)
	Tax benefit of limited partnership investment		(63,707)	(79,361)
		Gross deferred tax liabilities	(236,659)	(252,121)
Net deferred tax liability (1)			$ (123,879)	$ (141,551)
(1) Includes $59.4 million and $57.7 million classified as current assets at December 31, 2006 and 2005, respectively, and ($183.3) million and ($199.3) million classified as noncurrent liabilities at December 31, 2006 and 2005, respectively.

67

At December 31, 2006, the Company had approximately $75 million of federal and $177 million of state tax net operating loss carryforwards. The Federal net operating losses were primarily acquired through various acquisitions. The net operating loss carryforwards can be used to reduce future taxable income and expire over varying periods through the year 2026.

There is no valuation allowance for the 2006 and 2005 deferred tax assets as the Company believes that the realization of the deferred tax assets, including net operating losses, is more likely than not due to the future reversals of existing taxable temporary differences.

Current income taxes payable of $84.1 million and $46.3 million are included in "other accrued liabilities" on the consolidated balance sheets as of December 31, 2006 and December 31, 2005, respectively.

H. EMPLOYEE BENEFIT PLANS

Stock Incentive Plan

As of December 31, 2006, the Company had one stock incentive plan, the Amended and Restated 2004 Stock Incentive Plan (the “Stock Incentive Plan”) under which shares of the Company’s common stock were authorized for issuance to key employees, consultants and directors in the form of stock options, restricted stock and other stock-based awards. In May 2006, the Stock Incentive Plan was amended to increase the number of shares authorized for issuance by an additional 9.0 million shares.

The Stock Incentive Plan is authorized to grant either incentive stock options or nonqualified stock options, stock appreciation rights, restricted stock and other stock-based awards at the discretion of the Compensation and Benefits Committee of the Board of Directors. Shares available for issuance under the Stock Incentive Plan were 9.9 million and 3.5 million as of December 31, 2006 and 2005, respectively. For more information regarding the Company’s stock-based compensation, please refer to Note F, Stock-Based Compensation.

Employee Stock Purchase Plan

Effective January 1, 2006, the Company terminated the Employee Stock Purchase Plan. The Company’s Employee Stock Purchase Plan, implemented in 1994, allowed substantially all employees who meet length of service requirements to set aside a portion of their salary for the purchase of the Company’s common stock. At the end of each plan year, the Company issued the stock to participating employees at an issue price equal to 85% of the lower of the stock price at the end of the plan year or the average stock price, as defined in the plan. The Company issued 86,800 and 38,900 shares in 2005 and 2004, respectively.

Employee Retirement Plans

As of December 31, 2006, the Company had one defined contribution retirement plan qualifying under the Internal Revenue Code Section 401(k): the Coventry Health Care, Inc. Retirement Savings Plan (the “Savings Plan”). All employees of Coventry Health Care, Inc. and employees of its subsidiaries can elect to participate in the Savings Plan. T. Rowe Price is the custodial trustee of all Savings Plan assets, participant loans and the Coventry Health Care, Inc. common stock in the Savings Plan.

Under the Savings Plan, participants may defer up to 75% of their eligible compensation, limited by the maximum compensation deferral amount permitted by applicable law. The Company makes matching contributions in the Company’s common stock equal to 100% of the participant’s contribution on the first 3% of the participant’s eligible compensation and equal to 50% of the participant’s contribution on the second 3% of the participant’s eligible compensation. Participants will vest in the Company’s matching contributions in 50% increments annually on their anniversary date over a period of two years of service with the Company. Effective January 1, 2006, the Savings Plan was amended to provide 100% vesting for all employer matching contributions made after January 1, 2006. The Savings Plan permits divestiture, whereby employees with three or more years of service were eligible to sell the employer match portion of the Coventry common stock in their accounts, during certain times of the year, and transfer the proceeds to other Coventry 401(k) funds of their choosing. All costs of the Savings Plan are funded by the Company and participants as they are incurred.

The Company previously had other 401(k) plans that it sponsored. These plans arose from acquisitions of other companies and these plans have either since been terminated or merged into the Savings Plan. The cost of the Savings Plan, including the acquired plans, for 2006, 2005 and 2004 was approximately $18.9 million, $14.5 million, and $6.3 million, respectively.

68

401(k) Restoration and Deferred Compensation Plan

As of December 31, 2006, the Company was the sponsor of a 401(k) Restoration and Deferred Compensation Plan (“RESTORE”), currently known as the Coventry Health Care, Inc. 401(k) Restoration and Deferred Compensation Plan. Under the RESTORE, participants may defer up to 15% of their base salary and up to 100% of any bonus awarded. Effective January 1, 2006, the RESTORE was amended to enable participants to defer up to 75% of their base salary. The Company makes matching contributions equal to 100% of the participant’s contribution on the first 3% of the participant’s compensation and 50% of the participant’s contribution on the second 3% of the participant’s compensation. Participants vest in the Company’s matching contributions ratably over two years. All costs of the RESTORE are funded by the Company as they are incurred.

The cost, principally employer matching contributions, of the RESTORE charged to operations for 2006, 2005 and 2004 was $1.2 million, $1.1 million and $1.0 million, respectively.

Executive Retention Plans

As of December 31, 2005, the Company was the sponsor of two deferred compensation plans that were designed to promote the retention of key senior management and to recognize their strategic importance to the Company. During 2006, these plans were settled and paid out in cash and a new plan was created with similar design features. The fixed dollar and stock equivalent allocations charged to operations for these plans were $5.0 million, $15.6 million, and $11.6 million in 2006, 2005 and 2004, respectively, and the liability for these plans was $1.2 million and $37.0 million at December 31, 2006 and 2005, respectively.

I. DEBT

The Company’s outstanding debt was as follows at December 31, 2006 and 2005 (in thousands):

	December 31,
	2006	2005
8.125% Senior notes due 2/15/12	$ 170,500	$ 170,500
5.875% Senior notes due 1/15/12	250,000	250,000
6.125% Senior notes due 1/15/15	250,000	250,000
5-year Term loan	90,000	100,000
Total Debt	$ 760,500	$ 770,500

On February 1, 2002, the Company completed a transaction to sell $175.0 million original 8.125% senior notes due February 15, 2012 in a private placement. These senior notes were then registered with the Securities and Exchange Commission. Interest on the notes is payable on February 15 and August 15 each year. In August 2003, the Company repurchased a portion of its senior notes with a face value of $4.5 million and a weighted average premium of 8.9%. The carrying value of the senior notes is equal to the face value and the fair value is based on the quoted market prices. As of December 31, 2006, the fair value of the 8.125% senior notes was $176.5 million. See Note Q for subsequent event information related to these senior notes.

On January 28, 2005, the Company completed the private placement of $250 million aggregate principal amount of 5 7/8% senior notes due 2012 and $250 million aggregate principal amount of 6 1/8% senior notes due 2015. These senior notes have since been exchanged and are now registered with the Securities and Exchange Commission. The senior notes are general unsecured obligations of the Company and rank equal in right of payment to all of the Company’s existing and future senior debt, including its 8 1/8% senior notes due 2012 and its new credit facilities as described below. As of December 31, 2006, the fair value of the 5 7/8% senior notes and the 6 1/8% senior notes was $245.6 million and $247.2 million, respectively.

On January 28, 2005, the Company also entered into senior, unsecured credit facilities consisting of a $300 million five-year term loan and a $150 million five-year revolving credit facility, of which $65 million was drawn at closing. The proceeds from the sale of the senior notes and the credit facilities were used to finance the acquisition of all of First Health’s outstanding common stock, refinance the existing indebtedness of First Health and pay related transaction fees and expenses. During the six months ended June 30, 2005, the Company made non-scheduled payments of $140.0 million and a scheduled repayment of $7.5 million on the credit facilities leaving a balance of $217.5 million.

69

On June 30, 2005, the Company entered into new credit facilities providing for a five-year revolving credit facility in the principal amount of $350 million, of which $117.5 million was drawn at closing, and a five-year term loan in the principal amount of $100 million. The new term loan facility requires regularly scheduled annual payments of principal in the amount of $10 million per year. The first payment under this agreement was made during the quarter ended June 30, 2006. Unless terminated earlier, the revolving credit facility will mature five years after closing and is payable in full upon its maturity on the termination date. The Company used the net proceeds of the borrowings under the new credit facilities to pay down and terminate its original term loan and revolving credit facility. On July 29, 2005, the Company paid off the outstanding balance of $117.5 million on its revolving credit facility.

During the quarter ended June 30, 2005, as a result of the refinancing, the Company wrote off $5.4 million of deferred financing costs related to the original credit facilities.

Loans under the new credit facilities bear interest at a margin or spread in excess of either (1) the one-, two-, three-, six-, nine-, or twelve- month rate for Eurodollar deposits (the “Eurodollar Rate”) or (2) the greater of the federal funds rate plus 0.5% or the base rate of the Administrative Agent (“Base Rate”), as selected by the Company. The margin or spread depends on the Company’s non-credit-enhanced long-term senior unsecured debt ratings and varies from 0.450% to 1.750% for Eurodollar Rate advances and from 0.000% to 0.500% for Base Rate advances.

The Company’s senior notes and credit facilities require compliance with specified financial ratios and contain certain covenants and restrictions regarding incurring additional debt, limiting dividends or other restricted payments, restricting transactions with affiliates, disposing of assets and consolidations or mergers. The Company has complied with all ratios and covenants under the senior notes and credit facilities.

As of December 31, 2006, the aggregate maturities of debt based on their contractual terms, are as follows (in thousands):

2007	$ 10,000
2008	10,000
2009	10,000
2010	60,000
2011	-
Thereafter	670,500
Total	$ 760,500

J. COMMITMENTS AND CONTINGENCIES

As of December 31, 2006, the Company is contractually obligated to make the following minimum lease payments within the next five years and thereafter (in thousands):

	Lease Payments	Sublease Income	Net Lease Payments
2007	$   26,993	$ (1,716)	$   25,277
2008	25,842	(1,480)	24,362
2009	21,691	(1,351)	20,340
2010	16,532	(1,073)	15,459
2011	14,047	(1,073)	12,974
Thereafter	20,302	(1,436)	18,866
Total	$ 125,407	$ (8,129)	$ 117,278

The Company operates in leased facilities with original lease terms of up to thirteen years with options for renewal. Total rent expense was $30.3 million, $30.2 million and $19.0 million, for the years ended December 31, 2006, 2005 and 2004, respectively.

70

Legal Proceedings

In the normal course of business, the Company has been named as a defendant in various legal actions such as actions seeking payments for claims denied by the Company, medical malpractice actions, employment related claims and other various claims seeking monetary damages. The claims are in various stages of proceedings and some may ultimately be brought to trial. Incidents occurring through December 31, 2006 may result in the assertion of additional claims. The Company maintains general liability, professional liability and employment practices liability insurances in amounts that it believes are appropriate, with varying deductibles for which it maintains reserves. The professional liability and employment practices liability insurances are carried through its captive subsidiary. Although the results of pending litigation are always uncertain, we do not believe the results of such actions currently threatened or pending, including those described below, will individually or in the aggregate, have a material adverse effect on our consolidated financial position or results of operations.

The Company is a defendant in the provider track of the In Re: Managed Care Litigation filed in the United States District Court for the Southern District of Florida, Miami Division, Multi-District Litigation (“MDL”), No. 1334, in the action captioned, Charles B. Shane., et al., vs. Humana, Inc., et al. This lawsuit was filed by a group of physicians as a class action against Coventry and nine other companies in the managed care industry. The plaintiffs alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), conspiracy to violate RICO and aiding and abetting a scheme to violate RICO. In addition to these federal law claims, the complaint included state law claims for breach of contract, violations of various state prompt payment laws and equitable claims for unjust enrichment and quantum meruit. The trial court dismissed several of the state law claims and ordered all physicians who had an arbitration provision in their provider contracts to submit their direct RICO claims and their remaining state law claims to arbitration. As a consequence of this ruling, the plaintiffs who had arbitration provisions voluntarily dismissed their claims that were subject to arbitration. In its order, the trial court also held that the plaintiffs’ claims of (1) conspiracy to violate RICO and (2) aiding and abetting violations of RICO were not subject to arbitration. The trial court then certified various subclasses of plaintiffs with respect to these two federal law claims.

Seven defendants have entered into settlement agreements with the plaintiffs, which have received final approval from the trial court. On June 16, 2006, the trial court filed an order in the Shane lawsuit which granted summary judgment on all claims in favor of the Company. The trial court also granted summary judgment on all claims in favor of two other defendants. The plaintiffs have appealed the trial court’s summary judgment order to the Eleventh Circuit Court of Appeals. The Shane lawsuit has triggered the filing of copycat class action complaints by other health care providers such as chiropractors, podiatrists, acupuncturists and other licensed health care professionals. Each of these actions has been transferred to the MDL and have been designated as “tag-along” actions. The court has entered an order which stays all proceedings in the tag-along actions until all pre-trial proceedings in the Shane action have been concluded. Although the Company can not predict the outcome, management believes that the Shane and the tag-along actions will not have a material adverse effect on its financial position or its results of operations. Management also believes that the claims asserted in these lawsuits are without merit and the Company intends to defend its position.

Capitation Arrangements

A small percentage of the Company’s membership is covered by global capitation arrangements. Under the typical arrangement, the provider receives a fixed percentage of premium to cover all the medical costs provided to the globally capitated members. Under some capitated arrangements, physicians may also receive additional compensation from risk sharing and other incentive arrangements. Global capitation arrangements limit the Company’s exposure to the risk of increasing medical costs, but expose the Company to risk as to the adequacy of the financial and medical care resources of the provider organization. In addition to global capitation arrangements, the Company has capitation arrangements for ancillary services, such as mental health care. The Company is ultimately responsible for the coverage of its members pursuant to the customer agreements. To the extent that the respective provider organization faces financial difficulties or otherwise is unable to perform its obligations under the capitation arrangements, the Company will be required to perform such obligations. Consequently, the Company may have to incur costs in excess of the amounts it would otherwise have to pay under the original global or ancillary capitation arrangements. Medical costs associated with capitation arrangements made up approximately 6.1%, 6.5%, and 7.1% of the Company’s total medical costs for the years ended December 31, 2006, 2005 and 2004, respectively. Membership associated with global capitation arrangements was approximately 110,000, 116,000 and 127,000 as of December 31, 2006, 2005 and 2004, respectively.

71

K. CONCENTRATIONS OF CREDIT RISK

The Company’s financial instruments that are exposed to credit risk consist primarily of cash equivalents, investments in fixed income securities and accounts receivable. The Company invests its excess cash in state and municipal bonds, U.S. Treasury and agency securities, mortgage-backed securities, asset-backed securities, corporate debt and other securities. Investments in marketable securities are managed within guidelines established by the Board of Directors, which only allow for the purchase of investment-grade fixed income securities and limit the amount that may be invested in any one issuer. The fair value of the Company’s financial instruments is equivalent to their carrying value and, although there is some credit risk associated with these instruments, the Company believes this risk to be minimal.

Concentration of credit risk with respect to receivables is limited due to the large number of customers comprising the Company’s customer base and their breakdown among geographical locations. The Company believes the allowance for doubtful accounts adequately provides for estimated losses as of December 31, 2006. The Company has a risk of incurring losses if such allowances are not adequate.

L. STATUTORY INFORMATION

The Company’s HMO and insurance company subsidiaries are required by state regulatory agencies to maintain minimum surplus balances, thereby limiting the dividends the parent may receive from its regulated entities. During 2006, the Company received $297 million in dividends from its regulated subsidiaries.

The National Association of Insurance Commissioners (“NAIC”) has proposed that states adopt risk-based capital (“RBC”) standards that, if adopted, would generally require higher minimum capitalization requirements for HMOs and other risk-bearing health care entities. RBC is a method of measuring the minimum amount of capital appropriate for a managed care organization to support its overall business operations in consideration of its size and risk profile. The managed care organization’s RBC is calculated by applying factors to various assets, premiums and reserve items. The factor is higher for those items with greater underlying risk and lower for less risky items. The adequacy of a managed care organization’s actual capital can then be measured by a comparison to its RBC as determined by the formula. The Company’s health plans are required to submit an RBC report to the NAIC and their domiciled state’s department of insurance with their annual filing.

Regulators will use the RBC results to determine if any regulatory actions are required. Regulatory actions that could take place, if any, range from filing a financial action plan explaining how the plan will increase its statutory net worth to the approved levels, to the health plan being placed under regulatory control.

The majority of states in which we operate health plans have adopted a risk-based capital (“RBC”) policy that recommends the health plans maintain statutory reserves at or above the ‘Company Action Level’ which is currently equal to 200% of their RBC. We have adopted an internal policy to maintain all of our regulated subsidiaries’ statutory capital and surplus at or above 250% of their RBC and a level of 300% in aggregate (referred to below as “300% of RBC”). Some states in which our regulated subsidiaries operate require deposits to be maintained with the respective states’ departments of insurance. The table below summarizes the Company’s statutory reserve information as of December 31, 2006 and 2005 (in millions except percentage data).

	2006	2005
Regulated capital and surplus	$ 1,070.6 (a)	$ 897.4
300% of RBC	$    666.5 (a)	$ 555.3 (a)
Excess capital and surplus above 300% of RBC	$    404.1 (a)	$ 342.1 (a)
Capital and surplus as percentage of RBC	481% (a)	485% (a)
Statutory deposits	$     56.4	$   49.4
(a) unaudited

The increase in capital and surplus for our regulated subsidiaries is a result of net earnings partially offset by dividends paid to the parent company.

Excluding funds held by entities subject to regulation and excluding our investment in an equipment leasing limited liability company, we had cash and investments of approximately $563.1 million and $347.2 million at December 31, 2006 and 2005, respectively. The increase was primarily due to the dividends received from our regulated subsidiaries and earnings from our non-regulated First Health business offset, in part, by the share repurchases discussed previously.

72

M. OTHER INCOME

Other income for the years ended December 31, 2006, 2005 and 2004 includes interest income, net of fees, of approximately $101.5 million, $59.8 million and $44.1 million, respectively.

N. SHARE REPURCHASE PROGRAM

The Company’s Board of Directors has approved a program to repurchase its outstanding common stock. Stock repurchases may be made from time to time at prevailing prices on the open market, by block purchase or in private transactions. In February 2006, our Board of Directors approved an increase to the share repurchase program in an amount equal to 5% of our outstanding common stock, thus increasing our repurchase authorization by 8.1 million shares. Under the share repurchase program, the Company purchased 4.6 million shares of the Company’s common stock during 2006, at an aggregate cost of $256.1 million, no shares were purchased in 2005 and 3.0 million shares during 2004, at an aggregate cost of $84.6 million. The total remaining common shares the Company is authorized to repurchase under this program is 6.2 million as of December 31, 2006. Excluded from these amounts are shares purchased in exchange for employee payroll taxes on vesting of restricted stock awards as these purchases are not part of the program.

O. SEGMENT INFORMATION

The Company has two reportable segments: Health Plans and First Health. Each of these segments is managed separately and separate operating results are available that are evaluated by the chief operating decision maker. The Health Plans segment provides commercial, Medicare and Medicaid products to a cross section of employer groups and individuals. Commercial products include HMO, PPO and POS products. HMO products provide comprehensive health care benefits to members primarily through a primary care physician. PPO and POS products permit members to participate in managed care but allow them the flexibility to utilize out-of-network providers in exchange for increased out-of-pocket costs. The Company provides comprehensive health benefits to members participating in Medicare and Medicaid programs and receives premium payments from federal and state governments.

The First Health segment provides services to the Group Health and Specialty sectors. The Group Health business offers its managed care and administrative products to commercial payors in three customer classifications:

• National Accounts – a variety of stand-alone managed care services and a portfolio of integrated health plan products to self-insured payors

• Federal Employees Health Benefits Program – a variety of managed care and administrative services available to federal employees and annuitants

• Network Rental – national PPO network and other managed care products to national, regional and local third party administrators and insurance carriers

The Specialty business offers network managed care and administrative services to two customer classifications:

• Medicaid/Public Sector – offers products and services more specialized to the needs of state governments as public sector health programs move toward more efficient utilization of health services. Product offerings include pharmacy benefit management, clinical management and fiscal intermediary services

• Workers’ Compensation Services – managed care administrative services including access to our provider network, bill review and clinical management

73

The table below summarizes the Company’s reportable segments (in thousands). “Other” represents the elimination of fees charged between segments. First Health only includes results since the date of acquisition. Disclosure of total assets by reportable segment has not been disclosed, as they are not reported on a segment basis internally by the Company and are not reviewed by the Company’s chief operating decision maker:

		Year Ended December 31, 2006
		Health	First
		Plans	Health	Other	Total
Operating Revenues:
	Managed care premiums	$ 6,776,277	$   81,024	$               -	$ 6,857,301
	Management services	124,576	758,439	(6,560)	876,455
Total operating revenues		6,900,853	839,463	(6,560)	7,733,756
Total operating expenses		6,211,728	687,585	(6,560)	6,892,753
Operating earnings		$    689,125	$ 151,878	$               -	$    841,003

		Year Ended December 31, 2005
		Health	First
		Plans	Health (A)	Other	Total
Operating Revenues:
	Managed care premiums	$ 5,686,250	$  41,912	$               -	$ 5,728,162
	Management services	119,573	770,402	(6,891)	883,084
Total operating revenues		5,805,823	812,314	(6,891)	6,611,246
Total operating expenses		5,202,702	623,617	(6,891)	5,819,428
Operating earnings		$    603,121	$ 188,697	$               -	$    791,818
(A) Includes results since January 28, 2005, the date of acquisition.

The Health Plan operations are aligned in several insured products. The Company believes identifying the gross margin and medical loss ratio (“MLR”) calculation from each of these products is useful in understanding the Company’s results of operations and is summarized in the table below (in thousands):

	Years Ended December 31,
		Medicare		Medicare
	Commercial	Advantage	Medicaid	Part D (1)	Total
2006
Revenues	$ 4,529,636	$ 814,624	$ 762,093	$ 669,924	$ 6,776,277
Medical costs	3,519,641	647,178	652,198	565,856	5,384,873
Gross margin	$ 1,009,995	$ 167,446	$ 109,895	$ 104,068	$ 1,391,404
MLR	77.7%	79.4%	85.6%	84.5%	79.5%
2005
Revenues	$ 4,255,577	$ 676,349	$ 754,324	$            -	$ 5,686,250
Medical costs	3,338,944	542,928	638,415	-	4,520,287
Gross margin	$    916,633	$ 133,421	$ 115,909	$            -	$ 1,165,963
MLR	78.5%	80.3%	84.6%	n/a	79.5%
2004
Revenues	$ 4,024,219	$ 564,779	$ 609,601	$            -	$ 5,198,599
Medical costs	3,182,732	470,611	532,552	-	4,185,895
Gross margin	$    841,487	$   94,168	$   77,049	$            -	$ 1,012,704
MLR	79.1%	83.3%	87.4%	n/a	80.5%
(1) Represents the Medicare Part D Prescription Drug Plan and excludes the health plan Medicare Advantage business.

74

First Health operations are aligned into two sectors. The Company believes identifying the revenue from each of these sectors is useful in understanding the Company’s results of operations. Revenue from the Company’s First Health sectors since the date of acquisition is as follows (in thousands):

	Year Ended	Period Ended (1)
	December 31, 2006	December 31, 2005
National Accounts	$ 113,990	$ 141,283
Federal Employees Health Benefits Plan	208,177	204,678
Network Rental	126,573	89,442
Group Health Subtotal	448,740	435,403
Medicaid/Public Sector	184,503	183,197
Workers’ Compensation	206,220	193,714
Specialty Business Subtotal	390,723	376,911
Total First Health Revenue	$ 839,463	$ 812,314
(1) Includes results since January 28, 2005, the date of acquisition

P. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations (in thousands, except per share data) for the years ended December 31, 2006 and 2005. Due to rounding of quarterly results, total amounts for each year may differ immaterially from the annual results.

	Quarters Ended
	March 31,	June 30,	September 30,	December 31,
	2006	2006	2006	2006
Operating revenues	$ 1,938,717	$ 1,944,909	$ 1,909,136	$ 1,940,995
Operating earnings	182,719	206,588	224,281	227,414
Earnings before income taxes	192,798	217,422	238,701	247,428
Net earnings	120,981	135,454	147,517	156,094
Basic earnings per share	0.76	0.86	0.93	0.99
Diluted earnings per share	0.74	0.84	0.92	0.97
	Quarters Ended
	March 31,	June 30,	September 30,	December 31,
	2005	2005	2005	2005
Operating revenues	$ 1,565,200	$ 1,652,957	$ 1,674,189	$ 1,718,900
Operating earnings	178,474	207,457	210,023	195,864
Earnings before income taxes	179,523	206,368	212,056	201,479
Net earnings	112,651	129,496	133,065	126,428
Basic earnings per share	0.75	0.81	0.83	0.79
Diluted earnings per share	0.73	0.79	0.81	0.77

Q. SUBSEQUENT EVENTS

On February 1, 2007, the Company purchased certain assets, including membership of approximately 31,000 members, from FirstGuard Health Plan Missouri, Inc., a wholly owned subsidiary of Centene Corporation.

On February 8, 2007, the Company announced it has signed a definitive agreement to acquire Concentra, Inc.’s workers’ compensation managed care services businesses. The Company will acquire the Concentra businesses for $387.5 million in an all-cash transaction expected to close in 90 to 180 days from that date, subject to closing conditions, regulatory and other customary approvals.

On February 15, 2007, the Company redeemed all $170.5 million of its outstanding 8.125% senior notes. The Company redeemed the senior notes at a redemption price equal to 104.1% of the principal amount plus interest accrued on the redemption date. The funds for payment of the redemption price were provided by existing cash.

75

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9a: Controls and Procedures

Management’s Annual Report on Internal Control over Financial Reporting

Coventry’s management, including the principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) under the U.S. Securities Exchange Act of 1934) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

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

Coventry’s management has performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), Internal Controls – Integrated Framework, and believes that the COSO framework is a suitable framework for such an evaluation. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements for the year ended December 31, 2006, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting which is included in this Annual Report on Form 10-K.

Disclosure Controls and Procedures

We have performed an evaluation as of the end of the period covered by this report of the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 ), under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

76

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Coventry Health Care, Inc.

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Coventry Health Care, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

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

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s consolidated balance sheets as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of Coventry Health Care, Inc., and our report dated February 28, 2007 expressed an unqualified opinion thereon.

Baltimore, Maryland

February 28, 2007

77

Item 9b: Other information

Not applicable

PART III

Item 10: Directors, Executive Officers and Corporate Governance.

The information set forth under the captions “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Audit Committee,” “Financial Expert,” “Nomination of Board Members”, “Code of Ethics” and “Corporate Governance” in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders to be held on May 17, 2007, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference. As provided in General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information regarding executive officers of our Company is provided in Part I of this Annual Report on Form 10-K under the caption, “Executive Officers of our Company.”

Item 11: Executive Compensation.

The information set forth under the caption “Executive Compensation” in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders to be held on May 17, 2007, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference.

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forth under the captions, “Executive Compensation,” “Voting Stock Ownership of Principal Shareholders, Directors and Executive Officers” and “Equity Compensation Plan Information,” in our Proxy Statement for our 2007 Annual Meeting of Shareholders to be held on May 17, 2007, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference.

Item 13: Certain Relationships and Related Transactions, and Director Independence.

The information set forth under the captions, “Certain Relationships and Related Transactions” and “Corporate Governance,” in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders to be held on May 17, 2007, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference.

Item 14: Principal Accountant Fees and Services

The information set forth under the captions, “Fees Paid to Independent Auditors” and “Audit Committee’s Pre-approval Policies and Procedures” in our definitive Proxy Statement for our 2007 Annual Meeting of Shareholders to be held on May 17, 2007, which we intend to file within 120 days after our fiscal year-end, is incorporated herein by reference.

78

PART IV

Item 15: Exhibits, Financial Statement Schedules

(a) 1. Financial Statements

	Form 10-K
	Pages
Report of Independent Registered Public Accounting Firm	49
Consolidated Balance Sheets, December 31, 2006 and 2005	50
Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004	51
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004	52
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004	53
Notes to Consolidated Financial Statements, December 31, 2006, 2005 and 2004	54

2. Financial Statement Schedules

None

3. Exhibits Required To Be Filed By Item 601 Of Regulation S-K

Exhibit No.	Description of Exhibit
3.1	Restated Certificate of Incorporation of Coventry Health Care, Inc. (Incorporated by reference to Exhibit 3.1 to Coventry's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, filed on August 9, 2006).
3.2	Amended and Restated Bylaws of Coventry Health Care, Inc. (Incorporated by reference to Exhibit 3.2.4 to Coventry's Current Report on Form 8-K filed on November 10, 2004).
4.1	Specimen Common Stock Certificate Incorporated by reference to Exhibit 4.1 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
4.2	Indenture dated as of February 1, 2002 between Coventry Health Care, Inc., as Issuer, and First Union National Bank, as Trustee. (Incorporated by reference to Exhibit 4.9 to Coventry's Form S-4, Registration Statement No. 333-83106).
4.3	Form of Note issued pursuant to the Indenture dated as of February 1, 2002 between Coventry Health Care, Inc., as Issuer, and First Union National Bank, as Trustee (Incorporated by reference to Exhibit 4.9 to Coventry's Form S-4, Registration Statement No. 333-83106).
4.4	Indenture for the 2012 Notes, dated as of January 28, 2005, between Coventry and Wachovia Bank, National Association, a national banking association, as Trustee (Incorporated by reference to Exhibit 4.1 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
4.5	Form of Note for the 2012 Notes issued pursuant to the Indenture dated as of January 28, 2005 between Coventry Health Care, Inc., as Issuer, and Wachovia Bank, National Association, as Trustee (Incorporated by reference to Exhibit 4.1 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
4.6	Indenture for the 2015 Notes, dated as of January 28, 2005, between Coventry and Wachovia Bank, National Association, a national banking association, as Trustee (Incorporated by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
4.7	Form of Note for the 2015 Notes issued pursuant to the Indenture dated as of January 28, 2005 between Coventry Health Care, Inc., as Issuer, and Wachovia Bank, National Association, as Trustee (Incorporated by reference to Exhibit 4.2 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
4.8	Registration Rights Agreement for the 2012 Notes, dated as of January 28, 2005, by and among Coventry and Lehman Brothers Inc., CIBC World Markets Corp., ABN AMRO Incorporated, Banc of America Securities LLC, Wachovia Securities and Piper Jaffray & Co. (Incorporated by reference to Exhibit 4.3 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
4.9	Registration Rights Agreement for the 2015 Notes, dated as of January 28, 2005, by and among Coventry and Lehman Brothers Inc., CIBC World Markets Corp., ABN AMRO Incorporated, Banc of America Securities LLC, Wachovia Securities and Piper Jaffray & Co. (Incorporated by reference to Exhibit 4.4 to Coventry’s Current Report on Form 8-K dated January 28, 2005).
10.1	Transition and Retirement Agreement effective as of January 1, 2005, between Allen F. Wise and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K dated September 23, 2004 ).
10.2	Employment Agreement effective as of January 1, 2005 between Thomas P. McDonough and the Company (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K/A filed on March 15, 2005).
10.3	Employment Agreement effective as of January 1, 2005, between Dale B. Wolf and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.2 to Coventry’s Current Report on Form 8-K/A dated November 23, 2004).
10.4	Employment Agreement effective as of January 1, 2005, between Harvey C. DeMovick and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.1 to Coventry’s Current Report on Form 8-K/A dated November 23, 2004).
10.5	Employment Agreement effective as of August 1, 2004, between Thomas C. Zielinski and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.8 to Coventry’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed on November 8, 2004).
10.6	Employment Agreement effective as of January 1, 2005, between Shawn M. Guertin and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.1 to Coventry’s Current Report on Form 8-K dated November 19, 2004).
10.7	Employment Agreement effective June 1, 2004, between Bernard J. Mansheim, M.D. and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.7 to Coventry’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, filed on August 4, 2004).
10.8	Employment Agreement effective as of January 1, 2005, between Francis S. Soistman and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.2 to Coventry’s Current Report on Form 8-K dated November 19, 2004).
10.9	Employment Agreement effective as of July 1, 2004, between Patrisha L. Davis and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.9 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.10	Employment Agreement effective as of January 31, 2005, between Harry Creasey and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.10 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.11	Non-Employee Director Compensation Schedule effective January 1, 2005 (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 10, 2005).
10.12	Summary of Non-Employee Directors' Compensation.
10.13	Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2006 (Incorporated by reference to Exhibit 10.13 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.14	Summary of Named Executive Officer Compensation.
10.15	1993 Stock Option Plan (as amended) (Incorporated by reference to Exhibit 10.8.4 attached to the Coventry Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.16	Coventry Corporation 1997 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.29 to Coventry Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
10.17	Coventry Health Care, Inc. Amended and Restated 1998 Stock Incentive Plan, amended as of June 5, 2003 (Incorporated by reference to Exhibit 10.15 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. filed on March 10, 2004).
10.18	Amended Coventry Health Care, Inc. 2004 Incentive Plan (Incorporated by reference to Exhibit 10.1 to Coventry's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, filed on November 8, 2006).
10.19.1	Form of Coventry Health Care, Inc. Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.18 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005).
10.19.2	Form of Amendment to Coventry Health Care, Inc. Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.20.1	Form of Coventry Health Care, Inc. Restricted Stock Award Agreement (Incorporated by reference to Exhibit 10.19 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005).
10.20.2	Form of Amendment to Coventry Health Care, Inc. Restricted Stock Agreement (Incorporated by reference to Exhibit 10.3 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.21	Form of Coventry Health Care, Inc. Performance-Based Restricted Stock Award Agreement (Incorporated by reference to Exhibit 10.21 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed on March 9, 2006).
10.22	2004 Executive Management Incentive Plan (Incorporated by reference to Exhibit 10.20 to Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 10, 2004).
10.23	2005 Executive Management Incentive Plan (Incorporated by reference to Exhibit 10.2 to Coventry’s Current Report on Form 8-K dated November 23, 2004).
10.24	2006 Executive Management Incentive Plan (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K filed on January 12, 2006).
10.25	2003 Deferred Compensation Plan (Incorporated by reference to Exhibit 10.18.3 to the Company’s Quarterly Report, on Form 10-Q for the quarter ended June 30, 2003.
10.26	2004 Mid-Term Executive Retention Program (Incorporated by reference to Exhibit 10.26 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005).
10.27	Special Incentive Plan effective as of January 1, 2005 among Thomas P. McDonough and James E. McGarry and Coventry Health Care, Inc. (Incorporated by reference to Exhibit 10.1 to Coventry’s Current Report on Form 8-K dated November 23, 2004).
10.28.1	Coventry Health Care, Inc. Supplemental Executive Retirement ("SERP") Plan, as amended and restated effective January 1, 2003, including the First Amendment effective as of January 1, 2004 (Incorporated by reference to Exhibit 10.31 to Coventry's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed March 16, 2005).
10.28.2	Second Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement ("SERP") Plan, as amended and restated effective January 1, 2003, including the First Amendment effective as of January 1, 2004, effective May 18, 2005 (Incorporated by reference to Exhibit 10 to Coventry's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed August 9, 2005).
10.28.3	Third Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement Plan (now known as the 401(k) Restoration and Deferred Compensation Plan), effective as of December 1, 2006.
10.29	Coventry Share Plan, as amended and restated, effective as of January 1, 2006.
10.30	Credit Agreement dated June 30, 2005, by and among the several banks and other financial institutions or entities from time to time parties thereto, JPMorgan Chase Bank and Wachovia Bank, National Association, as Documentation Agents, Lehman Commercial Paper Inc. and Bank of America, N.A., as Syndication Agents, and Citibank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to Coventry's Form 8-K filed on July 1, 2005).
10.31	2004 Incentive Plan (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K, filed on May 24, 2006).
10.32	2006 Mid-Term Executive Retention Program (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K, filed on May 25, 2006).
10.33	2007 Coventry Health Care, Inc. Executive Management Incentive Plan (Incorporated by reference to Exhibit 10.1 to Coventry's Current Report on Form 8-K, filed on November 7, 2006).
12	Computation of Ratio of Earnings to Fixed Charges
14	Code of Business Conduct and Ethics initially adopted by the Board of Directors of Coventry on February 20, 2003, as amended on March 3, 2005 and November 1, 2006.
21	Subsidiaries of the Registrant.
23	Consent of Ernst & Young LLP.
31.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director.
31.2	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.
32	Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director and Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

79

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 thereunto duly authorized
		COVENTRY HEALTH CARE, INC.
		(Registrant)
Date:	February 28, 2007	By: /s/ Dale B. Wolf
		Dale B. Wolf
		Chief Executive Officer and Director
Date:	February 28, 2007	By: /s/ Shawn M. Guertin
		Shawn M. Guertin
		Executive Vice President, Chief
		Financial Officer and Treasurer
Date:	February 28, 2007	By: /s/ John J. Ruhlmann
		John J. Ruhlmann
		Senior Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
	Signature	Title (Principal Function)	Date
	By: /s/ Allen F. Wise	Chairman of the Board and Director	February 28, 2007
	Allen F. Wise
	By: /s/ Dale B. Wolf	Chief Executive Officer and Director	February 28, 2007
	Dale B. Wolf
	By: /s/ John H. Austin, M.D.	Director	February 28, 2007
	John H. Austin, M.D.
	By: /s/ Joel Ackerman	Director	February 28, 2007
	Joel Ackerman
	By: /s/ L. Dale Crandall	Director	February 28, 2007
	L. Dale Crandall
	By: /s/ Emerson D. Farley, Jr., M.D.	Director	February 28, 2007
	Emerson D. Farley, Jr., M.D.
	By: /s/ Lawrence N. Kugelman	Director	February 28, 2007
	Lawrence N. Kugelman
	By: /s/ Daniel N. Mendelson	Director	February 28, 2007
	Daniel N. Mendelson
	By: /s/ Rodman W. Moorhead, III	Director	February 28, 2007
	Rodman W. Moorhead, III
	By: /s/ Robert W. Morey	Director	February 28, 2007
	Robert W. Morey
	By: /s/ Elizabeth E. Tallett	Director	February 28, 2007
	Elizabeth E. Tallett
	By: /s/ Timothy T. Weglicki	Director	February 28, 2007
	Timothy T. Weglicki

80

INDEX TO EXHIBITS

Reg. S-K: Item 601

Exhibit
No.	Description of Exhibit
10.12	Summary of Non-Employee Directors’ Compensation.
10.14	Summary of Named Executive Officer Compensation.
10.28.3	Third Amendment to Coventry Health Care, Inc. Supplemental Executive Retirement Plan (now known as the 401(k) Restoration and Deferred Compensation Plan), effective as of December 1, 2006.
10.29	Coventry Share Plan, as amended and restated, effective as of January 1, 2006.
12	Computation of Ratio of Earnings to Fixed Charges.
14	Code of Business Conduct and Ethics initially adopted by the Board of Directors of Coventry on February 20, 2003, as amended on March 3, 2005 and November 1, 2006.
21	Subsidiaries of the Registrant.
23	Consent of Ernst & Young LLP
31.1	Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director.
31.2	Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.
32	Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 made by Dale B. Wolf, Chief Executive Officer and Director and Shawn M. Guertin, Executive Vice President, Chief Financial Officer and Treasurer.

Note: This index only lists the exhibits included in this Form 10-K. A complete list of exhibits can be found in “Item 15. Exhibits, Financial Statement Schedules” of this Form 10-K.

81

EX-10.12

Exhibit 10.12

Coventry Health Care, Inc. (“Coventry”)

Summary of Director Compensation

Non-employee directors of Coventry are compensated pursuant to the 2006 Directors Compensation Program for non-employee directors, previously filed as Exhibit 10.13 to Coventry Current Report on Form 8-K, filed on November 10, 2005 (the “Program”), which authorizes Coventry to make certain compensatory awards to non-employee directors pursuant to Coventry’s 2004 Incentive Plan and allows non-employee directors to defer portions of their compensation in accordance with Coventry’s Deferred Compensation Plan for Non-Employee Directors. The following table summarizes the components and amounts of the compensation package paid offered to eligible non-employee directors in 2006 and 2007.

Compensation Components	Board or Committee	Compensation
Annual Compensation for Attendance at Regular Board Meetings1 (paid/vested/deferred quarterly in arrears in accordance with the Program and includes compensation for five regularly scheduled Board meetings)	Board	$ 225,000
Annual Committee Chair Retainer (Paid annually in arrears)	Lead Director	$   10,000
	Chair of Audit Committee	10,000
	Chair of Comp Committee	10,000
	Chair of N/CG Committee	5,000
Attendance at In-Person Special Meeting	Board	$     3,000
	Audit Committee	3,000
	Comp Committee	3,000
	N/CG Committee	1,500
Participation in a Special Telephonic Meeting	Board	$     1,000
	Audit Committee	1,000
	Comp Committee	1,000
	N/CG Committee	500
Reimbursement of Reasonable Travel Expenses	All Directors	Actual Costs
New Director Stock Option Grant	New Director	10,000 options to acquire shares which vest in equal amounts over four years
Health and Basic Life Insurance Coverage	All Non-employee Directors
	(voluntary participation)

Subject to the terms of the Program, non-employee directors may elect the form and the timing of their compensation on an individual basis as summarized in the table below. All elections of the form of payment must be made in multiples of 25%. The table below summarizes the forms of compensation each individual non-employee director may select as well as certain material terms related to those forms of compensation.

Payment “Form”2	Maximum Allocation	Payment “Current”	Payment “Deferred”	Vesting
Cash	50%3	Paid at the end of each quarter	Credited at the end of each quarter4	None

_________________________

¹ Any non-employee directors who become eligible to participate in the Program after January 1 will receive a pro rata portion of the Annual Compensation.

²  Value of stock options, restricted stock awards and stock units determined in accordance with SFAS 123R.

³ Percentage limit may be waived with the approval of the Chairman of the Compensation Committee

⁴ Deferred cash will be credited quarterly with interest based on the Company’s borrowing rate set at the beginning of each year (2005 rate is approximately 5%)

Restricted Stock/ Stock Units	100%	Granted at beginning of year	Stock Units deferred until termination of service or unforeseeable emergency	Quarterly over the year of service
Stock Options	100%	Granted at beginning of year	Exercisable when vested and subject to a 10 year term	Quarterly over the year of service

EX-10.14

Exhibit 10.14

Coventry Health Care, Inc. (“Coventry”)

Summary of Named Executive Officer Compensation

Base Salary

The following table sets forth the current base salaries provided to Coventry’s Chief Executive Officer, Chief Financial Officer, and three most highly compensated executive officers (“Named Executive Officers”):

Executive Officer	Current Salary
Dale B. Wolf, Chief Executive Officer	$925,000
Shawn M. Guertin, Executive Vice President, Chief Financial Officer, and Treasurer	$525,000
Thomas P. McDonough, President	$885,000
Harvey C. DeMovick, Jr., Executive Vice President, Customer Service Operations, and Chief Information Officer	$600,000
Francis S. Soistman, Jr., Executive Vice President, Government & Individual Plans	$575,000

Executive Management Incentive Plan

2006 Criteria and Incentives

Coventry’s Chief Executive Officer, Chief Financial Officer, and three most highly compensated officers are also eligible to receive a non-equity incentive award each year under Coventry’s Executive Management Incentive Plan (the 2006 Executive Management Incentive Plan (the “2006 EMIP”) which was previously filed as Exhibit 10.25 to Coventry’s Current Report on Form 8-K filed on January 12, 2006. For fiscal year 2006, incentives under the 2006 EMIP were based on the attainment of budgeted EPS (earnings per share) and year-over-year EPS growth. The incentives paid to Coventry’s Chief Executive Officer and other named executive officers for performance in fiscal year 2006 are set forth below:

Executive Officer	Incentive for 2006
Dale B. Wolf, Chief Executive Officer	$     1,625,000
Shawn M. Guertin, Executive Vice President, Chief Financial Officer, and Treasurer	$        450,000
Thomas P. McDonough, President	$2,400,000 (1)
Harvey C. DeMovick, Jr., Executive Vice President, Customer Service Operations, and Chief Information Officer	$        575,000
Francis S. Soistman, Jr., Executive Vice President, Government & Individual Plans	$        650,000

⁽¹⁾ Includes $1,700,000 special incentive for First Health integration and $700,000 EMIP.

2007 Criteria

Pursuant to Coventry’s 2007 Executive Management Incentive Plan (the “2007 EMIP”), which was previously filed as Exhibit 10.1 to Coventry’s Current Report on Form 8-K, filed on November 7, 2006, the Compensation Committee of Coventry’s Board of Directors approved the incentive criteria for fiscal year 2007 under the 2007 EMIP. For fiscal year 2007, incentives under the 2007 EMIP will be predicated on budgeted earnings per share targets and year-over-year EPS growth.

2003 Deferred Compensation Plan and 2004 Mid-Term Executive Retention Program

In addition to their base salaries and incentives, Coventry’s Chief Executive Officer, Chief Financial Officer, and three most highly compensated executive officers were also eligible to receive an annual cash and stock equivalent allocation to an account under the 2003 Deferred Compensation Plan, effective July 1, 2003, a copy of which is filed as Exhibit 10.18.3 to Coventry’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed on August 12, 2003, and the 2004 Mid-Term Executive Retention Program, effective July 1, 2004, a copy of which is filed as Exhibit 10.26 to Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005. The EPS goals for the 2004 and 2005 program years were met, and the three plan years all vested July 1, 2006. The accounts were paid in cash, equal to the June 30, 2006 stock value and investment value of the cash account as of that date. The following payouts were made on July 7, 2006:

Executive Officer	Payments in 2006
Dale B. Wolf, Chief Executive Officer	$ 6,730,375
Shawn M. Guertin, Executive Vice President, Chief Financial Officer, and Treasurer	$    949,499
Thomas P. McDonough, President	$ 6,376,064
Harvey C. DeMovick, Jr., Executive Vice President, Customer Service Operations, and Chief Information Officer	$ 2,405,521
Francis S. Soistman, Jr., Executive Vice President, Government & Individual Plans	$ 1,738,439

2006 Mid-Term Executive Retention Program

In addition to their base salaries and incentives, Coventry’s Chief Executive Officer, Chief Financial Officer, and three most highly compensated executive officers are also eligible to receive an annual cash and stock equivalent allocation to an account under the 2006 Mid-Term Executive Retention Program, effective July 1, 2006, a copy of which is filed as Exhibit 10.1 to Coventry’s Current Report on Form 8-K filed on May 24, 2006. The amount of the allocation is a percentage of base salary and incentive earned for the prior year and ranges from 0% to 55%, based on performance. Each account will fully vest on July 1, 2009 and will be paid out in cash, subject to the attainment of pre-

established performance criteria for each performance period. In the event the performance criteria are not met in any period, the award for that period is forfeited. For the twelve month period ended December 31, 2006, the performance criteria were based on the attainment of budgeted EPS. The performance criteria for the twelve months ended December 31, 2006 was met, and the participants were credited the following amounts in accounts under the 2006 Mid-Term Executive Retention Program:

Executive Officer	2006 Allocation	2006 Stock Equivalent Allocation
Dale B. Wolf, Chief Executive Officer	$ 1,147,500	$ 401,610
Shawn M. Guertin, Executive Vice President, Chief Financial Officer, and Treasurer	$    323,750	$ 113,302
Thomas P. McDonough, President	$    621,250	$ 217,448
Harvey C. DeMovick, Jr., Executive Vice President, Customer Service Operations, and Chief Information Officer	-0-	-0-
Francis S. Soistman, Jr., Executive Vice President, Government & Individual Plans	$    393,750	$ 137,804

Other Benefit Plans and Arrangements

In addition to their base salaries and incentives, Coventry’s Chief Executive Officer, Chief Financial Officer, and three most highly compensated executive officers are also eligible to:

• Participate in Coventry’s long-term incentive plan under its 2004 Incentive Plan, a copy of which is filed as Exhibit 10.17 to Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005, which can be in the form of stock options, stock appreciation rights, restricted stock, performance awards, other stock-based awards or cash; and

• Participate in Coventry’s 401(k) Restoration and Deferred Compensation Plan, as amended, a copy of which is filed as Exhibit 10.31 to Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed on March 16, 2005, Exhibit 10 to Coventry’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, filed on August 9, 2005, and Exhibit 10.29.3 to Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed herewith.

EX-10.28.3

Exhibit 10.28.3

THIRD AMENDMENT

TO THE

COVENTRY HEALTH CARE, INC.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

WHEREAS, Coventry Health Care, Inc. (the “Company”) maintains the Coventry Health Care, Inc. Supplemental Executive Retirement Plan (the “Plan”); and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company may amend the Plan at any time; and

WHEREAS, the Company wishes to amend the Plan, effective as provided below.

NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows, effective as provided below:

1.            The name of the Plan is changed to “The Coventry Health Care, Inc. 401(k) Restoration and Deferred Compensation Plan,” effective as of December 1, 2006.

2.            Article IX of the Plan is amended, effective December 22, 2006, to read as follows:

“ARTICLE IX.

AMENDMENT, MERGER AND TERMINATION OF PLAN

9.1 Amendment of Plan

The Corporation, by action of its Chief Executive Officer, may at any time amend the Plan in whole or in part, provided, however, that no amendment shall be effective to decrease or restrict any Deferred Compensation Account maintained pursuant to any existing Deferred Compensation Agreement under the Plan.

9.2 Merger of Plan

The Corporation, by action of its Chief Executive Officer, may at any time merge the Plan and its related Trust with another non-qualified plan maintained by the Employer or any member of a controlled group of corporations as defined in Code Section 1563 or a member of an affiliated service group as defined under Code Section 414(m).

9.3 Termination of Plan

The Corporation, by action of the Compensation Committee of the Board, may at any time terminate the Plan with respect to new deferral elections, as to any Eligible Employee or in its entirety if, in the judgment of the Compensation Committee of the Board, the tax, accounting, or other effect of the continuance of the Plan, or any potential payment thereunder would not be in the best interest of the Employer. If the Plan is terminated in its entirety or as to any Eligible Employee, each affected Participant shall be 100% vested in the value of his Deferred Compensation Account.

NY:1399107v2

Upon such termination, each Participant will receive the value of his Deferred Compensation Account in the form of a lump-sum payment to be made no later than 120 days following the termination date.”

3. Except as provided above, the Plan remains in full force and effect.

The Company has caused this amendment to the Plan to be executed by its duly authorized officer this 24^th day of January, 2007.

COVENTRY HEALTH CARE, INC.

By:   /s/ Dale B. Wolf  

Title:   Chief Executive Officer  

NY:1399107v2 - 2 -

EX-10.29

Exhibit 10.29

COVENTRY HEALTH CARE, INC.

RETIREMENT SAVINGS PLAN

Amended and Restated

Effective as of January 1, 2006

COVENTRY HEALTH CARE, INC.

RETIREMENT SAVINGS PLAN

TABLE OF CONTENTS

INTRODUCTION			1
ARTICLE 1 DEFINITIONS			2
	1.01	Account	2
	1.02	Account Participant	2
	1.03	“Actual Contribution Ratio”	2
	1.04	“Actual Deferral Ratio”	3
	1.05	“Affiliate”	3
	1.06	“Alternate Payee”	3
	1.07	“Annuity Contract”	3
	1.08	“Automatic Deferral Election”	3
	1.09	“Average Contribution Percentage”	4
	1.10	“Average Deferral Percentage”	4
	1.11	“Beneficiary”	4
	1.12	“Benefit Commencement Date”	5
	1.13	“Board”	5
	1.14	“Catch-Up Contributions”	5
	1.15	“Code”	5
	1.16	“Company”	5
	1.17	“Compensation”	6
	1.18	“Contributions”	6
	1.19	“Distributee”	6
	1.20	“Earned Income”	6
	1.21	“Elective Deferral Contributions”	7
	1.22	“Eligible Employee”	7
	1.23	“Eligible Retirement Plan”	7
	1.24	“Eligible Rollover Distribution”	7
	1.25	“Employee”	8
	1.26	“Employer”	8
	1.27	“Employer Contributions”	8
	1.28	“Employment Commencement Date”	9
	1.29	“ERISA”	9
	1.30	“Excess Aggregate Contributions”	9
	1.31	“Excess Contributions”	9
	1.32	“Excess Elective Deferrals”	9
	1.33	“FMLA Leave”	9
	1.34	“Forfeiture Date”	9
	1.35	“Highly Compensated Employee”	10
	1.36	“Hour of Service”	10
	1.37	“Inactive Participant”	10
	1.38	“Investment Fund”	10

- i -

	1.39	“Investment Manager”	11
	1.40	“Leased Employee”	11
	1.41	“Limitation Year”	12
	1.42	“Loan Administrator”	12
	1.43	“Named Fiduciary”	12
	1.44	“Non-highly Compensated Employee”	12
	1.45	“Normal Retirement Age”	12
	1.46	“Normal Retirement Date”	13
	1.47	“Participant”	13
	1.48	“Parental Absence”	13
	1.49	“Period of Military Duty”	13
	1.50	“Period of Service”	13
	1.51	“Period of Severance”	13
	1.52	“Plan”	13
	1.53	“Plan Administrator”	13
	1.54	“Plan Year”	14
	1.55	“Predecessor Employer”	14
	1.56	“Qualifying Employer Securities”	14
	1.57	“Qualifying Employer Securities Fund”	14
	1.58	“ Qualified Matching Contributions”	14
	1.59	“Qualified Nonelective Contributions”	14
	1.60	“Reemployment Commencement Date”	14
	1.61	“Regulation”	15
	1.62	“Rollover Contributions”	15
	1.63	“Self-employed Individual”	15
	1.64	“Severance from Service Date”	15
	1.65	“Totally and Permanently Disabled”	15
	1.66	“Trust Agreement”	15
	1.67	“Trust Fund or Fund”	16
	1.68	“Trustee”	16
	1.69	“Valuation Date”	16
	1.70	“Vesting Service”	16
	1.71	“Years of Service”	17
ARTICLE 2 PARTICIPATION			18
	2.01	Eligibility	18
	2.02	Commencement of Participation	18
	2.03	Change In Participation	18
	2.04	Termination of Participation	19
	2.05	Omission of Eligible Employee	19
ARTICLE 3 CONTRIBUTIONS			20
	3.01	Automatic Deferral Election	20
	3.02	Affirmative Election to make Elective Deferral Contributions	21

ii

	3.03	Catch-up Contributions	21
	3.04	Limitation on Elective Deferral Contributions	21
	3.05	Employer Matching Contributions	22
	3.06	Rollover Contributions	22
	3.07	Vesting	24
	3.08	Forfeitures	25
	3.09	Repayments	25
	3.10	Return of Contributions to Employer	26
	3.11	Veteran Rights	27
	3.12	Corrective Contributions	27
ARTICLE 4 LIMITATIONS ON CONTRIBUTIONS			28
	4.01	Dollar Limitation on Elective Deferral Contributions	28
	4.02	ADP Limitation on Elective Deferral Contributions	28
	4.03	ACP Limitation On Matching Contributions	33
	4.04	Limitation on Allocations	38
	4.05	Participants Not Covered Under Other Plans	39
	4.06	Participants Covered Under Other defined Contribution Plans	41
ARTICLE 5 INVESTMENT OF CONTRIBUTIONS			43
	5.01	Investment and Timing of Contributions	43
	5.02	Valuation of Funds/Qualifying Employer Securities	44
	5.03	Notice to Participants	46
ARTICLE 6 DISTRIBUTION OF BENEFITS			47
	6.01	Forms of Distribution	47
	6.02	Distribution Election Procedures	47
	6.03	Consent to Distribution	47
	6.04	Direct Rollover	48
	6.05	Timing of Distribution	48
	6.06	In-Service Withdrawals	50
	6.07	Hardship Withdrawals	50
	6.08	Loans	50
	6.09	Distributions Under Qualified Domestic Relations Orders	54
ARTICLE 7 DISTRIBUTION REQUIREMENTS			56
	7.01	General Rules	56
	7.02	Time and Manner of Distribution	56
	7.03	Required Minimum Distributions During Participant’s Lifetime	57
	7.04	Required Minimum Distributions After Participant’s Death	57
	7.05	Definitions	59
ARTICLE 8 GENERAL PROVISIONS			61
	8.01	Amendments	61

iii

	8.02	Mergers and Direct Transfers	61
	8.03	Termination of Plan	62
ARTICLE 9 ADMINISTRATION OF THE PLAN			64
	9.01	Administration	64
	9.02	Employers	64
	9.03	Plan Expenses	65
	9.04	Assignment and Levy	65
	9.05	Infancy or Incompetency	65
	9.06	Missing Persons	66
	9.07	Claim and Appeal Procedures	66
	9.08	Voting and Tender of Qualifying Employer Securities	68
ARTICLE 10 TOP HEAVY PROVISIONS			70
	10.01	Determination of Top-Heavy Status	70
	10.02	Top-Heavy Plan Definition and Ratio	70
	10.03	Determination Date	71
	10.04	Present Value of Accrued Benefits	71
	10.05	Adjustments to Present Value of Accrued Benefits	72
	10.06	Adjustments to Plan Provisions if Plan is Top-Heavy	72
	10.07	“Key Employee” and “Non-Key Employee” Defined	73
ARTICLE 11 MISCELLANEOUS			75
	11.01	Nonguarantee of Employment	75
	11.02	Titles and Headings	75
APPENDIX I –		FIRST HEALTH GROUP CORP. RETIREMENT
		SAVINGS PLAN PROTECTED BENEFITS	APP. I-1
APPENDIX II -		FIRST HEALTH PRIORITY SERVICES, INC. 401(K)
		PLAN PROTECTED BENEFITS	APP.II-1
ATTACHMENT A – Employers			ATT.A-1

iv

INTRODUCTION

Coventry Health Care, Inc. (the “Company”) established the Coventry Health Care, Inc. Retirement Savings Plan (the “Plan”), effective as of April 1, 1998, for the benefit of eligible employees. The Plan was amended and restated for the Uruguay Round Agreements Act, General Agreement on Tariffs and Trade (“GATT”), the Uniformed Services Employment and Re-employment Rights Act of 1994 (“USERRA”), the Small Business Job Protection Act of 1996 (“SBJPA”) and the Tax Payer Relief Act of 1997 (“TRA ‘97”), collectively referred to as “GUST”, effective as of April 1, 1998. The Plan was further amended for the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), effective as of January 1, 2002, and amended thereafter to reflect certain regulatory provisions and design-based modifications.

Effective as of January 1, 2006, the Plan is hereby amended and restated in its entirety. It is intended that the Plan qualify under the Internal Revenue Code of 1986 as a profit sharing plan that includes a qualified cash or deferred arrangement, and shall be interpreted in accordance with such legal requirements. Employers agree to operate the Plan according to the terms, provisions and conditions set forth in this document.

ARTICLE 1

DEFINITIONS

Words and phrases defined in this Definitions Section shall have that defined meaning when used in this Plan, unless the context clearly indicates otherwise.

1.01	“Account” means, with respect to any Participant, the value of his or her undivided share of the Trust Fund which is composed of sub-accounts including, but not limited to, those for one or more of the following types of contributions and any earnings or appreciation thereon: (i) Elective Deferral Contributions; (ii) Matching Contributions; (iii) Qualified Nonelective Contributions; (iv) Qualified Matching Contributions; and (v) Rollover Contributions.
1.02	“Active Participant” means a Participant whose Compensation is currently being reduced for his or her Elective Deferral Contributions to the Plan.
1.03	“Actual Contribution Ratio” means for each Eligible Employee who has met the eligibility requirements of Section 2.01, for the applicable Plan Year, the sum of his or her: (i) Matching Contributions (other than Matching Contributions made on account of additional Elective Deferral Contributions made pursuant to Section 3.11 and Section 414(u) of the Code), and (ii) any Qualified Nonelective Contributions and Elective Deferral Contributions treated as Matching Contributions for that Plan Year, divided by the Employee’s Compensation for that Plan Year (provided the Average Deferral Percentage Test of Article 4 is met before the Average Contribution Percentage Test of Article 4 is met and continues to be met following the exclusion of those contributions that are used to meet such Average Contribution Percentage Test), and calculated to the nearest one-hundredth of one percent. If a Highly Compensated Employee is eligible to participate in any other qualified retirement plan of an Employer or Affiliate to which matching contributions and/or after-tax contributions are made, the Actual Contribution Ratio of such Highly Compensated Employee shall be calculated in accordance with, and to the extent required by, Regulations issued under Section 401(m) of the Code, by treating the Plan and such other qualified retirement plan or plans as a single plan. The Average Contribution Percentage for Highly Compensated Employees shall be adjusted to reflect the Actual Contribution Ratios so calculated for such Highly Compensated Employees.

2

1.04	“Actual Deferral Ratio” means for each Eligible Employee who has met the eligibility requirements of Section 2.01, for the applicable Plan Year, the sum of his or her: (i) Elective Deferral Contributions; and (ii) amounts treated as Elective Deferral Contributions (other than Catch-Up Contributions made pursuant to Section 3.03 and additional Elective Deferral Contributions made pursuant to Section 3.11 and Section 414(u) of the Code) for that Plan Year (but excluding Elective Deferral Contributions that are taken into account in determining the Eligible Employee’s Actual Contribution Ratio provided theAverage Deferral Percentage Test of Article 4 is met both with and without the exclusion of those contributions), divided by the Employee’s Compensation for that Plan Year, and calculated to the nearest one-hundredth of one percent. If a Highly Compensated Employee is eligible to participate in any other cash or deferred arrangement (within the meaning of Section 401(k) of the Code) of an Employer or Affiliate, the Actual Deferral Ratio for such Highly Compensated Employee shall be calculated in accordance with, and to the extent required by, Regulations issued under Section 401(k) of the Code, by treating this Plan and such other cash or deferred arrangement(s) as a single plan. The Average Deferral Percentage for Highly Compensated Employees shall be adjusted to reflect the Actual Deferral Ratio so calculated for such Highly Compensated Employees.
1.05	“Affiliate” means: (i) any trade or business that is a member of a controlled group of corporations (as defined in section 414(b) of the Code) that includes the Company; (ii) any trade of business (whether or not incorporated) that is under common control (as defined in Section 414(c) of the Code) with the Company; (iii) any organization (whether or not incorporated) that is a member of any affiliated service group (as defined in Section 414(m) of the Code) that includes the Company; and (iv) any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code.
1.06	“Alternate Payee” means any spouse, former spouse, child, or other dependent of a Participant who is recognized by a qualified domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant.
1.07	“Annuity Contract” means an annuity contract or contracts into which an Employer may enter with an Insurer for guaranteed benefits, for the investment of Contributions in separate accounts, and for the payment of benefits under this Plan.
1.08	“Automatic Deferral Election” means the automatic Elective Deferral Contribution election set forth in Section 3.01.

3

1.09	“Average Contribution Percentage” means the average (expressed as a percentage to the nearest one-hundredth of one percent) of the Actual Contribution Ratios of: (i) the Eligible Employees who are Highly Compensated Employees who met the eligibility requirements of Section 2.01 as a group for the current Plan Year; and (ii) the Eligible Employees who are Non-Highly Compensated Employees who met the eligibility requirements of Section 2.01 as a group for the preceding Plan Year. For purposes of the preceding sentence, the determination of the preceding Plan Year’s Average Contribution Percentage for the above group of Non-Highly Compensated Employees is made without regard to any such individual’s status in the current Plan Year. The Plan Administrator may take into account, in computing the Average Contribution Percentages, Elective Deferral Contributions as provided for in Regulation Section 1.401(m)-2(a)(6).
1.10	“Average Deferral Percentage” means the average (expressed as a percentage to the nearest one-hundredth of one percent) of the Actual Deferral Ratios of: (i) the Eligible Employees who are Highly Compensated Employees who met the eligibility requirements of Section 2.01 as a group for the current Plan Year; and (ii) the Non-Highly Compensated Employees who met the eligibility requirements of Section 2.01 as a group for the preceding Plan Year. For purposes of the preceding sentence, the determination of the preceding Plan Year’s Average Deferral Percentage for the above group of Non-Highly Compensated Employees is made without regard to any such individual’s status in the current Plan Year. The Plan Administrator may take into account in computing the Average Deferral Percentages, Qualified Nonelective Contributions and Qualified Matching Contributions meeting the requirements of Regulation Section 1.401(k)-6, but to the extent such contributions are so taken into account, such contributions shall not be taken into account in determining the Average Contribution Percentage.
1.11	“Beneficiary” means the person or persons (including a trust, or the estate of the Participant) designated by a Participant to receive any benefit under the Plan when the Participant dies; provided, however, that for the purpose of distributing any death benefit before the Participant’s Retirement Date, the Beneficiary of a married Participant shall automatically be his or her spouse unless the spouse consents to the designation of someone else as Beneficiary in a document filed with an Employer that acknowledges the effect of such consent and is witnessed by a Plan representative or a notary public. Unless the consent of the spouse expressly permits designations by the Participant without a requirement of further consent by the spouse, the spouse’s consent must be limited to the Beneficiary, class of Beneficiaries, or contingent Beneficiary named in the election. The Spouse’s consent shall not be required if it is established to the satisfaction of the Plan Administrator that the consent cannot be obtained because there is no spouse, the spouse cannot be located or because of such other circumstance as may be prescribed by regulations issued by the Secretary of the Treasury. In addition to designating a primary Beneficiary, a Participant may designate a secondary Beneficiary to receive the death benefit in the event the primary Beneficiary does not survive. If there is no Beneficiary named or surviving when the Participant dies, the Participant’s Beneficiary shall be the Participant’s surviving spouse, or where there is no surviving spouse, the Participant’s estate.

4

1.12	“Benefit Commencement Date” means the first day of the first period for which an amount is payable as an annuity or any other form.
1.13	“Board” means the board of directors of the Company.
1.14	“Catch-Up Contributions” means additional Elective Deferral Contributions as set forth in Section 3.03.
1.15	“Code” means the Internal Revenue Code of 1986, as amended from time to time, and Regulations thereunder. References to any section of the Code shall be to that section as it may be renumbered, amended, supplemented or reenacted.
1.16	“Company” means Coventry Health Care, Inc.

5

1.17	“Compensation” means, except for purposes of Article 4, “Limitations on Contributions,” the total wages within the meaning of Code Section 3401(a) and all other payments of compensation to an Employee by an Employer (in the course of an Employer’s trade or business) for which an Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3), and 6052. Compensation shall include elective contributions. For this purpose, elective contributions are amounts contributed by an Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Employee under Code Section 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), or 403(b). Amounts under Code Section 125 include any amounts not available to an Employee in cash in lieu of group health coverage under a Code Section 125 arrangement because the Employee is unable to certify that he or she has other health coverage, providedthat the Employer does not otherwise request or collect information regarding the Employee’s other health coverage as part of the enrollment process for the health plan. Compensation shall not include bonuses, non cash compensation and post-employment severance pay. For any Self-employed Individual, Compensation means Earned Income. For Plan Years beginning on or after January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any determination period shall not exceed $200,000, as adjusted for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year.
1.18	“Contributions” means, with respect to any Participant, one or more of the following types of contributions:
		(a)	“Elective Deferral Contributions” made, pursuant to Sections 3.01, 3.02 or 3.03, by or on behalf of a Participant;
		(b)	“Matching Contributions” made, pursuant to Section 3.05, by an Employer with respect to a Participant who makes Elective Deferral Contributions;
		(c)	“Qualified Nonelective Contributions” and “Qualified Matching Contributions” made, pursuant to Article 4, by an Employer with respect to a Participant that are 100% Vested when made and meet the additional requirements as set forth in Regulation Section 1.401(k)-6; and
		(d)	“Rollover Contributions” consisting of contributions a Participant has elected to transfer to this Plan pursuant to Section 3.06.
1.19	“Distributee” means an Employee or former Employee. In addition, the Employee’s (or former Employee’s) surviving spouse and the Employee’s (or former Employee’s) spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are Distributees with regard to the interest of the spouse or former spouse.
1.20	“Earned Income” means, for a Self-employed Individual, net earnings from self-employment in the trade or business for which the Plan is established if such Self-employed Individual’s personal services are a material income producing factor for that trade or business. Net earnings shall be without regard to items not included in gross income and the deductions properly allocable to or chargeable against such items. Net earnings shall be reduced for Employer Contributions to the Employer’s qualified retirement plans to the extent deductible under Code Section 404.

6

1.21	“Elective Deferral Contributions” means any Employer contributions made to the Plan at the election of the Participant in lieu of cash compensation. Elective Deferral Contributions shall not include any deferrals properly distributed as excess annual additions.
1.22	“Eligible Employee” means an Employee employed by an Employer who has completed one Hour of Service, except that Eligible Employee does not include any individual who is:
		(a)	included in a unit of Employees covered by a collective bargaining agreement, unless such collective bargaining agreement provides for their participation;
		(b)	a provider of services to an Employer and/or an Affiliate pursuant to a contractual arrangement, either with that person or with a third party, other than one specifically providing for an employment relationship with an Employer; or
		(c)	a Leased Employee.
	If any person excluded as an Eligible Employee pursuant to the preceding paragraph (b) shall be determined by a court, federal, state or local regulatory or administrative authority to have provided services as a common law employee of an Employer, such determination shall not alter such person’s ineligibility to participate in the Plan.
	If an Employer reclassifies an individual as an Eligible Employee, he or she shall be an Eligible Employee prospectively from the effective date of that reclassification only, and then only if he or she otherwise satisfies the requirements of this Section. The decision of the Plan Administrator whether an Employee is an Eligible Employee shall be, in all respects, final and conclusive.
1.23	“Eligible Retirement Plan” means an individual retirement account described in Code Section 408(a); an individual retirement annuity described in Code Section 408(b) (other than an endowment contract); an annuity plan described in Code Section 403(a); an annuity contract described in Code Section 403(b); an eligible plan under Code Section 457(b) which is maintained by a state or political subdivision of a state and agrees to separately account for amounts transferred into such plan from this Plan; or a qualified trust described in Code Section 401(a) which is exempt from tax under Code Section 501(a).
1.24	“Eligible Rollover Distribution” means any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution excludes:

7

		(a)	any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated Beneficiary, or for a specified period of ten years or more;
		(b)	any distribution to the extent such distribution is a required minimum distribution under Code Section 401(a)(9);
		(c)	any amount that is distributed on account of hardship;
		(d)	the portion of any other distribution(s) that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer securities); and
		(e)	any other distribution(s) reasonably expected to total less than $200 during a year.
	For purposes of Section 3.06, a portion of a distribution shall not fail to be an Eligible Rollover Distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or individual retirement annuity described in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section 401(a) or 403(a) that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.
1.25	“Employee” means an individual who is employed by an Employer or any other entity required to be aggregated with an Employer under Code Sections 414(b), (c) or (m). The term Employee also shall include any Leased Employee deemed to be an employee of any Employer as provided in Code Section 414(n) or (o).
1.26	“Employer” means the Company or any Affiliate that has adopted this Plan. A list of Employers is set forth in Attachment A.
1.27	“Employer Contributions” means Matching Contributions, Qualified Nonelective Contributions or Qualified Matching Contributions made by an Employer with respect to a Participant, and corrective contributions, if any, made pursuant to Section 3.12.

8

1.28	“Employment Commencement Date” means the first day on which an Employee first completes an Hour of Service with an Employer or an Affiliate.
1.29	“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and Regulations thereunder. References to any section of ERISA shall be to that section as it may be renumbered, amended, supplemented or reenacted.
1.30	“Excess Aggregate Contributions” means, for a Plan Year, the excess of the aggregate amount of Matching Contributions actually taken into account in computing the Actual Contribution Ratio of a Highly Compensated Employee over the maximum of such contributions allowable under the Average Contribution Percentage Test of Article 4.
1.31	“Excess Contributions” means, for a Plan Year, the excess of the Elective Deferral Contributions actually taken into account in computing the Actual Deferral Ratio of a Highly Compensated Employee over the maximum of such contributions allowable under the Average Deferral Percentage Test of Article 4.
1.32	“Excess Elective Deferrals” means, for a calendar year, those Elective Deferral Contributions that exceed the dollar limitation under Code Section 402(g) (including, if applicable, the dollar limitation on Catch-up Contributions defined in Code Section 414(v)) for such year.
1.33	“FMLA Leave” means a leave of absence pursuant to the provisions of the Family and Medical Leave Act of 1993, as amended from time to time, and Regulations thereunder. References to any section of the FMLA shall be to that section as it may be renumbered, amended, supplemented or reenacted.
1.34	“Forfeiture Date” means the date on which a Participant’s nonvested Account balance is forfeited in accordance with Section 3.08(a).

9

1.35		“Highly Compensated Employee” means any active or former Employee who is a “highly compensated active Employee” or a “highly compensated former Employee” as determined below and in accordance with Code Section 414(q) and the Regulations thereunder.
			(a)	A “highly compensated active Employee” is an Employee who performs service for an Employer or an Affiliate during the Plan Year and who:
				(i)	was a 5 percent owner at any time during the current Plan Year or the preceding Plan Year; or
				(ii)	for the preceding Plan Year had Compensation from an Employer or an Affiliate in excess of $80,000 and, if the Company so elects, was in the top paid group for the preceding year. The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d).
			(b)	A “highly compensated former Employee” is any Employee who separated from service (or was deemed to have separated) prior to the current Plan Year, performs no service for an Employer or an Affiliate during the current Plan Year, and was a highly compensated active Employee for either the separation year or any Plan Year ending on or after the Employee’s 55th birthday.
			(c)	“Compensation” for purposes of this Section shall mean compensation as defined in Code Section 415(c)(3).
1.36	“Hour of Service” means each hour for which an Employee is paid, or entitled to payment, for performing duties for an Employer.
	Hours of Service shall be credited for employment with any other entity required to be aggregated with the Company under Code Sections 414(b), (c), (m) or (o) and the Regulations thereunder for purposes of eligibility and vesting. Hours of Service also shall be credited for any individual considered an Employee for purposes of this Plan pursuant to Code Section 414(n) or Code Section 414(o) and the Regulations thereunder.
1.37	“Inactive Participant” means a Participant for whom no Elective Deferral Contributions are currently being made.
1.38	“Investment Fund” means one or more of the funds which may from time to time be made available for investment of a Participant’s Account pursuant to Article 5.

10

	The Investment Fund shall be valued at current fair market value as of the applicable Valuation Date. The valuation shall take into consideration investment earnings credited, expenses charged, distributions made, and changes in the values of the assets held in the Investment Fund.
	The Investment Fund shall be allocated at all times to Participants, except as otherwise expressly provided in the Plan. The Account of a Participant shall be credited or debited with its share of the gains and losses of the Investment Fund. That part of a Participant’s Account invested in a funding arrangement which establishes one or more accounts or investment vehicles for such Participant thereunder shall be credited or debited with the gain or loss from such accounts or investment vehicles. The part of a Participant’s Account which is invested in other funding arrangements shall be credited or debited with a proportionate share of the gain or loss of such investments. The share shall be determined by multiplying the gain or loss of the investment by the ratio of the part of the Participant’s Account invested in such funding arrangement to the total of the Investment Fund invested in such funding arrangement.
1.39	“Investment Manager” means any fiduciary appointed pursuant to Article 5 (other than the Named Fiduciary):
		(a)	who has the power to manage, acquire, or dispose of any assets of the Plan;
		(b)	who: (i) is registered as an investment adviser under the Investment Advisers Act of 1940; (ii) is not registered as an investment adviser under such Act by reason of paragraph (1) of section 203A(a) of such Act, is registered as an investment adviser under the laws of the state (referred to in such paragraph (1)) in which it maintains its principal office and place of business, and, at the time it last filed the registration form most recently filed by it with such state in order to maintain its registration under the laws of such state, also filed a copy of such form with the Secretary of Labor, (iii) is a bank, as defined in that Act; or (iv) is an insurance company qualified to perform services described in subparagraph (a) above under the laws of more than one state; and
		(c)	who has acknowledged in writing being a fiduciary with respect to the Plan.
1.40	“Leased Employee” means:
		(a)	any person who performs services for an Employer (other than as an Employee):
			(i)	the services are provided pursuant to an agreement between an Employer and any other person (“Leasing Organization”);

11

			(ii)		such person has performed services for such Employer (including services performed for a related person in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year; and
			(iii)		such services are performed under primary direction or control of an Employer.
			Contributions or benefits provided by the Leasing Organization to a Leased Employee, which are attributable to service performed for an Employer, shall be treated as provided by an Employer.
		(b)	A Leased Employee shall not be considered an Employee of an Employer if:
			(i)	such person is covered by a money purchase pension plan providing a nonintegrated Employer contribution rate of at least 10 percent of compensation, as defined in Code Section 415(c)(3); and
			(ii)	Leased Employees do not constitute more than 20 percent of the recipient’s nonhighly compensated work force.
1.41	“Limitation Year” means the Plan Year. If the Limitation Year is amended to a different consecutive 12 month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made.
1.42	“Loan Administrator” means the person or entity appointed by the Plan Administrator to administer the loan program hereunder. If no such person or entity is appointed, the Loan Administrator will be the Plan Administrator.
1.43	“Named Fiduciary” means the person or persons who have authority to control and manage the operation of the Plan. The Named Fiduciary is the 401(k) Plan Investment Committee as designated by the Board.
1.44	“Non-highly Compensated Employee” means an Employee who is not a Highly Compensated Employee.
1.45	“Normal Retirement Age” means age 65.

12

1.46	“Normal Retirement Date” means first day of the month on or after the date the Participant reaches his or her Normal Retirement Age.
1.47	“Participant” means any person included in the membership of this Plan as provided in Article 2, including an Active Participant or an Inactive Participant.
1.48	“Parental Absence” means an Employee’s absence from work: (i) by reason of pregnancy of the Employee; (ii) by reason of birth of a child of the Employee; (iii) by reason of the placement of a child with the Employee in connection with adoption of such child by such Employee; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.
1.49	“Period of Military Duty” means the period of time from the date the Employee was first absent from active work for an Employer because of qualified military service as defined in Code Section 414(u)(5) and Chapter 43 of Title 38 of the U.S. Code to the date the Employee was reemployed.
1.50	“Period of Service” means a period of time beginning on an Employee’s Employment Commencement Date or Reemployment Commencement Date (whichever applies) and ending on his or her Severance from Service Date.
1.51	“Period of Severance” means a period of time beginning on an Employee’s Severance from Service Date and ending on the date such Employee again performs an Hour of Service for an Employer or an Affiliate provided, however, that no Period of Severance shall be deemed to have been incurred by reason of such Employee’s Period of Military Duty.
1.52	“Plan” means the Coventry Health Care, Inc. Retirement Savings Plan set forth herein and as it may be amended from time to time.
1.53	“Plan Administrator” means the person or persons appointed by the Board, or if not appointed by the Board, appointed by the Named Fiduciary, to administer the Plan.

13

1.54	“Plan Year” means the calendar year.
1.55	“Predecessor Employer” means a company of which an Employer was once a part (e.g., due to a spinoff or change of corporate status) or an entity (including a division or an operation of an entity) absorbed by an Employer because of a merger or acquisition (stock or asset), which maintained this Plan.
1.56	“Qualifying Employer Securities” means any securities which are issued by an Employer or any Affiliate that meet the requirements of Code Section 409(l) and ERISA Section 407(d)(5). This also shall include any securities that satisfied the requirements of the definition when those securities were assigned to the Plan.
1.57	“Qualifying Employer Securities Fund” means that part of the assets of the Trust Fund that are designated to be held primarily or exclusively in Qualifying Employer Securities for the purpose of providing benefits for Participants.
1.58	“Qualified Matching Contributions” means matching Employer Contributions, other than Matching Contributions or Qualified Nonelective Contributions, that are 100% vested when made and meet the additional requirements as set forth in Regulation Section 1.401(k)-6.
1.59	“Qualified Nonelective Contributions” means nonelective Employer Contributions, other than Matching Contributions or Qualified Matching Contributions, that are 100% vested when made and meet the additional requirements as set forth in Regulation Section 1.401(k)-6.
1.60	“Reemployment Commencement Date” means the first date an Employee performs an Hour of Service for an Employer following a Period of Severance.

14

1.61	“Regulation” means any regulation, ruling or other interpretation, validly promulgated by the U.S. Department of Treasury, U.S. Department of Labor, or other federal agency as the case may be, and in effect at the time in question. Reference to a Regulation or section thereof includes that Regulation or section and any comparable Regulation or section that amends, supplements or supersedes that Regulation or section.
1.62	“Rollover Contributions” means the Rollover Contributions which are made by an Eligible Employee or an Inactive Participant according to the provisions of Section 3.06.
1.63	“Self-employed Individual” means, with respect to any fiscal year, an individual who has Earned Income for the fiscal year (or would have Earned Income but for the fact the trade or business for which this Plan is established did not have net profits for such fiscal year.
1.64	“Severance from Service Date” means the earlier of:
		(a)	the date the Employee resigns, retires, dies, or is discharged; or
		(b)	the first anniversary of the first date the Employee begins a one year absence from service (with or without pay) for any reason.
	Solely to determine whether a one-year Period of Severance has occurred for eligibility or vesting purposes for an Employee who is absent from service beyond the first anniversary of the first day of a Parental Absence, Severance from Service Date is the second anniversary of the first day of the Parental Absence. The period between the first and second anniversaries of the first day of the Parental Absence is not a Period of Service and is not a Period of Severance.
1.65	“Totally and Permanently Disabled” means that the Participant has either qualified for benefits under the Employer’s long-term disability plan or has been determined to be “totally disabled” under the federal Social Security Act. The determination under the Employer’s long-term disability plan or the federal Social Security Act may be relied upon by the Plan Administrator for purposes of this Plan.
1.66	“Trust Agreement” means the agreement between the Company and Trustee established for the purpose of holding and distributing the Trust Fund under the provisions of the Plan.

15

1.67	“Trust Fund or Fund” means the total funds held under the Trust Agreement for the purpose of providing benefits for Participants. These funds result from Contributions made under the Plan which are forwarded to the Trustee to be deposited in the Trust Fund, and earnings thereon.
1.68	“Trustee” means the trustee or trustees under the Trust Agreement. The term Trustee as it is used in this Plan is deemed to include the plural unless the context clearly indicates otherwise.
1.69	“Valuation Date” means the date on which the value of the assets of the Trust Fund is determined. The value of each Account which is maintained under this Plan shall be determined on the Valuation Date. In each Plan Year, the Valuation Date shall be the last day of the Plan Year. At the discretion of the Named Fiduciary, Plan Administrator or Insurer (whichever applies), assets of the Trust Fund may be valued more frequently. These dates also shall be Valuation Dates.
1.70	“Vesting Service” means an Employee’s Period of Service, expressed as years and fractional parts of a year (to four decimal places) on the basis that 365 days equals one year, measured from the Employee’s Employment Commencement Date to the Employee’s most recent Severance from Service Date, adjusted as follows:
		(a)	Reduced by any Period of Severance that occurred prior to the Employee’s most recent Severance from Service Date, unless such Period of Severance is included under the service spanning rule set forth in (e) below.
		(b)	To include an Employee’s service with a Predecessor Employer that did not maintain this Plan. This service includes service performed while a proprietor or partner.
		(c)	To include service with an entity while that entity was an Affiliate, to the extent it has not already been credited.
		(d)	To include an Employee’s Period of Military Duty to the extent it has not already been credited.
		(e)	To include a Period of Severance under either of the following conditions (service spanning rule):
			(i)	the Period of Severance immediately follows a period during which an Employee is not absent from work and ends within 12 months; or

16

		(ii)	the Period of Severance immediately follows a period during which an Employee is absent from work for any reason other than quitting, being discharged, or retiring (such as a leave of absence or layoff) and ends within 12 months of the date he or she was first absent.
	If an Employee has more than one Period of Service or if all or a part of a Period of Service is not counted, his or her Vesting Service shall be determined by adjusting his or her Employment Commencement Date so that he or she has one continuous period of Vesting Service equal to the aggregate of all his or her countable Periods of Service.
1.71	“Years of Service” means an Employee’s Vesting Service disregarding any modifications which exclude service.

17

ARTICLE 2

PARTICIPATION

2.01 Eligibility

An Employee employed by an Employer shall become an Eligible Employee upon the completion of one Hour of Service.

2.02 Commencement of Participation

An Eligible Employee shall become an Active Participant in the Plan upon making Elective Deferral Contributions to the Plan pursuant to the Plan’s Automatic or Affirmative Elective Deferral Contribution provisions, as set forth in Article 3.

2.03 Change In Participation

(a) Change from Active Participant to Inactive Participant Status: If an Active Participant ceases to be an Eligible Employee because of a change in employment status including but not limited to a severance of employment or a transfer to the employ of an Affiliate that is not an Employer, or if he or she elects to discontinue making any Elective Deferral Contributions, he or she shall become an Inactive Participant, and the following shall apply:

(i) An Active Participant shall become an Inactive Participant on the date indicated in (A) or (B) below, as applicable:

(A) An Active Participant who ceases to be an Eligible Employee because of a change in his or her employment status shall become an Inactive Participant as of the date of his or her change in status.

(B) An Active Participant who elects to discontinue making any Elective Deferral Contributions shall become an Inactive Participant as soon as practicable following the effective date of the election.

(ii) An Inactive Participant’s Account shall continue to be revalued. An Inactive Participant shall not be eligible to make any Elective Deferral Contributions or to receive Matching Contributions for as long as he or she remains an Inactive Participant, other than any Matching Contributions due, if any, for the Plan Year in which the Participant became an Inactive Participant.

(iii) An Inactive Participant shall have the same rights as an Active Participant to make any election hereunder.

(iv) When an Inactive Participant’s employment terminates for any reason, he or she (or in the event of his or her death, his or her Beneficiary) shall be

18

entitled to the benefits provided under the applicable provisions of this Plan.

(v) Notwithstanding any provision in this Section to the contrary, except as otherwise noted in this Plan or as required by law, any Inactive Participant who is not an Employee on the effective date of this restatement shall be entitled to benefits determined according to the provisions of the prior document. Such individual shall become subject to this restated Plan document as of his or her Reemployment Commencement Date, unless such reemployment is as a Leased Employee.

(b) Return to Active Participant Status: A Participant who became an Inactive Participant as a result of a change in employment status shall be eligible to become an Active Participant as of any payroll period following the date on which he or she again becomes an Eligible Employee. An Inactive Participant who elected to discontinue making any Elective Deferral Contributions, or who returns from a Period of Military Duty or FMLA Leave, may resume making Elective Deferral Contributions as of any subsequent payroll period, if such Participant is an Eligible Employee as of such date.

2.04 Termination of Participation

A Participant shall cease to participate in the Plan on the date he or she is no longer an Eligible Employee and his or her account balance is zero.

2.05 Omission of Eligible Employee

If, in any Plan Year, any Eligible Employee who should be included as an Active Participant in the Plan is erroneously omitted, an Employer shall make a corrective contribution with respect to the omitted Employee as required by applicable law or Regulation.

19

ARTICLE 3

CONTRIBUTIONS

3.01 Automatic Deferral Election

(a) Automatic Elective Deferral Contributions: The Plan provides for an automatic default election to make Elective Deferral Contributions.

(i) The Automatic Deferral Election shall apply when an Eligible Employee first becomes eligible to make Elective Deferral Contributions (or again becomes eligible after a period during which he or she was not an Active Participant, e.g., during a leave of absence or during a suspension on account of a hardship distribution), unless and until he or she affirmatively elects to modify the Automatic Deferral Election.

(ii) The Automatic Deferral Election provides for an Elective Deferral Contribution equal to 6% of Compensation per pay period that will be allocated to a Participant’s Elective Deferral Contribution Account.

(iii) The Eligible Employee shall be provided a notice that explains the Automatic Deferral Election and his or her right to make an affirmative election to change the Automatic Deferral Election in accordance with Section 3.01(b). The notice shall include the procedure for exercising those rights and the timing for implementing any such election.

(iv) If a Participant for whom an Automatic Deferral Election is in effect does not direct the investment of such contributions, the automatic Elective Deferral Contributions shall be invested pursuant to the direction of the Named Fiduciary. A Participant may change the manner in which his or her Elective Deferral Contributions are invested at any time in accordance with the provisions of Article 5.

(b) Modifying the Automatic Deferral Election: A Participant may change the Automatic Deferral Election by affirmatively electing to:

(i) make Elective Deferral Contributions at a percentage of Compensation that is other than the percentage specified in Section 3.01(a)(ii); or

(ii) make no Elective Deferral Contributions.

If the Participant elects to contribute a percentage of Compensation other than the percentage provided for under the Automatic Deferral Election, the percentage selected must comply with any other applicable limitations under the Plan.

(c) Annual Notice of Automatic Deferral Election: At least thirty (30) days, but not more than ninety (90) days, before the beginning of each Plan Year, each Active Participant shall be provided a notice that explains the Automatic Deferral Election and his or her right to affirmatively modify the Automatic Deferral

20

Election. The notice shall include the procedure for exercising that right and the timing for implementing any such election.

3.02 Affirmative Election to make Elective Deferral Contributions

(a) Elective Deferral Contribution Affirmative Election: Subject to the limitations of Article 4, each Participant may elect, through payroll deduction, to have his or her Employer make Elective Deferral Contributions to the Plan on his or her behalf in an amount from 1% to 75% of the Compensation that would otherwise be payable to him or her each payroll period. Any election made by a Participant to start contributions, or to change the percentage of his or her Elective Deferral Contributions, shall become effective as soon as practicable after the date such election is filed with the Plan Administrator, providing that the Participant is an Eligible Employee on such date. A Participant’s Elective Deferral Contributions shall be allocated to his or her Elective Deferral Contribution Account. If a Participant who affirmatively elects to make Elective Deferral Contributions does not direct the investment of such contributions, the Elective Deferral Contributions shall be invested pursuant to the direction of the Named Fiduciary. A Participant may change the manner in which his or her Elective Deferral Contributions are invested at any time in accordance with the provisions of Article 5.

(b) Election to Discontinue Elective Deferral Contributions: A Participant may elect to discontinue his or her Elective Deferral Contributions at any time. Such election shall be effective as soon as practicable following the date the election is filed with the Plan Administrator.

(c) Modification in Contributions to Comply with Limitations: Notwithstanding the foregoing, during any Plan Year, the Plan Administrator may require a Participant to decrease or suspend his or her Elective Deferral Contributions to the extent necessary to comply with the limitations of Article 4 for that Plan Year.

3.03 Catch-Up Contributions

In addition to Elective Deferral Contributions otherwise permitted to be made in accordance with the terms of this Article 3, all Eligible Employees who will have attained age 50 before the close of the Plan Year shall be eligible to make Catch-Up Contributions in accordance with, and subject to, the limitations of Code Section 414(v). Catch-Up Contributions for a Participant for a Plan Year may not exceed the dollar limit on Catch-Up Contributions under Code Section 414(v)(2)(B)(i) for the Plan Year, as adjusted by the Secretary of the Treasury for cost-of-living increases. Catch-Up Contributions shall not be taken into account for the purposes of Section 3.05, or for the limitations in Section 3.04 and Article 4.

3.04 Limitation on Elective Deferral Contributions

No Participant shall be permitted to make Elective Deferral Contributions under this Plan, or any other qualified plan, during any taxable year in excess of the dollar limitation

21

contained in Code Section 402(g) in effect for such taxable year, except to the extent such Participant is eligible to make catch-up contributions pursuant to Section 3.03 above.

3.05 Employer Matching Contributions

(a) Employer Matching Contributions: An Employer shall make Matching Contributions in an amount equal to 100% of Elective Deferral Contributions which are not over 3% of Compensation, plus 50% of Elective Deferral Contributions which are in excess of 3% of Compensation but are not over 6% of Compensation, to the extent such Elective Deferral Contributions do not exceed the applicable limits under Code Sections 401(a)(17), 402(g) or 415(c). In accordance with Article 4, Employer Matching Contributions shall not be made on Excess Elective Deferrals.

(b) Pay Period Calculation: Matching Contributions shall be calculated based on Elective Deferral Contributions and Compensation for a pay period. Matching Contributions are made on a pay period basis for all persons who were Active Participants at any time during that pay period. Matching Contributions are subject to vesting as set forth in Section 3.07 below.

(c) Match in Qualifying Employer Securities: Notwithstanding any provision of Article 5 to the contrary, an Employer may make all or any portion of the Matching Contributions, which are to be invested in Qualifying Employer Securities, to the Trustee in the form of Qualifying Employer Securities. Effective as of January 1, 2004, only Participants who have completed at least three (3) Years of Service with an Employer may divest themselves of any portion, or all, of the Qualifying Employer Securities held in their Matching Contribution sub-account under the Plan. Notwithstanding the preceding sentence, effective December 1, 2006, all Participants may divest themselves of any portion, or all, of the Qualifying Employer Securities held in their Matching Contribution sub-accounts under the Plan. Participants who are subject to Section 16 of the Securities Exchange Act of 1934, will need to obtain approval from the Company’s legal department before the divestiture of any Qualifying Employer Securities is processed, and all Participants shall be subject to such securities law compliance procedures as the Company shall determine.

3.06 Rollover Contributions

The Plan will accept Participant Rollover Contributions and/or direct rollovers (including a rollover contribution and/or direct rollover received by the Eligible Employee as a surviving spouse, or a spouse or former spouse who is an alternate payee under a qualified domestic relations order) of distributions from the types of plans specified below.

(a) Direct Rollovers: The Plan will accept a direct rollover of an Eligible Rollover Distribution from:

22

(i) a qualified plan described in Code Section 401(a) or 403(a), excluding after-tax employee contributions.

(ii) an annuity contract described in Code Section 403(b), excluding after-tax employee contributions.

(iii) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, excluding after-tax employee contributions.

(b) Participant Rollover Contributions from Other Plans: The Plan will accept a Participant contribution of an Eligible Rollover Distribution from:

(i) a qualified plan described in Code Section 401(a) or 403(a), excluding after-tax employee contributions.

(ii) an annuity contract described in Code Section 403(b).

(iii) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state of political subdivision of a state.

(c) Participant Rollover Contributions from IRAs: The Plan will not accept a Participant Rollover Contribution or the portion of a distribution from an individual retirement account or individual retirement annuity described in Code Section 408(a) or (b), or Section 408A.

For purposes of this Section 3.06, a Distributee includes an Employee who is a surviving spouse or a spouse or former spouse designated an alternate payee under a qualified domestic relations order.

A Rollover Contribution shall be allowed in cash only and must be made according to procedures established by the Plan Administrator.

If an Eligible Employee is not an Active Participant when the Rollover Contribution is made, he or she shall be deemed to be an Active Participant only for the purpose of investment and distribution of the Rollover Contribution. No Employer Contributions shall be made for or allocated to such an Eligible Employee until the time he or she meets all of the requirements to become an Active Participant.

Rollover Contributions made by an Eligible Employee or an Inactive Participant shall be credited to his or her Account. The part of the Participant’s Account resulting from Rollover Contributions is fully (100%) vested and nonforfeitable at all times.

23

3.07 Vesting

(a) Vested Account: A Participant’s Elective Deferral Contributions, Rollover Contributions, Qualified Nonelective Contributions and Qualified Matching Contributions shall be fully (100%) vested and nonforfeitable at all times. Notwithstanding any other provision of the Plan to the contrary, all Matching Contributions made on or after January 1, 2006 shall be 100% vested at all times.

(b) Vesting Percentage: The Vesting Percentage is the percentage used to determine the nonforfeitable portion of a Participant’s Account attributable to Employer Contributions that were not 100% vested when made.

(i) The applicable Vesting Percentage for a Participant is determined based on the Employee’s Vesting Service, as shown below:

VESTING SERVICE      (whole years)	VESTING PERCENTAGE
Less than 1 Year	0%
1 Year	50%
2 or more years	100%

(ii) However, the Vesting Percentage shall be 100% for a Participant who is an Employee on or after the date he or she reaches Normal Retirement Age. In addition, the Vesting Percentage for a Participant on the date he or she becomes Totally and Permanently Disabled or dies shall be 100%.

(iii) If the schedule used to determine a Participant’s Vesting Percentage is changed, the new schedule shall not apply to a Participant unless he or she is credited with an Hour of Service on or after the date of the change and the Participant’s nonforfeitable percentage on the day before the date of the change is not reduced under this Plan.

(iv) All references in the Plan to forfeitures of Matching Contributions made on or after January 1, 2006 shall be disregarded.

(c) In-Service Distributions When Not Fully Vested: If a distribution is made from a Participant’s Matching Contributions at a time when the Participant is not 100% vested in such contributions and the Participant’s employment with an Employer has not terminated, then:

(i) A separate remainder sub-account will be established for the Participant’s interest in such Matching Contribution account at the time of the distribution; and

(ii) At any subsequent time, the Participant’s vested portion of such separate account will be equal to an amount “X” determined under the formula:

X = P(AB + (RxD)) – (RxD), where:

24

P = the Participant’s vested percentage determined under subsection (b) at the relevant time.

AB = the amount in such separate sub-account at the relevant time.

R = the ratio of AB to the amount in the sub-account after the distribution.

D = the amount of the distribution.

3.08 Forfeitures

(a) General Rule: Generally, any portion of a Participant’s Account in which the Participant is not vested upon a severance of employment for any reason shall be forfeited as of the earlier of: (i) the date of his or her death; or (ii) the last day of the Plan Year in which the Participant incurs five (5) consecutive one year Periods of Severance (the Participant’s “Forfeiture Date”).

All or a Portion of a Participant’s nonvested Account shall be forfeited before such earlier date if, after he or she ceases to be an Employee, he or she receives, or is deemed to receive, a distribution of his or her entire vested Account or a distribution of his or her vested Account derived from Employer Contributions which were not 100% vested when made. The forfeiture shall occur as of the date the Participant receives, or is deemed to receive, the distribution. If a Participant receives, or is deemed to receive, his or her entire vested Account, his or her entire nonvested Account shall be forfeited. If a Participant receives a distribution of his or her vested Account from Employer Contributions which were not 100% vested when made, but less than his entire vested Account from such contributions, the amount to be forfeited shall be determined by multiplying his nonvested Account from such contributions by a fraction. The numerator of the fraction is the amount of the distribution derived from Employer Contributions which were not 100% vested when made and the denominator of the fraction is his entire vested Account derived from such contributions on the date of distribution.

(b) Application of Forfeitures: Forfeitures shall be determined at least once during each Plan Year. Forfeitures may first be used to pay administrative expenses of the Plan. Forfeitures that have not been used to pay administrative expenses shall be applied to reduce Employer Contributions made after the Forfeitures are determined. Upon their application to reduce Employer Contributions, Forfeitures shall be deemed to be Employer Contributions.

3.09 Repayments

If a Participant again becomes an Eligible Employee after receiving a distribution which caused all or a portion of his or her nonvested Account to be forfeited, he or she shall have the right to repay to the Plan the entire amount of the distribution he or she received (excluding any amount of such distribution resulting from Contributions which were

25

100% vested when made). The repayment must be made in a single sum (repayment in installments is not permitted) before the earlier of the date five (5) years after the date he or she again becomes an Eligible Employee, or the end of the first period of five (5) consecutive one year Periods of Severance which begin after the date of the distribution.

If the Participant makes the repayment above, the Plan Administrator shall restore to his or her Account an amount equal to his or her nonvested Account which was forfeited on the date of distribution, unadjusted for any investment gains or losses.

If no amount is to be repaid because the Participant only received a distribution of Contributions that were 100% vested when made, and he or she again performs an Hour of Service as an Eligible Employee within the repayment period, the Plan Administrator shall restore the forfeited portion of the Participant’s Account as if he or she had made a required repayment on the date he or she performed such Hour of Service. Restoration of the Participant’s Account shall include restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Account, according to applicable Regulations; provided, however, the Plan Administrator shall not restore the Nonvested Account if: (i) a Forfeiture Date has occurred after the date of the distribution and on or before the date of repayment; and (ii) that Forfeiture Date would result in a complete forfeiture of the amount the Plan Administrator would otherwise restore.

The Plan Administrator shall restore the Participant’s Account by the close of the Plan Year following the Plan Year in which repayment is made or deemed to be made. Permissible sources for the restoration of the Participant’s Account are Forfeitures or special Employer Contributions. Such special Employer Contributions shall be made without regard to profits. The repaid and restored amounts are not included in the Participant’s Annual Additions, as defined in Article 4.

3.10 Return of Contributions to Employer

Notwithstanding any provisions of this Plan to the contrary, to the extent permitted by applicable law, contributions shall be returned to an Employer under the following circumstances:

(a) Mistake: If, and to the extent that any contribution was made by a mistake of fact, the Plan Administrator may direct the Trustee to return the contribution to an Employer at any time within one (1) year after the payment of such contribution, provided that any earnings of the Trust Fund attributable to such mistaken contribution will not be returned to the Employer, but must remain in the Trust Fund.

(b) Nondeductibility: Any contributions made to this Plan by an Employer shall be subject to the express condition that such contributions will be deductible against such Employer’s federal income tax return under Code Section 404. If, and to the extent that the Internal Revenue Service determines that a contribution is not deductible under Code Section 404, the Plan Administrator may direct the Trustee to return the contribution to an Employer at any time within one (1) year after the

26

date of disallowance, provided such contribution was conditioned on being deductible when made.

(c) Adjustments: Except as this Plan may otherwise provide, any contribution returned shall be adjusted to reflect its proportionate share of any Trust Fund gain or loss if, and to the extent, allowable under the applicable rules of the Internal Revenue Service.

(d) Limitation on Rights: Notwithstanding any provision of this Plan to the contrary, the right or claim of any Participant or Beneficiary to any asset of the Trust or to any benefit under the Plan shall be subject to and limited by the provisions of this Section.

3.11 Veterans Rights

Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to any Period of Military Duty will be provided in accordance with Section 414(u) of the Code. Further, loan repayments will be suspended under the Plan as permitted by Code Section 414(u).

3.12 Corrective Contributions

If it becomes necessary to correct mistakes made in amounts distributed from or credited to Accounts, to restore the portion of a Participant’s Account which was forfeited pursuant to any provision of the Plan or if an Employee should have been included as a Participant but is mistakenly excluded for any reason, correction or restoration shall first be made out of Employer Contributions and forfeitures and then out of Trust earnings for the Plan Year in question, but only to the extent that such amounts have not already been allocated under the provisions of the Plan. Any additional amounts needed may be provided by a special contribution to the Plan which the Company, in its sole discretion (but subject to the applicable limitations on deductible contributions and maximum annual additions and considering the rules on deductibility under Code Section 162), may elect to make. Any such correction of mistake or special contribution shall be corrected, allocated or credited in the fashion specified by the Plan Administrator.

27

ARTICLE 4

LIMITATIONS ON CONTRIBUTIONS

4.01 Dollar Limitation on Elective Deferral Contributions

(a) During any Plan Year, the Elective Deferral Contributions made on behalf of a Participant under this Plan and any other plan maintained by an Employer or an Affiliate for any taxable year shall not exceed the applicable dollar limit for such year under Section 402(g) of the Code, except to the extent permitted under Section 3.03 for contributions made in accordance with Section 414(v) of the Code. In order to prevent the limitation of this Section from being exceeded for any Plan Year, the Plan Administrator may prospectively limit the percentage or amount of Compensation which a Participant may elect to have contributed as Elective Deferral Contributions.

(b) If the Elective Deferral Contributions of a Participant to this Plan and any plan of an Employer or an Affiliate exceed the limitation of the preceding paragraph as of the end of any Plan Year, or if prior to March 1 following the end of any Plan Year a Participant has submitted to the Plan Administrator a written certification stating that all or part of his or her Elective Deferral Contributions to the Plan constitute Excess Elective Deferrals, such Participant shall be given a distribution of such excess amount from his or her Elective Deferral Contribution Account, and any income allocable thereto, no later than April 15 following the end of the Plan Year with respect to which such excess amount was contributed. Notwithstanding the distribution of any Excess Elective Deferrals, such Excess Elective Deferrals shall be included for the Plan Year in which such contributions were made for purposes of computing the Actual Deferral Ratio for a Highly Compensated Employee but not for a Non-highly Compensated Employee.

(c) If, as a result of the application of the preceding paragraphs, a Participant’s Elective Deferral Contributions are reduced, the corresponding Matching Contributions, if any, shall be forfeited.

4.02 ADP Limitation on Elective Deferral Contributions

(a) Effective January 1, 2006, the Plan is intended to be a “safe harbor” 401(k) plan under Code Section 401(k)(12) by making safe harbor matching contributions. Consequently, this Section 4.02 is of no force or effect with respect to Elective Deferral Contributions made on or after January 1, 2006, and all references in the Plan to such Section or to the Average Deferral Percentage Test (or ADP Test) shall be disregarded with respect to any such Elective Deferral Contributions.

Notwithstanding the preceding paragraph, if the Plan is amended so as not to be a “safe harbor” 401(k) plan with respect to Elective Deferral Contributions made on or after January 1, 2006 with respect to all or any group of Participants, such amendment also shall make the provisions of the remainder of this Section 4.02 applicable to such Participants.

28

As of the end of each Plan Year, after Excess Elective Deferrals have been determined, the Plan must satisfy the Average Deferral Percentage Test (the “ADP Test”). The ADP Test shall be satisfied using the current year testing method, unless the Company has elected to use the prior year testing method.

(i) The ADP for Participants who are Highly Compensated Employees for the Plan Year and the prior year’s ADP for Participants who were Non-highly Compensated Employees for the Plan Year must satisfy one of the following tests:

(A) The ADP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for Participants who were Non-highly Compensated Employees for the prior Plan Year multiplied by 1.25; or

(B) The ADP for Participants who are Highly Compensated Employees for the Plan Year:

(1) shall not exceed the ADP for Participants who were Non-highly Compensated Employees for the Plan Year multiplied by 2.00, and

(2) the difference between such ADPs is not more than 2 percentage points.

(b) The Actual Deferral Ratio for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferral Contributions (and Qualified Matching Contributions, Qualified Nonelective Contributions or both, if treated as Elective Deferral Contributions for purposes of the ADP Test) allocated to his or her account under two or more arrangements described in Code Section 401(k) that are maintained by an Employer or an Affiliate shall be determined as if such Elective Deferral Contributions (and such Qualified Matching Contributions, Qualified Nonelective Contributions or both, if applicable) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, the Actual Deferral Ratio for such Highly Compensated Employee for a Plan Year shall be determined by accumulating all contributions under such plans that would be taken into account for purposes of computing the Actual Deferral Ratio for the plan year if such other plans had the same Plan Year. The foregoing notwithstanding, plans shall be treated as separate if mandatorily disaggregated under the Regulations of Code Section 401(k).

(c) For purposes of the ADP Test, Elective Deferral Contributions, Qualified Matching Contributions treated as Elective Deferral Contributions and Qualified Nonelective Contributions treated as Elective Deferral Contributions must be made before the end of the 12-month period immediately following the Plan Year

29

to which the contributions relate. The Plan Administrator shall maintain records sufficient to demonstrate satisfaction of the ADP Test and the amount of Qualified Matching Contributions treated as Elective Deferral Contributions or Qualified Nonelective Contributions treated as Elective Deferral Contributions, or both, used in such test.

(d) In order to prevent or correct a failure of the ADP Test for a Plan Year, any one or any combination of the following preventative or corrective actions may be used:

(i) Elective Deferral Contributions for Highly Compensated Employees may be reduced. The Named Fiduciary, or its delegate, may direct the Employers to refrain from making Elective Deferral Contributions on behalf of Highly Compensated Employees to ensure that the requirements set forth above are satisfied for each Plan Year;

(ii) Qualified Matching Contributions or Qualified Nonelective Contributions may be contributed for that Plan Year. The Company, by action of an appropriate officer, may direct the Employers to contribute Qualified Matching Contributions or Qualified Nonelective Contributions that will be treated as Elective Deferral Contributions for that Plan Year;

(iii) Elective Deferral Contributions for Highly Compensated Employees may be treated as Catch-Up Contributions. The Named Fiduciary, or its delegate, may direct that, to the extent necessary to satisfy such test, Excess Contributions and any income or loss allocable thereto which have been allocated to the Participants’ Elective Deferral Contribution Accounts shall, if it violates no other provision of this Plan, be treated as Catch-Up Contributions; and

(iv) Elective Deferral Contributions for Highly Compensated Employees may be returned from the Plan. The Named Fiduciary, or its delegate, may direct that, to the extent necessary to satisfy such test, Excess Contributions and any income or loss allocable thereto shall be returned from the Plan to the Highly Compensated Employees before the close of the next Plan Year.

(e) Excess Contributions are determined in the following manner. First, the amount of the Actual Deferral Ratio of the Highly Compensated Employee with the highest Actual Deferral Ratio shall be hypothetically reduced to satisfy the ADP Test or to cause such ratio to equal the Actual Deferral Ratio of the Highly Compensated Employee with the next highest ratio, whichever occurs first. This process is repeated until the ADP Test is satisfied. The total amount of Excess Contributions is equal to the sum of such hypothetical reductions multiplied, in each case, by the Highly Compensated Employee’s Compensation.

(f) The Elective Deferral Contributions of the Highly Compensated Employee with the largest Elective Deferral Contributions shall be reduced by the amount of Excess

30

Contributions or, if less, by the amount needed to equal the Elective Deferral Contributions of the Highly Compensated Employee with the next largest Elective Deferral Contributions. This process shall be repeated with the remaining amount of Excess Contributions until the total amount of Excess Contributions is accounted for. If these reductions are made, the ADP Test is treated as being satisfied regardless of whether the Actual Deferral Ratios, if recalculated after the reductions, satisfy the ADP Test.

(g) The reductions required by Section 4.01 shall be applied prior to the reductions and tests of this Section 4.02. The amount of Excess Contributions which are treated as Catch-Up Contributions or are returned from the Plan to a Highly Compensated Employee shall be reduced by the amount of Excess Contributions previously treated as Catch-Up Contributions or previously returned with respect to such Highly Compensated Employee for the same Plan Year. Any Excess Contributions which are treated as Catch-Up Contributions shall remain subject to the nonforfeitability requirements and distribution limitations that apply to Elective Deferral Contributions.

(h) If the Company elects to use Qualified Matching Contributions or Qualified Nonelective Contributions for purposes of the ADP Test, the Actual Deferral Ratio for Non-highly Compensated Employees for the current year will be determined by taking into account only:

(i) Elective Deferral Contributions for those Non-highly Compensated Employees that are taken into account for purposes of the ADP Test (and not the ACP Test) under the current year testing method for the current year; and

(ii) Qualified Matching Contributions or Qualified Nonelective Contributions that are allocated to the accounts of those Non-highly Compensated Employees as of a date during the current year, used to satisfy the ADP Test (but not the ACP Test) under the current year testing method for the current year and that meet the requirements of subsection (i) below.

Thus, if the Company elects to use Qualified Matching Contributions or Qualified Nonelective Contributions, the following contributions made during the current year will be disregarded:

(iii) Qualified Matching Contributions used to satisfy either the ADP Test or ACP Test under the current year testing method for the prior testing year or that fail to meet the requirements of subsection (i) below;

(iv) Qualified Nonelective Contributions used to satisfy either the ADP Test or ACP Test under the current year testing method for the prior testing year or that fail to meet the requirements of subsection (i) below; and

(v) Elective Deferral Contributions taken into account for purposes of the ACP Test under the current year testing method for the current year.

31

(i) Qualified Matching Contributions and Qualified Nonelective Contributions may be used to satisfy the ADP Test, but the same amounts cannot be used to satisfy both the ADP Test and the ACP Test. Qualified Matching Contributions on behalf of a Non-highly Compensated Employee will not be taken into account for purposes of the ADP Test to the extent such Qualified Matching Contributions exceed the greatest of:

(i) 5% of that Non-highly Compensated Employee’s Compensation;

(ii) that Non-highly Compensated Employee’s Elective Deferral Contributions for such Plan Year; and

(iii) the product of two (2) times the Plan’s representative matching rate (as determined under applicable Regulations) and that Non-highly Compensated Employee’s Elective Deferral Contributions for such Plan Year.

Qualified Nonelective Contributions taken into account for purposes of the ADP Test must satisfy the requirements of Code Section 401(a)(4). Qualified Nonelective Contributions on behalf of a Non-highly Compensated Employee will not be taken into account for purposes of the ADP Test to the extent such Qualified Nonelective Contributions exceed the product of that Non-highly Compensated Employee’s Compensation and the greater of: (x) 5% or (y) two (2) times the Plan’s representative contribution rate (as determined under applicable Regulations). Notwithstanding the preceding sentences, Qualified Nonelective Contributions made in connection with the Davis-Bacon Act, Service Contract Act or similar legislation can be taken into account for purposes of the ADP Test to the extent permitted under Regulation Section 1.401(k)-2(a)(6)(iv)(D).

(j) The Excess Contributions shall be adjusted for income or loss. The income or loss allocable to such Excess Contributions allocated to each Participant shall be equal to the income or loss allocable to the Participant’s Elective Deferral Contributions (and, if applicable, Qualified Matching Contributions treated as Elective Deferral Contributions or Qualified Nonelective Contributions treated as Elective Deferral Contributions, or both) for the Plan Year in which the excess occurred, multiplied by a fraction. The numerator of the fraction is the Excess Contributions. The denominator of the fraction is the closing balance without regard to any income or loss occurring during such Plan Year (as of the end of such Plan Year) of the Participant’s Account resulting from Elective Deferral Contributions (and Qualified Matching Contributions or Qualified Nonelective Contributions, or both, if such contributions are included in the ADP Test).

(k) In addition “gap period” income or loss will be distributed. Such gap period income or loss is 10% of the amount determined above, multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution only if the distribution occurs after the 15^th of such month.

32

(l) Excess Contributions allocated to a Participant shall be distributed from the Participant’s Account resulting from Elective Deferral Contributions. If such Excess Contributions exceed the balance in the Participant’s Account resulting from Elective Deferral Contributions, the balance shall be distributed from the Participant’s Account resulting from Qualified Matching Contributions treated as Elective Deferral Contributions (if applicable) and Qualified Nonelective Contributions treated as Elective Deferral Contributions (if applicable), respectively.

(m) If, as a result of the application of the preceding paragraphs, a Participant’s Elective Deferral Contributions are reduced, the corresponding Matching Contributions, if any, plus any income and minus any loss allocable thereto, shall be forfeited. Also, Excess Contributions shall be treated as Annual Additions, as defined in Section 4.04.

4.03 ACP Limitation on Matching Contributions

(a) Effective January 1, 2006, the Plan is intended to be a “safe harbor” 401(m) plan under Code Section 401(m)(11) by making safe harbor matching contributions. Consequently, this Section 4.03 is of no force or effect with respect to Matching Contributions made on or after January 1, 2006, and all references in the Plan to such Section or to the Average Contribution Percentage Test (or ACP Test) shall be disregarded with respect to any such Matching Contributions.

Notwithstanding the preceding paragraph, if the Plan is amended so as not to be a “safe harbor” 401(k) plan with respect to Matching Contributions made on or after January 1, 2006 with respect to all or any group of Participants, such amendment also shall make the provisions of the remainder of this Section 4.03 applicable to such Participants. Also, if the Plan is amended to permit after-tax employee contributions made on or after January 1, 2006 with respect to all or any group of Participants, such amendment also shall make the provisions of the remainder of this Section 4.03 applicable to such contributions and such Participants.

As of the end of each Plan Year, the Plan must satisfy the Average Contribution Percentage Test (the “ACP Test”). The ACP Test shall be satisfied using the current year testing method, unless the Company has elected to use the prior year testing method.

(i) The ACP for Participants who are Highly Compensated Employees for the Plan Year and the ACP for Participants who were Non-highly Compensated Employees for the Plan Year must satisfy one of the following tests:

(A) The ACP for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for Participants who

33

were Non-highly Compensated Employees for the Plan Year multiplied by 1.25; or

(B) The ACP for Participants who are Highly Compensated Employees for the Plan Year:

(1) shall not exceed the ACP for Participants who were Non-highly Compensated Employees for the Plan Year multiplied by 2.00; and

(2) the difference between such ACPs is not more than 2 percentage points.

(b) The Actual Contribution Ratio for any Eligible Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have matching or employee contributions (and Qualified Matching Contributions, Qualified Nonelective Contributions or both, if not treated as Elective Deferral Contributions for purposes of the ADP Test) allocated to his or her account under two or more arrangements described in Code Section 401(m) that are maintained by an Employer or an Affiliate shall be determined as if such matching and employee contributions (and such Qualified Matching Contributions, Qualified Nonelective Contributions or both, if applicable) were made under a single arrangement. If a Highly Compensated Employee participates in two or more arrangements permitting matching or employee contributions that have different plan years, the Actual Contribution Ratio for such Highly Compensated Employee for a Plan Year shall be determined by accumulating all contributions under such plans that would be taken into account for purposes of computing the Actual Contribution Ratio for the plan year if such other plans had the same Plan Year. The foregoing notwithstanding, plans shall be treated as separate if mandatorily disaggregated under the Regulations of Code Section 401(m).

(c) For purposes of the ACP Test, Matching Contributions that are forfeited because the Elective Deferral Contributions to which they relate are treated as Excess Elective Deferrals or Excess Contributions are not taken into account. Also, for purposes of determining the ACP Test, Matching Contributions, Qualified Matching Contributions (not treated as Elective Deferral Contributions) and Qualified Nonelective Contributions treated as Matching Contributions must be made before the end of the 12-month period immediately following the Plan Year to which the contributions relate. The Plan Administrator shall maintain records sufficient to demonstrate satisfaction of the ACP Test and the amount of Qualified Matching Contributions (not treated as Elective Deferral Contributions) or Qualified Nonelective Contributions treated as Matching Contributions, or both, used in such test.

(d) In order to prevent or correct a failure of the ACP Test for a Plan Year, any one or any combination of the following preventative or corrective actions may be used:

34

(i) Matching Contributions for Highly Compensated Employees may be reduced. The Named Fiduciary, or its delegate, may direct the Employers to refrain from making Matching Contributions on behalf of Highly Compensated Employees to ensure that the requirements set forth above are satisfied for each Plan Year;

(ii) Qualified Matching Contributions or Qualified Nonelective Contributions may be contributed for that Plan Year. The Company, by action of an appropriate officer, may direct the Employers to contribute Qualified Matching Contributions or Qualified Nonelective Contributions that will be treated as Matching Contributions for that Plan Year; and

(iii) Matching Contributions for Highly Compensated Employees may be returned from the Plan or forfeited. The Named Fiduciary, or its delegate, may direct that, to the extent necessary to satisfy such test, Excess Aggregate Contributions and any income or loss allocable thereto shall, if vested, be returned from the Plan to the Highly Compensated Employees before the close of the next Plan Year and shall, if unvested, be forfeited.

(e) Excess Aggregate Contributions are determined in the following manner. First, the amount of the Actual Contribution Ratio of the Highly Compensated Employee with the highest Actual Contribution Ratio shall be hypothetically reduced to satisfy the ACP Test or to cause such ratio to equal the Actual Contribution Ratio of the Highly Compensated Employee with the next highest ratio, whichever occurs first. This process is repeated until the ACP Test is satisfied. The total amount of Excess Aggregate Contributions is equal to the sum of such hypothetical reductions multiplied, in each case, by the Highly Compensated Employee’s Compensation.

(f) The Matching Contributions of the Highly Compensated Employee with the largest Matching Contributions shall be reduced by the amount of Excess Aggregate Contributions or, if less, by the amount needed to equal the Matching Contributions of the Highly Compensated Employee with the next largest Matching Contributions. This process shall be repeated with the remaining amount of Excess Aggregate Contributions until the total amount of Excess Aggregate Contributions is accounted for. If these reductions are made, the ACP Test is treated as being satisfied regardless of whether the Actual Contribution Ratios, if recalculated after the reductions, satisfy the ACP Test.

(g) The reductions required by Sections 4.01 and 4.02 shall be applied prior to the reductions and tests of this Section 4.03. The amount of vested Excess Aggregate Contributions to be returned from the Plan to a Highly Compensated Employee shall be reduced by the amount of vested Excess Aggregate Contributions previously returned to such Highly Compensated Employee for the same Plan Year. Unvested Excess Aggregate Contributions shall not be returned from the Plan to a Highly Compensated Employee, but instead shall be forfeited.

35

(h) If the Company elects to use Qualified Matching Contributions or Qualified Nonelective Contributions for purposes of the ACP Test, the Actual Contribution Ratio for Non-highly Compensated Employees for the current year will be determined by taking into account only:

(i) Elective Deferral Contributions taken into account for purposes of the ACP Test under the current year testing method for the current year;

(ii) Matching Contributions for those Non-highly Compensated Employees that are taken into account for purposes of the ACP Test under the current year testing method for the current year; and

(iii) Qualified Matching Contributions or Qualified Nonelective Contributions that are allocated to the accounts of those Non-highly Compensated Employees as of a date during the current year, used to satisfy the ACP Test (but not the ADP Test) under the current year testing method for the current year and meet the requirements of subsection (i) below.

Thus, if the Company elects to use Qualified Matching Contributions or Qualified Nonelective Contributions, the following contributions made during the current year will be disregarded:

(iv) Elective Deferral Contributions taken into account for purposes of the ADP Test under the current year testing method for the current year;

(v) Qualified Matching Contributions used to satisfy either the ADP Test or ACP Test under the current year testing method for the prior testing year or that fail to meet the requirements of subsection (i) below; and

(vi) Qualified Nonelective Contributions used to satisfy either the ADP Test or ACP Test under the current year testing method for the prior testing year or that fail to meet the requirements of subsection (i) below.

(i) Qualified Matching Contributions and Qualified Nonelective Contributions may be used to satisfy the ACP Test, but the same amounts cannot be used to satisfy both the ADP Test and the ACP Test. Qualified Matching Contributions on behalf of a Non-highly Compensated Employee will not be taken into account for purposes of the ACP Test to the extent such Qualified Matching Contributions exceed the greatest of:

(i) 5% of that Non-highly Compensated Employee’s Compensation;

(ii) that Non-highly Compensated Employee’s Elective Deferral Contributions for such Plan Year; and

(iii) the product of two (2) times the Plan’s representative matching rate (as determined under applicable Regulations) and that Non-highly

36

Compensated Employee’s Elective Deferral Contributions for such Plan Year.

Qualified Nonelective Contributions used to satisfy the ACP Test must satisfy the requirements of Code Section 401(a)(4). Qualified Nonelective Contributions on behalf of a Non-highly Compensated Employee will not be taken into account for purposes of the ACP Test to the extent such Qualified Nonelective Contributions exceed the product of that Non-highly Compensated Employee’s Compensation and the greater of: (x) 5% or (y) two (2) times the Plan’s representative contribution rate (as determined under applicable Regulations). Notwithstanding the preceding sentences, Qualified Nonelective Contributions made in connection with the Davis-Bacon Act, Service Contract Act or similar legislation can be taken into account for purposes of the ACP Test to the extent permitted under Regulation Section 1.401(m)-2(a)(6)(v)(D).

(j) The Excess Aggregate Contributions shall be adjusted for income or loss. The income or loss allocable to such Excess Aggregate Contributions allocated to each Participant shall be equal to the income or loss allocable to the Participant’s Matching Contributions (and, if applicable, Qualified Matching Contributions (not treated as Elective Deferral Contributions) or Qualified Nonelective Contributions treated as Matching Contributions, or both) for the Plan Year in which the excess occurred, multiplied by a fraction. The numerator of the fraction is the Excess Aggregate Contributions. The denominator of the fraction is the closing balance without regard to any income or loss occurring during such Plan Year (as of the end of such Plan Year) of the Participant’s Account resulting from Matching Contributions (and Qualified Matching Contributions or Qualified Nonelective Contributions, or both, if such contributions are included in the ACP Test).

(k) In addition “gap period” income or loss will be distributed. Such gap period income or loss is 10% of the amount determined above, multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution only if the distribution occurs after the 15^th of such month.

(l) Excess Aggregate Contributions allocated to a Participant shall be distributed from the Participant’s Account resulting from Matching Contributions. If such Excess Aggregate Contributions exceed the balance in the Participant’s Account resulting from Matching Contributions, the balance shall be distributed from the Participant’s Account resulting from Qualified Matching Contributions not treated as Elective Deferral Contributions (if applicable) and Qualified Nonelective Contributions treated as Matching Contributions (if applicable), respectively.

(m) Excess Aggregate Contributions shall be treated as Annual Additions, as defined in Section 4.04.

37

4.04 Limitation on Allocations

For the purpose of determining the contribution limitation set forth in this Section, the following terms are defined as follows:

(a) “Annual Additions” means the sum of Employer Contributions, Catch-Up Contributions and forfeitures credited to a Participant’s Account for the Limitation Year. Annual Additions to a defined contribution plan also shall include: amounts allocated to an individual medical account, as defined in Code Section 415(l)(2), which are part of a pension or annuity plan maintained by an Employer; amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in Code Section 419A(d)(3), under a welfare benefit fund, as defined in Code Section 419(e), maintained by an Employer; and allocations under a simplified employee pension.

For this purpose, any excess amount applied under this Section in the Limitation Year to reduce Employer Contributions shall be considered Annual Additions for such Limitation Year.

If Annual Additions are credited to a Participant’s Account under any other defined contribution plan maintained by an Employer for a Limitation Year, the amount of Annual Additions which may be credited to the Participant’s Account under this Plan for that Limitation Year shall be limited to the excess of the limitations herein over the amount of such other Annual Additions.

(b) “Compensation” means, for a Limitation Year, the Compensation actually paid or made available in gross income during such Limitation Year. For purposes of applying the limitations of this Section, Compensation paid or made available during such Limitation Year shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by an Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), or 457. Amounts under Code Section 125 include any amounts not available to an Employee in cash in lieu of group health coverage under a Code Section 125 arrangement because the Employee is unable to certify that he or she has other health coverage, providedthat the Employer does not otherwise request or collect information regarding the Employee’s other health coverage as part of the enrollment process for the health plan.

(c) “Employer” means an Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (as defined in Code Section 415(c) as modified by Code Section 415(h)) or affiliated service groups (as defined in Code Section 414(m)) of which the Employer is a

38

part, and any other entity required to be aggregated with an Employer pursuant to Regulations under Code Section 414(o).

(d) “Excess Amount” means the excess of the Participant’s Annual Additions (excluding Catch-Up Contributions) for the Limitation Year over the Maximum Permissible Amount.

(e) “Maximum Permissible Amount” means the lesser of:

(i) $40,000, as adjusted for increases in the cost-of-living under Code Section 415(d); or

(ii) 100% percent of the Participant’s Compensation for the Limitation Year.

The Compensation limitation referred to in (ii) above shall not apply to any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an Annual Addition.

If a short Limitation Year is created because of an amendment changing the Limitation Year to a different consecutive 12 month period, for the short Limitation Year the amount in (i) above shall be replaced by the amount in (i) above multiplied by the following fraction:

Number of months in the short Limitation Year

12

4.05 Participants Not Covered Under Other Plans

(a) If the Participant does not participate in, and has never participated in:

(i)another qualified defined contribution plan maintained by an Employer;

(ii) a welfare benefit fund, as defined in Code Section 419(e), maintained by an Employer;

(iii) an individual medical account, as defined in Code Section 415(l)(2), maintained by an Employer; or

(iv) a simplified employee pension, as defined in Code Section 408(k), maintained by an Employer,

which provides an Annual Addition, the amount of Annual Additions (other than Catch-Up Contributions) which may be credited to the Participant’s Account for any Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If an Employer Contribution that would otherwise be contributed or allocated to the Participant’s Account would cause the Annual Additions for the Limitation Year to exceed the

39

Maximum Permissible Amount, the amount contributed or allocated shall be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount.

(b) Prior to determining the Participant’s actual Compensation for the Limitation Year, an Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant’s Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.

(c) As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant’s actual Compensation for the Limitation Year.

(d) If there is a reasonable error in estimating a Participant’s Compensation for the Limitation Year, a reasonable error in determining the amount of Elective Deferral Contributions (within the meaning of Code Section 402(g)(3)) that may be made with respect to any individual under the limits of Code Section 415, or under other facts and circumstances allowed by the Internal Revenue Service there is an Excess Amount, the Excess Amount will be disposed of as follows:

(i) Any Elective Deferral Contributions that are not the basis for Matching Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be distributed to the Participant.

(ii) If after the application of (i) above an Excess Amount still exists, any Elective Deferral Contributions that are the basis for Matching Contributions (plus attributable earnings), to the extent they would reduce the Excess Amount, will be distributed to the Participant. Concurrently with the distribution of such Elective Deferral Contributions, any Matching Contributions which relate to any Elective Deferral Contributions distributed in the preceding sentence, to the extent such application would reduce the Excess Amount, will be applied as provided in (iii) or (iv) below.

(iii) If after the application of (ii) above an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant’s Account will be used to reduce Employer Contributions for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary.

(iv) If after the application of (iii) above an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer Contributions for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary.

40

(v) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, it will participate in the allocation of investment gains or losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participant’s Accounts before any Employer Contributions may be made to the Plan for that Limitation Year. Excess Amounts held in a suspense account may not be distributed to Participants or former Participants except as provided in (vi) below.

(vi) In the event the Plan and Trust Fund are terminated, any amount remaining in such suspense account at the time of termination shall be allocated to the accounts of the Participants in the Plan Year in which the Plan is terminated in the same proportions as a nonelective contribution for such Plan Year would be allocated, but only to the extent permitted by the aforesaid limitations on Annual Additions. If after such allocation any amount remains in such suspense account, it shall be paid to the Employers except that, to the extent consisting of Elective Deferral Contributions, such portion shall be paid to the Participants.

4.06 Participants Covered Under Other Defined Contribution Plans

This Section applies if, in addition to this Plan, the Participant is covered under:

(i)another qualified defined contribution plan maintained by an Employer;

(ii) a welfare benefit fund (as defined in Code Section 419(e)) maintained by an Employer;

(iii) an individual medical account (as defined in Code Section 415(e)(2)) maintained by an Employer; or

(iv) a simplified employee pension (as defined in Code Section 408(k)) maintained by an Employer

which provides an Annual Addition during any Limitation Year. The Annual Additions under all such qualified defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions for the Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant’s account under the other plans and welfare benefit funds for the same limitation year. The Annual Addition which may be credited to the Account of a Participant under this Plan for any such Limitation Year shall not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to the account of the Participant under the other plans and welfare benefit funds for the same Limitation Year. If the Annual Additions with respect to the Participant under other defined contribution plans and welfare funds maintained by an Employer are less than the Maximum Permissible Amount and an Employer Contribution that would otherwise be contributed or allocated to the Account of the Participant under this Plan would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the

41

amount contributed or allocated will be reduced so that the Annual Additions under all plans and funds for the Limitation Year shall equal the Maximum Permissible Amount. If Annual Additions with respect to the Participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Account of the Participant under this Plan for the Limitation Year.

42

ARTICLE 5

INVESTMENT OF CONTRIBUTIONS

5.01 Investment and Timing of Contributions

The handling of Contributions is governed by the provisions of the Trust Agreement, any Annuity Contract, and any other funding arrangement in which the Investment Fund is, or may be held, or invested.

(a) As directed by the Named Fiduciary, except as required by ERISA, the Trustee shall manage the investment of the Trust Fund representing Elective Deferral Contributions and Employer Contributions except to the extent an Investment Manager has been appointed to manage Trust assets. Except as required by ERISA, if an Investment Manager is appointed, the Trustee shall invest the Trust Fund in accordance with the directions of the Investment Manager, and the Trustee shall have no discretionary control over, nor any other discretion regarding, the investment or reinvestment of such Trust Fund assets.

(b) At the direction of the Named Fiduciary, the Trustee may establish such different Investment Funds as the Named Fiduciary shall determine. As directed by the Named Fiduciary, the Trustee may select as an Investment Fund any fund registered under the Investment Company Act of 1940, any pooled fund maintained by a bank or trust company, or any insurance or annuity contract issued by an insurer licensed to do business in all states in which Employees reside. The Named Fiduciary in its sole discretion, may select among such Investment Funds the Investment Funds to be made available for the investment of Participants,’ Beneficiaries’ and Alternate Payees’ Accounts, as it deems appropriate. If Investment Funds are made available:

(i) Such Investment Funds shall provide differing investment opportunities for Participants, Beneficiaries and Alternate Payees to choose from. Any such separate fund may be established through separate accounting of a portion of the Trust Fund or through the use of investment products referred to in this paragraph (b). The Plan Administrator shall provide Participants, Beneficiaries and Alternate Payees, with information concerning the nature of each such separate fund.

(ii) The Participant shall designate, subject to such rules as the Plan Administrator may prescribe, the Investment Fund or Funds to which Contributions shall be invested on his or her behalf. The Investment Fund selection of a Participant shall apply uniformly to all of his or her Contributions. Investment designations made pursuant to this subparagraph shall remain in effect unless and until changed pursuant to subparagraph (iii). If a Participant fails to make a timely investment designation, the Named Fiduciary shall direct the investment of his or her Account by the establishment of a “default” Investment Fund until such investment designation is made.

43

(iii) The Participant, Beneficiary or Alternate Payee may change, subject to such rules as the Plan Administrator may prescribe, any investment designation, provided any such election is filed with the Plan Administrator, or its delegate, on or before the date and time prescribed by the Plan Administrator. Each investment designation shall remain in effect until effectively changed.

(iv) The Participant, Beneficiary or Alternate Payee may elect, subject to such rules as the Plan Administrator may prescribe, to reallocate amounts in his or her Account previously invested in the Investment Fund(s) by specifying the desired investment mix among such Funds, provided any such election is filed with the Plan Administrator, or its delegate, on or before the date and time prescribed by the Plan Administrator. Such investment mix shall remain in effect until effectively changed.

(v) To the extent a particular Investment Fund has restrictions imposed on the transfer in or transfer out of amounts to and from other Investment Funds, such restrictions shall be communicated to the Participants, Beneficiaries and Alternate Payees.

(vi) The Trustee may, from time to time, have on hand funds which are received as contributions or transfers to the Trust Fund which are awaiting investment or funds received as a result of the disposition of assets pursuant to a tender offer, merger, or other corporation action which are awaiting reinvestment, in which case the Trustee shall have the power to hold the relevant portion of the Trust Fund unallocated and uninvested pending receipt of clear and proper investment directions or pending receipt of a contribution amount which is necessary to carry out an investment direction.

(c) All or some portion of the Participant’s Account may be invested in Qualifying Employer Securities. If the Participant has investment control, once an investment in the Qualifying Employer Securities Fund is made available to Participants, it shall continue to be available unless the Plan is amended to disallow such available investment. In the absence of an election to invest in Qualifying Employer Securities, Participants shall be deemed to have elected to have their Accounts invested wholly in other investment options of the Investment Fund. Once an election is made, it shall be considered to continue until a new election is made.

5.02 Valuation of Funds/Qualifying Employer Securities

Each Investment Fund shall be valued at fair market value following the close of business on each Valuation Date. Each Account shall be adjusted to reflect the effect of income, collected and accrued, realized and unrealized profits and losses, expenses, and all other transactions (including distributions and contributions) since the immediately preceding Valuation Date. The value of an Account held in the Qualifying Employer Securities

44

Fund may be expressed in units. If the Qualifying Employer Securities are not publicly traded, or if an extremely thin market exists for such securities so that reasonable valuation may not be obtained from the market place, then such securities must be valued at least annually by an independent appraiser who is not associated with an Employer, the Plan Administrator, the Trustee, or any person related to any fiduciary under the Plan. The independent appraiser may be associated with a person who is merely a contract administrator with respect to the Plan, but who exercises no discretionary authority and is not a Plan fiduciary.

(a) If there is a public market for Qualifying Employer Securities of the type held by the Plan, then the Named Fiduciary may use as the value of the securities the price at which such securities trade in such market. If the Qualifying Employer Securities do not trade on the relevant date, or if the market is very thin on such date, then the Named Fiduciary may use for the valuation the next preceding trading day on which the trading prices are representative of the fair market value of such securities in the opinion of the Named Fiduciary.

(b) Cash dividends payable on the Qualifying Employer Securities shall be reinvested in additional shares of such securities. In the event of any cash or stock dividend or any stock split, such dividend or split shall be credited to the Accounts based on the number of shares of Qualifying Employer Securities credited to each Account as of the payable date of such dividend or split.

(c) All purchases of Qualifying Employer Securities shall be made at a price, or prices, which, in the judgment of the Plan Administrator, do not exceed the fair market value of such securities.

(d) In the event that the Trustee acquires Qualifying Employer Securities by purchase from a “disqualified person” as defined in Code Section 4975(e)(2) or from a “party in interest” as defined in ERISA Section 3(14), the terms of such purchase shall contain the provision that in the event there is a final determination by the Internal Revenue Service, the Department of Labor, or court of competent jurisdiction that the fair market value of such securities as of the date of purchase was less than the purchase price paid by the Trustee, then the seller shall pay or transfer, as the case may be, to the Trustee an amount of cash or shares of Qualifying Employer Securities equal in value to the difference between the purchase price and such fair market value for all such shares. In the event that cash or shares of Qualifying Employer Securities are paid or transferred to the Trustee under this provision, such securities shall be valued at their fair market value as of the date of such purchase, and interest at a reasonable rate from the date of purchase to the date of payment or transfer shall be paid by the seller on the amount of cash paid.

(e) The Plan Administrator may direct the Trustee to sell, resell, or otherwise dispose of Qualifying Employer Securities to any person, including an Employer, provided that any such sales to any disqualified person or party in interest, including an Employer, will be made at not less than the fair market value and no

45

commission will be charged. Any such sale shall be made in conformance with ERISA Section 408(e).

(f) The Company is responsible for compliance with any applicable Federal or state securities law with respect to all aspects of the Plan, including, but not limited to Section 16 of the Securities Act. If the Qualifying Employer Securities or interest in this Plan are required to be registered in order to permit investment in the Qualifying Employer Securities Fund as provided in this section, then such investment will not be effective until the later of the effective date of the Plan or the date such registration or qualification is effective. The Company, at its own expense, will take or cause to be taken any and all such actions as may be necessary or appropriate to affect such registration or qualification. Further, if the Trustee is directed to dispose of any Qualifying Employer Securities held under the Plan under circumstances which require registration or qualification of the securities under applicable Federal or state securities laws, then the Company will, at its own expense, take or cause to be taken any and all such action as may be necessary or appropriate to effect such registration or qualification.

5.03 Notice to Participants

At least once a year, the Plan Administrator shall notify each Participant (and the Beneficiary of each deceased Participant) and Alternate Payee of the balance in such Participant’s or Alternate Payee’s Account as of the last Valuation Date.

46

ARTICLE 6

DISTRIBUTION OF BENEFITS

6.01 Forms of Distribution

With respect to the distribution of either retirement benefits or death benefits:

(a) The automatic form of benefit payable to or on behalf of a Participant or Beneficiary shall be a single sum cash payment.

(b) Where a Participant’s Account contains Qualifying Employer Securities, the Participant or Beneficiary may request a distribution of the portion of his or her Account that is held in the Qualifying Employer Securities Fund as a single sum cash payment or a single sum distribution in kind, with fractional shares paid in cash.

6.02 Distribution Election Procedures

The Participant or spouse shall make any election under this section in writing. The Plan Administrator may require such individual to complete and sign any necessary documents as to the provisions to be made.

6.03 Consent to Distribution

(a) Vested Account Valued at More than $5,000. If the value of a Participant’s vested Account (excluding Rollover Contributions, if any), exceeds $5,000, no distribution may be made to the Participant unless the Participant is notified no less than thirty (30) days, and no more than ninety (90) days, before the Benefit Commencement Date, that the Participant must consent to the distribution and that the Participant has a right to defer the distribution. Such consent also shall be required if the value of the Participant’s vested Account (excluding Rollover Contributions, if any) at the time of any prior distribution exceeded $5,000. A distribution may commence less than thirty (30) days but not more than seven (7) days after the notice described above is given, provided that the Participant: (i) is informed that he or she has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution; and (ii) after receiving the notice, affirmatively elects a distribution.

Unless and until a Participant files an election to receive a distribution of his or her vested Account, the Participant shall be deemed to have elected to receive a deferred benefit payable following his or her Normal Retirement Date. The Participant may then elect at any time following his or her termination of employment to receive a distribution of his or her vested Account as soon as administratively feasible following the Plan Administrator’s or its delegate’s receipt of such election filed on a prescribed form.

(b) Vested Account Valued at $5,000 or Less. The consent of the Participant is not required for a distribution of the Participant’s vested Account if the value of the

47

Participant’s vested Account (excluding Rollover Contributions, if any) is not greater than $5,000. The Participant shall receive a distribution of his or her vested Account determined as of the Valuation Date immediately preceding the date of distribution, as soon as practicable following the termination of his or her employment, payable as follows:

(i) In the event the value of the Participant’s vested Account (including Rollover Contributions, if any) is greater than $1,000 and the Participant does not elect to have such distribution paid in a direct rollover to a specified Eligible Retirement Plan in accordance with Section 6.04 or to receive a single sum, the vested Account shall be payable in a direct rollover to an individual retirement plan established by the Plan Administrator in accordance with the procedure established by the Plan Administrator.

(ii) In the event the value of the Participant’s vested Account (including Rollover Contributions, if any) is $1,000 or less and the Participant does not elect to have such distribution paid in a direct rollover, it shall be payable as a single sum cash distribution to a specified Eligible Retirement Plan in accordance with Section 6.04.

(c) Upon Plan Termination. Upon termination of this Plan, if the Plan does not offer an annuity option (purchased from a commercial provider), and if an Employer (or any Affiliate) does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)), the Participant’s Account balance will, without the Participant’s consent, be distributed to the Participant. However, if any Affiliate maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) then the Participant’s Account will be transferred, without the Participant’s consent, to the other plan if the Participant does not consent to an immediate distribution.

(d) The consent of the Participant shall not be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415.

6.04 Direct Rollover

Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee’s election under this Article, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a direct rollover in accordance with Code Section 401(a)(31).

6.05 Timing of Distribution

(a) Unless otherwise elected, benefits shall begin before the 60^th day following the close of the Plan Year in which the latest date below occurs:

48

(i) the date the Participant attains age 65;

(ii) the 10^th anniversary of the year the Participant commenced participation in the Plan; or

(iii) the date the Participant ceases to be an Employee.

Notwithstanding the foregoing, the failure of a Participant to consent to a distribution while a benefit is immediately distributable, shall be deemed to be an election to defer the start of benefits sufficient to satisfy this Section.

The Participant may elect to have his or her benefits begin after the latest date for beginning benefits described above, subject to the following provisions of this Section. The Participant shall make the election in writing. Such election must be made before his or her Normal Retirement Date or the date he or she ceases to be an Employee, if later. The election must describe the form of distribution and the date benefits will begin. The Participant shall not elect a date for beginning benefits or a form of distribution that would result in a benefit payable when he or she dies which would be more than incidental within the meaning of the applicable Regulations.

(b) The Participant’s vested Account which results from Elective Deferral Contributions may not be distributed to a Participant or to his or her Beneficiary (or Beneficiaries) in accordance with the Participant’s or Beneficiary’s (or Beneficiaries’) election, earlier than separation from service, death, or disability. Such amount also may be distributed upon:

(i) Termination of the Plan, as permitted in Article 8.

(ii) The disposition by an Employer, if an Employer is a corporation, to an unrelated corporation of substantially all of the assets, within the meaning of Code Section 409(d)(2), used in a trade or business of an Employer if an Employer continues to maintain the Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets.

(iii) The disposition by an Employer, if an Employer is a corporation, to an unrelated entity of an Employer’s interest in a subsidiary, within the meaning of Code Section 409(d)(3), if an Employer continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary.

(iv) The attainment of age 59½ as permitted in Section 6.06 below.

(v) The hardship of the Participant as permitted in Section 6.07 below.

This Section 6.05(b), other than subsection (v), shall apply to all Matching Contributions made on or after January 1, 2006 and earnings thereon.

49

All distributions that may be made pursuant to one or more of the foregoing distributable events will be a retirement benefit and shall be distributed to the Participant according to the distribution of benefit provisions of this Article 6. In addition, distributions that are triggered by (i), (ii) and (iii) above must be made in a lump sum. A lump sum shall include, if applicable, a distribution of an annuity contract.

6.06 In-Service Withdrawals

(a) A Participant may withdraw any part of his or her vested Account attributable to Rollover Contributions at any time.

(b) A Participant who has attained age 59½ may withdraw any part of his or her vested Account attributable to Elective Deferral Contributions or Matching Contributions at any time.

6.07 Hardship Withdrawals

A Participant may withdraw any part of his or her vested Account attributable to the Elective Deferral Contributions (but not earnings thereon) in the event of hardship due to an immediate and heavy financial need.

(a) Immediate and heavy financial need shall be limited to:

(i) expenses for (or necessary to obtain) medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

(ii) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);

(iii) payment of tuition, related educational fees, and room and board expenses, for the next 12 months of post-secondary education for the Participant, his or her spouse, children, or dependents (as defined in Code Section 152 without regard to Code Section 152(b)(1), (b)(2) and (d)(1)(B));

(iv) payments necessary to prevent the eviction of the Participant from his or her principal residence or foreclosure on the mortgage of the Participant’s principal residence; or

(v) payments for funeral or burial expenses for the Participant’s deceased parent, spouse, child or dependents (as defined in Code Section 152 without regard to Code Section 152(d)(1)(B));

(vi) expenses to repair damage to the Participant’s principal residence that would qualify for a casualty loss deduction under Code Section 165 (determined without regard to whether the loss exceeds 10 percent of adjusted gross income); and

50

(vii) any other distribution which is deemed by the Commissioner of the Internal Revenue Service to be made on account of immediate and heavy financial need as provided in Regulations and other documents of general applicability.

No withdrawal shall be allowed which is not necessary to satisfy such immediate and heavy financial need.

(b) Such withdrawal shall be deemed necessary only if all of the following requirements are met:

(i) the distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any Federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution);

(ii) the Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under the Plan and all other plans maintained by an Employer to the extent such loan would not itself increase the financial hardship; and

(iii) the Plan, and all other plans maintained by an Employer, provide that the Participant’s elective contributions and participant contributions will be suspended for at least six (6) months after receipt of the hardship distribution.

(c) A request for a hardship withdrawal shall be made in such manner and in accordance with such rules as the Plan Administrator will prescribe for this purpose (including by means of voice response or other electronic means). Hardship withdrawals shall be a retirement benefit and shall be distributed to the Participant according to the distribution of benefits provisions of this Article. A Forfeiture shall not occur solely as a result of a hardship withdrawal.

6.08 Loans

(a) Loans shall be made available to all Participants, Beneficiaries or Alternate Payees who are parties-in-interest, as defined by ERISA, on a reasonably equivalent basis. Owner-employees (as defined in Code Section 401(c)(3)) and shareholder-employees (as defined in Code Section 1379 before the enactment of the Subchapter S Revision Act of 1982) are not eligible for loans under this Section. Loans shall not be made to Highly Compensated Employees in an amount greater than the amount made available to other Participants. To the extent that loans were offered under the 401(k) plans of Predecessor Employers, this Plan will accept rollover loan notes from former employees who participated under such plans.

(b) A loan shall be a Participant-directed investment of his or her Account. The loan is a Trust Fund investment but no Account other than the borrowing Participant’s

51

Account shall share in the interest paid on the loan or bear any expense or loss incurred because of the loan.

(c) The number of outstanding loans shall be limited to two.

(d) The minimum amount of any loan shall be $500.

(e) Loans must be adequately secured. No collateral other than a portion (up to 50%) of the Participant’s vested Account shall be accepted. The Loan Administrator shall determine if the collateral is adequate for the amount of the loan requested.

(f) Each loan shall bear a reasonable rate of interest to be determined by the Loan Administrator at the inception of the loan. The interest rate, once determined shall remain in effect for the duration of the loan. In determining the interest rate, the Loan Administrator shall take into consideration interest rates currently being charged by commercial lenders for loans of comparable risk on similar terms and for similar durations. The Loan Administrator shall not discriminate among Participants in the matter of interest rates; but loans granted at different times may bear different interest rates in accordance with the current appropriate standards.

(g) The amount of the loan shall not exceed the lesser of (i) or (ii) below:

(i) $50,000 reduced by excess, if any, of:

(A) the highest outstanding balance of loans from the Plan during the one-year period ending on the day before the date on which the loan was made; over

(B) the outstanding balance of loans from the plan on the date on which such loan was made, or

(ii) 50% of the present value (determined as of the most recent Valuation Date) of the loan applicant’s vested Account under the Plan.

(h) The loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five (5) years from the date of the loan. If the loan is used to acquire a dwelling unit, which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant, the repayment period shall not be made for a period longer than the repayment period consistent with commercial practices. The period of repayment shall be arrived at by mutual agreement between the Loan Administrator and the Participant if the loan is for a primary residence.

(i) An application for a loan shall be made in such manner and in accordance with such rules as the Loan Administrator shall prescribe for this purpose (including by means of voice response or other electronic means). The application must specify the amount and duration requested.

52

(j) Each loan shall be fully documented in the form of a promissory note signed by the loan applicant for the face amount of the loan, together with interest determined as specified above.

(k) There will be an assignment of collateral to the Plan executed at the time the loan is made.

(l) In those cases where repayment through payroll deduction is available, installments are so payable, and a payroll deduction agreement shall be executed by the Participant at the time the loan is made. Loan repayments that are accumulated through payroll deduction shall be paid to the Trustee as soon as possible as required by ERISA.

(m) Where payroll deduction is not available, payments may be made in cash in accordance with rules established by the Loan Administrator. Any payment that is not by payroll deduction shall be made payable to the Employer or the Trustee, as specified in the promissory note, and delivered to the Loan Administrator, including prepayments, service fees and penalties, if any, and other amounts due under the note. The Loan Administrator shall deposit such amounts into the Plan as soon as possible as required by ERISA.

(n) The promissory note may provide for reasonable late payment penalties and service fees. Any penalties or service fees shall be applied to all Participants in a nondiscriminatory manner. If the promissory note so provides, such amounts may be assessed and collected from the Account of the Participant as part of the loan balance.

(o) Each loan may be paid prior to maturity, in part or in full, without penalty or service fee, except as may be set out in the promissory note.

(p) The Plan may suspend loan payments for a period not exceeding one year during which an approved unpaid leave of absence occurs, other than a military leave of absence. The Loan Administrator shall provide the Participant a written explanation of the effect of the suspension of payments upon his or her loan.

(q) If a Participant separates from service (or takes a leave of absence) from an Employer because of service in the military and does not receive a distribution of his or her vested Account, the Plan shall suspend loan payments until the Participant’s completion of military service or until the Participant’s fifth anniversary of commencement of military service, if earlier, as permitted under Code Section 414(u). The Loan Administrator shall provide the Participant a written explanation of the effect of his or her military service upon his or her loan.

(r) If any payment of principal and interest, or any portion thereof, remains unpaid for more than ninety (90) days after due, the loan shall be in default. For purposes of Code Section 72(p), the Participant shall then be treated as having received a deemed distribution regardless of whether or not a distributable event has occurred.

53

(s) Upon default, the Plan has the right to pursue any remedy available by law to satisfy the amount due, along with accrued interest, including the right to enforce its claim against the security pledged and execute upon the collateral as allowed by law. The entire principal balance, whether or not otherwise then due, along with accrued interest, shall become immediately due and payable without demand or notice, and subject to collection or satisfaction by any lawful means, including specifically, but not limited to, the right to enforce the claim against the security pledged and to execute upon the collateral as allowed by law.

(t) Notwithstanding the above, in the event of default, foreclosure on the note and attachment of security or use of amounts pledged to satisfy the amount then due shall not occur until a distributable event occurs in accordance with the Plan, and shall not occur to an extent greater than the amount then available upon any distributable event which has occurred under the Plan.

(u) All reasonable costs and expenses, including but not limited to attorney’s fees, incurred by the Plan in connection with any default or in any proceeding to enforce any provision of a promissory note or instrument by which a promissory note for a Participant loan is secured, shall be assessed and collected from the Account of the Participant as part of the loan balance.

(v) If no distributable event has occurred under the Plan at the time that the Participant’s vested Account would otherwise be used under this provision to pay any amount due under the outstanding loan, this will not occur until the time a distributable event occurs under the Plan. An outstanding loan will become due and payable in full sixty (60) days after a Participant ceases to be an Employee and a party in interest as defined in ERISA or after complete termination of the Plan.

(w) The Administrator and the Loan Administrator each may adopt such other loan rules and/or procedures as each deem appropriate or necessary for the administration of this Plan.

6.09 Distributions Under Qualified Domestic Relations Orders

The Plan specifically permits distributions to an Alternate Payee under a qualified domestic relations order as defined in Code Section 414(p), at any time, regardless of whether the Participant has attained his or her earliest retirement age, as defined in Code Section 414(p), under the Plan and in any form of payment permitted under the Plan. A distribution to an Alternate Payee before the Participant has attained his or her earliest retirement age is available only if the order specifies that distribution shall be made prior to the earliest retirement age or allows the Alternate Payee to elect a distribution prior to the earliest retirement age.

If any portion of the Participant’s vested Account is payable during the period the Plan Administrator (or its delegate) is making its determination of the qualified status of the domestic relations order, a separate accounting shall be made of the amount payable. If

54

the Plan Administrator (or its delegate) determines the order is a qualified domestic relations order within 18 months of the date amounts are first payable following receipt of the order, the payable amounts shall be distributed in accordance with the order. If the Plan Administrator (or its delegate) does not make its determination of the qualified status of the order within the 18 month determination period, the payable amounts shall be distributed in the manner the Plan would distribute if the order did not exist and the order shall apply prospectively if the Plan Administrator (or its delegate) later determines the order is a qualified domestic relations order.

The Plan shall make payments or distributions required under this section by separate benefit checks or other separate distribution to the Alternate Payee(s).

55

ARTICLE 7

DISTRIBUTION REQUIREMENTS

7.01 General Rules

(a) Precedence: The requirements of this Article 7 will take precedence over any inconsistent provisions of the Plan.

(b) Requirements of Regulations Incorporated: All distributions required under this Article 7 will be determined and made in accordance with the Regulations under Section 401(a)(9) of the Code.

7.02 Time and Manner of Distribution

(a) Required Beginning Date: The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s required beginning date.

(b) Death of Participant Before Distributions Begin: If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(i) If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70½, if later.

(ii) If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, then, distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(iii) If there is no designated beneficiary as of the date of the Participant’s death who remains a beneficiary as of September 30 of the year immediately following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(iv) If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 7.02(b), other than Section 7.02(b)(i), will apply as if the surviving spouse were the Participant.

For purposes of this Section 7.02 and Section 7.04, unless Section 7.02(b)(iv) applies, distributions are considered to begin on the Participant’s required beginning date. If Section 7.02(b)(iv) applies, distributions are considered to

56

begin on the date distributions are required to begin to the surviving spouse under Section 7.02(b)(i). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s required beginning date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 7.02(b)(i)), the date distributions are considered to begin is the date distributions actually commence.

(c) Forms of Distribution: Unless the Participant’s interest is distributed in a single sum on or before the required beginning date, as of the first distribution calendar year, distributions will be made in accordance with Sections 7.03 and 7.04 of this Article 7.

7.03 Required Minimum Distributions During Participant’s Lifetime

(a) Amount of Required Minimum Distribution For Each Distribution Calendar Year: During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(i) the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in Regulation Section 1.401(a)(9)-9, Q&A-2, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or

(ii) if the Participant’s sole designated beneficiary for the distribution calendar year is the Participant’s surviving Spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in Regulation Section 1.401(a)(9)-9, Q&A-3, using the Participant’s and Spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year.

(b) Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death: Required minimum distributions will be determined under this Section 7.03 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant’s date of death.

7.04 Required Minimum Distributions After Participant’s Death

(a) Death On or After Date Distribution Begins:

(i) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated beneficiary, determined as follows:

57

(A) The Participant’s remaining life expectancy is calculated in accordance with the Single Life Table found in Regulation Section 1.401(a)(9)-9, Q&A-1, using the age of the Participant in the year of death, reduced by one for each subsequent year.

(B) If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated in accordance with the Single Life Table found in Regulation Section 1.401(a)(9)-9, Q&A-1, for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.

(C) If the Participant’s surviving Spouse is not the Participant’s sole designated beneficiary, the designated beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.

(ii) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the Participant’s remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(b) Death Before Distributions Begin:

(i) Participant Survived by Designated Beneficiary. If the Participant dies before the date of distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account balance by the remaining life expectancy of the Participant’s designated beneficiary, determined as provided in Section 7.03(a).

(ii) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

58

(iii) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before distributions begin, the Participant’s surviving spouse is the Participant’s sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 7.02(a), this Section 7.04(b) will apply as if the surviving spouse were the Participant.

7.05 Definitions

For purposes of this Article 7, the following definitions shall have the following meanings:

(a) Designated beneficiary: The individual who is designated as the Beneficiary under Section 1.12 of the Plan and is the designated beneficiary under Code Section 401(a)(9) and Regulation Section 1.401(a)(9)-1, Q&A-4.

(b) Distribution calendar year: A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 7.02(b). The required minimum distribution for the Participant’s first distribution calendar year will be made on or before the Participant’s required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant’s required beginning date occurs, will be made on or before December 31 of that distribution calendar year.

(c) Life expectancy: Life expectancy as computed by use of one of the following tables: as appropriate (1) the Single Life Table, (2) Uniform Life Table, or (3) Joint and Last Survivor Table found in Regulation Section 1.401(a)(9)-9.

(d) Participant’s account balance: The Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.

(e) Required beginning date: The April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or retires, except in the case of a Participant who is a 5-percent owner in which case it is the April 1 of the

59

calendar year following the calendar year in which such Participant attains age 70½.

(f) 5-percent Owner: A Participant is treated as a 5-percent owner for purposes of this Section if such Participant is a 5-percent owner as defined in Section 416 of the Code of any time during the Plan Year ending with or within the calendar year in which such owner attains age 70½. Once distributions have begun to a

5-percent owner under this Section, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.

60

ARTICLE 8

GENERAL PROVISIONS

8.01 Amendments

The Company, by action of its Chief Executive Officer, may amend or modify this Plan, in whole or in part, at any time in his or her sole discretion, including but not limited to any remedial retroactive changes (within the time specified by the applicable Regulations) to comply with any law or Regulation to which the Plan is subject.

Except as permitted by applicable law, no amendment to this Plan shall be effective to the extent that it has the effect of decreasing a Participant’s accrued benefit.

Except as permitted by applicable law, no amendment to the Plan shall be effective to eliminate or restrict an optional form of benefit.

An amendment shall not decrease a Participant’s vested interest in the Plan. If an amendment to the Plan, or a deemed amendment in the case of a change in top heavy status of the Plan as provided in Article 10, changes the computation of the percentage used to determine that portion of a Participant’s Account attributable to Employer Contributions which is nonforfeitable (whether directly or indirectly), each Participant or former Participant:

(i) who has completed at least three (3) Years of Service on the date the election period described below ends; and

(ii) whose nonforfeitable percentage will be determined on any date after the date of the change

may elect, during the election period, to have the nonforfeitable percentage of his Account that results from Employer Contributions determined without regard to the amendment. This election may not be revoked. If after the Plan is changed, the Participant’s nonforfeitable percentage will at all times be as great as it would have been if the change had not been made, no election needs to be provided. The election period shall begin no later than the date the Plan amendment is adopted, or deemed adopted in the case of a change in the top heavy status of the Plan, and end no earlier than the 60^th day after the latest of the date the amendment is adopted (or deemed adopted) or becomes effective, or the date the Participant is issued written notice of the amendment (or deemed amendment) by the Employer or the Plan Administrator.

8.02 Mergers and Direct Transfers

The Plan may not be merged or consolidated with, nor have its assets or liabilities transferred to, any other retirement plan, unless each Participant in the Plan would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if this Plan had then terminated). The Company may enter into merger agreements or direct transfer

61

of assets agreements with the sponsors of other retirement plans which are qualified under Code Section 401(a), including an elective transfer, and may accept the direct transfer of plan assets, or may transfer plan assets, as a party to any such agreement. The Company shall not consent to, or be a party to a merger, consolidation, or transfer of assets with a plan which is subject to the survivor annuity requirements of Code Section 401(a)(11) if such action would result in a survivor annuity feature being maintained under this Plan.

The Plan may accept a direct transfer of plan assets on behalf of an Eligible Employee. If the Eligible Employee is not an Active Participant when the transfer is made, the Eligible Employee shall be deemed to be an Active Participant only for the purpose of investment and distribution of the transferred assets. Employer Contributions shall not be made for or allocated to the Eligible Employee, until the time he meets all of the requirements to become an Active Participant.

The Plan shall hold, administer, and distribute the transferred assets as a part of the Plan. The Plan shall maintain a separate account for the benefit of the Employee on whose behalf the Plan accepted the transfer in order to reflect the value of the transferred assets.

A Participant’s protected benefits may be eliminated upon transfer between qualified defined contribution plans if the conditions in Q&A 3(b)(1) in Section 1.411(d)-4 of the Regulations are met. The transfer must meet all of the other applicable qualification requirements.

A Participant’s protected benefits may be eliminated upon transfer between qualified plans (both defined benefit and defined contribution) if the conditions in Q&A 3©(1) in Section 1.411(d)-4 of the Regulations are met. If the Participant is eligible to receive an immediate distribution of his entire nonforfeitable accrued benefit in a single sum distribution that would consist entirely of an eligible rollover distribution under Code Section 401(a)(31), such transfer will be accomplished as a direct rollover under Code Section 401(a)(31). The rules applicable to distributions under the Plan will apply to the transfer, but the transfer will not be treated as a distribution for purposes of the minimum distribution requirements of Code Section 401(a)(9).

8.03 Termination of Plan

The Company expects to continue the Plan indefinitely but reserves the right to terminate the Plan, by action of the Compensation Committee of the Board, in whole or in part, at any time, upon giving written notice to all parties concerned.

The Account of each Participant shall be fully (100%) vested and nonforfeitable as of the effective date of complete termination of the Plan. The Account of each Participant who is included in the group of Participants deemed to be affected by a partial termination of the Plan shall be fully (100%) vested and nonforfeitable as of the effective date of the partial termination of the Plan. The Participant’s Account shall continue to participate in the earnings credited, expenses charged, and any appreciation or depreciation of the Investment Fund until his or her vested Account is distributed. The Named Fiduciary, in

62

its sole discretion, shall be responsible for determining whether a partial termination has occurred, and, in its sole discretion, may fully vest the Accounts of a group of Participants because they are affected by a business divestiture, layoff, reduction-in-force or other similar transaction, in which case the rules relating to a partial termination shall apply (even if a true partial termination under Code Section 411(d)(3) has not occurred).

A Participant’s Account which does not result from Elective Deferral Contributions may be distributed to the Participant after the effective date of the complete termination of the Plan. A Participant’s Account resulting from such Contributions may be distributed upon complete termination of the Plan, but only if neither an Employer nor any Affiliate maintains or establishes a successor defined contribution plan (other than an Employer stock ownership plan as defined in Code Section 4975(e)(7), a simplified employee pension plan as defined in Code Section 408(k) or a SIMPLE IRA plan as defined in Code Section 408(p)) and such distribution is made in a lump sum. A distribution under this Article shall be a retirement benefit and shall be distributed to the Participant according to the provisions of Article 6.

The Participant’s entire vested Account shall be paid in a single sum to the Participant as of the effective date of complete termination of the Plan if: (i) the requirements for distribution of Elective Deferral Contributions in the above paragraph are met; and (ii) consent of the Participant is not required to distribute a benefit which is immediately distributable. The small amounts payment is in full settlement of all benefits otherwise payable.

The assets of this Plan shall not be paid to an Employer at any time, except that, after the satisfaction of all liabilities under the Plan, any assets remaining may be paid to an Employer. The payment may not be made if it would contravene any provision of law.

63

ARTICLE 9

ADMINISTRATION OF THE PLAN

9.01 Administration

Subject to the provisions of this article, the Named Fiduciary has complete control of the administration of the Plan. The Named Fiduciary has all the powers necessary for it to properly carry out its administrative duties. Not in limitation, but in amplification of the foregoing, the Named Fiduciary has complete discretion to construe and interpret the provisions of the Plan, including ambiguous provisions, if any, and to determine all questions that may arise under the Plan, including all questions relating to the eligibility of Employees to participate in the Plan and the amount of benefit to which any Participant or Beneficiary may become entitled. The Named Fiduciary’s decisions upon all matters within the scope of its authority shall be final.

The Named Fiduciary may appoint or employ such persons as it deems necessary to render advice with respect to any responsibility it has under the Plan. The Named Fiduciary may delegate to the Plan Administrator and/or any employee any responsibility it may have under the Plan and may designate any other person or persons to carry out any of its responsibilities under the Plan. Any delegation of the Named Fiduciary’s authority under the Plan carries with it the Named Fiduciary’s complete and exclusive authority and discretion to construe and interpret the provisions of the Plan, unless otherwise stated.

Unless otherwise set out in the Plan or Annuity Contract, the Plan Administrator may delegate recordkeeping and other duties which are necessary for the administration of the Plan to any person or firm that agrees to accept such duties. The Plan Administrator shall be entitled to rely upon all tables, valuations, certificates and reports furnished by the consultant or actuary appointed by the Plan Administrator and upon all opinions given by any counsel selected or approved by the Plan Administrator.

The Plan Administrator shall receive all claims for benefits by Participants, former Participants and Beneficiaries. The Plan Administrator shall determine all facts necessary to establish the right of any claimant to benefits and the amount of those benefits under the provisions of the Plan. The Plan Administrator may establish rules and procedures to be followed by claimants in filing claims for benefits, in furnishing and verifying proofs necessary to determine age, and in any other matters required to administer the Plan.

9.02 Employers

(a) Participating Affiliates:

The Company and each of the Affiliates listed in Attachment A is an Employer that has adopted this Plan. An Affiliate’s participation in this Plan shall be authorized in writing by the Company and by the Affiliate and shall provide that such Affiliate:

64

(i) agrees that the provisions of this Plan and any amendments hereto shall control with respect to the duties, rights and benefits under the Plan of the Affiliate’s employees, their spouses, and other persons designated by the Affiliate’s employees as eligible for benefits under the Plan; and

(ii) appoints the Named Fiduciary, the Plan Administrator and the Board as its agents to exercise on its behalf all the powers and authority conferred upon the Named Fiduciary, Plan Administrator and the Company under the Plan.

(b) Employer Contributions:

Contributions made by any Employer shall be treated as Contributions made by the Company. Forfeitures arising from those Contributions shall be used for the benefit of all Participants.

(c) Withdrawal of Employer:

An Employer shall not be an Employer if it ceases to be controlled by or affiliated with the Company. Further, the Company may, in its sole discretion, determine that an Employer shall no longer participate in the Plan and direct that such Employer withdraw from the Plan. Similarly, an Employer may, by action of its board of directors, elect to terminate its participation and withdraw from the Plan.

9.03 Plan Expenses

Expenses of the Plan, to the extent that an Employer does not pay such expenses, may be paid out of the assets of the Plan provided that such payment is consistent with ERISA.

9.04 Assignment and Levy

Except as may be required to comply with a qualified domestic relations order in accordance with Section 6.09, no Participant’s Account under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge, and any attempt to do so shall be void; nor shall any such Account be in any manner liable for or subject to the debts, contracts, engagements or torts of the person entitled to a benefit. If any Participant or Beneficiary under this Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any Account under this Plan, except as specifically provided herein, or if any Account shall be levied upon, garnished or attached, then such benefit shall, in the discretion of the Named Fiduciary, cease and terminate. In that event the Named Fiduciary will hold or apply the same or any part thereof to or for the benefit of such Participant or Beneficiary, his or her spouse, children or other dependents or any of them in such manner and in such proportion as the Named Fiduciary may deem proper.

9.05 Infancy or Incompetency

65

In the event that the Plan Administrator shall find that any person to whom a benefit is payable is an infant or incompetent by reason of physical or mental disability, any payment due to such person, unless a prior claim shall have been made by a duly qualified guardian or other legal representative, may be paid to the spouse, parent, brother or sister of such person, or any other person deemed by the Named Fiduciary to be responsible for the care of such person. Any such payment shall be a payment for the account of the person otherwise entitled to payment of the benefit and shall be a complete discharge of any liability therefor under this Plan

9.06 Missing Persons

If in the case of any benefit payable to a Participant or Beneficiary under this Plan, the Plan Administrator is unable to locate such person within six months following the date a certified letter was mailed to such person’s last known address notifying him or her of the benefit, the amount so distributable shall be treated as a forfeiture. In the event the Participant or Beneficiary is subsequently located, such benefit shall be restored.

9.07 Claim and Appeal Procedures

(a) Claims made for benefits under the Plan shall be submitted in writing to the Plan Administrator (or its delegate) on a form prescribed for such purpose. Within ninety (90) days after its receipt of a claim for benefits under the Plan, the Plan Administrator (or its delegate) shall give written notice to the claimant of its decision on the claim unless the Plan Administrator (or its delegate) determines that special circumstances require an extension of time for processing the claim.

If an extension of time for processing a claim is needed, a written notice shall be furnished to the claimant within the 90-day period referred to above. The notice shall state the special circumstances requiring the extension and the date by which a decision can be expected. In no event, however, shall such decision be made more than one-hundred-eighty (180) days from the date the claim was filed.

(b) If a claim for benefits is wholly or partially denied, the Plan Administrator (or its delegate) shall provide the claimant with a notice in a manner calculated to be understood by that individual setting forth:

(i) the specific reason or reasons for denying payment of the benefits;

(ii)specific references to the Plan provisions upon which the denial is based;

(iii) a description of any additional material or information which may be needed to perfect the request, including an explanation of why such material or information is necessary; and

(iv) an explanation of the Plan’s claim review procedures and the time limits applicable to such procedures and a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA if the claim is denied following review on appeal.

66

(c) Any claimant whose claim for benefits is denied by the Plan Administrator (or its delegate) may appeal to the Named Fiduciary (or its delegate) for review of the denial by making a written request therefore within sixty (60) days of receipt of a notification of denial. Any such request may include any written comments, documents, records and other information relating to the claim and may include a request for “relevant” documents (as defined below) to be provided free of charge. The claimant may if he or she chooses, request a representative to make such written submissions on his or her behalf.

The Named Fiduciary (or its delegate) shall notify the claimant in writing within sixty (60) days after the request for an appeal of its final decision. If, however, the Named Fiduciary (or its delegate) determines that special circumstances require additional time for processing, the Named Fiduciary (or its delegate) may extend such 60-day period, but not by more than an additional sixty (60) days and shall notify the claimant in writing of such extension. The notice shall state the special circumstances requiring the extension and the date by which a decision can be expected. If the period of time is extended due to a claimant’s failure to submit information necessary to decide the claim, the period for making the determination on appeal shall be tolled from the date on which the notification of the extension is sent to the claimant until the date on which the claimant responds to the request for additional information.

(d) In the case of an adverse benefit determination on appeal, the Named Fiduciary (or its delegate) will provide written notification to the claimant, set forth in a manner calculated to be understood by the claimant, of:

(i)the specific reason or reasons for the adverse determination on appeal;

(ii)the specific Plan provisions on which the denial of the appeal is based;

(iii) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records, and other information “relevant” (as defined below) to the claimant’s claim for benefits; and

(iv) a statement of the claimant’s right to bring a civil action under ERISA Section 502(a).

(e) A decision on review shall be final and binding on all persons for all purposes. If a claimant shall fail to file a request for appeal according to the procedures herein outlined, such claimant shall have no rights to review and shall have no right to bring action in any court, and the denial of the claim shall become final and binding on all persons for all purposes.

(f) For purposes of this Section, a document, record or other information shall be considered “relevant” to a claimant’s claim if such document, record or other information: (i) was relied upon in making the benefit determination; (ii) was submitted, considered, or generated in the course of making the benefit

67

determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination; and (iii) demonstrates compliance with the administrative processes and safeguards required in making the benefit determination.

9.08 Voting and Tender of Qualifying Employer Securities

Voting rights with respect to Qualifying Employer Securities will be passed through to Participants. The Trustee shall exercise all voting rights with respect to Qualifying Employer Securities which are allocated to Plan Accounts in accordance with instructions from Participants. Before each meeting of shareholders, an Employer shall cause to be sent to each person with power to control such voting rights a copy of any notice and any other information provided to shareholders and, if applicable, a form for instructing the Trustee how to vote at such meeting (or any adjournment thereof) the number of full and fractional shares subject to such person’s voting control. The Trustee may establish a deadline in advance of the meeting by which such forms must be received in order to be effective.

If Participants control voting rights, each Participant shall be entitled to one vote for each share credited to his or her Account.

If Participants control voting rights, and if some or all of the Participants have not directed or have not timely directed the Trustee on how to vote, then the Trustee shall vote such Qualifying Employer Securities in the same proportion as those shares of Qualifying Employer Securities for which the Trustee has received proper direction for such matter.

Tender rights or exchange offers for Qualifying Employer Securities will be passed through to Participants. As soon as practicable after the commencement of a tender or exchange offer for Qualifying Employer Securities, the Company shall cause each person with power to control the response to such tender or exchange offer to be advised in writing the terms of the offer and, if applicable, to be provided with a form for instructing the Trustee, or for revoking such instruction, to tender or exchange shares of Qualifying Employer Securities, to the extent permitted under the terms of such offer. In advising such persons of the terms of the offer, the Company may include statements from the Board setting forth its position with respect to the offer.

If some or all of the Participants have not directed or have not timely directed the Trustee on how to tender, then the Trustee shall not tender such Qualifying Employer Securities.

If the tender or exchange offer is limited so that all of the shares that the Trustee has been directed to tender or exchange cannot be sold or exchanged, the shares that each Participant directed to be tendered or exchanged shall be deemed to have been sold or exchanged in the same ratio that the number of shares actually sold or exchanged bears to the total number of shares that the Trustee was directed to tender or exchange.

The Trustee shall hold the Participant’s individual directions with respect to voting rights or tender decisions in confidence and, except as required by law or as directed by the

68

Named Fiduciary, shall not divulge or release such individual directions to anyone associated with the Company or an Employer. The Named Fiduciary may require verification of the Trustee’s compliance with the directions received from Participants by any independent auditor selected by the Named Fiduciary, provided that such auditor agrees to maintain the confidentiality of such individual directions.

The Named Fiduciary may develop procedures to facilitate the exercise of votes or tender rights, such as the use of facsimile or electronic transmissions for the Participants located in physically remote areas.

69

ARTICLE 10

TOP HEAVY PROVISIONS

10.01 Determination of Top-Heavy Status

The Plan shall be considered to be a “top-heavy plan” with respect to a Plan Year if the Plan is included in an “aggregation group” (as defined below) and the aggregation group is a “top-heavy group” (as defined in Section 10.02 below) as of the “determination date” (as defined in Section 10.03 below) with respect to such Plan Year. The required aggregation and permissive aggregation rules are described below:

(a) Required Aggregation Group. The required aggregation group of an Employer includes each qualified retirement plan (including a simplified employee pension plan) of an Employer in which a “key employee” (as defined in Section 10.07 below) participates in the Plan Year containing the determination date, or any of the four (4) preceding Plan Years. In addition, each other such plan of an Employer which, during this period, enables any such plan in which a key employee participates to satisfy the nondiscrimination in benefits or contributions requirements of Section 401(a)(4) of the Code or the minimum participation standards of Section 410 of the Code, is part of the required aggregation group.

(b) Permissive Aggregation Group. A permissive aggregation group consists of plans of an Employer that are required to be aggregated, plus one or more plans that are not part of a required aggregation group but that satisfy the requirements of Sections 401(a)(4) and 410 of the Code when considered together with the required aggregation group.

(c) Collectively Bargained Plans. Collectively bargained plans that include a key employee must be included in the required aggregation group for an Employer. Collectively bargained plans that do not include a key employee may be included in a permissive aggregation group. The special top-heavy rules do not apply to collectively bargained plans, however, whether or not they include a key employee.

10.02 Top-Heavy Plan Definition and Ratio

The term “top-heavy group” means any aggregation group if the sum (as of the determination date) of the present value, determined as of the determination date, of the accrued benefits for key employees under all defined benefit plans included in such group and all defined contribution plans included in such group exceeds sixty percent (60%) of a similar sum determined for all Employees, excluding former key employees. In the case of plans that are required to be aggregated, each plan in the required aggregation group will be top-heavy if the group is top-heavy. No plan in the required aggregation group will be top-heavy if the group is not top-heavy. If a permissive aggregation group is top-heavy, only those plans that are part of the required aggregation group are top-heavy. Plans that are not part of the required aggregation group are not top-heavy. The

70

Plan Administrator shall determine for each Plan Year whether the Plan is top-heavy, but precise top-heavy ratios need not be computed every year.

10.03 Determination Date

Whether a plan is top-heavy is determined on the determination date. The “determination date” is: (i) the last day of the preceding Plan Year; or (ii) in the case of the first Plan Year, the last day of such first Plan Year. The present value of accrued benefits and distributions made as of the determination date are generally determined as of the determination date. An Employee’s status as a key employee is based on the Plan Year containing the determination date. If more than one plan is aggregated pursuant to Section 10.01, the present value of the accrued benefits (including distributions for key employees and all Employees) is determined separately for each plan as of each plan’s determination date. The plans are then aggregated by adding the results of each plan as of the determination dates for such plans that fall within the same calendar year. If the total results show that the plans are top-heavy, each plan will be top-heavy for the plan year commencing immediately following its respective determination date.

10.04 Present Value of Accrued Benefits

(a) The present value, as of the determination date, of accrued benefits of any participant in a defined contribution plan, for purposes of this Article, includes the balance of: (i) the participant’s account balance as of the most recent valuation date occurring within a twelve (12) month period ending on the determination date; and (ii) an adjustment for employer contributions due as of the determination date which are required to be taken into account on that date under Code Section 416 and applicable Regulations. The present value of such accrued benefits includes Employee contributions, whether voluntary or mandatory, determined as the balance of such Employee’s contribution account as of the determination date. If an Employee has not performed services for an Employer maintaining the Plan or an Affiliate at any time during the one (1) year period ending on the determination date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account.

(b) The present value, as of the determination date, of accrued benefits of any participant in a defined benefit plan shall be determined in accordance with Code Section 416 and applicable Regulations. The accrued benefit of a participant other than a key employee shall be determined under: (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employers and Affiliates, or (ii) if there is no such method as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). The present value of such accrued benefits includes Employee contributions whether voluntary or mandatory, determined as the balance of such Employee’s contribution account as of the determination date. If an Employee has not performed services for an Employer maintaining the Plan or an Affiliate at any time during the one (1) year period

71

ending on the determination date, any accrued benefit for such individual shall not be taken into account.

10.05 Adjustments to Present Value of Accrued Benefits

(a) Distributions. The present values of accrued benefits of an Employee as of the determination date shall be increased by the distribution made with respect to the Employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the one (1) year period ending on the determination date. The preceding sentence also shall apply to distributions under a terminated plan which had it not been terminated would have aggregated with the Plan as part of the required aggregation group. In the case of a distribution made for a reason other than separation from service, death or disability, this provision shall be applied by substituting “five (5) year period” for “one (1) year period.”

(b) Rollovers and Plan-to-Plan Transfers. In the case of unrelated rollovers or plan-to-plan transfers, the plan providing the distributions always counts the distribution and the plan accepting the rollover or transfer does not consider the rollover part of the accrued benefit. In the case of related rollovers or transfers, the plan providing the rollover does not count the rollover as a distribution and the plan accepting the rollover counts the rollover in the present value of the accrued benefits. An unrelated rollover or transfer is both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer. A related rollover or transfer is either not initiated by the Employee or is made to a plan maintained by the same employer.

10.06 Adjustments to Plan Provisions if Plan is Top-Heavy

For any Plan Year that the Plan is top-heavy, the following adjustments to its provisions shall be applicable and shall be implemented by the Named Fiduciary and Plan Administrator where necessary to preserve the qualified status of the Plan:

(a) Minimum Benefits. For any such Plan Year, a contribution shall be made by an Employer on behalf of each “qualifying non-key employee” (as defined below) employed by such Employer in an amount equal to three percent (3%) of the non-key employee’s Compensation for the year. In the event, however, that the highest “allocation rate” (as defined below) for such Plan Year for any Eligible Employee who is a key employee is less than three percent (3%) of such Eligible Employee’s Compensation for the year, such lesser percentage shall be substituted for “three percent (3%)” in the preceding sentence. As used in this paragraph (a), the term “allocation rate” means the percentage determined by dividing the aggregate amount of contributions made by all Employers, and forfeitures allocated, on behalf of the Eligible Employee for the Plan Year by the amount of the Eligible Employee’s Compensation for the year. For the purposes of this paragraph (a), the term “qualifying non-key employee” shall mean, with respect to a Plan Year, a non-key employee who satisfies each of the following requirements: (i) the non-key employee is an Eligible Employee at any time

72

during such Plan Year; (ii) the non-key employee is employed by an Employer on the last day of the Plan Year; (iii) the non-key employee is not a participant in any defined benefit pension plan maintained by an Employer at any time during the Plan Year; and (iv) the non-key employee is not a member of a collective bargaining unit covered by a collective bargaining agreement. Any contribution required to be made on behalf of a non-key employee by an Employer under the provisions of this paragraph (a) shall be allocated to a separate Employer contribution account maintained on behalf of the non-key employee herein.

(b) Matching contributions. Matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the Plan. Matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the Average Contribution Percentage Test and other requirements of Section 401(m) of the Code.

(c) Notwithstanding paragraph (a), if a non-key employee is a qualifying non-key employee (but for (a)(iii) above), such individual shall receive the minimum top-heavy plan defined benefit accrual of 2% of Compensation each year of service (up to 10 years of service) under the defined benefit pension plan and shall not receive the minimum benefit set forth in (a) above. If such non-key employee does not accrue the required top heavy minimum benefit under the defined benefit pension plan or another plan sponsored by an Employer, such Employer shall make a contribution under this Plan on behalf of such non-key employee for the Plan Year in an amount required to satisfy the provisions of Code Section 416(c).

(d) Vesting. During top-heavy Plan Years, a Participant credited with Hours of Service after the Plan became top-heavy has a nonforfeitable right to the following percentage of his accrued benefit determined pursuant to the following table except to the extent that a more favorable schedule is provided in Section 3.07.

VESTING SERVICE	NONFORFEITABLE PERCENTAGE
Less than 3 years	0%
3 or more years	100%

After the Plan ceases to be top-heavy, all Participants with three (3) or more Years of Vesting Service shall continue to vest pursuant to the schedule set forth above, there shall be no reduction in accrued vested benefits, but the Plan shall otherwise revert to the vesting provisions applicable prior to its becoming top-heavy or such other provisions as may then otherwise be in effect.

10.07 “Key Employee” and “Non-Key Employee” Defined

As used in this Article 10, a key employee is any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date was: (i) an officer of an Employer or an Affiliate having annual compensation greater than $130,000 (as adjusted under Code Section 416(i)(1)); (ii) a

73

five percent (5%) owner of an Employer or an Affiliate; or (iii) a one percent (1%) owner of an Employer or an Affiliate having annual compensation greater than $150,000. For purposes of this definition the following paragraphs also shall apply:

(a) The terms “key employee,” “former key employee,” and “non-key employee” include the beneficiaries of such individuals. The term “non-key employee” means any Employee who is not a key employee.

(b) Whether an individual is an officer shall be determined upon the basis of all the facts, including, for example, the source of the officer’s authority, the term for which elected or appointed, and the nature and extent of the duties to be performed.

(c) If any self-employed individuals are treated as Employees under this Plan, their earned income from self-employment for services provided to Employers or Affiliates is to be treated as compensation for purposes of this Section.

(d) The term “annual compensation” means compensation within the meaning of Section 415I(3) of the Code.

The determination of who is a key employee will be made in accordance with Section 416(i)(1) of the Code and applicable Regulations.

74

ARTICLE 11

MISCELLANEOUS

11.01 Nonguarantee of Employment

The establishment of this Plan shall not be construed as conferring any legal or other rights upon any Employee or any person for a continuation of employment, nor shall it interfere with the rights of an Employer to discharge any Employee or refuse to rehire a former Employee or otherwise act with relation to him or her. Each Employer may take any action (including discharge or refusal to rehire) with respect to any Employee or former Employee or other person and may treat him or her without regard to the effect that such action or treatment might have upon him or her as a Participant in this Plan.

11.02 Titles and Headings

The titles and headings of the respective Articles and Sections are inserted merely for convenience and shall be given no legal effect.

IN WITNESS WHEREOF, this Plan as amended and restated is hereby executed this 22^nd day of December, 2006.

COVENTRY HEALTH CARE, INC.

By:   /s/ Dale B. Wolf  

Title:   Chief Executive Officer  

75

APPENDIX I

FIRST HEALTH GROUP CORP. RETIREMENT SAVINGS PLAN

PROTECTED BENEFITS

Notwithstanding any other provision of the Coventry Health Care, Inc. Retirement Savings Plan (the “Plan”) to the contrary, the following shall apply with respect to benefits accrued by employees of First Health Group Corp. and its affiliates before January 1, 2006, under the First Health Group Corp. Retirement Savings Plan (the “FH Plan”) who were participants in the FH Plan as of December 31, 2005 and became Participants in the Plan effective as of

January 1, 2006.

1) Vesting in Employer Contributions

a) Except as otherwise provided below with respect to former participants in the CCN, Inc. 401(k) Plan (the “CCN Plan”) and the Claims Administration Corporation Employees’ Savings Plan (the “CAC Plan”), the FH Plan provided for vesting on the following schedule:

Less than 2 years of Vesting Service 0% vested

After 2 years of Vesting Service 25% vested

After 3 years of Vesting Service 50% vested

After 4 years of Vesting Service 75% vested

After 5 years of Vesting Service 100% vested

Participants also become 100% vested in their Account balance in the event of their death or Total and Permanent Disability while still employed.

b) CCN Plan Participants. The CCN Plan merged into the First Health Plan as of January 1, 2002. The CCN Plan provided for vesting on the following schedule:

Less than 1 year of Vesting Service 0% vested

At least 1 but less than 2 years of Vesting Service 33.3% vested

At least 2 but less than 3 years of Vesting Service 66.7% vested

3 or more years of Vesting Service 100% vested

c) CAC Plan Participants. The CAC Plan merged into the First Health Plan as of December 31, 2002. The CAC Plan provided for vesting on the following schedule:

Less than 1 years of Vesting Service 0% vested

After 1 year of Vesting Service 20% vested

After 2 years of Vesting Service 40% vested

After 3 years of Vesting Service 60% vested

After 4 years of Vesting Service 80% vested

After 5 years of Vesting Service 100% vested

APP. I. - 1

2) In-Service Withdrawals

a) HealthCare Value Management, Inc. Profit Sharing Plan (the “HCVM Plan”) Participants

i) Age 59½. Except as may otherwise be permitted under Section 6.06, an individual who has attained age 59½ who participated in the HCVM Plan may withdraw all or any portion of his or her vested HCVM account at any time for any reason upon written notice to the Plan Administrator. Such withdrawals are limited to two (2) in any 12-month period.

ii) Matching and Discretionary Contribution Account. A participant in the HCVM Plan who has been an active participant in the HCVM Plan, the FH Plan and this Plan for at least five (5) years may withdraw any part of his or her vested HCVM Matching Contribution Account and HCVM Discretionary Contribution Account at any time. Such withdrawals are limited to two (2) in any 12-month period.

b) CAC Plan Participants

i) Age 59½. Except as may otherwise be permitted under Section 6.06, an individual who has attained age 59½ who participated in the CAC Plan may withdraw all or any portion of his or her CAC Plan vested matching account, CAC Plan 401(k) account, and CAC Plan after-tax account at any time for any reason upon written notice to the Plan Administrator. Such withdrawals are limited to two (2) in any Plan Year. The minimum amount of any such withdrawal is $1,000.

ii) Withdrawal of CAC Plan Matching Account. A participant in the CAC Plan who has been an active participant in the CAC Plan, the FH Plan and this Plan for at least five (5) years may withdraw any part of his or her vested CAC Plan matching account at any time. A participant in the CAC Plan who has fewer than five (5) years of participation may withdraw any portion of his or her CAC matching account in the CAC Plan that has been in the CAC Plan, the FH Plan and this Plan for at least two (2) years. Such withdrawals are limited to two (2) in any Plan Year. The minimum amount of any such withdrawal is $1,000.

iii) Withdrawal of CAC Plan After-Tax Account. A participant in the CAC Plan who has a CAC Plan after-tax account may withdraw all or any portion of such account at any time for any reason upon written notice to the Plan Administrator. Such withdrawals shall be limited to two (2) during any Plan Year. The minimum amount of any such withdrawal is $1,000.

c) CCN Plan Participants. A participant in the CCN Plan who has a CCN Plan after-tax account may withdraw all or any portion of the balance of his or her CCN Plan after-tax account and/or employer contribution account at any time for any reason upon written request to the Plan Administrator.

d) Other FH Plan Participants. The provisions for in-service withdrawals under the Plan are at least as favorable as those under the FH Plan.

APP. I. - 2

APPENDIX II

FIRST HEALTH PRIORITY SERVICES, INC.

401(k) PLAN

PROTECTED BENEFITS

Notwithstanding any other provision of the Coventry Health Care, Inc. Retirement Savings Plan (the “Plan”) to the contrary, the following shall apply with respect to benefits accrued by employees of First Health Priority Services, Inc. (“FHPS”) before January 1, 2006 under the First Health Priority Services, Inc. 401(k) Plan (the “FHPS Plan”) who were participants in the FHPS Plan on December 31, 2005 and become Participants in the Plan effective as of January 1, 2006.

1) Vesting

Vesting of benefits accrued under the FHPS Plan occurred in accordance with the following schedule:

Less than 2 years of Vesting Service 0% vested

After 2 years of Vesting Service 20% vested

After 3 years of Vesting Service 40% vested

After 4 years of Vesting Service 60% vested

After 5 years of Vesting Service 80% vested

After 6 years of Vesting Service 100% vested

2) Vesting Service

For purposes of determining Vesting Service under this Plan, the date of hire as used by the FHPS Plan for First Health Priority Services employees who were participants in the FHPS Plan on December 31, 2005 and who became Participants in this Plan as of January 1, 2006 shall be used as the date of hire under this Plan. In no event will the amount of Vesting Service for such Participants under this Plan be less than the Vesting Service under the FHPS Plan as of December 31, 2005.

3) In-Service Withdrawals

Except as may otherwise be permitted under Section 6.06, an individual who has attained age 59½ who participated in the FHPS Plan may withdraw all or any portion of his or her vested FHPS account at any time for any reason upon written notice to the Plan Administrator.

APP. II-1 - 2

ATTACHMENT A

EMPLOYERS

An Affiliate of the Company will be an Employer provided that:

1. the Affiliate has Employees; and

2. the Affiliate is not specifically excluded from participation in the Plan.

As of January 1, 2006, the following Affiliates are specifically excluded from participation in the Plan:

FHC, Inc. (an Ontario corporation)

ATT.A.1 - 2

EX-12

					Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
	For the year ended December 31,
	2006	2005	2004	2003	2002
Earnings before income taxes	$ 896,348	$ 799,425	$ 526,991	$ 393,064	$ 225,741
Fixed charges	62,546	68,472	20,649	20,865	18,501
Earnings before income taxes and fixed charges	$ 958,894	$ 867,897	$ 547,640	$ 413,929	$ 244,242
Fixed charges:
Interest expense	$ 52,446	$ 58,414	$ 14,301	$ 15,051	$ 13,446
Portion of rental expense representative of interest factor	10,100	10,058	6,348	5,814	5,055
Total fixed charges	$ 62,546	$ 68,472	$ 20,649	$ 20,865	$ 18,501
Ratio of earnings to fixed charges	15.3	12.7	26.5	19.8	13.2

EX-14

Exhibit 14

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 1 of 30

I. PURPOSE

Coventry Health Care, Inc., together with all of its subsidiaries (“CHC”), is dedicated to conducting its business in accordance with the highest standards of ethical conduct. CHC is committed to conducting its business activities with uncompromising integrity and in full compliance with the federal, state and local laws governing its business. This commitment applies to relationships with stockholders, customers (enrollees, federal providers, state and local governments), contractors, vendors, competitors, auditors and all public and government bodies.

To protect CHC’s reputation and to assure uniformity in standards of conduct, CHC has established this Code of Business Conduct and Ethics (“Code of Business Conduct and Ethics” or this “Code”) as part of its Compliance and Ethics Program (“Compliance and Ethics Program”or“the Program”). Unless a provision of this Code states otherwise, this Code shall apply to all directors, officers and employees of CHC (collectively, “Covered Persons”). For purposes of this Code: (1) the term “employees” shall mean all persons employed directly by CHC, but shall exclude all non-management directors; (2) the term “officers” shall mean all persons in the position of Vice President or any superior position as indicated on CHC’s organizational chart; and (3) the term “directors” shall mean all management and non-management directors on CHC’s Board of Directors.

Under the Compliance and Ethics Program, a Compliance Officer has been appointed to ensure compliance with the Program, to serve as a contact for employees to report any potential violations of laws, regulations or this Program, and to take appropriate action against violators of any such laws, regulations or this Program. The intent of this Program is to ensure that every Covered Person understands the proper standards of conduct and conforms his or her conduct with all applicable laws, rules and regulations, including the standards issued by the state and federal governmental programs in which CHC participates (e.g., Medicare (Parts C and D), Medicaid and Federal Employee Health Benefits programs.

This Code of Ethics exists to provide directors, officers, employees, sales representatives, stockholders, suppliers and members of the general public with an official statement of how CHC and its subsidiaries must and will conduct business in the marketplace. Under this Code, all Covered Persons will conduct themselves in the full spirit of honest and lawful behavior. In addition, Covered Persons must not cause another employee or non-employee to act otherwise, whether through inducement, suggestion or coercion. This Code of Ethics and the policies and procedures of the Compliance and Ethics Program are not meant to cover all situations. Any doubts whatsoever as to the appropriateness of a particular situation, whether or not the situation is described within this Code of Ethics, should be submitted either to your immediate supervisor, manager, the CHC Compliance

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 2 of 30

Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, the Human Resources Department, the General Counsel or the CHC Comply Line.

All employees of CHC are to read, be familiar with, and immediately after being hired at CHC and at least annually after hire, sign the attached Statement of Understanding (Attachment A) and complete the Business Transactions With A Party In Interest Questionnaire (Attachment D). All non-management directors of CHC must also read, be familiar with, and immediately after being elected or appointed to the Board of Directors of CHC (the “Board”), and at least annually after such election or appointment, sign the attached Statement of Understanding. At the discretion of management, other additional individuals may be asked to read and sign the Statement of Understanding. Only the CHC Compliance Officer (or the Audit Committee in the case of executive officers and directors of CHC) may make decisions regarding requests for interpretation of or exceptions to this Code of Ethics.

Any Covered Person violating any provision of this Code will be subject to disciplinary action, up to and including separation from the Company. In addition, promotion of and adherence to this Code and to the Compliance and Ethics Program will be one criterion used in evaluating the performance of Covered Persons. To the extent that any additional policies are set forth in any other CHC manual, those policies should be consistent with this Code. In case of any inconsistency, this Code shall govern.

II. CONFLICT OF INTEREST

Covered Persons must avoid situations where their personal interest could conflict or appear to conflict with their responsibilities, obligations or duties to further CHC’s interest or present an opportunity for personal gain apart from the normal compensation provided through employment. Conflicts of interest may not always be clear-cut so if you have a question, you should consult with the CHC Compliance Officer or CHC’s General Counsel. Any Covered Person who becomes aware of a conflict or potential conflict should bring it to the attention ofthe Board (in the case of a director), an immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, the Human Resources Department, the General Counsel or the CHC Comply Line or consult the procedures described in Section X. G. of this Code. The following guidelines have been developed to help you identify conflicts of interest:

A. Use of Corporate Funds and Assets

Covered Persons may not use assets of the organization for their own personal benefit or gain. All property and business of the organization shall be used in a manner designed to further CHC’s interest rather than the personal interest of an

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 3 of 30

individual Covered Person. Covered Persons are prohibited from the unauthorized use or taking of CHC’s equipment, supplies, software, data, intellectual property, materials or services. Prior to engaging in any activity on CHC’s time which will result in remuneration or the use of CHC’s equipment, supplies, materials or services for personal or non-work related purposes, Covered Persons shall obtain the approval of their immediate supervisor or manager or other senior management of CHC.

B. Outside Financial Interests

Thefollowing is alistof the types of activities by Covered Persons, or household members of such Covered Persons, that might cause conflicts of interest. This list is not exhaustive and any questions regarding activities that may posea potential conflict of interest shouldbedirected to the Board (in the case of a director), an immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line.

1. Ownership in or employment by any outside concern which does business with CHC. This does not apply to stock or other investments held in a publicly held corporation, provided the value of the stock or other investments does not exceed 5% of the corporation’s stock. CHC may, following a review of the relevant facts, permit ownership interests which exceed these amounts if management concludes such ownership interests will not adversely impact CHC’s business interest or the judgment of the employee.

2. Conduct of any business not on behalf of CHC, with any vendor, supplier, contractor, or agency, or any of their officers or employees.

3. Representation of CHC by a Covered Person in any transaction in which he or she or a household member has a substantial personal interest.

4. Disclosure or use of confidential, special or inside information of or about CHC, particularly for personal profit or advantage of the Covered Person or a household member or other.

5. Competition with CHC by a Covered Person, directly or indirectly, in the purchase, sale or ownership of property or property rights or interests, or business opportunities.

Covered Persons who may have a conflict of interest must contact the Board (in the case of a director), an immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, a

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 4 of 30

Human Resources Officer, the General Counsel or the CHC Comply Line for guidance.

C. Outside Activities

Employees should avoid outside employment or activities that may have a negative impact upon their job performance with CHC, and all Covered Persons should avoid outside employment or activities that may conflict with their obligations, loyalties or fiduciary responsibilities to CHC.

D. Honoraria

Employees, with the permission of the CEO, may participate as faculty and speakers at educational programs and functions on behalf of CHC during office hours. Any honoraria in excess of Five Hundred Dollars ($500) shall be turned over to CHC unless the employee used time off, paid or unpaid, to attend the program or that portion of the program for which the honoraria is paid.

E. Participation on Boards of Directors/Trustees

1. An employee must obtain approval from the Senior Line Officer or CHC’s General Counsel prior to serving as a member of the board of directors/trustees of any organization whose interests may conflict with those of CHC. CHC retains the right to prohibit membership on any board of directors/trustees where such membership might conflict with the best interest of CHC.

2. An employee who is asked, or seeks to serve on the board of directors/trustees of any organization whose interest would not have an impact on CHC (for example, civic, charitable, fraternal and so forth) is not required to obtain such prior approval.

3. All compensation received by an employee for board services provided during normal work time may be retained by the employee.

4. An employee, if so required by CHC, must disclose all board of directors/trustees activities in CHC’s annual Conflict of Interest disclosure statement.

F. Corporate Opportunities

Covered Persons are prohibited without the consent of the Board of Directors from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position. No Covered Person may

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 5 of 30

use corporate property, information, or position for improper personal gain, and no Covered Person may compete with CHC directly or indirectly without consent of the Board (or an appropriate committee of the Board). Covered Persons owe a duty to CHC to advance its legitimate interests when the opportunity to do so arises.

G. Loans

CHC’s executive officers and directors may never accept loans or guarantees of obligations from CHC, from other employees, officers or directors of CHC on behalf of or for the benefit of CHC, or from any other person or entity, including suppliers and vendors, having or seeking business with CHC, except as permitted by law. No employee of CHC may accept loans or guarantees of obligations from any person or entity, including suppliers and vendors, having or seeking business with CHC. If you have any doubts as to whether a loan is permissible, please contact the CHC Compliance Officer or CHC’s General Counsel for guidance.

III. FRAUD AND ABUSE

CHC expects all Covered Persons to comply scrupulously with all federal, state and local laws and government regulations. These laws and regulations prohibit (1) disguised payments in the submission of false, fraudulent or misleading claims to any government entity or third party payor, including claims for services not rendered, claims which characterize the service differently than the service actually rendered, or claims which do not otherwise comply with applicable program or contractual requirements; and (2) making false representations to any person or entity in order to gain or retain participation in a program or to obtain payment for any service. All Covered Persons must report immediately to the Board (in the case of directors), an immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, the Human Resources Department, the General Counsel or the CHC Comply Line any actual or perceived violation of this Code, the Compliance and Ethics Program, or any other CHC policy.

A. Exclusion from Medicare/Medicaid Programs

1. CHC shall review the Department of Health and Human Services Office of the Inspector General (OIG) and General Services & Administration (GSA) exclusion lists for all new employees and, at least annually, to confirm that Covered Persons have not been excluded, sanctioned or otherwise barred from participating in the Medicare/Medicaid programs. The OIG maintains a site on the internet at http://exclusions.oig.hhs.gov listing those who have been excluded from the Medicare and Medicaid

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 6 of 30

programs. The GSA debarred/exclusions lists may be found on the internet at http://www.epls.gov. CHC also shall inform applicants that if employed, CHC will confirm the applicant’s status with the OIG after the first three (3) months of employment. If any employee has been excluded from participation in the Medicare/Medicaid programs or is convicted of health care fraud, CHC will terminate that employee’s employment or contract.

2. Prior to contracting with certain vendors, suppliers and agents, CHC will also review the OIG and GSA exclusion lists to confirm that such entities have not been excluded, sanctioned or otherwise barred from participating in the federal health care programs. If a vendor, supplier or contractor has been excluded, sanctioned or barred, CHC will terminate the contract in accordance with CHC policy.

3. As part of the annually executed Statement of Understanding (AttachmentA), each employee will certify annually that he or she has not been convicted of, or charged with, a criminal offense related to health care nor has he or she been listed by a federal agency as debarred, excluded or otherwise ineligible for participation in federally funded health care programs.

IV. DEALING WITH THIRD PARTIES

CHC obtains and keeps its business because of the quality of its products and services. CHC is committed to providing services that meet all contractual obligations and CHC’s quality standards. Conducting business, however, with vendors, suppliers, contractors, providers and customers (subscribers or members) can pose ethical or even legal problems, especially in activities where differing local customs and market practices exist. The following guidelines are intended to help all Covered Persons make the “right” decision in potentially difficult situations.

A. Contract Negotiation

CHC has an affirmative duty to disclose current, accurate and complete cost and pricing data where such data is required under appropriate federal or state law or regulation. Employees involved in the pricing of contract proposals or in the negotiation of a contract must ensure the accuracy, completeness and currency of all data generated and given to supervisors and other employees. Furthermore, all representations made by CHC employees to CHC’s customers and suppliers, both government and commercial, must be accurate, complete and current. The submission to a federal government customer of a representation, quotation,

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 7 of 30

statement or certification that is false, incomplete or misleading can result in civil and/or criminal liability for CHC, the involved employee and any supervisors who condone such an improper practice. All Covered Persons should endeavor to deal fairly with all of CHC’s vendors, suppliers, contractors, providers and customers, to the extent appropriate under applicable law and consistent with CHC policy and their duties of loyalty to CHC. It is inappropriate to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other practice that may be considered unfair-dealing.

B. Marketing and Advertising Activities

In conducting all marketing and advertising activities, Covered Persons may offer only honest, straightforward, fully informative and nondeceptive information. It is in the best interests of members, CHC and payors alike, for members, physicians and other referral sources to understand fully the services offered by CHC, and the potential financial consequences if CHC’s services are ordered. Therefore, Covered Persons shall not distort the truth, make false claims, engage in comparative advertising or attack or disparage another competitor. All direct to consumer marketing activities that involve giving anything of value to a member require compliance with the relevant policies. For further information on marketing activities, please see all relevant training materials related to marketing practices in the Center for Learing Technologies on the CHC intranet at http://cvtynet.

C. Antitrust and Competition

Antitrust and competitionlaws apply to all commercial and federal domestic transactions conducted by CHC(and in some casesforeign transactions). These laws are designed to ensure that competition exists and to preserve the free enterprise system. These laws generally prohibit agreements to fix prices or participation in unfair practices that may reduce competition in the marketplace. The antitrust laws applicable to CHC are complex and Covered Persons should consult the CHC Compliance Officer or CHC’s General Counsel if any questions arise as to the applicability of these laws to any activities conducted by Covered Persons. At a minimum, antitrust laws prohibit Covered Persons from engaging in the following activities:

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 8 of 30

 

1. Discussions or agreements with competitors of CHC regarding price fixing, stabilization or discrimination.

   

2. Discussions or agreements with suppliers or customers of CHC that unfairly restrict trade or exclude other competitors from the marketplace.

   

3. Discussions or agreements with competitors of CHC to allocate territories, markets or customers.

   

4. Discussions or agreements with competitors of CHC to boycott suppliers, customers or providers.

   

5. Requiring customers of CHC to buy from CHC through the use of coercion, express or implied.

 

Employees responsible for areas of the business of CHC that may implicate the antitrust and competition laws must be aware of the laws in the jurisdictions in which CHC conducts business and the applicability of those laws. Many countries have antitrust and competition laws that differ from the U.S. laws and employees must be aware of the specific laws in the jurisdictions in which they conduct the business of CHC.

D. Anti-kickback and False Claims Issues

Federal and state laws generally prohibit CHC and Covered Persons from offering or paying anything of value to induce the referral of patients for health care items or services when such items or services are reimbursable by federal health care programs. These laws also prohibit soliciting or accepting anything of value under similar circumstances. In addition, CHC and Covered Persons are subject to various state and federal laws prohibiting the filing of false claims. False claims laws prohibit, among other activities, filing claims for services not rendered ornot rendered as describedin the claim, or otherwise submitting false data to a state or federal health care program and upon which reimbursement may be based in whole or in part. For a more detailed description of state and Federal laws which prohibit the filing of false claims, please refer to the CHC Policy Center (http://policycenter). Anti-kickback and false claims laws are complex andCovered Persons should consult the CHC Compliance Officer or CHC’s General Counsel when questions arise as to the applicability of these laws to any activities conducted by Covered Persons. Covered Persons should be aware that these laws mayapply outside of the Medicare and Medicaid contexts as well.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 9 of 30

CHC has adopted various policies designed to ensure compliance with federal and state anti-kickback and false claimslaws. For further information please refer to the CHC Policy Center (http://policycenter) or the Center for Learning Technologies (http://cvtynet)on the CHC intranet and all other relevant policies.

E. Gifts and Entertainment

1. To avoid both the reality and the appearance of improper relations with vendors, suppliers, contractors, providers or customers (subscribers or members), the following standards apply to receipt of gifts and entertainment by CHC employees. In addition to the standards listed here, CHC employees are required to sign the “Pharmaceutical Company Relationships Employee Acknowledgment” Form (Attachment C).

a. CHC employees may not accept gifts of money under any circumstances nor may they solicit non-monetary gifts, gratuities or any other personal benefit or favor of any kind from vendors, suppliers, contractors or customers (subscribers or members).

CHC employees and their immediate families may accept unsolicited, non-monetary gifts from a business firm or individual doing or seeking to do business with CHC only if: (1) the gift is no more than the nominal value of $100 per calendar year; or (2) the gift is advertising or promotional material that has a fair market value of no more than $100. Gifts of more than $100 per calendar year may be accepted if protocol, courtesy or other special circumstances exist. However, all such gifts with a fair market value of more than $100 must first be reported to the CHC Compliance Officer and CHC’s General Counsel, who will determine if the CHC employee may accept the gift or must return it.

b. CHC employees may not encourage or solicit entertainment from any individual or company with whom CHC does business. From time to time, CHC employees may offer and/or accept entertainment, but only if the entertainment is reasonable, occurs infrequently and does not involve lavish expenditures. CHC employees who have questions or concerns about entertainment must contact their Senior Line Officer, the CHC Compliance Officer, or CHC’s General Counsel.

2. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 10 of 30

advantage with customers. No gift or entertainment should ever be offered, given, or provided by any CHC employees, family member of a CHC employee or agent to a CHC customer unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Please discuss with your immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line any gifts or proposed gifts which you are not certain are appropriate.

F. Payments to Third Parties

Agreements with agents, sales representatives, vendors, consultants and other contractors should be in writing and should be clearly and accurately set forth the services to be performed, the basis for payment and the applicable rate or fee. Payments should be reasonable in amount, not excessive in light of common practice and equal to the value of the products or services. Third parties should be advised that the agreement may be publicly disclosed.

G. No Payments to Government Employees

No CHC employee may offer or makeavailable in any amount, directly or indirectly, any payment of money, gifts, services, entertainment or anything of value to any federal, state or local government official or employee.

H. Billing and Reimbursement

CHC is committed to ensuring that its billing and reimbursement practices comply with all federal and state laws, regulations, guidelines and policies and that all bills are correct and reflect current payment methodologies. CHC is committed further to ensuring that all members and customers receive timely and accurate bills and that all questions regarding billing are answered promptly and accurately.

V. FINANCIAL REPORTING AND INTERNAL CONTROL

False or misleading entries may not be made in the financial books or employment records of CHC for any reason. No Covered Person may engage in any actions that result in or create false or misleading entriesin CHC’s books and records.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 11 of 30

No payment or receipt on behalf of CHC may be approved or made with the intention or understanding that any part of the payment or receipt is to be used for a purpose other than that described in the documents supporting the transaction. “Slush funds” or similar funds or accounts where no accounting for receipts or expenditures is made on CHC records are strictly prohibited.

A. Personnel Records

Salary, benefit and other personal information relating to employees shall be treated as confidential. Personnel files, payroll information, disciplinary matters and similar information shall be maintained in a manner designed to ensure confidentiality in accordance with applicable laws. Covered Persons will exercise due care to prevent the release or sharing of information beyond those persons who may need such information to fulfill their job function.

B. Internal Control

CHC has established control standards and procedures to ensure that assets are protected and properly used and that financial records and reports are accurate and reliable. All Covered Persons share the responsibility for maintaining and complying with required internal controls.

C. Financial Reporting

All financial reports, accounting records, research reports, expense accounts, time sheets and other documents must accurately and clearly represent the relevant facts or the true nature of a transaction. Employees who submit timesheets must be careful to do so in a complete, accurate and timely manner. The employee’s signature on a timesheet is a representation that the timesheet accurately reflects the number of hours worked on the specified project. Improper or fraudulent accounting, documentation or financial reporting is contrary to the policy of CHC and may be in violation of applicable laws.

D. Expense Accounts

Many CHC employeesregularly use CHC business expense accounts, which must be for legitimate business purposes and documented and recorded accurately. The submission of false, inappropriate or inaccurate expenses for reimbursement will result in disciplinary action up to, and including dismissal, and may result in civil action or criminal charges. If you are not sure whether a certain expense is for a legitimate business purpose, ask your supervisor.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 12 of 30

E. Protection and Proper Use of Company Assets

Covered Persons are expected to use good judgment in the utilization of CHC, customer and supplier property. The use of CHC assets, facilities or services for any unlawful, improper or unauthorized purpose is strictly prohibited. The use of CHC assets for non-CHC purposes is appropriate only when specifically authorized by CHC policy or procedure or when the user receives express authorization from his or her supervisor. Any personal use of a CHC resource must not result in added cost, disruption of business processes, or any other disadvantage to CHC. Supervisors are responsible for the resources assigned to their respective departments and are empowered to resolve issues concerning their proper use.

The theft or misuse of any property or services by any Covered Persons will result in that person being disciplined, discharged or possibly subjected to civil and criminal penalties. CHC’s equipment, systems, facilities, corporate credit cards and supplies must be used only for conducting CHC business or for purposes authorized by management.

VI. COMMUNICATION PRACTICES

A. Confidential Information

Covered Persons may have access to confidential information about CHC, its customers, suppliers and competitors or other information that might be of use to competitors or harmful to CHC or its customers, if disclosed. Until released to the public, this information should not be disclosed to fellow Covered Persons, who do not have a business need to know such information, or to non-employees for any reason, except in accordance with established CHC procedures. Confidential information of this kind includes, among other things, information or data on products, business strategies, corporate manuals, processes, systems or procedures. Please refer to the separate CHC policy regarding confidential information entitled “Coventry Health Care, Inc. Statement of Policy Regarding Insider Trading and Confidentiality.” Please also see the Proprietary Information and Confidentiality Agreement found in Attachment B to this Code.

B. Honest Communication and Fair and Accurate Disclosure

CHC requires candor and honesty from Covered Persons in the performance of their responsibilities and in communication with our attorneys and auditors. No Covered Person shall make false or misleading statements to any member, person or entity doing business with CHC about other members, persons or entities doing

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 13 of 30

business or competing with CHC, or about the products or services of CHC or its competitors.

In drafting and filing periodic reports or other documents filed with the Securities and Exchange Commission and in other public communications, Covered Persons should take all steps necessary to ensure full, fair, accurate, timely and complete disclosure. Such steps should include going beyond the minimum requirements to convey a fair and accurate financial picture of the Company to public investors.

Business records and communications often become public, and Covered Persons should always avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports.

C. Misappropriation of Proprietary Information

Covered Persons shall not misappropriate confidential or proprietary information belonging to another person or entity nor utilize any publication, document, computer program, information or product in violation of a third party’s interest in such product. All Covered Persons are responsible to ensure they do not improperly copy for their own use documents or computer programs in violation of applicable copyright laws or licensing agreements. Covered Persons shall not utilize confidential business information obtained from competitors, including customer lists, price lists, contracts or other information in violation of a covenant not to compete, prior employment agreement or in any other manner likely to provide an unfair or illegal competitive advantage to CHC.

D. Privacy Issues Regarding Written and Electronic Mail

Use of CHC’s e-mail systems involves additional considerations and requires special care. Covered persons must bear in mind that e-mail is not private, and its source is clearly identifiable. E-mail messages may remain part of CHC’s business records long after they have supposedly been deleted. Covered Persons must ensure that their personal e-mail does not adversely affect CHC or its public image or that of its customers, partners, associates or suppliers. E-mail may not be used for external broadcast messages or to send or post chain letters, messages of a political or religious nature, or messages that contain obscene, profane, racial or otherwise offensive language or material. Violations of this policy will result in disciplinary action up to, and including dismissal.

CHC reserves the right, subject to applicable laws, to monitor and review all written and electronic communications that Covered Persons send or receive at

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 14 of 30

work or using CHC’s systems, including electronic mail, voicemail, envelopes, packages or messages marked “personal and confidential.”

E. Requests for Information

Employees should only respond to inquiries or questions from third parties, either directly or indirectly, if such employee is certain that he or she is authorized to do so. Even if the employee is authorized by CHC regulations to provide such information, if there is a designated spokesperson or coordinated approach to dealing with that information the employee must refer the third party to the appropriate source within CHC. Requests for information from financial and security analysts or investors should always be directed to the Chief Executive Officer or Chief Financial Officer as should requests for information from the media. Requests from an attorney for information or to interview a Covered Personshould be directed to CHC’s General Counsel.

F. Maintenance of Company Records and Files

All Covered Persons must follow CHC policy regarding the retention, disposal or destruction of any CHC records or files. Laws and regulations require retention of certain CHC records for various periods of time, particularly in the tax, personnel, health and safety, environment, contract, customs and corporate structure areas. Records should always be retained or destroyed according to CHC’s record retention policies. The Record Retention and Destruction Policy and state schedules may be accessed in two locations on the CHC intranet. For access, go to the Coventry today home page and click on “Human Resources” and then “Policies” or click on “essentials” and select the topic “Compliance, General”. Those policies should always be strictly adhered to. In accordance with those policies, in the event of litigation or governmental investigation, please consult CHC’s General Counsel.

VII. POLITICAL ACTIVITIES AND CONTRIBUTIONS

CHC encourages each of its Covered Persons to be good citizens and to fully participate in the political process. Covered Persons should, however, be aware that: (1) federal law and the laws of most states prohibit corporate contributions to political candidates, political parties or party officials; and (2) Covered Persons who participate in partisan political activities must ensure that they do not leave the impression that they speak or act for or on behalf of CHC.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 15 of 30

VIII. DISCRIMINATION

CHC believes that the fair and equitable treatment of employees, subscribers, members and other persons is critical to fulfilling its vision and goals.

It is a policy of CHC to enroll subscribers and members without regard to the race, color, religious belief, sex, ethnic background, national origin, alienage, ancestry, citizenship status, age, marital status, pregnancy, sexual orientation, veteran status or physical or mental disability or history of disability of such person, or any other classification prohibited by law.

It is a policy of CHC to recruit, hire, train, promote, assign, transfer, layoff, recall and terminate employees based on their own ability, achievement, experience and conduct without regard to race, color, religious belief, sex, ethnic background, national origin, alienage, ancestry, citizenship status, age, marital status, pregnancy, sexual orientation, veteran status or physical or mental disability or history of disability of such person or any other classification prohibited by law.

No form of harassment or discrimination on the basis of race, color, religious belief, sex, ethnic background, national origin, alienage, ancestry, citizenship status, age, marital status, pregnancy, sexual orientation, veteran status or physical or mental disability or history of disability or any other classification prohibited by law will be permitted. Each allegation of harassment or discrimination will be promptly investigated in accordance with applicable human resource policies and procedures.

IX. IMPLEMENTATION

Strict adherence to this Code of Business Conduct and Ethics is vital. Management is responsible for ensuring that Covered Persons are aware of the provisions of the Code of Business Conduct and Ethics. For clarification or guidance on any point in the Code of Business Conduct and Ethics, please consult the CHC Compliance Officer or CHC’s GeneralCounsel.

To ensure that proper dissemination and understanding of this Code is achieved, the following implementation will be followed: Employees will furnish a signed Statement of Understanding, attached to the Code as Attachment A, both at the time of hire and then on a yearly basis. Human Resources shall be responsible for making sure each employee signs the Statement of Understanding on an annual basis. Signing of this Statement of Understanding shall be done in conjunction with the training requirements set forth in CHC’s Policy on Employee Training (see below). New employees shall sign the Statement of Understanding immediately after being hired at CHC.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 16 of 30

A. Covered Persons

Covered Persons are to report dishonest or illegal activities described within this Code of Business Conduct and Ethics. Failure to report dishonest or illegal activities or reporting false information is a very serious violation of this Code of Business Conduct and Ethics and could be cause for immediate termination of employment. The reporting of a suspected Code violation may be made verbally or in writing, but preferably, in writing containing a description of the factual basis for the suspected dishonest or illegal activities (e.g., documents, events, meetings) and, preferably, should be signed. See Section X. below for the procedure to follow for reporting suspected violations of this Code. It is a serious Code violation for any CHC employee to initiate or encourage reprisal action against an employee or other person who in good faith reports known or suspected Code violations.

B. Board of Directors

1. The Audit Committee of the Board of Directors is generally responsible for assuring that the business of CHC is conducted in accordance with the Code. The Audit Committee will assure that the Code is properly administered. If willful violations are discovered, the Audit Committee shall assure that the legal rights of individuals are protected, that CHC’s legal obligations are fulfilled and that proper disciplinary and legal actions are taken. The Audit Committee will further see that corrective measures and safeguards are instituted to prevent recurrence of violations.

2. Only the Audit Committee has the authority to waive any provision of this Code with respect to an executive officer or director of CHC. If a waiver of this Code is granted for a director or executive officer, such waiver must be promptly and accurately disclosed as required by law or applicable stock exchange rule.

C. Training

On an annual basis, each employee must attend at least one in-service or seminar dealing with compliance with laws, the Compliance and Ethics Program and/or this Code. This attendance will be documented. See CHC’s Policy on Employee Training. In addition, employees directly involved in a government program shall receive additional compliance training in accordance with other government program training policies.

The CHC Compliance Officer shall establish such other training or dissemination of information to all Covered Persons concerning the necessity to comply with all

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 17 of 30

applicable laws and with this Code, including the continuation of existing compliance program such as Medicare/Medicaid compliance and compliance with securities law reporting.

The CHC Compliance Officer shall make periodic reports to CHC’s Chief Executive Officer and Board of Directors concerning compliance with the above training requirements.

D. CHC Officers and Managers

All officers and managers are responsible for reporting any actual or suspected material Code violations. The procedures for reporting actual or suspected violations are set forth in Section X below. All officers and managers are also responsible for reviewing this Code with each of their employees and ensuring that it is countersigned annually and placed in the employee’s personnel file. New employees shall read and sign the Statement of Understanding (AttachmentA) upon employment.

Officers and managers may be sanctioned for failing to instruct adequately their subordinates or for failing to detect non-compliance with applicable policies and legal requirements, where reasonable diligence on the part of the officer or manager would have led to the discovery of any problems or violations and given CHC the opportunity to correct them earlier.

X. PROCEDURES FOR REPORTING SUSPECTED VIOLATIONS (WHISTLEBLOWER POLICY)

The Company has adopted this policy to promote the reporting or disclosure of Violations and potential Violations. The Company does not encourage frivolous complaints, but it does want any Covered Person or vendor, supplier or agent of the Company (each an “Affected Person”) who knows of a Violation or potential Violation to contact a representative of the Company through one of the methods contained in SectionX.G. A “Violation” includes the following:

(1) violations of law, including any rule of the Securities and Exchange Commission, federal laws related to fraud against the Company’s stockholders, and the laws and regulations of any jurisdiction in which the Company operates;

(2) violations of Company policies (including this Code of Business Conduct and Ethics) and statutory or other requirements for good corporate governance;

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 18 of 30

(3) improper accounting entries, violations of internal accounting controls or improper auditing matters;

(4) any other matter, which in the good faith belief of any Affected Person, could cause harm to the business or public position of the Company; or

(5) any attempt to conceal a Violation or evidence of a potential Violation.

A. General Policy.

Any Affected Person who, in Good Faith, reports a Violation is referred to as a “Whistleblower” and is protected from any retaliation by the Company. “Good Faith” means that the Affected Person has a reasonably held belief that the disclosure is true and has not been made either for personal gain or for any ulterior motive.

The Company notes that Sections 806 and 1107 of the Sarbanes-Oxley Act of 2002 provides certain legal protection to whistleblowers. Under Section 806, the Company and its officers, employees, contractors, subcontractors and agents cannot discharge, demote, suspend, threaten, harass, or in any other manner discriminate (collectively, “Retaliate”) against employees who provide information in investigations – including internal investigations – into certain types of violations of the securities laws and regulations, or who file proceedings relating to similar violations. Additionally, under Section 1107, any person who

knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

B. Purpose of the Whistleblower Policy.

The Company has adopted this whistleblower policy in order to:

(a) cause Violations to be disclosed before they can disrupt the business or operations of the Company, or lead to serious loss,

(b) promote a climate of accountability with respect to Company resources, including its employees, and

(c) ensure that no Affected Person should feel at a disadvantage in raising legitimate concerns.

This policy provides a means whereby Affected Persons can safely raise, internally and at a high level, serious concerns and disclose information that the Affected Person believes in good faith could constitute a Violation.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 19 of 30

For a more detailed description of state and Federal laws which prohibit the filing of false claims and that protect Whistleblowers under such laws, please refer to the CHC Policy Center (http://policycenter).

C. Affected Persons Protected.

This procedure offers protection to Affected Persons, who disclose matters that are, or could give rise to, Violations, provided the disclosure is made:

• In good faith,

• In the reasonable belief of the individual making the disclosure that the conduct or matter disclosed could give rise to a Violation, and

• Pursuant to the procedures contained in Section X.G. below.

No complaint that satisfies these conditions will result in dismissal or disciplinary action or any other form of discrimination for the complainant. Any acts of Retaliation against a Whistleblower shall be treated by the Company as a serious disciplinary matter and could result in dismissal.

D. Confidentiality of Disclosure.

The Company will treat all such disclosures as confidential and privileged to the fullest extent permitted by law. The Company will exercise particular care to keep confidential the identity of any Affected Person, making an allegation under this procedure until a formal investigation is launched. Thereafter, the identity of the Affected Person making the allegation may be kept confidential, if requested, unless such confidentiality is incompatible with a fair investigation or unless there is an overriding reason for disclosure. In this instance, the Affected Person making the disclosure will be so informed. Where disciplinary proceedings are invoked against any individual following a complaint under this procedure, the Company will normally require the name of the Affected Person to be disclosed to the person subject to such proceedings.

The Company encourages individuals to put their name to any disclosure they make, but any Affected Person may also make anonymous disclosure as provided in Section X.G.5. below. In responding to an anonymous complaint, the Company will pay due regard to fairness to any individual named in the complaint, the seriousness of the issue raised, the credibility of the complaint and will undertake to conduct an effective investigation and discovery of evidence.

Investigations will be conducted as quickly as possible, taking into account the nature and complexity of the disclosure.

E. Unsubstantiated Allegations.

If an Affected Person makes an allegation in good faith, which is not confirmed by subsequent investigation, no action will be taken against that individual. In

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 20 of 30

making a disclosure, all individuals should exercise due care to ensure the accuracy of the information.

If after investigation a matter raised under this procedure is found to be without substance and to have been made for malicious or frivolous reasons, the Affected Person could become the subject of disciplinary action.

Where an allegation is not substantiated (a) the conclusions of the investigation will be made known both to the Affected Person who made the allegation and to the person against whom the allegation was made and (b) all papers relating to the allegation and investigation will be removed from the record.

F. Follow-Up.

The General Counsel will deliver a report of all substantiated disclosures and any subsequent actions taken to the Board of Directors.

The conclusion of the investigation will be communicated to the person or persons against whom the complaint or allegation is made and to the Affected Person who made the complaint or allegation.

G. Procedures

1. Any disclosure made by a Affected Person under this policy must be reported to one of the following as appropriate:

(a) to the Affected Person’s immediate supervisor or manager,

(b) to the Chief Compliance Officer, a Deputy Compliance Officer or the Medicare Compliance Officer of the Company,

(c) to a Human Resources Officer,

(d) to the General Counsel,

(e) to the Chief Financial Officer if the allegation relates to financial, accounting or auditing matters, or

(f) if an employee wishes to remain completely anonymous, by calling the Company’s anonymous reporting hotline, “The Comply Line” at 1-877-242-5463, which is staffed twenty-four hours a day and seven days a week.

Affected Persons are expected to report any suspected Violations.

The Comply Line number shall be posted in all work locations. All reports must contain sufficient information for the CHC Compliance Officer to investigate the concerns raised. CHC will attempt to treat such reports confidentially and to protect the identity of the individual who has made a report to the maximum extent possible and as may be permitted under applicable law.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 21 of 30

2. All reports will be investigated. Upon receipt of credible reports of suspected violations or irregularities, the CHC Compliance Officer shall see that appropriate corrective action takes place immediately. CHC will weigh relevant facts and circumstances, including, but not limited to, the extent to which the behavior was contrary to the express language or general intent of the Code, the seriousness of the behavior, the person’s history with CHC and other factors which CHC deems relevant. No adverse action or retribution of any kind will be taken by CHC against an Affected Person solely because he or she reports in good faith a suspected Violation. Proof of Violations may result in discipline ranging from warnings and reprimands to discharge or, where appropriate, the filing of a civil or criminal complaint. Disciplinary decisions will be made by operating management, subject to review by the CHC Compliance Officer, the Vice-President of Human Resources and CHC’s General Counsel. Individuals will be informed of the charges against them and will be given the opportunity, as appropriate, to state their position before any disciplinary action is imposed.

If CHC’s General Counsel determines that a violation of this Code or law has occurred, the General Counsel will report such violation to the Board or the appropriate committee of the Board together with any reports or analysis that the General Counsel or any member of the Board determines is necessary or appropriate for the Board to review.

An Affected Person must wait at least two weeks for a response after reporting the Violation or potential Violation, unless the Affected Person believes in good faith that conditions warrant a quicker reply, in which case the Affected Person shall detail those conditions as part of his or her initial report.

3. An Affected Person, who is not satisfied with the response after following the procedure set out in SectionX.G.1. or who has not received a response in the time period contained in Section X.G.2., may invoke this Section. The Affected Person must continue to discuss any issues with the persons identified. However, the disclosure shall thereafter also be directed, in writing, and confidentially, to the Chair of the Board of Directors. The Chair of the Board of Directors shall then make a preliminary investigation of such concerns and report in writing to the General Counsel, with a request that the General Counsel investigate further and report to the Board in a period of time specified by the Chair of the Board of Directors. The General Counsel may appoint another person to undertake the preliminary investigation, provided that the findings and conclusions of the person so appointed shall be reported to, and endorsed by, the General Counsel before the report is made to the Board.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 22 of 30

4. If on preliminary examination the complaint or allegation is judged to be wholly without substance or merit, it shall be dismissed and the Affected Person informed of the decision and the reasons for such dismissal. If it is judged that a prima facie case may exist, the matter shall be dealt with in accordance with the Company’s normal disciplinary procedures or as otherwise may be deemed appropriate according to the nature of the case. The outcome of the investigation will be reported to the Affected Person.

5. Subject to Section X.G.4., if any allegation of a Violation relates to a director or executive officer of the Company, the Chair of the Board of Directors may retain independent counsel to investigate the matter and to make a report to the Board.

THIS CODE SETS FORTH GENERAL GUIDELINES ONLY AND MAY NOT INCLUDE ALL CIRCUMSTANCES THAT WOULD FALL WITHIN THE INTENT OF THE CODE AND BE CONSIDERED A VIOLATION THAT SHOULD BE REPORTED. AFFECTED PERSONS SHOULD REPORT ALL SUSPECTED DISHONEST OR ILLEGAL ACTIVITIES WHETHER OR NOT THEY ARE SPECIFICALLY ADDRESSED IN THE CODE.

H. Website Publication

This Code of Business Conduct and Ethics shall be posted on the Company’s website.

I. Annual Review.

This procedure will be reviewed annually by the Board after consultation with the Compliance Officer, taking into account the effectiveness of the policy in promoting proper disclosure, but with a view to minimizing the opportunities to cause improper investigations.

XI. LIMITATION ON EFFECT OF CODE OF BUSINESS CONDUCT AND ETHICS

Nothing contained in this Code of Business Conduct and Ethics is to be construed or interpreted to create a contract of employment, either express or implied, nor is anything contained in this Code of Business Conduct and Ethics intended to alter a person’s status of “employment-at-will” with CHC to any other status.

XII. RESERVATION OF RIGHTS

CHC reserves the right to amend the Code of Business Conduct and Ethics, in whole or in part, at any time and solely at its discretion.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 23 of 30

ATTACHMENTS:

Attachment A: Statement of Understanding of and Compliance with CHC’s Code of Business Conduct and Ethics

Attachment B: Proprietary Information, Confidentiality and Non-Solicitation Agreement

Attachment C: Pharmaceutical Company Relationships Employee Acknowledgement

Attachment D: Business Transactions With a Party in Interest

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 24 of 30

ATTACHMENT A

STATEMENT OF UNDERSTANDING OF AND COMPLIANCE WITH

CHC’S CODE OF BUSINESS CONDUCT AND ETHICS

I certify that I have read and understand CHC’s Code of Business Conduct and Ethics and relevant other sections of the Compliance and Ethics Program and agree to abide by it during the entire term of my employment at CHC. I acknowledge that:

(1) I understand how the Code applies to me and agree to fully comply with each of its provisions;

(2) I further understand that CHC expects each person to whom this Code applies to abide by its terms and conditions and to conduct the business and affairs of CHC in a manner consistent with its general statement of principles;

(3) I further understand that failure to abide by this Code or the guidelines for behavior which the Code represents may lead to disciplinary action;

(4) I have a duty to report any alleged or suspected violation of any laws, regulations, the Code of Business Conduct and Ethics or the Compliance and Ethics Program to immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line;

(5) Unless otherwise noted below, I am not aware of any possible violation of the Code of Business Conduct and Ethics or the Compliance and Ethics Program;

(6) Neither I nor a family member has been convicted of, or charged with, a criminal offense related to health care nor have I or a family member been listed by a federal agency as debarred, excluded or otherwise ineligible for participation in federally funded health care programs; and

(7) I have received compliance training either within this past year (for existing employees) or, if a new hire, within the first thirty (30) days of hire.

(8) I know of no situation in which my personal interest or the personal interest of a household member could conflict with or appear to conflict with CHC’s interests.

[For Existing Employees Only]

Further, I certify that:

(1) I am not aware of any additional circumstances, other than those disclosed below, that could represent a potential violation of any law, regulation, the Code of Business Conduct and Ethics or the Compliance and Ethics Program;

(2) I will report any potential violation of which I become aware promptly to my immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, the Medicare Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line; and

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 25 of 30

(3) I understand that any violation of any laws, regulations, the Code of Business Conduct and Ethics, the Compliance and Ethics Program, or any other corporate compliance policy or procedure is grounds for disciplinary action, up to and including discharge from employment.

Yes No

_______ _______

If no, please explain any extenuating circumstances:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

Circumstances that could represent a potential violation of any law, regulation, the Code of Business Conduct and Ethics or the Compliance and Ethics Program:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

[For Government Programs Personnel Only]

Icertify that I have received additional compliance training during the last year as required by relevant Compliance and Ethics Programs policies.

Yes No

_______ _______

If no, please explain any extenuating circumstances:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

[For Managers and Supervisors Only]

Icertify that I have personally:

(1) discussed with each employee under my direct supervision the content and application of the Compliance and Ethics Program and ensured that each employee completed the required training;

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 26 of 30

(2) informed each employee that compliance with the Compliance and Ethics Program is a condition of employment; and

(3) informed each employee that CHC will take appropriate disciplinary action, including termination, for violation of any laws, regulations, the Code of Business Conduct and Ethics, the Compliance and Ethics Program or any other corporate compliance policy or procedure.

Yes No

_______ _______

If no, please explain any extenuating circumstances:

_________________________________________________________________________________

_________________________________________________________________________________

_________________________________________________________________________________

Please check the appropriate box:

oI certify that this is my first review of the Code of Business Conduct and Ethics following my initial employment.

oI certify that this is my annual review of the Code of Business Conduct and Ethics.

______________ ___________________________________________________

Date Signature

___________________________________________________

Print/Type Name

___________________________________________________

Position

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 27 of 30

ATTACHMENT B

PROPRIETARY INFORMATION, CONFIDENTIALITY

AND NON-SOLICITATION AGREEMENT

You may have access to or be made aware of confidential or proprietary information. This could include, as examples, information about members, employer groups, providers, company financials, internal strategic plans, employee records including salary information, or similarly sensitive data.

You are expected to use such information to perform your duties and to keep it totally confidential. You are not to discuss or share confidential information with anyone inside or outside Coventry Health Care, Inc., its subsidiaries and affiliated entities (collectively, “CHC”), who does not have a direct need-to-know involvement. Violation of confidentiality is grounds for immediate release. You will also not discuss or share any confidential information after your employment with CHC ends, except as required by law.

Computer data security is as much a concern as safeguarding other confidential materials and information. The computer resources of CHC are vital to our operations. They contain confidential data about members, employer groups, providers, CHC and employees. It is our policy to protect this information, use it only for the purposes intended, and make it available only to those who need it. In this effort, we will be guided by the following principles:

1. The computer resources of CHC are to be used only for authorized, legitimate purposes.

2. Our computer data is to be used only for the business needs of CHC and its subsidiaries.

3. A password will be required to access our computer records. A password is private information and is to be used only by the person to whom it is issued.

4. Each of us must recognize the need to protect CHC’s computer data. Report suspected abuses or violations of security to an immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line, immediately.

During employment with Coventry Health Care, Inc., and for the one-year period following termination of employment, you agree not to hire away any then-current employee of Coventry Health Care, Inc. or any of its subsidiaries, or to persuade any such employee to leave employment with Coventry Health Care, Inc. or any of its subsidiaries.

I have read and understand the above confidentiality policy, and I will abide by this company policy.

_____________________________________________________________________________

Name Date

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 28 of 30

ATTACHMENT C

PHARMACEUTICAL COMPANY RELATIONSHIPS

EMPLOYEE ACKNOWLEDGMENT

It is the policy of Coventry Health Care, Inc., its subsidiaries and other affiliated entities (collectively, “CHC”) that all employees maintain certain standards of ethics and conduct as described herein with respect to the possible acceptance of any gifts from any pharmaceutical manufacturers, vendors, suppliers or contractors (each a “Pharmaceutical Company”), regardless of whether CHC currently does business with the Pharmaceutical Company (“Employee Gift Policy”). This Employee Gift Policy also is applicable to the immediate family members (spouse and children) of the CHC Employee.

Any CHC Employee violating this Employee Gift Policy will be subject to disciplinary action that may include termination from CHC employment. CHC also may elect to pursue any and all legal remedies available against any violator of this Employee Gift Policy.

Money Gifts. CHC Employees may not accept gifts of money from a Pharmaceutical Company under any circumstance.

Non-Money Gifts. CHC Employees may not solicit from a Pharmaceutical Company non-monetary gifts, gratuities or any other personal benefits. CHC Employees may accept unsolicited, non-monetary gifts from a Pharmaceutical Company only if: (1) the gift is no more than the nominal value of $100 per calendar year and is reported to the CHC legal department; or (2) the gift is advertising or promotional material that has a fair market value no greater than $100. Gifts of more than $100 in value per calendar year may only be accepted if protocol, courtesy or other special circumstances exist; provided however, that CHC employees mustfirst report and receive prior approval of all such gifts from CHC’s CEO or a CHC Compliance Officer, and the CHC legal department before accepting gifts of more than $100 in value per calendar year.

Entertainment.CHC Employees may not encourage or solicit entertainment from a Pharmaceutical Company. From time to time, CHC Employees may accept from a Pharmaceutical Company entertainment; provided however, that such entertainment is reasonable, occurs infrequently and does not involve lavish expenditures. CHC Employees who have questions or concerns regarding the appropriateness of accepting entertainment must contact their immediate supervisor, manager, the CHC Compliance Officer, a Deputy Compliance Officer, a Human Resources Officer, the General Counsel or the CHC Comply Line.

Trips.CHC Employees may not accept from a Pharmaceutical Company an offer of a free or discounted trip, including plane fare, lodging, associated meals, entertainment, honorariums or meeting registration. If a CHC Employee would otherwise attend the proposed meeting because of its educational value, the CHC Employee should request funding from the CHC health plan budget after receiving approval to do so from his/her supervisor. For a limited number of legally appropriate circumstances, there may be an exception to this general prohibition. Under such circumstances, the CHC Employee mustfirst report and receive prior approval from two people—at least one of the following persons: the Senior Vice President, Human Resources; the Chief Operating Officer; or the Chief Medical Officer; and one person from the CHC Legal Department.

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 29 of 30

PHARMACEUTICAL COMPANY RELATIONSHIPS EMPLOYEE ACKNOWLEDGMENT page 2

Monetary Sponsorship of CHC Educational Meetings. CHC Employees may accept a Pharmaceutical Company’s offer to underwrite expenses for a CHC in-house joint educational or training meeting designed by CHC and the Pharmaceutical Company to improve the quality of healthcare delivered to CHC enrollees; provided that the financial support to be received from the Pharmaceutical Company is limited to meeting room rental and CHC’s publication of educational or training materials. Other financial support, including hotel accommodations, entertainment or travel expense, is prohibited. Each CHC Employee mustfirst report and receive prior approval for all such sponsorship from two people—at least one of the following persons: the Chief Operating Officer; the Chief Medical Officer; or the Senior Vice President, Human Resources; and one person from the CHC Legal Department.

I understand that each CHC employee must execute this Employee Gift Policy and return it to the CHC Director of Human Resources or his/her designee in order to be made a part of my permanent CHC employee personnel file. Further, I have read, understand and agree to abide by the terms of this Employee Gift Policy during my tenure at CHC.

PRINT NAME: _______________________________________________

SIGNATURE: _______________________________________________

DATE: _______________________________________________

COVENTRY HEALTH CARE

COMPLIANCE AND ETHICS PROGRAM

Code of Business Conduct and Ethics

Page 30 of 30

ATTACHMENT D

BUSINESS TRANSACTIONS

WITH A PARTY IN INTEREST

Any business transaction(s) between CHC and/or any of its subsidiaries and

(i) an individual who is an officer, director or employee of CHC or its subsidiaries, or

(ii) the spouse, child or parent of an individual who is an officer, director or employee of CHC or its subsidiaries,

that has a total value exceeding $25,000 in any calendar year must be reported to CHC’s Compliance Officer immediately.

In the space provided below, please describe any current or potential business transactions that fall within the above definition:

EX-21

Exhibit 21

EXHIBIT “A”

COVENTRY HEALTH CARE, INC.

LIST OF SUBSIDIARIES

January 31, 2007

Subsidiaries	State of Organization
Altius Health Plans Inc. (HMO)	Utah
Carelink Health Plans, Inc. (HMO)	West Virginia
CHCCares, Inc.	Tennessee
CHC Casualty Risk Retention Group, Inc. (Reinsurance)	Vermont
Coventry Financial Management Services, Inc.	Delaware
Coventry Health and Life Insurance Company (Indemnity)	Delaware
Coventry Health Care Investment Corporation	Delaware
Coventry Healthcare Management Corporation	Delaware
Coventry Health Care of Delaware, Inc. (HMO)	Delaware
Coventry Health Care of Georgia, Inc. (HMO)	Georgia
Coventry Health Care of Iowa, Inc. (HMO)	Iowa
Coventry Health Care of Kansas, Inc. (HMO)	Kansas
Coventry Health Care of Louisiana, Inc. (HMO)	Louisiana
Coventry Health Care of Nebraska, Inc. (HMO)	Nebraska
Coventry Health Care of Pennsylvania, Inc. (HMO)	Pennsylvania
Coventry Management Services, Inc. (CSO, IS and employees)	Pennsylvania
Coventry Health Care National Network, Inc.	Delaware
Coventry Prescription Management Services, Inc.	Nevada
Coventry Services Corporation	Delaware
Coventry Transplant Network, Inc.	Delaware

Page 1 of 3

Coventry Health Care National Accounts, Inc.	Delaware
Coventry Product Services, Inc.	Delaware
Coventry Health Care Workers Compensation, Inc.	Delaware
First Health Group Corp.	Delaware
American Life and Health Insurance Company	Missouri
Cambridge Life Insurance Company	Missouri
Claims Administration Corp.	Maryland
FHC , Inc.	Ontario
Coventry Health Care, Inc. - First Health Group Corp PAC, Inc.	Illinois
First Health Insurance Services, Inc.	Illinois
First Health Life & Health Insurance Company	Texas
First Health Priority Services, Inc..	California
First Health Services Corporation	Virginia
First Health Services of Arkansas, Inc.	Arkansas
First Health Services of Florida, Inc.	Delaware
First Health Services of Montana, Inc.	Delaware
Health Care Management, Inc.	Delaware
First Health Strategies, Inc.	Delaware
Group Health Plan, Inc.	Missouri
HealthAmerica Pennsylvania, Inc. (HMO)	Pennsylvania
HealthAssurance Financial Services, Inc.	Delaware
HealthAssurance Pennsylvania, Inc. (RANLI PPO) (Formerly Health PASS, Inc.)	Pennsylvania
HealthCare USA of Missouri, LLC (Medicaid HMO)	Missouri
OmniCare Health Plan, Inc. (Medicaid HMO)	Michigan

Page 2 of 3

PersonalCare Insurance of Illinois, Inc.	Illinois
Provider Synergies, LLC	Ohio
Southern Health Services, Inc. (HMO)	Virginia
SouthCare PPO, Inc.	Missouri
WellPath of South Carolina, Inc.	South Carolina
WellPath Preferred Services, Inc. (TPA)	North Carolina
WellPath Select, Inc.	North Carolina

Page 3 of 3

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the inclusion of our reports dated February 28, 2007, with respect to the consolidated financial statements of Coventry Health Care, Inc., Coventry Health Care, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Coventry Health Care, Inc, included in the Annual Report (Form 10-K) for the year ended December 31, 2006, in the following Registration Statements:

Form S-4 Registration Statement No. 333-123014;

Form S-4 Registration Statement No. 333-120300;

Form S-8 Registration Statement No. 333-117966;

Form S-8 Registration Statement No. 333-122671;

Form S-8 Registration Statement No. 33-71806;

Form S-8 Registration Statement No. 33-57014;

Form S-8 Registration Statement No. 33-81356;

Form S-8 Registration Statement No. 33-81358;

Form S-8 Registration Statement No. 33-82562;

Form S-8 Registration Statement No. 33-87114;

Form S-8 Registration Statement No. 33-90268;

Form S-8 Registration Statement No. 33-95084;

Form S-8 Registration Statement No. 33-97246;

Form S-8 Registration Statement No. 333-39581;

Form S-8 Registration Statement No. 333-36735;

Form S-8 Registration Statement No. 333-47239;

Form S-8 Registration Statement No. 333-75615;

Form S-8 Registration Statement No. 333-107064;

Form S-3 Registration Statement No. 333-75675;

Form S-4 Registration Statement No. 333-45821;

Form S-3 Registration Statement No. 333-74280;

Form S-4 Registration Statement No. 333-83106

Form S-8 Registration Statement No. 333-138523

Baltimore, Maryland

February 28, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dale B. Wolf, certify that:

1. I have reviewed this annual report on Form 10-K of Coventry Health Care, Inc.;
   
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
   
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
   
   1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
      
      
   2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      
      
   3. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      
      
   4. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
      
      
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
   
   
   1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
      
      
   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
      
      

By: /s/ Dale B. Wolf

Dale B. Wolf

Chief Executive Officer and Director

Date: February 28, 2007

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Shawn M. Guertin, certify that:

1. I have reviewed this annual report on Form 10-K of Coventry Health Care, Inc.;
   
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
   
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
   
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
   
   1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
      
      
   2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      
      
   3. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      
      
   4. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
      
      
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
   
   
   1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
      
      
   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By: /s/ Shawn M. Guertin

Shawn M. Guertin

Executive Vice President, Chief Financial Officer and Treasurer

Date: February 28, 2007

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Coventry Health Care, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 28, 2007

By: /s/ Dale B. Wolf

Dale B. Wolf

Chief Executive Officer and Director

By: /s/ Shawn M. Guertin

Shawn M. Guertin

Executive Vice President, Chief Financial Officer and Treasurer