10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

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

For the transition period from              to             

Commission File Number: 1-12718

HEALTH NET, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	95-4288333
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA	91367
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (818) 676-6000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $.001 par value	New York Stock Exchange, Inc.
Rights to Purchase Series A Junior Participating Preferred Stock	New York Stock Exchange, Inc.

Securities Registered Pursuant to Section 12(g) of the Act: None

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

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

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  x    No  ¨

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.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

x Large accelerated filer	¨ Accelerated filer	¨ Non-accelerated filer	¨ Smaller reporting company
		(Do not check if a smaller reporting company)

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

The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2008 was $2,564,559,201 (which represents 106,590,158 shares of Common Stock held by such non-affiliates multiplied by $24.06, the closing sales price of such stock on the New York Stock Exchange on June 30, 2008).

The number of shares outstanding of the registrant’s Common Stock as of February 20, 2009 was 103,707,962 (excluding 40,046,152 shares held as treasury stock).

Documents Incorporated By Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for the 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended December 31, 2008.

HEALTH NET, INC.

INDEX TO FORM 10-K

	Page
PART I.
Item 1—Business	1
General	1
Segment Information	1
Provider Relationships	10
Additional Information Concerning Our Business	11
Government Regulation	14
Intellectual Property	18
Employees	18
Dependence Upon Customers	18
Shareholder Rights Plan	18
Potential Acquisitions and Divestitures	19
Item 1A—Risk Factors	20
Item 1B—Unresolved Staff Comments	39
Item 2—Properties	39
Item 3—Legal Proceedings	39
Item 4—Submission of Matters to a Vote of Security Holders	43
PART II.
Item  5—Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
Item 6—Selected Financial Data	48
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 7A—Quantitative and Qualitative Disclosures About Market Risk	78
Item 8—Financial Statements and Supplementary Data	79
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A—Controls and Procedures	80
Item 9B—Other Information	82
PART III.
Item 10—Directors, Executive Officers of the Registrant and Corporate Governance	83
Item 11—Executive Compensation	83
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13—Certain Relationships and Related Transactions, and Director Independence	83
Item 14—Principal Accountant Fees and Services	83
PART IV.
Item 15—Exhibits and Financial Statement Schedules	84
SIGNATURES	91
Index to Consolidated Financial Statements	F-1
Report of Independent Registered Public Accounting Firm	F-2
Supplemental Schedules	F-55

PART I

Item 1. Business.

General

We are an integrated managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. We operate and conduct our businesses through subsidiaries of Health Net, Inc., which is among the nation’s largest publicly traded managed health care companies. In this Annual Report on Form 10-K, unless the context otherwise requires, the terms “Company,” “Health Net,” “we,” “us,” and “our” refer to Health Net, Inc. and its subsidiaries. Our health plans and government contracts subsidiaries provide health benefits through our health maintenance organizations (“HMOs”), insured preferred provider organizations (“PPOs”) and point-of-service (“POS”) plans to approximately 6.7 million individuals across the country through group, individual, Medicare, (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network, provides behavioral health, substance abuse and employee assistance programs to approximately 6.9 million individuals, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs and offer managed health care product coordination for multi-region employers and administrative services for self-funded benefits programs. In addition, we own health and life insurance companies licensed to sell PPO, POS, exclusive provider organization (“EPO”) and indemnity products, as well as auxiliary non-health products such as life and accidental death and dismemberment, dental, vision, behavioral health and disability insurance, including our Medicare Part D Pharmacy coverage under Medicare.

Our executive offices are located at 21650 Oxnard Street, Woodland Hills, California 91367, and our Internet web site address is www.healthnet.com.

We make available free of charge on or through our Internet web site, www.healthnet.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Copies of our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Director Independence Standards and charters for the Audit Committee, Compensation Committee, Governance Committee and Finance Committee of our Board of Directors are also available on our Internet web site. We will provide electronic or paper copies free of charge upon request.

Our transfer agent, Wells Fargo, can help you with a variety of shareholder-related services, including change of address, lost stock certificates, transfer of stock to another person and other administrative services. You can write to our transfer agent at: Wells Fargo Shareowner Services, P.O. Box 64854, St. Paul, Minnesota 55164-0854, email stocktransfer@wellsfargo.com, or telephone (800) 468-9716 or (651) 450-4064.

Segment Information

We currently operate within two reportable segments, Health Plan Services and Government Contracts, each of which is described below. For additional financial information regarding our reportable segments, see “Results of Operations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 16 to our consolidated financial statements included as part of this Annual Report on Form 10-K.

Health Plan Services Segment

Our Health Plan Services segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. As of December 31, 2008, we had approximately 3.2 million at-risk members and 0.5 million Medicare stand-alone Part D members in our Health Plan Services segment.

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Managed Health Care Operations

We offer a full spectrum of managed health care products and services. Our strategy is to offer to employers and individuals a wide range of managed health care products and services that, among other things, provide comprehensive coverage and manage health care cost increases. Our health plans offer members a wide range of health care services including ambulatory and outpatient physician care, hospital care, pharmacy services, behavioral health and ancillary diagnostic and therapeutic services. Our health plans include a matrix package, which allows members to select their desired coverage from a variety of alternatives. Our principal commercial health products are as follows:

• HMO Plans: Our HMO plans offer comprehensive benefits generally through contracts with participating network physicians, hospitals and other providers. When an individual enrolls in one of our HMO plans, he or she may select a primary care physician (“PCP”) from among the physicians participating in our network. PCPs generally are family practitioners, general practitioners or pediatricians who provide necessary preventive and primary medical care, and are generally responsible for coordinating other necessary health care services, including making referrals to participating network specialists. We offer HMO plans with differing benefit designs and varying levels of co-payments that result in different levels of premium rates. In California, participating providers are typically contracted through medical groups. In those cases, enrollees in HMO plans are generally required to secure specialty professional services from physicians in the group, as long as such services are available from group physicians.

• PPO Plans: Our PPO plans offer coverage for services received from any health care provider, with benefits generally paid at a higher level when care is received from a participating network provider. Coverage typically is subject to deductibles and co-payments or coinsurance.

• Indemnity Plans: Our indemnity plans offer the member the ability to select any health care provider for covered services. Some care management features may be included in these plans, such as inpatient precertification, disease management programs and benefits for preventive services. Coverage typically is subject to deductibles and coinsurance.

• POS Plans: Our POS plans blend the characteristics of HMO and Indemnity plans. Members can have comprehensive HMO-style benefits for services received from participating network providers with lower co-payments (particularly within the medical group), but also have coverage, generally at higher co-payment or coinsurance levels, for services received outside the network.

Over the past five years, we have expanded all of our product lines, which has enabled us to react to the changing needs of employer groups and individual insureds. As of December 31, 2008, 42% of our commercial members were covered by POS and PPO products, 54% were covered by conventional HMO products and 4% were covered by EPO and fee-for-service products, including health plans such as consumer-directed health care plans. For information on our consumer-directed health care plans see “—Additional Information Concerning Our Business—Consumer-Directed Health Care Plans; Health Savings Accounts and Health Reimbursement Accounts.”

We believe we are well positioned for further healthcare reform and a volatile economic environment. Our product portfolios include offerings such as:

• Flexible network options such as HMO Silver, a narrow network, in Southern California to address the need for lower cost product offerings.

• Salud Con Health Net^SM, a family of affordable healthcare insurance products targeting the Latino community in Southern California. These products are available in Los Angeles, Orange, San Bernardino, Riverside and Ventura counties and were developed by Health Net of California to respond to the health care needs of uninsured Latino immigrants and their families. These products include group and individual coverage. The individual health care plans are the first-ever cross-border health care plans made available to individual consumers who purchase benefits directly from insurers.

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• Decision Power^SM, a series of programs designed to directly involve patients in their health care decisions.

• Consumer Directed Health Plan products such as Health Savings Accounts and Health Reimbursement Accounts.

• Community stores such as our Medicare stores in Phoenix, Arizona and Meriden, Connecticut and our community enrollment and customer service centers in East Los Angeles, California and Modesto, California.

The pricing of our products is designed to reflect the varying costs of health care based on the benefit alternatives in our products. We provide employers and employees the ability to select and enroll in products with greater managed health care and cost containment elements. In general, our HMOs provide comprehensive health care coverage for a fixed fee or premium that does not vary with the extent or frequency of medical services actually received by the member. PPO enrollees choose their medical care from a panel of contracting providers or choose a non-contracting provider and are reimbursed on a traditional indemnity plan basis after reaching an annual deductible. POS enrollees choose, each time they receive care, from conventional HMO or indemnity-like (in-network and out-of-network) coverage, with payments and/or reimbursement depending on the coverage chosen. We assume both underwriting and administrative expense risk in return for the premium revenue we receive from our HMO, POS and PPO products. We have contractual relationships with health care providers for the delivery of health care to our enrollees in each product category.

In 2008, we continued to focus on adding more small group (generally defined as employer groups with 2 to 50 employees) members and, as of December 31, 2008, approximately 34% of our commercial risk enrollment was in small group and individual accounts. The following table contains membership information relating to our commercial large group (generally defined as an employer group with more than 50 employees) members, commercial small group and individual members, Medicare members, Medicaid members, ASO members and Part D members as of December 31, 2008 (our Medicare and Medicaid businesses are discussed below under “—Medicare Products” and “—Medicaid and Related Products”):

Commercial—Large Group	1,341,691	(a)
Commercial—Small Group & Individual	681,852	(b)
Medicare (Medicare Advantage only)	295,344
Medicaid	811,703
ASO	44,034
Stand-alone PDP	544,919

(a) Includes 852,771 HMO members, 272,467 POS members, 160,615 PPO members, 30,980 EPO members and 24,858 Fee-for-Service (“FFS”) members.

(b) Includes 241,583 HMO members, 242,237 PPO members, 169,913 POS members, 28,115 EPO members and 4 FFS members.

The following table sets forth certain information regarding our employer groups in the commercial managed care operations of our Health Plan Services segment as of December 31, 2008:

Number of Employer Groups	57,972
Largest Employer Group as % of commercial enrollment	6.3	%
10 largest Employer Groups as % of commercial enrollment	19.5	%

A general description of our health plan operations in Arizona, California, Oregon, Connecticut, New Jersey and New York is set forth below. See “Item 7. Management’s Discussion and Analysis and Results of Operations—Health Plan Services Segment Membership” for a discussion on changes in our membership levels.

Arizona. Our commercial membership in Arizona was 122,839 as of December 31, 2008, which represented a decrease of approximately 10% during 2008. This decrease was primarily due to an decrease in PPO

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membership. Our Medicare membership in Arizona was 67,152 as of December 31, 2008, which represented an increase of approximately 32% during 2008. We did not have any Medicaid members in Arizona as of December 31, 2008.

California. Health Net of California, Inc., our California HMO (“HN California”), is one of the largest HMOs in California as measured by total membership and has one of the largest provider networks in California. Our commercial membership in California as of December 31, 2008 was 1,351,511, which represented a decrease of approximately 8% during 2008. The decrease in commercial membership was primarily due to a decrease of 52,501 HMO members and 47,561 PPO members. Our Medicare membership in California as of December 31, 2008 was 132,848, which represented an increase of approximately 18% during 2008. Our Medicaid membership in California as of December 31, 2008 was 764,928 members, which represented an increase of approximately 7% during 2008.

Oregon. Our commercial membership in Oregon was 132,582 as of December 31, 2008, which represented a decrease of approximately 2% during 2008. Of these members, approximately 15,655 are covered under policies issued in Washington. Our Medicare membership in Oregon increased by 681 members to 22,427 as of December 31, 2008 from 21,746 as of December 31, 2007. We did not have any Medicaid members in Oregon as of December 31, 2008.

Northeast. Our Northeast operations are conducted in Connecticut, New Jersey and New York. For our large employer group business, we directly market commercial HMO, PPO and POS products in New Jersey, Connecticut and New York, as well as an EPO product in New York. On May 31, 2007, we completed the acquisition (the “Guardian Transaction”) of The Guardian Life Insurance Company of America’s (“The Guardian”) 50% interest in HealthCare Solutions (“HCS”). Prior to the Guardian Transaction, our small group managed care and indemnity products in Connecticut, New Jersey and New York were marketed to existing insureds of The Guardian and distributed through the brokerage community in an integrated marketing effort under the HCS trade name. As part of these arrangements, The Guardian generally had the exclusive right to market and sell our HMO, PPO and POS products to small employer groups, and we and The Guardian each retained 50% of the premiums and claims. In addition, we recovered from The Guardian a specified portion of the administrative expenses and the direct marketing costs, which were shared equally. As a result of the Guardian Transaction, we terminated all pre-existing marketing and risk sharing arrangements and acquired certain intangible rights from The Guardian. As a result, we recognize 100% of the HCS revenues, claims and administrative and marketing expenses.

Our commercial membership in Connecticut was 138,520 as of December 31, 2008, which represented a decrease of approximately 14% since December 31, 2007. Our Medicare membership in Connecticut was 57,510 as of December 31, 2008, which represented an increase of approximately 28% during 2008. We did not have any Medicaid members in Connecticut as of December 31, 2008.

Our commercial membership in New Jersey was 73,172 as of December 31, 2008, which represented a decrease of approximately 19% during 2008. Our Medicaid membership in New Jersey was 46,775 as of December 31, 2008, which represented an increase of approximately 6% during 2007. We did not have any Medicare members in New Jersey as of December 31, 2008.

In New York, we had 204,915 commercial members as of December 31, 2008, which represented a decrease of approximately 12% during 2008. Our Medicare membership in New York was 5,840 and 2,819 as of December 31, 2008 and 2007, respectively. We did not have any Medicaid members in New York as of December 31, 2008.

Medicare Products

We offer our Medicare products directly to individuals and through employer/union groups. To enroll in one of our Medicare plans, covered persons must be entitled to both Parts A and B of Medicare. We provide or

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arrange health care services normally covered by Medicare, plus a broad range of health care services not covered by traditional Medicare. Any additional benefits in our plans are covered by a monthly premium charged to the enrollee or through portions of payments received from the Centers for Medicare & Medicaid Services (“CMS”) that may be allocated, per CMS regulations and guidance, for these purposes.

We were one of the nation’s largest Medicare Advantage contractors based on membership of 295,344 members as of December 31, 2008 compared to membership of 236,301 as of December 31, 2007. We were also a major participant in the “Part D” stand-alone drug benefit with 544,919 members in all 50 states and the District of Columbia as of December 31, 2008. Our portfolio of Medicare plans focuses on simplicity so that members can sign up and use benefits with minimal paperwork and coverage that starts immediately upon enrollment. We also provide Medicare supplemental coverage to 33,651 members through either individual Medicare supplement policies or employer group sponsored coverage.

In 2008, we offered Medicare Advantage plans in select counties in thirteen states (Arizona, California, Connecticut, Georgia, Hawaii, Massachusetts, New Mexico, New York, North Carolina, Oregon, Texas, Virginia and Washington). For Georgia, Hawaii, Massachusetts, New Mexico, New York, North Carolina, Texas and Virginia, the Medicare Advantage plan offerings are our Private Fee For Service (“PFFS”) plans. PFFS plans are non-network based Medicare Advantage plans that allow Medicare-eligible consumers to participate in a private Medicare health insurance plan with the flexibility of provider choice that original Medicare provides and better benefits than the standard Medicare Part A/Part B coverage.

In 2008, Health Net offered multiple types of Medicare Advantage Special Needs Plans in several states where we offer Medicare Advantage Plans. Dual Eligible Special Needs Plans designed for low income Medicare beneficiaries were offered in Arizona, California and Connecticut. Chronic Condition Special Needs Plans, designed for beneficiaries with chronic obstructive pulmonary disease, congestive heart failure, and hypercholesterolemia were offered in Arizona, California, Connecticut and Oregon. These plans offer access to additional health care and prescription drug coverage. See “—Government Regulation—Federal Legislation and Regulation—Medicare Legislation” and “Item 1A. Risk Factors—Our efforts to capitalize on Medicare business opportunities could prove to be unsuccessful” for additional information regarding our Medicare program.

In 2008, we experienced significant growth in several of our plans. The Healthy Heart plans in Southern California were particularly successful, combining a strong marketing effort with the American Heart Association’s approach to a healthy lifestyle. The plans include benefits to help enrollees avoid tobacco use; manage stress, blood pressure and high cholesterol; and promote nutrition, weight management and physical activity. The plans also include access to Decision Power^SM, Health Net’s program of online and on-call support and resources to directly involve members with their doctors in making health care and healthy lifestyle decisions. For 2009, the Healthy Heart concept is being expanded to select counties in Northern California.

Health Net is maintaining its coverage area for 2009; however, some products are no longer being offered in select counties. Specifically, the PFFS and Dual Eligible Special Needs Plans are not being offered in Connecticut. Health Net also adjusted benefits on most plans to address higher than expected health care costs in 2008.

Medicaid and Related Products

We are one of the top ten largest Medicaid HMOs in the United States based on membership. As of December 31, 2008, we had an aggregate of 811,703 Medicaid members compared to 845,753 members as of December 31, 2007, principally in California. Of the 811,703 Medicaid members, we had 46,775 Medicaid members in New Jersey, as of December 31, 2008. We withdrew from the Connecticut Medicaid program effective April 2008 which was the primary reason for the year-over-year decrease in our 2008 Medicaid membership. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Health Plan Services Segment Membership” for detailed information

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regarding our Medicaid enrollment by state. To enroll in our Medicaid products, an individual must be eligible for Medicaid benefits under the appropriate state regulatory requirements. The applicable state agency pays us a monthly fee for the coverage of our Medicaid members.

As of December 31, 2008, we had Medicaid operations in ten of California’s largest counties: Los Angeles, Fresno, Kern, Orange, Stanislaus, Riverside, Sacramento, San Bernardino, San Diego and Tulare. Effective February 2009, we withdrew from several counties in California, including Stanislaus. We are the sole commercial plan contractor with the State of California’s Department of Health Care Services (“DHCS”) to provide Medicaid service in Los Angeles County, California. As of December 31, 2008, 484,913 of our Medicaid members resided in Los Angeles County, California. This represents approximately 63% of our California Medicaid membership, and 60% of our total Medicaid membership. In May 2005, we renewed our contract with DHCS to provide Medicaid service in Los Angeles County. The renewed contract was effective April 1, 2006 and had an initial term of two years with three 24-month extension periods. On February 14, 2008, DHCS extended our contract for an initial 24-month extension period ending March 31, 2010.

Our California HMO, HN California, participates in the Children’s Health Insurance Program (“CHIP”), which, in California, is known as the Healthy Families program. As of December 31, 2008, there were 133,936 members (excluding 5,136 Healthy Kids members) in our Healthy Families program. CHIP was designed as a federal/state partnership, similar to Medicaid, with the goal of extending health insurance to children whose families earn too much money to be eligible for Medicaid, but not enough money to purchase private insurance. Monthly premiums are subsidized by the State of California and, as of February 1, 2009, range between $4 and $17 per child, up to a maximum of $51 for all children in a family enrolled in the Healthy Families Program. California receives two-thirds of the funding for the program from the federal government. In New Jersey, we participate in the New Jersey Medicaid program, as well as the New Jersey CHIP program, which is known as New Jersey FamilyCare. These programs provide comprehensive health care coverage for children and families as well as members who are aged, blind and disabled. We operate in 14 of 21 counties in New Jersey under a contract with the Division of Medical Assistance and Health Services. The current contract is scheduled to expire on June 30, 2009. We currently anticipate negotiating an extension of the contract to be effective July 1, 2009.

Administrative Services Only Business

We provide ASO products to large employer groups in Connecticut, New Jersey, New York and, to a more limited extent, California. Under these arrangements, we provide claims processing, customer service, medical management, provider network access and other administrative services without assuming the risk for medical costs. We are generally compensated for these services on a fixed per member per month basis. Our largest concentration of ASO business is in the Northeast, principally Connecticut. As of December 31, 2008, we had 44,034 members through our ASO business. Of those members, 38,837 were located in the Northeast.

Indemnity Insurance Products

We offer insured PPO, POS, EPO and indemnity products as “stand-alone” products and as part of multiple option products in various markets. These products are offered by our health and life insurance subsidiaries, which are licensed to sell insurance in 50 states and the District of Columbia. Through these subsidiaries, we also offer auxiliary non-health products such as life, accidental death and dismemberment, dental, vision and behavioral health insurance. Our health and life insurance products are provided throughout most of our service areas.

Other Specialty Services and Products

We offer pharmacy benefits, behavioral health, dental and vision products and services (sometimes through strategic relationships with third parties), as well as managed care products related to cost containment for hospitals, health plans and other entities as part of our Health Plan Services segment.

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Pharmacy Benefit Management. We provide pharmacy benefit management (“PBM”) services to Health Net members through our subsidiary, Health Net Pharmaceutical Services (“HNPS”). HNPS provides integrated PBM services to approximately 3.3 million Health Net members who have pharmacy benefits, including approximately 795,000 Medicare members. HNPS manages these benefits in an effort to achieve the highest quality outcomes at the lowest cost for its members. HNPS contracts with national health care providers, vendors, drug manufacturers and pharmacy distribution networks (directly and indirectly through a third party vendor), oversees pharmacy claims and administration, reviews and evaluates new FDA-approved drugs for safety and efficacy and manages data collection efforts to facilitate our health plans’ disease management programs.

HNPS focuses its effort on encouraging appropriate use of medications to enhance the overall member outcome while controlling overall cost to the health plan, member and employer. A committee of internal and external physicians and pharmacists select medications by therapeutic class that offer demonstrable clinical value. A cost effective option is then selected from equivalently effective options.

HNPS provides affiliated health plans various services including development of benefit designs, cost and trend management, sales and marketing support, and management delivery systems. HNPS outsources certain capital and labor-intensive functions of pharmacy benefit management, such as claims processing, mail order services and pharmacy network services.

Behavioral Health. We administer and arrange for behavioral health benefits and services through our subsidiary, Managed Health Network, Inc., and its subsidiaries (collectively “MHN”). MHN offers behavioral health, substance abuse and employee assistance programs (“EAPs”) on an insured and self-funded basis to groups in various states and is included as a standard part of most of our commercial health plans. They are also sold in conjunction with other commercial and Medicare products and on a stand-alone basis to unaffiliated health plans and employer groups. During 2008, MHN continued to expand its product portfolio services and client base through enhanced product wellness and behavioral change programs, and workplace and work life services, as part of its EAP solutions.

In 2008, MHN continued to implement, administer and monitor the non-medical counseling program for the U.S. Department of Defense under the Military Family Counseling Services program. See “—Government Contracts Segment—Other Department of Defense Contracts” for a description of this contract. MHN also holds contracts with the U.S. Department of State and the U.S. Agency for International Development (“USAID”) to provide EAP counseling services tailored for State Department and USAID employees and family members while posted overseas.

MHN’s products and services were provided to over 6.9 million individuals as of December 31, 2008, with approximately 1.5 million individuals under risk-based programs, approximately 1.7 million individuals under self-funded programs and approximately 3.7 million individuals under EAPs, including those who are also covered under other MHN programs. In 2008, MHN’s total revenues were $217 million. Of that amount, $145 million represented revenues from business with MHN affiliates and $72 million represented revenues from non-affiliate business.

Dental and Vision. In 2003, we sold our dental and vision subsidiaries and, as a result, we no longer underwrite or administer stand-alone dental and vision products. During 2008, we made available to our current and prospective members in Arizona and California private label dental products through a strategic relationship with SafeGuard Health Enterprises, Inc. (“SafeGuard”) and private label vision products through a strategic relationship with EyeMed Vision Care LLC (“EyeMed”). The stand-alone dental products were underwritten and administered by SafeGuard companies and the stand-alone vision products were underwritten by Fidelity Security Life Insurance Company and administered by EyeMed affiliated companies. Effective December 31, 2008, we terminated our relationship with SafeGuard. Beginning January 1, 2009, we entered into a strategic relationship with Dental Benefit Providers, Inc. (“DBP”) to provide the same services as were previously

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provided by Safeguard. The stand-alone dental products that were formerly underwritten and administered by SafeGuard companies are now underwritten and administered by DBP companies. DBP also administers dental products and coverage we provide to our members in Oregon. Liberty Dental Plans of California, Inc. serves as the administrator for the dental services we provide to our Medi-Cal and Healthy Families program enrollees and Doral Dental Services of New Jersey, LLC serves as the administrator for the dental services we provide to our New Jersey Medicaid members.

Government Contracts Segment

Our Government Contracts segment includes our TRICARE contract for the North Region and other health care related government contracts that we administer for the U.S. Department of Defense (the “Department of Defense”) and the U.S. Department of Veterans Affairs. Certain components of these contracts are subcontracted to unrelated third parties.

Under government-funded health programs, the government payor typically determines premium and reimbursement levels. Contracts under these programs are generally subject to frequent change, including changes that may reduce the number of persons enrolled or eligible, reduce the revenue received by us or increase our administrative or health care costs under such programs. The amount of government receivables set forth in our consolidated financial statements represents our best estimate of the government’s liability to us under TRICARE and other federal government contracts. In general, government receivables are estimates and are subject to government audit and negotiation. See “Item 1A. Risk Factors—A significant reduction in revenues from the government programs in which we participate could have an adverse effect on our business, financial condition or results of operations.”

TRICARE

Our wholly-owned subsidiary, Health Net Federal Services, LLC (“HNFS”), administers a large managed care federal contract with the Department of Defense under the TRICARE program in the North Region. We have been serving the Department of Defense since 1988 under the TRICARE program and its predecessor programs. We believe we have established a solid history of operating performance under our contracts with the Department of Defense. We believe there will be further opportunities to serve the Department of Defense and other governmental organizations in the future.

Our TRICARE contract for the North Region is one of three regional contracts awarded by the Department of Defense in August 2003 under the TRICARE Program. The North Region contract is a five-year contract and covers Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin and the District of Columbia. In addition, the contract covers a small portion of Tennessee, Missouri and Iowa.

The five-year North Region contract is subject to annual renewals on April 1 of each year at the option of the Department of Defense. We are currently in the fifth option period of health care operations under our TRICARE contract for the North Region, which is scheduled to conclude on March 31, 2009 unless extended by the Department of Defense. Health Net and the Department of Defense are currently negotiating an extension of the TRICARE North contract for an additional one-year option period, which, if exercised, would extend the TRICARE North contract to March 31, 2010. Health Net and the Department of Defense are also negotiating two subsequent six-month option periods, which, if exercised, would extend the TRICARE North contract to March 31, 2011. On March 24, 2008, the government issued a Request for Proposal for the third generation of TRICARE Managed Care Support contracts (referred to as “T3”). Health Net submitted its proposal to the government on June 30, 2008. The government held discussions with Health Net regarding its proposal in December 2008 and Health Net submitted its final proposal revision on January 2, 2009. The T3 contract is scheduled to be awarded by June 1, 2009 and, if awarded, health care delivery would commence on April 1,

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2010. Health Net anticipates that the current TRICARE North contract will be extended for one year through March 31, 2010 and the additional two six-month option periods will not be exercised.

Under the TRICARE contract for the North Region, we provide health care services to approximately 3.0 million Military Health System (“MHS”) eligible beneficiaries, including 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide administrative services only. Eligible beneficiaries in the TRICARE program are able to choose from a variety of program options. They can choose to enroll in TRICARE Prime, which is similar to a conventional HMO plan, or they can select, on a case-by-case basis, to utilize TRICARE Extra, which is similar to a conventional PPO plan, or TRICARE Standard, which is similar to a conventional indemnity plan.

Under TRICARE Prime, enrollees pay an enrollment fee (which is zero for active duty participants and their dependents) and select a primary care physician from a designated provider panel. The primary care physicians are responsible for making referrals to specialists and hospitals. Except for active duty family members, who have no co-payment charges, TRICARE Prime enrollees pay co-payments each time they receive medical services from a civilian provider. TRICARE Prime enrollees may opt, on a case-by-case basis, for a point-of-service option in which they are allowed to self-refer but incur a deductible and a co-payment.

Under TRICARE Extra, eligible beneficiaries may utilize a TRICARE network provider but incur a deductible and co-payment which is greater than the TRICARE Prime co-payment. Under TRICARE Standard, eligible beneficiaries may utilize a TRICARE authorized provider who is not a network provider but pay a higher co-payment than under TRICARE Prime or TRICARE Extra. As of December 31, 2008, there were approximately 1.5 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.

The TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs which is negotiated annually during the term of the contract, with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable and the collectibility is reasonably assured. As a result of changes in the estimate, during the year ended December 31, 2008, we recognized an increase in revenue of $17 million and an increase in cost of $22 million. As a result of changes in the estimate, during the year ended December 31, 2007, we recognized a decrease in revenue of $58 million, and a decrease in cost of $75 million. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.

We are paid within five business days for each health care claim run under the North Region contract based on paid claims with an annual reconciliation of the risk sharing provision. We are not responsible for providing most pharmaceutical benefits, claims processing for TRICARE and Medicare dual eligibles and certain marketing and education services. For additional information regarding our TRICARE contract for the North Region, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Other Department of Defense Contracts

In 2007, MHN was awarded a five-year contract, the Military Family & Life Consultant Program (“MFLC”), to develop, administer and monitor the non-medical counseling program for service members. Services under the MFLC began on April 1, 2007 and will end in 2012, subject to an early termination provision which is based on a funding ceiling of $300 million. The program is designed to deliver short-term situational problem solving counseling, primarily with regard to stress factors inherent in the military lifestyle.

The services provided under these subcontracts are not TRICARE benefits and are provided independently from the services provided under our TRICARE contract for the North Region. Revenues for the MFLC subcontract for the year ended December 31, 2008 were $106 million and were $143 million since the contract’s inception.

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Veterans Affairs

During 2008, HNFS administered 9 contracts with the U.S. Department of Veterans Affairs to manage community-based outpatient clinics in 9 states. HNFS also supported 23 other contracts with the U.S. Department of Veterans Affairs supporting 152 Veterans Affairs medical centers for claims repricing and audit services and one contract with the U.S. Marshals Service for claims re-pricing services. Total revenues for our Veterans Affairs business were approximately $30 million for the year ended December 31, 2008, representing a 6.3% decrease over 2007 primarily due to loss of outpatient clinic contracts. These revenues are derived from service fees received and have no insurance risk associated with them. MHN is a subcontractor in a program under the U.S. Department of Veterans Affairs, requiring MHN to make proactive outbound calls to returning veterans, perform assessments and make referrals to Veterans Affairs facilities.

Provider Relationships

We maintain a network of qualified physicians, hospitals and other health care providers in each of the states in which we offer network based managed care products and services.

Physician Relationships

The following table sets forth the number of primary care and specialist physicians contracted either directly with our HMOs or through our contracted participating physician groups (“PPGs”) as of December 31, 2008:

Primary Care Physicians (includes both HMO and PPO physicians)	70,265
Specialist Physicians (includes both HMO and PPO physicians)	238,371
Total	308,636

Under our California HMO and POS plans, all members are required to select a PPG and generally also a primary care physician from within that group. In our other plans, including all of our plans outside of California, members may be required to select a primary care physician from the broader HMO network panel of primary care physicians. The primary care physicians and PPGs assume overall responsibility for the care of members. Medical care provided directly by such physicians includes the treatment of illnesses not requiring referral, and may include physical examinations, routine immunizations, maternity and childcare, and other preventive health services. The primary care physicians and PPGs are responsible for making referrals (approved by the HMO’s or PPG’s medical director as required under the terms of our various plans) to specialists and hospitals. Certain of our HMOs offer enrollees “open access” plans under which members are not required to secure prior authorization for access to network physicians in certain specialty areas, or “open panels” under which members may access any physician in the network, or network physicians in certain specialties, without first consulting their primary care physician. PPO plans generally do not require prior authorization for specialty care.

PPG and physician contracts are generally for a period of at least one year and are automatically renewable unless terminated, with certain requirements for maintenance of good professional standing and compliance with our quality, utilization and administrative procedures. In California, PPGs generally receive a monthly “capitation” fee for every member assigned to it. Under a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the provider group accepts the risk of the frequency and cost of member utilization of professional services. The capitation fee represents payment in full for all medical and ancillary services specified in the provider agreements. In these capitation fee arrangements, in cases where the capitated PPG cannot provide the health care services needed, such PPGs generally contract with specialists and other ancillary service providers to furnish the requisite services under capitation agreements or negotiated fee schedules with specialists. Outside of California, most of our HMOs reimburse physicians according to a discounted fee-for-service schedule, although several have capitation arrangements with certain providers and provider groups in their market areas. For services provided under our PPO products and the out-of-network benefits of our POS products, we ordinarily reimburse physicians pursuant to discounted fee-for-service arrangements. A provider group’s financial instability or failure to pay secondary providers for services rendered

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could lead secondary providers to demand payment from us, even though we have made our regular capitated payments to the provider group. Depending on state law, we could be liable for such claims.

Health Net of Connecticut Inc, our Connecticut HMO (“HNCT”), has a contract with the Connecticut State Medical Society IPA (“CSMS-IPA”). This contract includes an agreed upon compensation budget with negotiated reimbursement rates for providers and has gain share and pay-for-performance features. Referral authorization and claims administration are performed by HNCT. This contract is scheduled to expire on March 24, 2010.

HNFS maintains a network of qualified physicians, facilities, and ancillary providers in the prime service areas of our TRICARE contract for the North Region. Services are provided on a fee-for-service basis. As of December 31, 2008, HNFS had 114,751 physicians, 2,393 facilities, and 11,695 ancillary providers in its TRICARE network.

Our behavioral health subsidiary, MHN, maintains a provider network comprised of approximately 44,839 psychiatrists, psychologists and other clinical categories of providers nationwide. Substantially all of these providers are contracted with MHN on an individual or small practice group basis and are paid on a discounted fee-for-service basis. Members who wish to access certain behavioral health services contact MHN and are referred to contracted providers for evaluation or treatment services. Generally, authorization for such services is for a limited number of appointments and must be renewed by MHN based on medical necessity. If a member needs inpatient services, MHN maintains a network of approximately 1,197 facilities.

In addition to the physicians that are in our networks, we have also entered into agreements with various third parties that have networks of physicians contracted to them (“Third Party Networks”). In general, under a Third Party Network arrangement, Health Net is licensed by the third party to access its network providers and pay the claims of these physicians pursuant to the pricing terms of their contracts with the Third Party Network.

Hospital Relationships

Our health plan subsidiaries arrange for hospital care primarily through contracts with selected hospitals in their service areas. These hospital contracts generally have multi-year terms or annual terms with automatic renewals and provide for payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service schedules.

Covered inpatient hospital care for our HMO members is comprehensive. It includes the services of hospital-based physicians, nurses and other hospital personnel, room and board, intensive care, laboratory and x-ray services, diagnostic imaging and generally all other services normally provided by acute-care hospitals. HMO or PPG nurses and medical directors are actively involved in discharge planning and case management, which often involves the coordination of community support services, including visiting nurses, physical therapy, durable medical equipment and home intravenous therapy.

Ancillary and Other Provider Relationships

Our health plan subsidiaries arrange for ancillary and other provider services, such as ambulance, laboratory, radiology and home health, primarily through contracts with selected providers in their service areas. These contracts generally have multi-year terms or annual terms with automatic renewals and provide for payments on a variety of bases, including capitation, per diem rates, case rates and discounted fee-for-service schedules. In certain cases, these provider services are included in contracts our health plan subsidiaries have with PPGs and hospitals.

Additional Information Concerning Our Business

Competition

We operate in a highly competitive environment in an industry currently subject to significant changes from business consolidations, new strategic alliances, legislative reform and market pressures brought about by a

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better informed and better organized customer base. Our health plans face substantial competition from for-profit and nonprofit HMOs, PPOs, self-funded plans (including self-insured employers and union trust funds), Blue Cross/Blue Shield plans, and traditional indemnity insurance carriers, some of which have substantially larger enrollments and greater financial resources than we do. The development and growth of companies offering Internet-based connections between health care professionals, employers and members, along with a variety of services, could also create additional competitors. We believe that the principal competitive features affecting our ability to retain and increase membership include the range and prices of benefit plans offered, size and quality of provider network, quality of service, responsiveness to user demands, financial stability, comprehensiveness of coverage, diversity of product offerings, and market presence and reputation. The relative importance of each of these factors and the identity of our key competitors vary by market. Over the past several years, a health plan’s ability to interact with employers, members and other third parties (including health care professionals) via the Internet has become a more important competitive factor. To that end, we have made technology investments to enhance our electronic interactions with third parties. We believe that we compete effectively against other health care industry participants in the states in which we operate.

Our primary competitors in California are Kaiser Permanente, Anthem Blue Cross of California, UnitedHealth Group, Inc. and Blue Shield of California. Together, these four plans and Health Net account for a majority of the insured market in California. Kaiser is the largest HMO in California based on number of enrollees and Anthem Blue Cross of California is the largest PPO provider in California based on number of enrollees. There are also a number of small, regional-based health plans that compete with Health Net in California, mainly in the small business group market segment. In addition, two of the major national managed care companies, Aetna, Inc. and CIGNA Corp., are active in California. Their respective commercial full-risk market share is not as significant as our primary competitors in California and we believe that each remains in California primarily to serve their national, self-funded accounts’ California employees.

Our largest competitor in Arizona is UnitedHealth Group. Our Arizona HMO also competes with Blue Cross Blue Shield of Arizona, CIGNA, Aetna and Humana Inc. Our Oregon health plan competes primarily against Kaiser, UnitedHealth Group, Providence, Regence Blue Cross/Blue Shield, PacificSource, Lifewise and ODS Health Plans, Inc.

In the Northeast, our Connecticut health plan competes for business with Aetna, WellPoint, Inc. (Anthem BCBS), ConnectiCare, Inc., UnitedHealth Group (UnitedHealthcare/Oxford Health Plans), and CIGNA. Our main competitors in New York are UnitedHealth Group (UnitedHealthcare/Oxford Health Plans), WellPoint (Empire Blue Cross Blue Shield), Aetna, HIP/GHI and CIGNA. Our main competitors in New Jersey are UnitedHealth Group (UnitedHealthcare/Oxford Health Plans), Horizon Blue Cross Blue Shield, Aetna and CIGNA.

Marketing and Sales

We market our products and services to individuals and employer groups through inside sales staff, independent brokers, agents and consultants and through the Internet. For our group health business, we market our products and services utilizing a three-step process. We first market to potential employer groups, group insurance brokers and consultants. We then provide information directly to employees once the employer has selected our health coverage. Finally, we engage members and employers in marketing for member and group retention. For our small group business, members are enrolled by their employer based on the plan chosen by the employer. In general, once selected by a large employer group, we solicit enrollees from the employee base directly. During “open enrollment” periods when employees are permitted to change health care programs, we use a variety of techniques to attract new enrollees, including, without limitation, direct mail, work day and health fair presentations and telemarketing. Our sales efforts are supported by our marketing division, which engages in product research and development, multicultural marketing, advertising and communications, and member education and retention programs.

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Premiums for each employer group are generally contracted on a yearly basis and are payable monthly. We consider numerous factors in setting our monthly premiums, including employer group needs and anticipated health care utilization rates as forecasted by us based on the demographic composition of, and our prior experience in, our service areas. Premiums are also affected by applicable regulations that in certain circumstances prohibit experience rating of group accounts (i.e., setting the premium for the group based on its past use of health care services) and by state regulations governing the manner in which premiums are structured.

In some of our markets we sell individual policies, which are generally sold through independent brokers and agents. In some states, carriers are allowed to individually underwrite these policies (i.e. select applicants to whom coverage will be provided and others who are denied), although in other states there may be a requirement of guaranteed issue that restricts the carrier’s discretion. In guaranteed issue states, exclusions for preexisting conditions are generally permitted. Where individual underwriting is permitted, the carrier may, in certain circumstances, rescind the policy coverage if the individual misrepresents his or her medical history in the application process. See “Item 1A. Risk Factors—Proposed federal and state legislation affecting the managed health care industry could adversely affect us” and “—Regulatory activities and litigation relating to the rescission of coverage, if resolved unfavorably, could adversely affect us” for additional information on health plans’ right to rescind coverage.

We believe that the importance of the ultimate health care consumer (or member) in the health care product purchasing process is likely to increase in the future, particularly in light of advances in technology and online resources. Accordingly, we are focusing our marketing strategies on the development of distinct brand identities and innovative product service offerings that will appeal to potential health plan members. For example, Decision Power^SM is a series of programs designed to more directly involve patients in their health care decisions. These programs allow our members to access information and consult with health coaches as they are making decisions regarding health care issues. As more employers begin to offer consumer directed health plans such as Health Savings Accounts (“HSAs”) and Health Reimbursement Accounts (“HRAs”), we believe consumers need to be able to learn, plan and make complex decisions regarding their health care. Our website combines access to current Health Net and vendor content and tools.

Consumer-Directed Health Care Plans; Health Savings Accounts and Health Reimbursement Accounts

Health Savings Accounts were created in 2003 as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “MMA”). HSAs are individually owned accounts, similar to an IRA or a 401(k) retirement plan, that generally allow employees or individuals to make contributions to the account on a pretax basis. Funds in HSAs can be used to pay for certain qualified medical expenses such as plan deductibles, co-payments and coinsurance on a tax-free basis. HSA funds can be invested and earnings on the investments are generally tax-free. HSAs must be used in conjunction with high-deductible health plans. High-deductible health plans provide in-and out-of-network benefits and cover a wide range of health care services.

Our HSA programs and other consumer-driven health care products provide our members with tools to determine what health care services they may need and to estimate how much those services would cost. We support our consumer-directed programs with web-based services that assist members in educating themselves about health care. The web-based program includes WebMD’s Subimo estimator tools, Decision Power^SM, prescription drug and hospital comparison tools.

Our California health plan also offers a Health Net Health Reimbursement Account. An HRA is a health reimbursement arrangement funded solely by an employer where the employer reimburses an employee for health expenses not covered by the group health insurance plan (such as deductibles and coinsurance amounts). Employees are reimbursed tax-free for qualified medical expenses that the employer agrees to reimburse, up to a maximum dollar amount for a coverage period. Subject to the employer’s discretion, up to 100% of any unused amounts in the HRA at the end of a plan year can be carried forward for reimbursement in subsequent years.

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Health Net Systems Consolidation Project

We continue to work on a number of systems and operational initiatives designed to improve our customer service, realize operational cost efficiencies and improve our decision making capability. In 2007, we completed our migration to a single medical management platform. This platform provides operational efficiency in clinical operating units, allows for better multi-disciplinary communication amongst our clinicians, and delivers our clinicians improved decision making and patient support tools.

In the third quarter of 2007, we also announced the next stage of our operational strategy. This stage is a three-year effort to consolidate claim platforms across the enterprise and to consolidate service centers and associated staff. We made significant progress in this arena in 2008, including addressing many of the manual processes and workarounds of having multiple systems. Our progress in IT applications and infrastructure outsourcing has been significant, and we continue to make progress on making it easier to do business with Health Net through the use of more sophisticated electronic channels. See “Item 1A. Risk Factors—We are subject to risks associated with outsourcing services and functions to third parties” for risks associated with our outsourcing arrangements. In addition, we have prioritized projects for 2009 with an eye to focusing on those that will bring the greatest immediate benefit. Examples of these projects include an electronic document distribution and print consolidation project, membership and accounting enrollment projects, a claims auto adjudication project and contact center technology and process improvements. Consolidating operations management and continuing to develop more consistent metrics and analytics will greatly increase our efficiency going forward and help us to deliver better service at a lower cost. The completion of the projects will enable us to improve claim turnaround times, auto adjudication rates, electronic data interchange, and internet capabilities. However, there are risks associated with these systems efforts. See “Item 1A. Risk Factors—If we fail to effectively maintain our management information systems, it could adversely affect our business.”

Medical Management

We believe that managing health care costs is an essential function for a managed care company. Among the medical management techniques we utilize to contain the growth of health care costs are pre-authorization or certification for outpatient and inpatient hospitalizations and a concurrent review of active inpatient hospital stays and discharge planning. We believe that this authorization process reduces inappropriate use of medical resources and achieves efficiencies in referring cases to the most appropriate providers. We also contract with third parties to manage certain conditions such as neonatal intensive care unit admissions and stays, as well as chronic conditions such as asthma, diabetes and congestive heart failure. These techniques are widely used in the managed care industry and are accepted practices in the medical profession.

Accreditation

We pursue accreditation for certain of our health plans from the National Committee for Quality Assurance (“NCQA”) and the Utilization Review Accreditation Commission (“URAC”). NCQA and URAC are independent, non-profit organizations that review and accredit HMOs and other healthcare organizations. HMOs that comply with review requirements and quality standards receive accreditation. The commercial line of business of our Arizona, California, Connecticut, New Jersey and New York HMO subsidiaries have all received NCQA accreditation with a score of “excellent,” which is the highest score NCQA awards. HN California’s Medicare line of business also received NCQA accreditation with a score of “excellent.” In addition, HN California’s Medicaid line of business received NCQA accreditation with a score of “Commendable,” which is customary for first-time accreditation. Our MHN subsidiary has received URAC accreditation.

Government Regulation

Our business is subject to comprehensive federal regulation and state regulation in the jurisdictions in which we do business. These laws and regulations govern how we conduct our businesses and result in additional

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requirements, restrictions and costs to us. We believe we are in compliance in all material respects with all current state and federal laws and regulations applicable to our businesses. Certain of these laws and regulations are discussed below.

Federal Legislation and Regulation

Medicare Legislation. On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”) was signed into law. This complex legislation made many significant structural changes to the federal Medicare program and added a voluntary prescription drug benefit, called a “Part D” benefit, which was made available to Medicare beneficiaries starting January 1, 2006.

The MMA changed the methodology for payment to private plans to a competitive bidding process beginning in 2006. For the Medicare Advantage plans, the federal CMS calculates county-specific payment rates based on fee-for-service costs in the county and a legislated formula. These rates then serve as a benchmark against which we must bid for providing the Medicare package of services. The projected savings from the benchmark rate is used 75% to fund additional benefits to members. The remaining 25% is retained by CMS. CMS then pays us a monthly rate for each enrollee, which is the bid amount, with risk adjustment for that member, plus the 75% of savings (if any) in the bid. The risk adjustment factor reflects the member’s age, gender and health status. The MMA also authorized regional PPOs to serve 26 regions covering the U.S. and its territories, and authorized other products designed to provide a private market option on a broader scale.

Our Medicare contracts are subject to regulation by CMS. CMS has the right to audit HMOs and PPOs operating under Medicare contracts to determine the quality of care being rendered and the degree of compliance with CMS’ contracts and regulations. In January 2008, we were notified by the CMS that we were deficient in certain administrative procedures with respect to our stand-alone PDP products, and were directed to cease the sale of such products until resumption of sale was approved by CMS. In March 2008, CMS authorized Health Net to resume sales of its stand-alone PDP products.

In late 2008, CMS performed a routine audit of Health Net’s Medicare Advantage operations. CMS found deficiencies in many of the business areas included in the audit. Health Net received CMS’ report and corrective action request on February 2, 2009. Health Net’s corrective action plan must be submitted within 45 days of receipt of the corrective action request for review and approval. See “Item 1A. Risk Factors—Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse effect on our operations” for a description of the risks associated with this audit.

In September 2008, in part to implement provisions of the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), CMS released final regulations regarding marketing practices of Medicare Advantage organizations (“MAO”) and PDP sponsors. The regulations prohibit certain marketing activities (including telemarketing and other unsolicited sales contacts) and require that agents and brokers selling Medicare Advantage and PDP products be state licensed and appointed in accordance with state laws. Health Net was required to be in compliance with these provisions when it began marketing activities on October 1, 2008 for 2009 plan year enrollments. CMS also released an interim final rule implementing other MIPPA provisions, including specifying restrictions on compensation to MAO and PDP sponsor contracted brokers. In November 2008, CMS released a revised interim final rule on the compensation restrictions. Health Net has implemented the requirements of the final regulations and interim final rule. Health Net could be subject to monetary and other sanctions from CMS in the event of non-compliance by Health Net or its contracted or in-house sales producers.

Medicaid and Related Legislation. Federal law has also implemented other health programs that are partially funded by the federal government, such as the Medicaid program (known as Medi-Cal in California) and CHIP (known as Healthy Families in California). They are largely regulated and administered by state agencies and thus there are variations in these programs from state to state. Federal funding remains critical to the viability of these programs. Federal law permits the federal government to oversee and, in some cases, to enact,

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regulations and other requirements that must be followed by the states. Medicaid is administered at the federal level by CMS; CHIP is administered by the Health Resources and Services Administration, another arm of the Department of Health and Human Services.

Privacy Regulations. The use and maintenance of individually identifiable health information and other data by our businesses is regulated by various laws at the federal, state and local level. These laws and regulations are changed frequently by legislation or administrative interpretation. Most of those laws are derived from Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the privacy provisions in the federal Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”).

HIPAA and the implementing regulations that have been adopted in connection therewith impose obligations for issuers of health insurance coverage and health benefit plan sponsors relating to the privacy and security of electronically transmitted protected health information (“PHI”). The regulations, which relate to privacy, electronic transactions and codesets and security regulations, require health plans, clearinghouses and providers to:

• comply with various requirements and restrictions related to the use, storage and disclosure of PHI,

• adopt rigorous internal procedures to protect PHI,

• create policies related to the privacy of PHI and

• enter into specific written agreements with business associates to whom PHI is disclosed.

The regulations also establish significant criminal penalties and civil sanctions for non-compliance. We believe we are in compliance with the HIPAA privacy regulations, the requirements relating to transactions and codesets and the security regulations.

The Gramm-Leach-Bliley Act generally requires insurers to provide customers with notice regarding how their personal health and financial information is used and the opportunity to “opt out” of certain disclosures before the insurer shares non-public personal information with a non-affiliated third party. Like HIPAA, this law sets a “floor” standard, allowing states to adopt more stringent requirements governing privacy protection.

ERISA. Most employee benefit plans are regulated by the federal government under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Employment-based health coverage is such an employee benefit plan. ERISA is administered, in large part, by the U.S. Department of Labor (“DOL”). ERISA contains disclosure requirements for documents that define the benefits and coverage. It also contains a provision that causes federal law to preempt state law in the regulation and governance of certain benefit plans and employer groups, including the availability of legal remedies under state law.

Other Federal Regulations. We must comply with, and are affected by, laws and regulations relating to the award, administration and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts.

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State Laws and Regulations

Our HMOs, insurance companies and behavioral health plan are subject to extensive state regulation. Set forth below are the principal regulatory agencies that govern our health plans and insurance companies.

Company	Regulatory Agency
Arizona HMO	Arizona Department of Insurance
California HMO	California Department of Managed Health Care
Connecticut HMO	Connecticut Department of Insurance
New Jersey HMO	New Jersey Department of Banking and Insurance, New Jersey Department of Human Services and Division of Medical Assistance and Health Services (for Medicard only)
New York HMO	New York Department of Insurance, New York Department of Health
Oregon HMO	Oregon Department of Consumer and Business Services
Health Net Life Insurance Company (Arizona, California, Connecticut and New Jersey PPO)	California Department of Insurance generally, and the Department of Insurance of each state in which it does business
Health Net Insurance of New York, Inc. (New York PPO)	New York Department of Insurance
MHN	California Department of Managed Health Care, New York Department of Insurance, New Jersey Department of Banking and Insurance, Connecticut Department of Insurance

Insurance and HMO laws impose a number of financial requirements and restrictions on our regulated subsidiaries, which vary from state to state. They generally include certain minimum capital and deposit and/or reserve requirements, restrictions on dividends and other distributions to the parent corporations and affiliated corporations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Statutory Capital Requirements.” These financial requirements are subject to change, which may require us to commit additional capital to certain regulated subsidiaries or may limit our ability to move capital through dividends and other distributions.

While there are state-by-state variations, HMO regulation generally is extremely comprehensive. Among the areas regulated by these HMO regulatory agencies are:

• Adequacy of financial resources, network of health care providers and administrative operations;

• Sales and enrollment requirements, disclosure documents and notice requirements;

• Product offerings, including the scope of mandatory benefits and required offerings of benefits that are optional coverages;

• Procedures for member grievance resolution and medical necessity determinations;

• Accessibility of providers, handling of provider claims (including out-of-network claims) and adherence to timely and accurate payment and appeal rules; and

• Linguistic and cultural accessibility standards, governance requirements and reporting requirements.

Variations in state regulation also arise in connection with the intensity of government oversight. Variations include: the need to file or have affirmatively approved certain proposals before use or implementation by the health plan; the degree of review and comment by the regulatory agency; the amount and type of reporting by the

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health plan to the regulatory agency; the extent and frequency of audit or other examination; and the authority and extent of investigative activity, enforcement action, corrective action authority, and penalties and fines.

Our regulated subsidiaries are also subject to legal restrictions on our ability to price some of our products. Some products may be subject to regulatory approval of premium levels. Generally, insurance and HMO laws require premiums to be established at amounts reasonably related to our costs.

Pending Federal and State Legislation

There are a number of other legislative initiatives and proposed regulations currently pending or previously proposed at the federal and state levels which could increase regulation of, and costs incurred by, the health care industry. These measures and other initiatives, if enacted, could have significant adverse effects on our operations. See “Item 1A. Risk Factors—Proposed federal and state legislation and regulations affecting the managed health care industry could adversely affect us.” We cannot predict the outcome of any of the pending legislative or regulatory proposals, nor the extent to which we may be affected by the enactment of any such legislation or regulation.

Intellectual Property

We have registered and maintain various service marks, trademarks and trade names that we use in our businesses, including marks and names incorporating the “Health Net” phrase, and from time to time we apply for additional registrations of such marks. We utilize these and other marks and names in connection with the marketing and identification of products and services. We believe such marks and names are valuable and material to our marketing efforts.

Employees

As of December 31, 2008, Health Net, Inc. and its subsidiaries employed 9,396 persons on a full-time basis and 250 persons on a part-time or temporary basis. These employees perform a variety of functions, including, among other things, provision of administrative services for employers, providers and members; negotiation of agreements with physician groups, hospitals, pharmacies and other health care providers; handling of claims for payment of hospital and other services; and provision of data processing services. Our employees are not unionized and we have not experienced any work stoppages since our inception. We consider our relations with our employees to be very good.

Dependence Upon Customers

The federal government is the only customer of the Company’s Government Contracts segment, with premiums and fees accounting for 100% of our Government Contracts revenue. In addition, the federal government is a significant customer of the Company’s Health Plan Services segment as a result of its contract with CMS for coverage of Medicare-eligible individuals, including Part D prescription plans, state agencies for federally-subsidized Medicaid and CHIP programs, and coverage of federal employees under the Federal Employees Health Benefits Program. Medicare premiums accounted for 28% of our total premium revenue in 2008.

Shareholder Rights Plan

On July 27, 2006, our Board of Directors approved the extension of the benefits afforded by our former shareholder rights plan, which expired at the close of business on July 31, 2006, by adopting a new shareholder rights plan pursuant to a Rights Agreement with Wells Fargo Bank, N.A. (the “Rights Agent”), dated as of July 27, 2006 (the “Rights Agreement”).

In connection with the Rights Agreement, on July 27, 2006, our Board of Directors declared a dividend distribution of one right (a “Right”) for each outstanding share of Common Stock to stockholders of record at the

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close of business on August 7, 2006 (the “Record Date”). Our Board of Directors also authorized the issuance of one Right for each share of Common Stock issued after the Record Date and prior to the earliest of the Distribution Date (as defined below) the redemption of the Rights and the expiration of the Rights and, in certain circumstances, after the Distribution Date. Subject to certain exceptions and adjustment as provided in the Rights Agreement, each Right entitles the registered holder to purchase from us one one-thousandth (1/1000^th) of a share of Series A Junior Participating Preferred Stock, par value of $0.001 per share, at a purchase price of $170.00 per Right (the “Purchase Price”). The terms of the Rights are set forth in the Rights Agreement.

Rights will attach to all common stock certificates representing shares then outstanding and no separate Rights certificates will be distributed. Subject to certain exceptions contained in the Rights Agreement, the Rights will separate from the Common Stock on the date that is 10 business days following (i) any person, together with its affiliates and associates (an Acquiring Person), becoming the beneficial owner of 15% or more of the outstanding common stock, (ii) the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more of the outstanding common stock or (iii) the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the common stock and that such person is an “Adverse Person,” as defined in the Rights Agreement (the earliest of such dates being called the “Distribution Date”). The Rights Agreement provides that certain passive institutional investors that beneficially own less than 20% of the outstanding shares of our common stock shall not be deemed to be Acquiring Persons.

The Rights will first become exercisable on the Distribution Date and will expire at the close of business on July 31, 2016 unless such date is extended or the Rights are earlier redeemed by us as described below.

Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared to be an Adverse Person, then the Rights will “flip-in” and entitle each holder of a Right, other than any Acquiring Person or Adverse Person and such person’s affiliates and associates, to purchase, upon exercise at the then-current exercise price of such Right, that number of shares of common stock having a market value of two times such exercise price.

In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the common stock does not remain outstanding or is changed or 50% of the assets, cash flow or earning power of the Company is sold or otherwise transferred to any other person, the Rights will “flip-over” and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person and such person’s affiliates and associates, to purchase, upon exercise at the then current exercise price of such Right, such number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

We may redeem the Rights at any time until the earlier of (i) 10 days following the date that any Acquiring Person becomes the beneficial owner of 15% or more of the outstanding common stock and (ii) the date the Rights expire at a price of $.01 per Right. In addition, at any time after a person becomes an Acquiring Person or is determined to be and Adverse Person and prior to such person becoming (together with such person’s affiliates and associates) the beneficial owner of 50% or more of the outstanding Common Stock, at the election of our Board of Directors, the outstanding Rights (other than those beneficially owned by an Acquiring Person, Adverse Person or an affiliate or associate of an Acquiring Person or Adverse Person) may be exchanged, in whole or in part, for shares of Common Stock, or shares of preferred stock of the Company having essentially the same value or economic rights as such shares.

Potential Acquisitions and Divestitures

We continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures in light of our core businesses and growth strategies. In November 2008, we announced that, among other strategic

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alternatives, we are considering a divestiture of our Northeast and Arizona businesses. See “Item 1A. Risk Factors—Acquisitions, divestitures and other significant transactions may adversely affect our business.”

Item 1A. Risk Factors

Cautionary Statements

The following discussion, as well as other portions of this Annual Report on Form 10-K, contain “forward-looking statements” within the meaning of Section 21E of the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, regarding our business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. These forward-looking statements involve a number of risks and uncertainties. All statements, other than statements of historical information provided or incorporated by reference herein, may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate” and “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, changes in the economy, volatility in the financial markets, trends in medical care ratios, unexpected utilization patterns or unexpectedly severe or widespread illnesses, membership declines, rate cuts affecting our Medicare or Medicaid businesses, issues relating to provider contracts, litigation costs, regulatory issues, operational issues, health care reform and general business and market conditions. Additional factors that could cause our actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, the factors set forth below and the risks discussed in our other filings from time to time with the SEC.

Any or all forward-looking statements in this Annual Report on Form 10-K and in any other public filings or statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of the factors discussed below will be important in determining future results. These factors should be considered in conjunction with any discussion of operations or results by us or our representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors or other communications by us. You should not place undue reliance on any forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date thereof. Except as may be required by law, we do not undertake to address or update forward-looking statements in future filings or communications regarding our business or operating results, and do not undertake to address how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications.

Our profitability will depend, in part, on our ability to accurately predict and control health care costs.

A substantial majority of the revenue we receive is used to pay the costs of health care services or supplies delivered to our members. The total health care costs we incur are affected by the number and type of individual services provided and the cost of each service. Our future profitability will depend, in part, on our ability to accurately predict health care costs and to manage future health care utilization and costs through underwriting criteria, utilization management, product design and negotiation of favorable professional and hospital contracts. Periodic renegotiations of hospital and other provider contracts, coupled with continued consolidation of physician, hospital and other provider groups, may result in increased health care costs or limit our ability to negotiate favorable rates. Changes in utilization rates, demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups and numerous other factors affecting health care costs may adversely affect our ability to predict and control health care costs as well as our financial condition, results of operations and cash flows. In addition, a large scale public health epidemic could affect our ability to control health care costs. See “—Large-scale public health epidemics and/or terrorist activity could cause us to incur unexpected health care and other costs and could materially and adversely affect our business, financial condition and results of operations.”

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For several years, one of the fastest increasing categories of our health care costs has been the cost of hospital-based products and services. Factors underlying the increase in hospital costs include, but are not limited to, the underfunding of public programs, such as Medicaid and Medicare and the constant pressure that places on rates from commercial health plans, growing rates of uninsured individuals, new technology, state initiated mandates, alleged abuse of hospital chargemasters, an aging population and, under certain circumstances, relatively low levels of hospital competition caused by market concentration. Another significant category of our health care costs is costs of pharmaceutical products and services. Factors affecting our pharmaceutical costs include, but are not limited to, the price of drugs, utilization of new and existing drugs and changes in discounts.

As a measure of the impact of medical cost on our financial results, relatively small differences between predicted and actual medical costs as a percentage of premium revenues can result in significant changes in our financial results. For example, if medical costs increased by 1% without a proportional change in related revenues for our health plan products, our annual net earnings for 2008 would have been reduced by approximately $107 million. The inability to forecast and manage our health care costs could have a material adverse effect on our business, financial condition or results of operations.

We face competitive pressure to contain premium prices.

In addition to the challenge of controlling health care costs, we face competitive pressure to contain premium prices. While health plans compete on the basis of many factors, including service and the quality and depth of provider networks, price will continue to be a significant basis of competition. Our premium revenue is set in advance of the actual delivery of services, and, in certain circumstances, before contracting with providers. While we attempt to take into account our estimate of expected health care costs over the premium period in setting the premiums we charge or bid, factors such as competition, regulations and other circumstances may limit our ability to fully base premiums on estimated costs. In addition, many factors may, and often do, cause actual health care costs to exceed those costs estimated and reflected in premiums or bids. These factors may include increased utilization of services, increased cost of individual services, catastrophes, epidemics, seasonality, new mandated benefits or other regulatory changes, and insured population characteristics. Our financial condition or results of operations could be adversely affected by significant disparities between the premium increases of our health plans and those of our major competitors or by limitations on our ability to increase or maintain our premium levels.

In 2008, our pricing was, we believe, generally consistent with that of our competitors but there can be no assurance that we will not institute higher premiums in the future. In addition, we continue to see decreases in our total commercial membership as we seek to improve margins. Any future increase in premiums could result in the loss of members. Additionally, there is always the possibility that adverse risk selection could occur when members who utilize higher levels of health care services compared with the insured population as a whole choose to remain with our health plans rather than risk moving to another plan. This could cause health care costs to be higher than anticipated and therefore cause our financial results to fall short of expectations.

In the various states in which we do business, premium prices are also constrained by state laws and regulations which restrict the spread between premiums and benefits, such as laws and regulations that require a minimum loss ratio of a certain percentage. These laws and regulations not only restrict our ability to raise our premiums but also create competitive pressure from some of our competitors who may have lower health care costs than we have and therefore price their premiums at relatively low levels in relation to our cost of care.

Our inability to estimate and maintain appropriate levels of reserves for claims may adversely affect our business, financial condition or results of operations.

Our reserves for claims are estimates of incurred costs based on various assumptions. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, the judicious administration of claims, medical costs and other factors. Included in the reserves for claims are estimates for the costs of services that have been incurred but not reported and for claims received but not

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processed. These estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, differences are reflected in current operations. Given the uncertainties inherent in such estimates, the actual liability could differ significantly from the amounts reserved. If our actual liability is lower than estimated, it could mean that we set premium prices too high, which could result in a loss of membership. If our actual liability for claims payments is higher than estimated, it could have a negative impact on our profitability per enrolled member and, subsequently, our earnings per share in any particular quarter or annual period. For example, in the first quarter of 2008, we announced that our actual liability for claims incurred during the second half of 2007 was significantly higher than what we had estimated, primarily as a result of unusual seasonal physician and hospital utilization patterns that emerged as fourth quarter claims from 2007 were paid in the first quarter of 2008, and an unusually active flu season. This development was a contributing factor to the company’s first quarter 2008 profitability being lower than previous guidance and its decision to lower its full-year 2008 earnings per diluted share guidance.

Our businesses are subject to significant government regulation, which increases our cost of doing business and could adversely affect our ability to grow our businesses.

Our businesses are subject to extensive federal and state laws and regulations, including, but not limited to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by governmental agencies. These laws and regulations are generally intended to benefit and protect providers and health plan members rather than stockholders of managed health care companies such as Health Net. The laws and rules governing our business and interpretations of those laws and rules are subject to frequent change, and may be interpreted in ways that differ from our understanding retroactively based upon the decisions of regulators or courts. Broad latitude is given to the agencies administering these regulations to interpret them and to impose substantial fines when they believe violations have occurred. Regulatory agencies have imposed substantial fines against us in the past, and may impose substantial fines against us in the future if they determine that we have not complied with applicable laws and regulations. See “Item 3. Legal Proceedings” for additional information. Existing or future laws and rules could force us to change how we do business and may restrict our revenue and/or enrollment growth, and/or increase our health care and administrative costs, and/or increase our exposure to liability with respect to members, providers or others. Further, individual associates may violate these laws and rules, notwithstanding our internal policies and compliance programs.

Our HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth, premium rates, approval of policy language and benefits, appeals and grievances with respect to benefit determinations, provider contracting, utilization management, issuance and termination of policies, claims payment practices and a wide variety of other regulations relating to the development and operation of health plans. There can be no assurance that we will be able to continue to obtain or maintain required governmental approvals or licenses or that regulatory changes will not have a material adverse effect on us. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Statutory Capital Requirements” for additional information.

As a government contractor, we are subject to U.S. government oversight. The government may ask about and investigate our business practices and audit our compliance with applicable rules and regulations. Depending on the results of those audits and investigations, the government could make claims against us. Under government procurement regulations and practices, a negative determination resulting from such claims could result in a contractor being fined, debarred and/or suspended from being able to bid on, or be awarded, new government contracts for a period of time. In addition, we are subject to state and federal false claims laws that generally prohibit the submission of false claims for reimbursement or payment to government agencies. Courts have imposed substantial fines and penalties against companies found to have violated these laws. We are also exposed to other risks associated with U.S. government contracting, including dependence upon Congressional appropriation and allotment of funds.

In addition, laws or regulations adopted in the future could adversely affect our business. See “—Proposed federal and state legislation and regulations affecting the managed care industry could adversely affect us.”

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Delays in obtaining or failure to obtain or maintain governmental approvals, or moratoria imposed by regulatory authorities, could adversely affect our revenue or the number of our members, increase costs or adversely affect our ability to bring new products to market as forecasted.

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 28% of our total premium revenue in 2008 and an expected 29% in 2009. Over the last several years we have significantly expanded our Medicare health plans and restructured our Medicare program management team and operations to enhance our ability to pursue business opportunities presented by the MMA and the Medicare program generally. For example, in 2008 we consolidated overall Medicare Program management under a single executive with responsibility for Medicare plan performance and compliance company-wide. All field-based sales and servicing operations remain in the local markets close to their customers and distribution channels.

Particular risks associated with our provision of Medicare Part D prescription drug benefits under the MMA include potential uncollectibility of receivables, inadequacy of pricing assumptions, inability to receive and process information and increased pharmaceutical costs, as well as the underlying seasonality of this business, and extended settlement periods for claims submissions. In addition, in connection with our participation in the Medicare Advantage and Part D programs, we regularly record revenues associated with the risk adjustment reimbursement mechanism employed by CMS. This mechanism is designed to appropriately reimburse health plans for the relative health care cost risk of its Medicare enrollees. While we have historically recorded revenue and received payment for risk adjustment reimbursement settlements, there can be no assurance that we will receive payment from CMS for the levels of the risk adjustment premium revenue recorded in any given quarter.

On July 15, 2008, the Medicare Improvement for Patients and Providers Act of 2008 (“MIPPA”) became law. Beginning in 2010, MIPPA may, among other things, significantly reduce funding for Medicare Advantage programs. In response to MIPPA, CMS promulgated interim final regulations governing the marketing and sale of Medicare Advantage and PDP products. These regulations prohibit certain marketing activities by contracted and in-house sales producers, including outbound calling, and place new requirements on amounts and duration of compensation payable to contracted producers. We could be subject to monetary and other sanctions by CMS for a contracted or in-house sales producer’s violation of these regulations. In addition, the new presidential administration has made it clear that health reform, including the reduction of Medicare expenditures, is an important priority.

If the cost and complexity of any changes to the Medicare program exceed our expectations or prevent effective program implementation; if the government alters or further reduces funding of Medicare programs; if we fail to design and maintain programs that are attractive to Medicare participants; if CMS suspended our ability to market, or enroll members in, our Medicare products; or if we are not successful in winning contract renewals or new contracts under the MMA’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. See “—Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse effect on our operations” for information on the results of our recent CMS audit.

A significant reduction in revenues from the government programs in which we participate could have an adverse effect on our business, financial condition or results of operations.

Approximately 49% of our annual revenues relate to federal, state and local government health care coverage programs, such as Medicare, Medicaid and TRICARE. All of the revenues in our Government Contracts segment come from the federal government. Under government-funded health programs, the government payor typically determines premium and reimbursement levels. If the government payor reduces premium or reimbursement levels or increases them by less than our costs increase, and we are unable to make offsetting adjustments through supplemental premiums and changes in benefit plans, we could be adversely

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affected. Contracts under these programs are generally subject to frequent change, including changes that may reduce the number of persons enrolled or eligible, reduce the revenue received by us or increase our administrative or health care costs under such programs. Changes of this nature could have a material adverse effect on our business, financial condition or results of operations. Changes to government health care coverage programs in the future may also affect our willingness to participate in these programs.

States periodically consider reducing or reallocating the amount of money they spend for Medicaid. Currently, many states are experiencing budget deficits, and some states have reduced or have begun to reduce, or have proposed reductions in, payments to Medicaid managed care providers. For example, in July 2008, the State of California implemented a 10% reduction in the state’s Medi-Cal reimbursement rates. This rate reduction had an adverse impact on our pretax income for 2008 and was one of the factors contributing to our lowered full-year earnings per share guidance for 2008. Any additional significant reduction in payments received in connection with Medicaid could adversely affect our business, financial condition or results of operations.

In addition, states can impose requirements on Medicaid programs that make continued operations not feasible. For example, in early 2008 we completed our transition out of the Medicaid program in Connecticut due to the state requiring Medicaid contractors to publicly disclose certain proprietary and trade secret information and persistent underfunding of the program.

The amount of government receivables set forth in our consolidated financial statements represents our best estimate of the government’s liability to us under TRICARE and other federal government contracts. In general, government receivables are estimates and subject to government audit and negotiation. In addition, inherent in government contracts are an uncertainty of and vulnerability to disagreements with the government. Final amounts we ultimately receive under government contracts may be significantly greater or less than the amounts we initially recognize on our financial statements.

Health care operations under our TRICARE North contract are scheduled to conclude on March 31, 2009 unless extended by the Department of Defense. We are currently negotiating an extension of the TRICARE North contract with the Department of Defense for an additional one-year option period, which, if exercised would extend the contract until March 31, 2010. On June 30, 2008, we submitted our proposal to the Department of Defense for the third generation of TRICARE Managed Care Support contracts (referred to as “T3”) and, following discussions with the government regarding our proposal, we submitted our final proposal on January 2, 2009. The T3 contract is scheduled to be awarded on or before June 1, 2009, with implementation of the new contracts scheduled to begin on April 1, 2010. Given the effective date of the new contracts, we currently believe that the Department of Defense will extend our current TRICARE North contract for one year. There are competitive proposals from other companies for the T3 contract. If the contract is not extended, and we are not awarded a new TRICARE contract, or if the terms and conditions of a new contract were significantly changed, it could have a material adverse effect on our business, results of operation and financial condition.

Proposed federal and state legislation and regulations affecting the managed health care industry could adversely affect us.

The United States Congress and federal and state regulatory agencies frequently consider legislative proposals and regulatory initiatives which, if enacted, could materially affect the managed health care industry and the regulatory environment. These proposals have included initiatives which, if enacted, could have material adverse effects on our operations, including subjecting us to additional litigation risk, regulatory compliance costs and restrictions on our business operations. Such measures have proposed, among other things, to:

• Restrict or eliminate health insurers and health plans in the marketplace;

• Restrict a health insurer or health plan’s profitability or regulate the medical cost ratio;

• Require health plans to pay significantly higher taxes, or reduce government funding of government-sponsored health programs in which we participate;

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• Mandate certain benefits and administrative or other services that could increase the cost of healthcare or administrative services, or restrict our right to manage the member’s care through authorization requirements, requirements of medical necessity, or formularies for covered pharmaceuticals;

• Restrict our ability to contract with and manage access to providers and provider groups, enhance certain provider payments or appeal rights, or restrict our ability to select and terminate providers;

• Mandate certain grievance and appeal rights for our members or providers, including establishment of third-party reviews of certain care decisions; and

• Regulate the individual coverage market by restricting or mandating premium levels, restrict our underwriting discretion, or restrict our ability to rescind coverage based on a member’s misrepresentations and omissions.

Recently, the issue of affordable health insurance and the challenge of insuring the uninsured have generated much public attention. In states where we conduct business, governors and state legislatures are considering various proposals to cover the uninsured. In addition, the new President and his administration, as well as members of Congress, have indicated that they intend to enact federal health reform measures in the near future. Proposals under consideration at both the state and federal levels include, but are not limited to, restructuring the health insurance market to mandate coverage, guaranteeing insurance in the individual market, merging individual and small group markets, placing a cap on loss ratios or premiums or otherwise taking steps to expand access to health insurance in a manner that does not allow for management of risk, and taking steps to limit insurance company profitability.

We cannot predict the outcome of the legislative and regulatory proposals described above or any other such legislative or regulatory proposals, nor the extent to which we may be affected by the enactment of any such legislation or regulations. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry.

We may experience losses as a result of the regional concentration of our business.

Our business operations are concentrated in the Northeast (in the states of Connecticut, New York and New Jersey) and in the states of California, Arizona and Oregon. Our California operations represented approximately 60% of our total revenue in 2008. In late 2008, we announced that, among other strategic alternatives, we are considering a divestiture of our Northeast and Arizona businesses. If we divest our Northeast and Arizona businesses, the geographic concentration of our remaining business operations will increase. Due to this concentration in a small number of states, and, in particular, California, we are exposed to the risk of a deterioration in our financial results arising from a significant economic downturn in one or more of these states. The state of California is experiencing a significant budget shortfall, which may lead to cuts in spending for services and the significant deterioration of economic conditions in California. If economic conditions in any of these states significantly worsen, we may experience a reduction in existing and new business, which may have a material adverse effect on our business, financial condition and results of operations. In addition, if any one of our health plans experiences significant losses, our consolidated results of operations may be materially and adversely affected. Losses of accounts or deterioration in margins in any one of the states in which we operate could have an adverse effect on our financial condition or results of operations.

Federal and state audits, review and investigations of us and our subsidiaries could have a material adverse effect on our operations.

We have been and, in some cases, currently are, involved in various federal and state governmental audits, reviews and investigations. These include routine, regular and special investigations, audits and reviews by CMS, state insurance and health and welfare departments and others pertaining to financial performance, market conduct and regulatory compliance issues. Such audits, reviews and investigations could result in the loss of

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licensure or the right to participate in certain programs, or the imposition of civil or criminal fines, penalties and other sanctions. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services. We have entered into consent agreements relating to, and in some instances have agreed to pay fines in connection with, several recent audits and investigations.

Many regulatory audits, reviews and investigations in recent years have focused on the timeliness and accuracy of claims payments by managed care companies and health insurers. Our subsidiaries have been the subject of audits, reviews and investigations of this nature. Depending on the circumstances and the specific matters reviewed, regulatory findings could require remediation of claims payment errors and payment of penalties of material amounts that could have a material adverse effect on our results of operations.

Beginning in November, 2008, CMS performed routine audits of certain of our Medicare Advantage, PFFS and PDP products, and found deficiencies in many of the business areas included in the review. On February 2, 2009, we received the audit report and corrective action request from CMS, and we have 45 days to submit our corrective action plan to CMS for review and approval. If CMS is not satisfied with our corrective action plan, or if it believes that the deficiencies are substantial and/or repeat deficiencies, it could levy enforcement actions, including financial penalties and/or the suspension of marketing and enrollment into our Medicare products. If CMS were to impose substantial financial penalties and/or suspend the marketing of and enrollment into our Medicare products for a significant period of time in the future, it could have a material adverse effect on our Medicare business.

On February 13, 2008, the New York Attorney General (NYAG) announced that his office was conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The NYAG’s office issued subpoenas to 16 health insurance companies, including us, in connection with this investigation. See “Item 3. Legal Proceedings” for additional detail regarding the NYAG’s investigation. On January 13, 2009, the NYAG announced that, as a result of his investigation, his office had entered into a settlement agreement with United HealthGroup, Inc., which owns and operates the Ingenix database used by most health plans, including us, to price out-of-network claims. At the time of the announcement of the settlement with United, the NYAG indicated his intent to continue his investigation with respect to other health insurers. In the meantime, the Connecticut Attorney General has also been investigating health plans’ reimbursement of out-of-network services. On March 28, 2008, we received a request for voluntary production from the Connecticut Attorney General that seeks information similar to that subpoenaed by the NYAG. We are in the process of responding to the request and are cooperating with the Connecticut Attorney General as appropriate in his investigation. There can be no assurance that other state attorneys’ general will not take actions similar to those taken by the NYAG and the Connecticut Attorney General.

In addition, from time to time, agencies of the U.S. government investigate whether our operations are being conducted in accordance with regulations applicable to government contractors. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting, which could have a material adverse effect on our financial condition and results of operations.

Regulatory activities and litigation relating to the rescission of coverage, if resolved unfavorably, could adversely affect us.

In our individual business in certain states, persons applying for insurance policies are required to provide information about their medical history as well as that of family members for whom they are seeking coverage. These applications are subjected to a formal underwriting process to determine whether the applicants present an acceptable risk. If coverage is issued and the health plan or insurer subsequently discovers that the applicant

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materially misrepresented their or their family members’ medical history, the health plan or insurer has the legal right to rescind the policy in accordance with applicable legal standards. Although rescission has long been a legally authorized practice, the decisions of health plans to rescind coverage and decline payment to treating providers, as well as the procedures used to do so, have recently generated public attention, particularly in California. As a result, there have been both legislative and regulatory actions, as well as significant litigation, in connection with this issue.

On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance (DOI) announced that they would be issuing joint regulations that would restrict the ability of health plans and insurers to rescind a member’s coverage and deny payment to treating providers. The DMHC has issued draft proposed regulations but has not formally promulgated any regulations to date. The DOI has not issued any proposed regulations and at this time it is not known whether or when either agency will issue regulations. As of January 1, 2008, health plans and insurers in California, under certain defined circumstances, are obligated to pay providers for services they have rendered despite the rescission of a member’s policy.

In October, 2007, the DMHC initiated a survey of Health Net of California’s activities regarding the rescission of policies for the period January 1, 2004 through June 30, 2006. Following completion of the survey, on May 15, 2008, Health Net of California entered into a settlement agreement with the DMHC. See “Item 3. Legal Proceedings—Litigation Relating to Rescission of Policies” for information regarding the details of the settlement agreement. Failure to substantially implement the actions set forth in the corrective action plan will subject Health Net of California to a potential additional penalty of up to $3 million.

In April, 2008, the DOI commenced an audit of Health Net Life Insurance Company’s rescission practices and related claims settlement practices for the period January 1, 2004 through February 29, 2008. On September 12, 2008, Health Net Life entered into a settlement agreement with the DOI which resolves all DOI matters regarding Health Net Life’s rescission practices from January 2004 to date. See “Item 3. Legal Proceedings—Litigation Relating to Rescission of Policies” for information regarding the details of the settlement agreement. Failure to substantially comply with the settlement agreement subjects Health Net Life to a potential additional monetary penalty of up to $3.6 million.

We are also party to arbitrations and litigation, including a putative class action, in which rescinded members allege that we unlawfully rescinded their coverage. The lawsuits generally seek reimbursement for the cost of medical services that were not paid as a result of the rescission, and also seek to recover for emotional distress, attorneys’ fees and punitive damages. One of these arbitrations was decided in 2008 and resulted in an award paid to the claimant of approximately $9.4 million. Recent court of appeal decisions in California adverse to health plans and insurers have increased the risks associated with rescissions of policies based on applications containing material misrepresentations of medical history, and may make it more difficult to rescind policies in the future. On February 20, 2008, the Los Angeles City Attorney filed a complaint against us relating to our underwriting practices and rescission of certain individual policies. The complaint sought equitable relief and civil penalties for, among other things, alleged false advertising, violations of unfair competition laws and violations of the California Penal Code. On February 10, 2009, Health Net entered into settlement agreements resolving both the putative class action and the action filed by the Los Angeles City Attorney. See “Item 3. Legal Proceedings—Litigation Relating to Rescission of Policies” for additional information regarding these settlement agreements. Other government agencies, including the Attorney General of California, have indicated that they are investigating, or may be interested in investigating, rescissions and related activities.

We cannot predict the outcome of the anticipated regulatory proposals described above, nor the extent to which we may be affected by the enactment of those or other regulatory or legislative activities relating to rescissions. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry. Similarly, given the complexity and scope

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of rescission lawsuits, their final outcome cannot be predicted with any certainty. It is possible that in a particular quarter or annual period our results of operations could be adversely affected by an ultimate unfavorable resolution of these cases.

We face risks related to litigation, which, if resolved unfavorably, could result in substantial penalties and/or monetary damages, including punitive damages. In addition, we incur material expenses in the defense of litigation and our results of operations or financial condition could be adversely affected if we fail to accurately project litigation expenses.

We are subject to a variety of legal actions to which any corporation may be subject, including employment and employment discrimination-related suits, employee benefit claims, wage and hour claims, breach of contract actions, tort claims, fraud and misrepresentation claims, shareholder suits, including suits for securities fraud, and intellectual property and real estate related disputes. In addition, we incur and likely will continue to incur potential liability for claims related to the insurance industry in general and our business in particular, such as claims by members alleging failure to pay for or provide health care, poor outcomes for care delivered or arranged, improper rescission, termination or non-renewal of coverage and insufficient payments for out-of-network services; claims by employer groups for return of premiums; and claims by providers, including claims for withheld or otherwise insufficient compensation or reimbursement, claims related to self-funded business, and claims related to reinsurance matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business practices and can include claims for punitive damages. Also, there are currently, and may be in the future, attempts to bring class action lawsuits against various managed care organizations, including us. In some of the cases pending against us, substantial non-economic or punitive damages are also being sought.

Recent court decisions and legislative activity may increase our exposure for any of the types of claims we face. There is a risk that we could incur substantial legal fees and expenses, including discovery expenses, in any of the actions we defend in excess of amounts budgeted for defense. Plaintiffs’ attorneys have increasingly used expansive electronic discovery requests as a litigation tactic. Responding to these requests, the scope of which may exceed the normal capacity of our historical systems for archiving and organizing electronic documents, may require application of significant resources and impose significant costs on us. In certain cases, we could also be subject to awards of substantial legal fees and costs to plaintiffs’ counsel.

We cannot predict the outcome of any lawsuit with certainty, and we are incurring material expenses in the defense of litigation matters, including without limitation, substantial discovery costs. While we currently have insurance policies that may provide coverage for some of the potential liabilities relating to litigation matters, there can be no assurance that coverage will be available for any particular case or liability. Insurers could dispute coverage or the amount of insurance could not be sufficient to cover the damages awarded or settlement amounts. In addition, certain liabilities such as punitive damages, may not be covered by insurance. Insurance coverage for all or certain types of liability may become unavailable or prohibitively expensive in the future or the deductible on any such insurance coverage could be set at a level that would result in us effectively self-insuring cases against us. The deductible on our errors and omissions (“E&O”) insurance has reached such a level. Given the amount of the deductible, the only cases which would be covered by our E&O insurance are those involving claims that substantially exceed our average claim values and otherwise qualify for coverage under the terms of the insurance policy.

We regularly evaluate litigation matters pending against us, including those described in Note 13 to our consolidated financial statements, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain cases, such as with the McCoy case, could result in an earnings charge in any particular quarter in which we enter into a settlement agreement. Although we have recorded litigation reserves which represent our best estimate on probable losses, both known and incurred but not reported, our recorded reserves might prove to be inadequate to cover an adverse result or settlement for extraordinary matters, such as the matters described in Note 13.

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Therefore, costs associated with the various litigation matters to which we are subject and any earnings charge recorded in connection with a settlement agreement could have a material adverse effect on our financial condition or results of operations.

If we are unable to maintain good relations with the physicians, hospitals and other providers that we contract with, our profitability could be adversely affected.

We contract with physicians, hospitals and other providers as a means to assure access to health care services for our members, to manage health care costs and utilization and to better monitor the quality of care being delivered. In any particular market, providers could refuse to contract with us, demand higher payments or take other actions, including litigation, which could result in higher health care costs, less desirable products for customers and members, disruption to provider access for current members or to support growth, or difficulty in meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant market positions or even monopolies. Some of these providers may compete directly with us. If these providers refuse to contract with us or utilize their market position to negotiate favorable contracts or place us at a competitive disadvantage, our ability to market our products or to be profitable in those areas could be adversely affected.

We contract with professional providers in California primarily through capitation fee arrangements. Under a capitation fee arrangement, we pay a provider group a fixed amount per member on a regular basis and the provider group accepts the risk of the frequency and cost of member utilization of professional services. Provider groups that enter into capitation fee arrangements generally contract with specialists and other secondary providers, and may contract with primary care physicians, to provide services. The inability of provider groups to properly manage costs under capitation arrangements can result in their financial instability and the termination of their relationship with us. A provider group’s financial instability or failure to pay secondary providers for services rendered could lead secondary providers to demand payment from us, even though we have made our regular capitated payments to the provider group. Depending on state law, we could be liable for such claims. In California, the liability of our HMO subsidiaries for unpaid provider claims has not been definitively settled. There can be no assurance that we will not be liable for unpaid provider claims. There can also be no assurance that providers with whom we contract will properly manage the costs of services, maintain financial solvency or avoid disputes with secondary providers, the failure of any of which could have an adverse effect on the provision of services to members and our operations.

Some providers that render services to our members and insureds that have coverage for out-of-network services are not contracted with our plans and insurance companies. In those cases, there is no pre-established understanding between the provider and the plan about the amount of compensation that is due to the provider; rather, the plan’s obligation is to reimburse the member based upon the terms of the member’s plan. In some states and product lines, the amount of reimbursement is defined by law or regulation, but in most instances it is established by a standard set forth in the plan that is not clearly translated into dollar terms, such as “usual, customary and reasonable.” In such instances providers may believe they are underpaid for their services and may either litigate or arbitrate their dispute with the plan or balance bill our member. Regulatory authorities in various states may also challenge the manner in which we reimburse members for services performed by non-contracted providers. For example, as described in more detail in “Item 3. Legal Proceedings—Proceedings Relating to Claims Payment Practices,” the NYAG announced in February 2008 that his office is in the process of conducting such an investigation, and settlements entered into by other health plans with the NYAG in the wake of this investigation have involved certain payments by those plans. As a result of litigation or regulatory activity, we may have to pay providers additional amounts or reimburse members for their out-of-pocket payments. The uncertainty about our financial obligations for such services and the possibility of subsequent adjustment of our original payments could have a material adverse effect on our financial position or results of operations.

In addition, provider groups and hospitals that do contract with us have in certain situations commenced litigation and/or arbitration proceedings against us to recover amounts they allege to be underpayments due to

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them under their contracts with us. We believe that provider groups and hospitals have become increasingly sophisticated in their review of claim payments and contractual terms in an effort to maximize their payments from us and have increased their use of outside professionals, including accounting firms and attorneys, in these efforts. These efforts and the litigation and arbitration that result from them could have a material adverse effect on our results of operations and financial condition.

If the current unfavorable economic conditions continue or further deteriorate, it could adversely affect our revenues and results of operations.

Recent market and economic conditions in the United States have been challenging and unprecedented. Continued concerns about the systemic impact of inflation, energy costs, rising unemployment rates, geopolitical issues, the availability and cost of credit and other capital, the U.S. mortgage market, consumer spending and a declining real estate market have contributed to increased market volatility and diminished expectations for the U.S. economy and this is expected to continue going forward. These extreme events could adversely affect our revenues and results of operations.

These market conditions expose us to a number of risks, including risks associated with the potential financial instability of our customers. If our customer base experiences cash flow problems or other financial difficulties, it could, in turn, adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans to purchase our products, or may make changes in the mix of products purchased from us. If our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, or may reduce their workforce, resulting in a decline in membership in our products. Further, our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business. The adverse economic conditions could also cause employers to stop offering certain health care coverage as an employee benefit or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs. A significant decline in membership in our plans and the inability of current and/or potential customers to pay their premiums as a result of unfavorable economic conditions may adversely affect our business, including our revenues, profitability and cash flow.

Higher unemployment rates and significant employment layoffs and downsizings may also impact the number of enrollees in managed care programs and the profitability of our operations. If economic conditions significantly deteriorate and unemployment rates continue to rise, we may experience a reduction in existing and new business, which may have a material adverse effect on our business, financial condition and results of operations.

An extended economic downturn could adversely affect state and federal budgets, resulting in reduced reimbursements or payments in our federal and state government health care coverage programs, including Medicare, Medicaid and CHIP. A reduction in state Medicaid reimbursement rates could be implemented retrospectively to payments already negotiated and/or received from the government and could adversely affect our revenues and financial results. In addition, state and federal budgetary pressures could cause new or a higher levels of assessments or taxes for our commercial programs, such as surcharges on select fee-for-service and capitated medical claims or premium taxes on health maintenance organizations, and could adversely affect our results of operations.

Our forecasts and other forward-looking statements are based on a variety of assumptions that are subject to significant uncertainties. Our performance may not be consistent with these forecasts and forward-looking statements.

From time to time in press releases and otherwise, we publish forecasts or other forward-looking statements regarding our future results, including estimated revenues, net earnings and other operating and financial metrics. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant

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uncertainties, and, as a matter of course, any number of them may prove to be incorrect. For example, in 2008, we lowered our full-year 2008 earnings per share guidance in the first, second and third quarter, which had a significant negative impact on our full year results.

The achievement of any forecast depends on numerous risks and other factors, including those described in this Annual Report, many of which are beyond our control. In addition, the volatility in the financial markets and challenging economic conditions may make it particularly difficult to forecast our future performance. As a result, we cannot assure that our performance will meet any management forecasts or that the variation from such forecasts will not be material and adverse. You are cautioned not to base your entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize the entire mix of publicly available historical and forward-looking information, as well as other available information affecting us, our services, and our industry when evaluating our forecasts and other forward-looking statements relating to our operations and financial performance.

We have a material amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may adversely affect our operations.

Our indebtedness includes $400 million in aggregate principal amount of 6.375% Senior Notes due 2017 and $175 million in borrowings under a financing facility which will amortize over a period ending December 2012. For a description of our Senior Notes and our financing facility, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure.” In addition, to provide liquidity, we have a $900 million five-year revolving credit facility that expires in June 2012. As of December 31, 2008, $150 million was outstanding under our revolving credit facility. We may incur additional debt in the future. Our existing indebtedness, and any additional debt we incur in the future through drawings on our revolving credit facility or otherwise could have an adverse effect on our business and future operations. For example, it could:

• require us to dedicate a substantial portion of cash flow from operations to pay principal and interest on our debt, which would reduce funds available to fund future working capital, capital expenditures and other general operating requirements;

• increase our vulnerability to general adverse economic and industry conditions or a downturn in our business; and

• place us at a competitive disadvantage compared to our competitors that have less debt.

We continually evaluate options to refinance our outstanding indebtedness. Our ability to obtain any financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors. Recently, credit markets have experienced unusual uncertainty, and liquidity and access to capital markets have tightened. See “—Adverse conditions in the credit markets may materially affect our ability to obtain credit.” Consequently, in the event we need to access the credit markets to refinance our debt, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. If we are unable to obtain financing on terms and within a time acceptable to us it could, in addition to other negative effects, have a material adverse effect on our operations, financial condition, ability to compete or ability to comply with regulatory requirements.

Adverse conditions in the credit markets may materially affect our ability to obtain credit.

The U.S. and global capital and credit markets have been experiencing extreme volatility and disruption. Concern about the stability of the markets generally has lead many lenders to reduce and in some cases cease to provide funding to borrowers. If current levels of market disruption and volatility continue or worsen, they may materially and adversely affect our ability to access additional capital to meet liquidity needs, which could have an adverse effect on our financial condition and results of operations.

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The current economic environment and volatility in the financial markets could have an adverse impact on the value of our investment portfolio and our goodwill which could, in turn, have a negative effect on our results of operations and stockholders’ equity.

Our investment portfolio is comprised primarily of available-for-sale investment securities such as interest-yielding debt securities of varying maturities. As of December 31, 2008, our available-for-sale investment securities were $1.5 billion. The value of fixed-income securities is highly sensitive to fluctuations in short-and long-term interest rates, with the value decreasing as such rates increase and increasing as such rates decrease. These securities may also be negatively impacted by illiquidity in the market. We closely monitor the fair values of our investment securities and regularly evaluate them for any other-than-temporary impairments. We have the intent and ability to hold our investments for a sufficient period of time to allow for recovery of the principal amount invested.

The current economic environment and recent volatility of the U.S. and global capital markets have negatively impacted the liquidity of investments, such as our debt securities, and a worsening of credit market disruptions or sustained market downturns could have additional negative effects on the liquidity and value of our investment assets. In addition, such volatility has increased the difficulty of assessing investment impairment and the same influences tend to increase the risk of potential impairment of these assets.

In the third quarter of 2008, we recognized a $14.6 million loss from other-than-temporary impairments in our available-for-sale investments and money market fund. Over time, the economic and capital market environment may further deteriorate or provide additional insight regarding the fair value of certain securities, which could change our judgment regarding the impairment of certain investments. This could result in realized losses relating to other-than-temporary declines being charged against future income. Given the current market conditions and the significant judgments involved, there is continuing risk that further declines in fair value may occur and material other-than-temporary impairments may result in realized losses in future periods, which could have an adverse effect on our results of operations, liquidity and financial condition. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information regarding our investment portfolio.

In addition, our regulated subsidiaries are also subject to state laws and regulations that govern the types of investments that are allowable and admissible in those subsidiaries’ portfolios. There can be no assurance that our investment assets will produce total positive returns or that we will not sell investments at prices that are less than the carrying value of these investments. Changes in the value of our investment assets, as a result of interest rate fluctuations, illiquidity or otherwise, could have a negative affect on our stockholders’ equity. In addition, if it became necessary for us to liquidate our investment portfolio on an accelerated basis, it could have an adverse effect on our results of operations.

The economic environment and crisis in the financial markets also resulted in significant fluctuations in our market capitalization during 2008. As a result of the decline in our market capitalization, we updated our annual goodwill impairment test as of December 31, 2008. No impairment was found but if our stock price does not stabilize or if our market capitalization continues to decline, we could be required to update our goodwill impairment test in future quarters. Depending on the results of any such impairment test, we could be required to take an impairment charge to reduce the carrying amount of our goodwill. If we were required to take such a charge, it would be non-cash and would not affect our liquidity, tangible equity or regulatory capital levels but could have a significant adverse effect on our results of operations.

Downgrades in our debt ratings, should they occur, may adversely affect our business, financial condition and results of operations.

Claims paying ability, financial strength, and debt ratings by nationally recognized rating agencies are increasingly important factors in establishing the competitive position of insurance companies and health benefits companies. Ratings information by nationally recognized rating agencies is broadly disseminated and generally used throughout the industry. We believe our claims paying ability and financial strength ratings are important

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factors in marketing our products to certain of our customers. In addition, our debt ratings impact both the cost and availability of future borrowings and accordingly, our cost of capital, and our amortizing financing facility contains covenants requiring that we maintain certain public debt ratings. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure—Amortizing Financing Facility” for additional information on our amortizing financing facility. Each of the rating agencies reviews our ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency’s independent opinion of our financial strength, operating performance, ability to meet our debt obligations or obligations to policyholders and other factors. Downgrades in our ratings, should they occur, may adversely affect our business, financial condition and results of operations.

We are a holding company and a substantial amount of our cash flow is generated by our subsidiaries. Our regulated subsidiaries are subject to restrictions on the payment of dividends and maintenance of minimum levels of capital.

As a holding company, our subsidiaries conduct substantially all of our consolidated operations and own substantially all of our consolidated assets. Consequently, our cash flow and our ability to pay our debt depends, in part, on the amount of cash that we receive from our subsidiaries. Our subsidiaries’ ability to make any payments to us will depend on their earnings, business and tax considerations, legal and regulatory restrictions and economic conditions. In addition, in certain states our regulated subsidiaries are subject to risk-based capital requirements, known as RBC. These laws require our regulated subsidiaries to report their results of risk-based capital calculations to the departments of insurance in their state of domicile and the National Association of Insurance Commissioners. Failure to maintain the minimum RBC standards could subject certain of our regulated subsidiaries to corrective action, including increased reporting and/or state supervision. In addition, in most states, we are required to seek prior approval before we transfer money or pay dividends from our regulated subsidiaries that exceed specified amounts. If our regulated subsidiaries are restricted from paying us dividends or otherwise making cash transfers to us, it could have material adverse effect on our results of operations and Health Net, Inc.’s free cash flow. For additional information regarding our regulated subsidiaries’ statutory capital requirements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Statutory Capital Requirements.”

Our revolving credit facility and our financing facility contain restrictive covenants that could limit our ability to pursue our business strategies.

On June 25, 2007, we entered into a $900 million five-year revolving credit facility. On December 19, 2007, we entered into a $175 million financing facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure” for additional information regarding our revolving credit facility and our financing facility. Our revolving credit facility and our financing facility require us to comply with various covenants that impose restrictions on our operations, including our ability to incur additional indebtedness, pay dividends, make investments or other restricted payments, sell or otherwise dispose of assets and engage in other activities. Our revolving credit facility and our financing facility also require us to comply with certain financial covenants, including a maximum leverage ratio and a minimum fixed charge coverage ratio. Our financing facility has a covenant requiring us to maintain certain minimum public debt ratings. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure Amortizing Financing Facility” for details regarding the threshold ratings we are required to maintain under the financing facility.

The restrictive covenants under our revolving credit facility and our financing facility could limit our ability to pursue our business strategies. In addition, any failure by us to comply with these restrictive covenants could result in an event of default under the revolving credit facility, our financing facility, and, in some circumstances, under the indenture governing our Senior Notes, which, in any case, could have a material adverse effect on our financial condition.

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The markets in which we do business are highly competitive. If we do not design and price our products competitively, our membership and profitability could decline.

We are in a highly competitive industry. Many of our competitors may have certain characteristics, capabilities or resources, such as greater market share, superior provider and supplier arrangements and existing business relationships, that give them an advantage in competing with us. These competitors include HMOs, PPOs, self-funded employers, insurance companies, hospitals, health care facilities and other health care providers. In addition, other companies may enter our markets in the future.

In addition, financial services or other technology-based companies could enter the market and compete with us on the basis of their streamlined administrative functions. The addition of new competitors can occur relatively easily and customers enjoy significant flexibility in moving between competitors. There is a risk that our customers may decide to perform for themselves functions or services currently provided by us, which could result in a decrease in our revenues. In addition, our providers and suppliers may decide to market products and services to our customers in competition with us.

In recent years, there has been significant merger and acquisition activity in our industry and in industries that act as our suppliers, such as the hospital, physician, pharmaceutical and medical device industries. This activity may create stronger competitors and/or result in higher health care costs. In addition, our contracts with government agencies, such as our TRICARE North contract, are frequently up for re-bid and the loss of any significant government contract to a competitor could have an adverse effect on our financial condition and results of operations. To the extent that there is strong competition or that competition intensifies in any market, our ability to retain or increase customers, our revenue growth, our pricing flexibility, our control over medical cost trends and our marketing expenses may all be adversely affected.

Nearly every major managed care organization has launched, announced or is developing HSA-compatible high-deductible health plans. We have launched HSA programs in our Northeast, Arizona, California and Oregon health plans. Our HSA programs represented a very small percentage of our total revenue in 2008. Some of our large competitors, such as Aetna and Blue Cross Blue Shield plans, have made large investments in, and heavily marketed, their consumer-directed health plans and have gained more enrollment in many markets across the country. If their enrollment trend continues, it may widen the competitive gap between us over the next several years. If we fail to design, maintain and effectively market consumer-directed health care programs that are attractive to consumers and, as a result, are unable to achieve a competitive market share in the consumer-directed care category, it could have a material adverse effect on our business, financial condition or results of operations.

We have historically experienced significant turnover in senior management and recently reorganized our management structure. If we are unable to manage the succession of our key executives, it could adversely affect our business.

We have experienced a high turnover in our senior management team in recent years and in late 2008 reorganized our management structure. Although we have succession plans in place and have employment arrangements with our key executives, these do not guarantee that the services of these key executives will continue to be available to us. We would be adversely affected if we fail to adequately plan for future turnover of our senior management team.

If we fail to effectively maintain our management information systems, it could adversely affect our business.

Our business depends significantly on effective information systems. The information gathered and processed by our management information systems assists us in, among other things, pricing our services, monitoring utilization and other cost factors, processing provider claims, billing our customers on a timely basis

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and identifying accounts for collection. Our customers and providers also depend upon our information systems for membership verification, claims status and other information. We have many different information systems for our various businesses and these systems require continual maintenance, upgrading and enhancement to meet our operational needs. Moreover, our merger, acquisition and divestiture activity requires transitions to or from, and the integration of, various information management systems.

Health Net’s operations strategy team is currently reviewing options for transitioning to a single technology platform companywide to gain operational and cost efficiencies. We believe that by consolidating our current systems, we will gain operational and cost efficiencies. Transitioning to a single in-house system and utilizing varying levels of system outsourcing are options currently under consideration by management. See “Item 1. Business—Additional Information Concerning Our Business—Health Net Systems Consolidation Project” for additional information regarding this consolidation project.

Any difficulty or unexpected delay associated with the transition to or from information systems, any inability or failure to properly maintain management information systems, or any inability or failure to successfully update or expand processing capability or develop new capabilities to meet our business needs, could result in operational disruptions, loss of existing customers, difficulty in attracting new customers, disputes with customers and providers, regulatory problems, significant increases in administrative expenses and/or other adverse consequences. In addition, we may, from time-to-time, obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to adverse effects if such third parties fail to perform adequately. See “—We are subject to risks associated with outsourcing services and functions to third parties.”

We are subject to risks associated with outsourcing services and functions to third parties.

We contract with independent third party vendors who provide services to us and our subsidiaries or to whom we delegate selected functions. These third party vendors include, but are not limited to, information technology system providers, medical management providers, claims administration providers, billing and enrollment providers, call center providers and specialty service providers. Our arrangements with third party vendors may make our operations vulnerable if those third parties fail to satisfy their obligations to us, including their obligations to maintain and protect the security and confidentiality of our information and data, as a result of our failure to adequately monitor and regulate their performance, changes in the vendors’ operations or financial condition or other matters outside of our control. Violations of laws or regulations governing our business by third party vendors could increase our exposure to liability or otherwise increase the costs associated with the operation of our business. In addition, to the extent we outsource selected services or selected functions to third parties in foreign jurisdictions, we could be exposed to risks inherent in conducting business outside of the United States, including international economic and political conditions, additional costs associated with complying with foreign laws and fluctuations in currency values.

In 2008, we entered into an outsourcing agreement (the “IT Outsourcing Agreement”) with International Business Machines Corporation (“IBM”) and two separate outsourcing agreements (collectively, the “Applications and Claims Outsourcing Agreements”) with Cognizant Technology Solutions U.S. Corporation (“Cognizant”). Under the terms of the IT Outsourcing Agreement, IBM will, among other things, provide us with data center services, IT security management services, technical support services, administrative support services and, via an IBM partner, voice and data network services. Under the terms of the Applications and Claims Outsourcing Agreements, Cognizant will, among other things, provide application development, testing and monitoring services, application maintenance and support services, project management services, claims adjudication, adjustment, audit and process improvement services. We will retain responsibility for the payment of claims and the development of claims processing policies.

The IT Outsourcing Agreement and the Applications and Claims Outsourcing Agreements, as well as any of our other outsourcing arrangements, could increase our exposure to the risks outlined above. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing projects or other relationships

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we enter into with third party vendors, as a result of regulatory restrictions on outsourcing or otherwise. This could result in substantial costs or other operational or financial problems that could adversely impact our results of operations.

Acquisitions, divestitures and other significant transactions may adversely affect our business.

We continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations. From time to time we review, from a strategic standpoint, potential acquisitions and divestitures in light of our core businesses and growth strategies. The success of any such acquisition or divestiture depends, in part, upon our ability to identify suitable buyers or sellers, negotiate favorable contractual terms and, in many cases, obtain governmental approval. For acquisitions, success is also dependent upon efficiently integrating the acquired business into the Company’s existing operations. If we are unable to consummate, successfully integrate and grow these acquisitions and to realize contemplated revenue synergies and cost savings, our financial results could be adversely affected. In addition, we may, from time to time, divest businesses that are less of a strategic fit for the company or do not produce an adequate return. In November 2008, we announced that, among other strategic alternatives, we are considering a divestiture of our Northeast and Arizona businesses. We may not be able to divest our Northeast and Arizona businesses or may not be able to do so on terms that are favorable to us. Failure to divest or execute another strategic alternative following such an announcement could adversely impact our ability to operate those businesses profitably. Should a divestiture of the Northeast and Arizona businesses occur, our profitability may be impacted by either gains or losses on the sales of those businesses or lost operating income or cash flows from those businesses. Further, in the event the structure of the transaction results in continuing obligations by the buyer to us or our customers, a buyer’s inability to fulfill these obligations could lead to future financial loss on our part. In addition, any divestiture could result in significant asset impairment charges, including those related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition and results of operations. These potential acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities and potential disputes with the buyers or sellers.

We must comply with restrictions on patient privacy and information security, including taking steps to ensure compliance by our business associates with HIPAA.

In December 2000, the Department of Health and Human Services promulgated regulations under HIPAA related to the privacy and security of electronically transmitted protected health information (“PHI”). The regulations require health plans, clearinghouses and providers to: comply with various requirements and restrictions related to the use, storage, transmission and disclosure of PHI; adopt rigorous internal procedures to safeguard PHI; and enter into specific written agreements with business associates to whom PHI is disclosed. The regulations also establish significant criminal penalties and civil sanctions for non-compliance. In addition, the regulations could expose us to additional liability for, among other things, violations of the regulations by our business associates, including the third party vendors involved in our outsourcing projects. Although our contracts with business associates provide for appropriate protections of PHI, we may have limited control over the actions and practices of our business associates. Compliance with HIPAA and other state and federal privacy and security regulations may result in cost increases due to necessary systems changes, the development of new administrative processes and the effects of potential noncompliance by our business associates.

Negative publicity regarding the managed health care industry could adversely affect our ability to market and sell our products and services.

Managed health care companies have received and continue to receive negative publicity reflecting the public perception of the industry. For example, the Company and the managed health care industry have been subject to negative publicity surrounding practices in connection with the rescission of individual health insurance policies. In addition, health care and related health care reform proposals have been and are expected

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to continue to be the subject of intense media attention, especially since the new presidential administration has announced that federal health reform is one of its top priorities. Such political discourse can often generate publicity that portrays managed care in a negative light. Our marketing efforts may be affected by the amount of negative publicity to which the industry has been subject, as well as by speculation and uncertainty relating to merger and acquisition activity among companies in our industry, including speculation about a possible divestiture of our Northeast and Arizona businesses. Speculation, uncertainty or negative publicity about us, our industry or our lines of business could adversely affect our ability to market and sell our products or services, require changes to our products or services, or stimulate additional legislation, regulation, review of industry practices or litigation that could adversely affect us.

If we are unable to manage our general and administrative expenses, our business, financial condition or results of operations could be harmed.

The level of our administrative expenses can affect our profitability, and administrative expense increases are difficult to predict. While we attempt to effectively manage such expenses, including through the development of online functionalities and other projects designed to create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to time due to business or product start-ups or expansions, growth, membership declines or changes in business, difficulties or delays in projects designed to create administrative efficiencies, acquisitions, reliance on outsourced services, regulatory requirements, including compliance with HIPAA regulations, or other reasons. For example, in 2007, our administrative expenses increased as we continued to support expected commercial growth. In addition, in November 2007, we announced a reorganization plan to enhance efficiency and achieve general and administrative cost savings. The reorganization is ongoing and is intended to enable us to streamline our operations, including consolidating technology platforms, combining duplicative administrative and operational functions and outsourcing certain operations where appropriate. We are targeting annual savings of $100 million in general and administrative expenses by 2010 in connection with the reorganization. However, there can be no assurance that the reorganization will produce the anticipated savings or that the reorganization will not significantly disrupt operations thereby negatively impacting our financial performance. In addition, there can be no assurance that we will be able to successfully manage our administrative expenses, which could have an adverse effect on our business, financial condition or results of operations.

We depend, in part, on independent brokers and sales agents to market our products and services, and recent regulatory investigations have focused on certain brokerage practices, including broker compensation arrangements and bid quoting practices.

We market our products and services both through sales people employed by us and through independent sales agents. Independent sales agents typically do not work with us on an exclusive basis and may market health care products and services of our competitors. We face intense competition for the services and allegiance of independent sales agents and we cannot assure you that these agents will continue to market our products at a reasonable cost. Although we have a number of sales employees and agents, if key sales employees or agents or a large subset of these individuals were to leave us, our ability to retain existing customers and members could be impaired.

There have been a number of investigations and enforcement actions against insurance brokers and insurers over the last several years regarding allegedly inappropriate or undisclosed payments made by insurers to brokers for the placement of insurance business. For example, CMS has increased its scrutiny of insurance brokers and insurers regarding allegedly improper sales and marketing practices in connection with the sale of Medicare products. While we are not aware of any unlawful practices by the Company or any of our agents or brokers in connection with the marketing and sales of our products and services, investigations by the New York Attorney General, New York Department of Insurance, CMS and other regulators, as well as regulatory changes initiated in several states in response to allegedly inappropriate broker conduct and broker payment practices, could result in changes in industry practices that could have an adverse effect on our ability to market our products.

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The market price of our common stock is volatile.

The market price of our common stock is subject to volatility. In 2008, the Morgan Stanley Healthcare Payor Index (the “HMO Index”), an index comprised of 11 managed care organizations, including Health Net, recorded an approximate 54.8% decrease in its value, while the per-share value of our common stock decreased by 77.5%. There can be no assurance that the trading price of our common stock will vary in a manner consistent with the variation in the HMO Index or the Standard & Poor’s 400 Mid-Cap Index of which our common stock is also a component. The market prices of our common stock and the securities of certain other publicly-traded companies in our industry have shown significant volatility and sensitivity in response to many factors, including public communications regarding managed care, legislative or regulatory actions, health care reform litigation or threatened litigation, health care cost trends, pricing trends, competition, earnings, receivable collections or membership reports of particular industry participants, and market speculation about or actual acquisition activity. Additionally, adverse developments affecting any one of the companies in our sector could cause the price of our common stock to weaken, even if those adverse developments do not otherwise affect us. There can be no assurances regarding the level or stability of our share price at any time or the impact of these or any other factors on our stock price.

If we are required to publicly disclose information regarding our provider reimbursement rates and preferred drug list or other trade secret information for our programs, it could have a material adverse effect on our business.

In 2008, following a determination that the Connecticut Freedom of Information Act was applicable to managed care organizations participating in the Connecticut Medicaid Program, the State of Connecticut announced that it was considering making the state’s Freedom of Information Act applicable to other state programs, such as programs for the uninsured and the State employee health benefits program. If we are required to publicly disclose information regarding our provider reimbursement rates, preferred drug lists or other trade secret information, it could have a material adverse effect on our ability to contract with providers and compete effectively in the marketplace.

Large-scale public health epidemics and/or terrorist activity could cause us to incur unexpected health care and other costs and could materially and adversely affect our business, financial condition and results of operations.

An outbreak of a pandemic disease and/or future terrorist activities, including bio-terrorism, could materially and adversely affect the U.S. economy in general and the health care industry specifically. Depending on the government’s actions and the responsiveness of public health agencies and insurance companies, a large-scale public health epidemic or future acts of bio-terrorism could lead to, among other things, increased use of health care services, disruption of information and payment systems, increased health care costs due to increased in-patient and out-patient hospital costs and the cost of any anti-viral medication used to treat affected people.

Natural disasters, including earthquakes, fires and floods, could severely damage or interrupt our systems and operations and result in an adverse effect on our business, financial condition or results of operations.

Natural disasters such as fire, flood, earthquake, tornado, power loss, virus, telecommunications failure, break-in or similar event could severely damage or interrupt our systems and operations, result in loss of data, and/or delay or impair our ability to service our members and providers. We have in place a disaster recovery plan which is intended to provide us with the ability to maintain fully redundant systems for our operations in the event of a natural disaster utilizing various alternate sites provided by a national disaster recovery vendor. However, there can be no assurance that such adverse effects will not occur in the event of a disaster. Any such disaster or similar event could have a material adverse effect on our business, financial condition and results of operations.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We lease office space for our principal executive offices in Woodland Hills, California. Our executive offices, comprising approximately 176,490 square feet, are occupied under two separate leases, one of which expired on December 31, 2008 (with respect to 51,175 square feet of space) and the other will expire on December 31, 2014 (with respect to 125,315 square feet of space). We have vacated the office space that was covered by the lease that expired on December 31, 2008. A significant portion of our California HMO operations are also housed in Woodland Hills, in a separate 333,954 square foot leased facility. The lease for this two-building facility expires December 31, 2011. Combined rent and rent-related obligations for our Woodland Hills facilities were approximately $16.2 million in 2008.

We also lease an aggregate of approximately 548,807 square feet of office space in Rancho Cordova, California for certain Health Plan Services and Government Contract operations. Our aggregate rent and rent-related obligations under these leases were approximately $11.1 million in 2008. These leases expire at various dates ranging from 2009 to 2013. We also lease a total of approximately 59,750 square feet of office space in San Rafael California for certain specialty services operations.

On March 29, 2007 we sold our 68-acre commercial campus in Shelton, Connecticut (the Shelton Property) to The Dacourt Group, Inc. (Dacourt), dba HN Property Owner, LLC, and leased it back from the Buyer under an operating lease agreement for an initial term of ten years with an option to extend for two additional terms of ten years each. We received net cash proceeds of $83.9 million and recorded a deferred gain of $60.9 million, which is amortized into income as contra-G&A expense over the lease term. Under the Shelton Property lease agreement and other lease agreements, we lease an aggregate of approximately 492,673 square feet of office space in Shelton, Connecticut for certain Health Plan Services for our Northeast Division. Our aggregate rent and rent-related obligations under these leases was approximately $9.0 million in 2008. These leases expire at various dates ranging from 2016 to 2017.

In addition to the office space referenced above, we lease approximately 76 sites in 24 states, totaling approximately 811,426 square feet of space. We also own a data center facility in Rancho Cordova, California comprising approximately 82,000 square feet of space.

We believe that our ownership and rental costs are consistent with those associated with similar space in the applicable local areas. Our properties are well maintained, adequately meet our needs and are being utilized for their intended purposes.

Item 3. Legal Proceedings.

Litigation Related to the Sale of Businesses

AmCareco Litigation

We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the AmCare plans filed suit against us contending that, among other things, we were responsible as a “controlling

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shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and ultimately be placed into receivership.

On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively, and entered judgments against us in those amounts.

The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims that awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying them attorneys’ fees and punitive damages.

On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. As a result, those receivers’ cross appeals were rendered moot. The Court of Appeal also reversed the trial court judgment in favor of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered judgment in favor of the AmCare-LA receiver in the amount of $2 million. On January 14, 2009, the three receivers filed a request for rehearing by the Court of Appeal. On February 13, 2009, the Court of Appeal denied the request for a rehearing. The receivers have 30 days from that date to file an application for a writ with the Louisiana Supreme Court.

In light of the original trial court judgments against us, on November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered against us on the grounds of ill practice which resulted in the judgments entered. We have alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts between the receivers, their counsel and the trial court during the course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal judge dismissed Health Net’s federal complaint and Health Net appealed to the U.S. Fifth Circuit Court of Appeals. On July 8, 2008, the Fifth Circuit issued an opinion affirming the district court’s dismissal of the federal complaint, albeit on different legal grounds from those relied upon by the district court. The state court nullity action has been stayed pending the resolution of Health Net’s jurisdictional appeal in the federal action and has remained stayed during the pendency of the appeal of the underlying judgments.

These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome, including the outcome of any appeal, cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations, cash flow and/or liquidity could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition.

Litigation Relating to Rescission of Policies

In recent years, there has been growing public attention, especially in California, to the practices of health plans and health insurers involving the rescission of members’ policies for misrepresenting their health status on

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applications for coverage. On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance (DOI) announced their intention to issue joint regulations limiting the rights of health plans and insurers to rescind coverage. The DMHC has issued draft proposed regulations but has not formally promulgated any regulations to date. The DOI has not issued any proposed regulations. In addition, effective January 1, 2008, newly enacted legislation in California requires health plans and insurers to pay health care providers who, under certain circumstances, have rendered services to members whose policies are subsequently rescinded. The issue of rescissions has also attracted increasing media attention, and both the DMHC and the DOI have been conducting surveys of the rescission practices of health plans, including ours. Other government agencies, including the Attorney General of California, are investigating, or have indicated that they may be interested in investigating, rescissions and related activities.

On October 16, 2007, the DMHC initiated a survey of Health Net of California’s activities regarding the rescission of policies for the period January 1, 2004 through June 30, 2006. Following completion of the survey, on May 15, 2008, Health Net of California entered into a settlement agreement with the DMHC. The settlement agreement requires Health Net of California to (1) pay a $300,000 administrative fine, (2) offer future coverage to all 85 HMO enrollees who had coverage rescinded from January 1, 2004 through May 15, 2008, (3) offer those enrollees an opportunity to participate in an expedited review process where the enrollee could seek to resolve claims for out-of-pocket medical expenses and other damages incurred as a result of the rescission, and (4) file a corrective action plan for various internal procedural changes by June 30, 2008. Health Net of California filed the corrective action plan by the due date and has commenced implementation of the corrective action plan. Failure to substantially implement the actions set forth in the corrective action plan will subject Health Net of California to a potential penalty of up to $3 million.

On April 7, 2008, the DOI commenced an audit of Health Net Life Insurance Company’s rescission practices and related claims settlement practices for the period January 1, 2004 through February 29, 2008. On September 12, 2008, Health Net Life entered into a settlement agreement with the DOI, which resolves all DOI matters regarding Health Net Life’s rescission practices from January 2004 to date. Under the settlement agreement, Health Net Life paid a $3.6 million penalty in and agreed to certain corrective actions, including offering future coverage to all 926 rescinded PPO insureds and offering an opportunity to participate in an expedited review process that allows former insureds to seek to resolve their claims for damages incurred as a result of their rescission. On October 7, 2008, Health Net Life filed a corrective action proposal for various procedure changes. Failure to substantially comply with the settlement agreement subjects Health Net Life to a potential additional monetary penalty of up to $3.6 million.

We are also party to arbitrations and litigation, including a putative class action lawsuit filed in April 2008 in Los Angeles Superior Court, in which rescinded members allege that we unlawfully rescinded their coverage. The lawsuits generally seek to recover the cost of medical services that were not paid for as a result of the rescission, and in some cases they also seek damages for emotional distress, attorney fees and punitive damages. On February 20, 2008, the Los Angeles City Attorney filed a complaint against Health Net in the Los Angeles Superior Court relating to our underwriting practices and rescission of certain individual policies. The complaint sought equitable relief and civil penalties for, among other things, alleged false advertising, violations of unfair competition laws and violations of the California Penal Code. On February 10, 2009, we entered into settlement agreements that resolved both the putative class action and the Los Angeles City Attorney’s lawsuit. Under the terms of the settlement agreements, we agreed to pay a total of $6.3 million to class members (individuals rescinded between February 20, 2004 and February 10, 2009), in accordance with an agreed upon distribution formula. The class action settlement agreement also provides that we will reimburse class members for certain out-of-pocket expenses related to covered medical services that occurred between the time of their original enrollment and the date of their rescission, and we will also hold them harmless for certain unpaid bills for such services. Under the agreement, our reimbursement and hold harmless obligations are capped at a total of $3 million in the aggregate. We will also pay attorney fees of approximately $2 million. Under the terms of the two agreements, we also agreed that we would not engage in any rescissions in California until January 31, 2010, unless legislation or regulations governing the process for rescissions is enacted, or we implement a third party

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independent review process that is not objected to by the DMHC or the DOI. The agreement with the City Attorney also provides that we will pay a $2 million civil penalty, as well as contribute $500,000 as cy pres payments to specified non-profit organizations that support childrens’ healthcare. We also agreed as part of the settlements to offer coverage to class members on a going forward basis without medical underwriting, similar to the offer we agreed to make as part of our settlements with the DMHC and DOI. On February 11, 2009, the court gave preliminary approval of the settlements and scheduled a final approval hearing for May 26, 2009. Class members will be given notice of the settlement, and an opportunity to opt out of the agreement, or to file objections to the settlement, which will be considered by the court at the final approval hearing. All of the settlement amounts have been fully accrued for as of December 31, 2008.

We cannot predict the outcome of the anticipated regulatory proposals described above, nor the extent to which we may be affected by the enactment of those or other regulatory or legislative activities relating to rescissions. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry. Similarly, given the complexity and scope of rescission lawsuits, their final outcome cannot be predicted with any certainty. It is possible that in a particular quarter or annual period our results of operations could be adversely affected by an ultimate unfavorable resolution of these cases.

Proceedings Relating to Claims Payment Practices

On March 13, 2008, we entered into a final settlement agreement with the plaintiffs in the McCoy, Wachtel and Scharfman lawsuits, which were nationwide class actions principally relating to our out-of-network claims payment practices. We are currently in the process of implementing the terms of the settlement agreement. We were also the subject of a regulatory investigation conducted by the New Jersey Department of Banking and Insurance (“DOBI”) related principally to the timeliness and accuracy of our claims payment practices for services rendered by out-of-network providers in New Jersey. On August 26, 2008, we entered into a consent order with DOBI and agreed to remediate certain claims and pay a $13 million fine. We completed the remediation of the claims as of August 1, 2008. In the third quarter of 2007, we recorded a $296.8 million charge relating to the settlement of the McCoy, Wachtel and Scharfman cases, including the $13 million fine arising from the consent order with DOBI.

On February 13, 2008, the New York Attorney General (NYAG) announced that his office was conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The NYAG’s office issued subpoenas to 16 health insurance companies, including us, in connection with this investigation. As described by the NYAG in a press conference on February 13, 2008, the threatened claims appear to be similar in part to those asserted by the plaintiffs in the McCoy, Wachtel and Scharfman cases described above. We are in the process of responding to the subpoena and are cooperating with the NYAG as appropriate in his investigation. On January 13, 2009, the NYAG announced that, as a result of his investigation, his office had entered into a settlement agreement with UnitedHealth Group, Inc., which owns and operates Ingenix, the company that supplied the database used by many health insurers, including us, to determine certain out-of-network reimbursements. Under the terms of the settlement, United will discontinue its ownership and operation of those databases, and will pay $50 million towards creation of a new database to be owned and operated by a non-profit organization in New York. Since the announcement of the agreement with United, the NYAG has reached agreements with some other health plans, under which they agreed to make payments towards the creation of the database and, in some instances, agree to utilize the database if certain conditions are satisfied. At the time of the announcement of the settlement, the NYAG indicated his intent to continue his investigation with respect to other health insurers. In the meantime, the Connecticut Attorney General has also been investigating health plans’ reimbursement of out-of-network services. On March 28, 2008, we received a request for voluntary production from the Connecticut Attorney General that sought information similar to that subpoenaed by the NYAG. We are in the process of responding to the request and are cooperating with the Connecticut Attorney General as appropriate in his investigation.

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Miscellaneous Proceedings

In the ordinary course of our business operations, we are also subject to periodic reviews by various regulatory agencies with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, rules relating to pre-authorization penalties, payment of out-of-network claims and timely review of grievances and appeals, which may result in remediation of certain claims and the assessment of regulatory fines or penalties.

In addition, in the ordinary course of our business operations, we are also party to various other legal proceedings, including, without limitation, litigation arising out of our general business activities, such as contract disputes, employment litigation, wage and hour claims, real estate and intellectual property claims, claims brought by members seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition or divestiture of various business units or other assets. We are also subject to claims relating to the performance of contractual obligations to providers, members, employer groups and others, including the alleged failure to properly pay claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to the insurance industry in general, such as claims relating to reinsurance agreements and rescission of coverage and other types of insurance coverage obligations.

These other regulatory and legal proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of any or all of these other regulatory and legal proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of all of these other regulatory and legal proceedings that are pending, after consideration of applicable reserves and potentially available insurance coverage benefits, should not have a material adverse effect on our financial condition and liquidity.

Potential Settlements

We regularly evaluate litigation matters pending against us, including those described above, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain cases, could result in a significant earnings charge in any particular quarter in which we enter into a settlement agreement. We have recorded reserves and accrued costs for future legal costs for certain significant matters described above. These reserves and accrued costs represent our best estimate of probable loss, including related future legal costs for such matters, both known and incurred but not reported, although our recorded amounts might ultimately be inadequate to cover such costs. Therefore, the costs associated with the various litigation matters to which we are subject and any earnings charge recorded in connection with a settlement agreement could have a material adverse effect on our financial condition or results of operations.

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

There were no matters submitted to a vote of the security holders of the Company, either through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2008.

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PART II

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

The following table sets forth the high and low sales prices of the Company’s common stock, par value $.001 per share, on The New York Stock Exchange, Inc. (“NYSE”) since January 2007.

	High		Low
Calendar Quarter—2007
First Quarter	$	56.43	$	45.76
Second Quarter	$	59.25	$	52.08
Third Quarter	$	56.00	$	46.74
Fourth Quarter	$	54.66	$	45.85
Calendar Quarter—2008
First Quarter	$	52.96	$	27.83
Second Quarter	$	32.39	$	24.01
Third Quarter	$	28.93	$	20.75
Fourth Quarter	$	29.87	$	7.38

On February 20, 2009, the last reported sales price per share of our common stock was $16.74 per share.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding the Company’s equity compensation plans is contained in Part III of this Annual Report on Form 10-K under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Holders of Common Stock

As of February 20, 2009, there were 1,771 holders of record of our common stock.

Dividends

We have not paid any dividends on our common stock during the preceding two fiscal years. We have no present intention of paying any dividends on our common stock, although the matter will be periodically reviewed by our Board of Directors.

We are a holding company and, therefore, our ability to pay dividends depends on distributions received from our subsidiaries, which are subject to regulatory net worth requirements and additional state regulations which may restrict the declaration of dividends by HMOs, insurance companies and licensed managed health care plans. The payment of any dividend is at the discretion of our Board of Directors and depends upon our earnings, financial position (including cash position), capital requirements and such other factors as our Board of Directors deems relevant.

Under our revolving credit facility and our financing facility, we cannot declare or pay cash dividends to our stockholders or purchase, redeem or otherwise acquire shares of our capital stock or warrants, rights or options to acquire such shares for cash except to the extent permitted under the revolving credit facility and the financing facility, which are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Structure.”

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Stock Repurchase Program

We have a $700 million stock repurchase program authorized by our Board of Directors. Subject to Board approval, additional amounts are added to the repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. We repurchased 6,851,595 shares of our common stock during the year ended December 31, 2008, for aggregate consideration of approximately $242.8 million.

We used net free cash available to fund the share repurchases. As of December 31, 2008, the remaining authorization under our stock repurchase program was $103.3 million and we had repurchased an aggregate of 36,623,347 shares of our common stock under our repurchase program at an average price of $34.40 for aggregate consideration of approximately $1,259.8 million (which amount includes exercise proceeds and tax benefits the Company had received from the exercise of employee stock options).

We may repurchase shares of our common stock under the stock repurchase program from time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions.

Our stock repurchase program does not have an expiration date. The stock purchase program may be suspended or discontinued at any time.

On November 4, 2008, we announced that our stock repurchase program is on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, will be undertaking a review of the Company’s strategic direction.

Under the Company’s various stock option and long term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and exercise price obligations arising from the vesting and/or exercise of stock options and other equity awards. These repurchases are not part of our stock repurchase program.

The following table presents monthly information related to repurchases of our common stock, including shares withheld by the Company to satisfy tax withholdings and exercise price obligations in 2008, as of December 31, 2008:

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Programs (b) (c)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Programs (c) (d)
January 1—January 31	—			—		—	—	$	346,159,116
February 1—February 29 (e)	1,904,010		$	46.78	$	89,064,600	1,895,300	$	257,491,899
March 1—March 31 (e)	1,306,123			41.51		54,214,053	1,303,800	$	203,349,454
April 1—April 30	—			—		—	—	$	203,349,454
May 1—May 31	—			—		—	—	$	203,349,454
June 1—June 30 (e)	2,236			30.21		67,550	—	$	203,349,454
July 1—July 31	—			—		—	—	$	203,349,454
August 1—August 31	2,450,000			27.56		67,526,830	2,450,000	$	135,822,624
September 1—September 30	1,202,495			27.00		32,473,146	1,202,495	$	103,349,478
October 1—October 31	—			—		—	—	$	103,349,478
November 1—November 30	—			—		—	—	$	103,349,478
December 1—December 31 (e)	1,788			9.65		17,254	—	$	103,349,478
	6,866,652	(e)	$	35.44	$	243,363,433	6,851,595

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(a) We did not repurchase any shares of our common stock during the twelve months ended December 31, 2008 outside our publicly announced stock repurchase program, except shares withheld in connection with our various stock option and long-term incentive plans.

(b) Our stock repurchase program was announced in April 2002. We announced additional repurchase authorization in August 2003, October 2006 and October 2007.

(c) A total of $700 million of our common stock may be repurchased under our stock repurchase program. Additional amounts may be added to the program based on exercise proceeds and tax benefits the Company receives from the exercise of employee stock options, but only upon further approval by the Board of Directors. The remaining authority under our repurchase program includes proceeds received from option exercises and tax benefits the Company received from exercise of employee stock options which have been approved for inclusion in the program by the Board.

(d) Our stock repurchase program does not have an expiration date. During the twelve months ended December 31, 2008, we did not have any repurchase program that expired, and we did not terminate any repurchase program prior to its expiration date.

(e) Includes 8,710, 2,323, 2,236, and 1,788 shares withheld by the Company to satisfy tax withholdings and exercise price obligations arising from the vesting and/or exercise of stock options and other equity awards in February, March, June, and December, 2008, respectively.

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Performance Graph

The following graph compares the performance of the Company’s Common Stock with the performance of the Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500 Index”) and our Industry Peer Group Index from December 31, 2003 (the last trading day of 2003) to December 31, 2004, 2005, 2006, 2007 and 2008. The graph assumes that $100 was invested on December 31, 2003 in each of the Common Stock, the S&P 500 Index, and the Industry Peer Group Index, and that all dividends were reinvested. The Industry Peer Group Index weights the constituent companies’ stock performance on the basis of market capitalization at the beginning of each annual period.

The Company’s Industry Peer Group Index includes the following companies: Aetna, Inc., Cigna Corporation, Coventry Health Care, Humana, Inc., UnitedHealth Group, Inc. and WellPoint, Inc. Sierra Health Services was removed from the Company’s Industry Peer Group Index due to UnitedHealth Group’s acquisition of Sierra in 2008.

Indexed Total Return (Stock Price Plus Reinvested Dividends)

Name	12/31/2003		12/31/2004		12/31/2005		12/31/2006		12/31/2007		12/31/2008
Health Net	$	100.00	$	88.29	$	157.65	$	148.81	$	147.71	$	33.30
Standard & Poor’s 500 Index	$	100.00	$	110.87	$	116.31	$	134.67	$	142.06	$	89.51
Industry Peer Group Index	$	100.00	$	152.90	$	222.99	$	207.45	$	241.71	$	111.52

All historical performance data reflects the performance of each Company’s own stocks only and does not include the historical performance data of acquired companies.

The preceding graph and related information are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed “soliciting materials” or to be “filed” with the Securities and Exchange Commission (other than as provided in Item 201). Such information shall not be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that we specifically incorporate it by reference into such filing.

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Item 6. Selected Financial Data.

The following selected financial and operating data are derived from our audited consolidated financial statements. The selected financial and operating data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K.

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(Dollars in thousands, except per share and PMPM data)
REVENUES:
Health plan services premiums	$	12,392,006		$	11,435,314		$	10,364,740		$	9,506,865		$	9,517,530
Government contracts		2,835,261			2,501,677			2,376,014			2,307,483			2,021,871
Net investment income		91,042			120,176			111,042			72,751			58,147
Administrative services fees and other income		48,280			51,104			56,554			53,434			48,845
Total revenues	$	15,366,589		$	14,108,271		$	12,908,350		$	11,940,533		$	11,646,393
INCOME SUMMARY (1):
Income from continuing operations	$	95,003		$	193,697		$	329,313		$	229,785		$	42,604
Net income	$	95,003		$	193,697		$	329,313		$	229,785		$	42,604
NET INCOME PER SHARE—DILUTED (1):
Income from continuing operations	$	0.88		$	1.70		$	2.78		$	1.99		$	0.38
Net income	$	0.88		$	1.70		$	2.78		$	1.99		$	0.38
Weighted average shares outstanding:
Diluted		107,610			113,829			118,310			115,641			113,038
BALANCE SHEET DATA:
Cash and cash equivalents and investments available for sale	$	2,172,859		$	2,564,295		$	2,120,844		$	2,106,303		$	1,782,102
Total assets		4,816,350			4,933,055			4,297,022			3,940,722			3,653,194
Loans payable—Current		27,335			35,000			200,000			—			—
Loans payable—Long term		253,992			112,363			300,000			—			—
Senior notes payable		398,276			398,071			—			387,954			397,760
Total stockholders’ equity (2)		1,752,126			1,875,582			1,778,965			1,589,075			1,272,880
OPERATING DATA:
Pretax margin		1.0	%		2.5	%		3.7	%		3.2	%		0.6	%
Health plan services medical care ratio (MCR)		86.9	%		85.4	%		83.0	%		84.3	%		88.4	%
Government contracts cost ratio		95.3	%		92.2	%		94.0	%		95.8	%		95.3	%
G&A expense ratio		10.4	%		11.1	%		11.2	%		10.0	%		9.3	%
Selling costs ratio		2.9	%		2.9	%		2.4	%		2.3	%		2.5	%
Health plan services premiums per member per month (PMPM)	$	277.79		$	263.54		$	243.70		$	235.80		$	216.34
Health plan services costs PMPM	$	241.27		$	225.00		$	202.22		$	198.75		$	191.24
Net cash (used in) provided by operating activities	$	(158,962	)	$	605,482		$	277,937		$	191,394		$	(54,912	)
Net cash (used in) investing activities	$	(67,871	)	$	(230,195	)	$	(184,879	)	$	(244,046	)	$	(14,242	)
Net cash (used in) provided by financing activities	$	(111,983	)	$	(73,076	)	$	(130,737	)	$	73,035		$	(69,615	)

(1) Includes a $175.1 million pretax charge in total of which $119.6 million was primarily related to severance and other expenses associated with the company’s operations strategy and included in G&A expenses, $37.5 million was included in health plan services expenses for estimated litigation liability and regulatory actions, $14.6 million investment impairment charge included in net investment income, and $3.4 million related to an impairment of the assets of a subsidiary included in other income for 2008; $306.8 million pretax litigation and regulatory-related charge for 2007; $107.2 million pretax debt refinancing and litigation charge for 2006; $83.3 million pretax litigation and severance charge for 2005; and $31.7 million pretax severance, asset impairment and other charge and $169 million pretax charge associated with provider settlements for 2004.

(2) No cash dividends were declared in each of the years presented.

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

OVERVIEW

General

We are an integrated managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. We are among the nation’s largest publicly traded managed health care companies. Our mission is to help people be healthy, secure and comfortable. We provide health benefits to approximately 6.7 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network (MHN), provides behavioral health, substance abuse and employee assistance programs to approximately 6.9 million individuals, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

How We Report Our Results

We currently operate within two reportable segments, Health Plan Services and Government Contracts, each of which is described below.

Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”) and Medicaid health plans, the operations of our health and life insurance companies, and our behavioral health and pharmaceutical services subsidiaries. We have approximately 3.7 million members, including Medicare Part D members and administrative services only (ASO) members in our Health Plan Services segment.

Our Government Contracts segment includes our government-sponsored managed care federal contract with the U.S. Department of Defense (the Department of Defense) under the TRICARE program in the North Region and other health care related government contracts. Under the TRICARE contract for the North Region, we provide health care services to approximately 3.0 million Military Health System (MHS) eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide ASO. We also provide behavioral health services to military families under the Department of Defense Military Family Life Counseling contract.

How We Measure Our Profitability

Our profitability depends in large part on our ability to, among other things, effectively price our health care products; manage health care costs, including reserve estimates and pharmacy costs; contract with health care providers; attract and retain members; and manage our general and administrative (G&A) and selling expenses. In addition, factors such as regulation, competition and general economic conditions affect our operations and profitability. The effect of escalating health care costs, as well as any changes in our ability to negotiate competitive rates with our providers, may impose further risks to our ability to profitably underwrite our business, and may have a material impact on our business, financial condition or results of operations.

We measure our Health Plan Services segment profitability based on medical care ratio (MCR) and pretax income. The MCR is calculated as health plan services expense (excluding depreciation and amortization) divided by health plan services premiums. The pretax income is calculated as health plan services premiums and administrative services fees and other income less health plan services expense and G&A and other net expenses. See “—Results of Operations—Table of Summary Financial Information” for a calculation of our MCR and “—Results of Operations—Health Plan Services Segment Results” for a calculation of our pretax income.

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Health plan services premiums include health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts, including Medicare Part D, to provide care to enrolled Medicare recipients. Medicare revenue can also include amounts for risk factor adjustments and additional premiums that we charge in some places to members who purchase our Medicare risk plans (see Note 2 to our consolidated financial statements). The amount of premiums we earn in a given year is driven by the rates we charge and enrollment levels. Administrative services fees and other income primarily include revenue for administrative services such as claims processing, customer service, medical management, provider network access and other administrative services. Health plan services expense includes medical and related costs for health services provided to our members, including physician services, hospital and related professional services, outpatient care, and pharmacy benefit costs. These expenses are impacted by unit costs and utilization rates. Unit costs represent the health care cost per visit, and the utilization rates represent the volume of health care consumption by our members.

G&A expenses include those costs related to employees and benefits, consulting and professional fees, marketing, premium taxes and assessments, occupancy costs and litigation and regulatory-related costs. Such costs are driven by membership levels, introduction of new products, system consolidations, outsourcing activities and compliance requirements for changing regulations. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support the Health Plan Services segment. Selling expenses consist of external broker commission expenses and generally vary with premium volume.

We measure our Government Contracts segment profitability based on government contracts cost ratio and pretax income. The government contracts cost ratio is calculated as government contracts cost divided by government contracts revenue. The pretax income is calculated as government contracts revenue less government contracts cost. See “—Results of Operations—Table of Summary Financial Information” for a calculation of our government contracts cost ratio and “—Results of Operations—Government Contracts Segment Results” for a calculation of our pretax income.

Government Contracts revenue is made up of two major components: health care and administrative services. The health care component includes revenue recorded for health care costs for the provision of services to our members, including paid claims and estimated incurred but not reported claims (IBNR) expenses for which we are at risk, and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. The administrative services component encompasses fees received for all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contract with the government. Government Contracts revenue and expenses include the impact from underruns and overruns relative to our target cost under the applicable contracts (see Note 2 to our consolidated financial statements).

Recent Developments

During the fourth quarter of 2008, we announced that the Company’s board of directors directed our Chief Operating Officer to assume responsibility for all operational matters of the Company, and our President and Chief Executive Officer to focus his efforts on the Company’s strategy, with particular emphasis on how best to deploy the Company’s assets in the current competitive and economic environment. This process includes reviewing our health plans in Arizona, Connecticut, New Jersey and New York to determine their long-term strategic position in the Company as well as a possible divestiture among other strategic alternatives. We are continuing with this process and no definitive decisions have been made at this time.

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During 2008, we have been actively engaged in the reprocurement process of the TRICARE North contract. In late December 2008, the government requested final proposal revisions from companies bidding on the TRICARE contracts. We submitted our response in early January 2009. We currently expect an award to occur during the first half of 2009.

2008 Financial Performance Summary

Health Net’s financial performance in 2008 is summarized as follows:

• Net income for the year ended December 31, 2008 decreased to $95.0 million, or $0.88 per diluted share, from $193.7 million, or $1.70 per diluted share, for the same period in 2007, and was impacted by after tax expenses of $104.1 million, or $0.97 per diluted share, and after-tax charges of $222.4 million, or $1.96 per diluted share, related to our operations strategy, litigation and regulatory matters, and other-than-temporary impairment of investment securities (collectively referred to as Charges) for the year ended December 31, 2008 and 2007, respectively;

• Total health plan enrollment was 3,720,000 as of December 31, 2008, a decrease of 34,000 members, or approximately 1.0%, compared to December 31, 2007;

• Total revenues for the year ended December 31, 2008 increased by approximately 9% to $15.4 billion from the same period in 2007;

• Health plan services segment pretax income was $14.4 million, including $175.1 million of Charges, for the year ended December 31, 2008 and was $164.8 million, including $306.8 million of Charges, for the same period in 2007;

• Government contracts segment pretax income was $132.7 million and $194.1 million for the years ended December 31, 2008 and 2007, respectively; and

• Net cash used in operating activities totaled $159.0 million for the year ended December 31, 2008 compared to net cash provided by operating activities of $605.5 million for the same period in 2007.

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RESULTS OF OPERATIONS

Table of Summary Financial Information

The table below and the discussion that follows summarize our results of operations for the last three fiscal years:

	Year Ended December 31,
	2008			2007			2006
	(Dollars in thousands, except per share and PMPM data)
Revenues
Health plan services premiums	$	12,392,006		$	11,435,314		$	10,364,740
Government contracts		2,835,261			2,501,677			2,376,014
Net investment income		91,042			120,176			111,042
Administrative services fees and other income		48,280			51,104			56,554
Total revenues		15,366,589			14,108,271			12,908,350
Expenses
Health plan services (excluding depreciation and amortization)		10,762,657			9,762,896			8,600,443
Government contracts		2,702,573			2,307,610			2,234,535
General and administrative		1,291,059			1,275,555			1,165,313
Selling		360,381			327,827			245,304
Depreciation and amortization		59,878			42,982			25,591
Interest		42,909			32,497			51,179
Debt refinancing charge		—			—			70,095
Litigation, severance and related benefit costs		—			—			37,093
Total expenses		15,219,457			13,749,367			12,429,553
Income from operations before income taxes		147,132			358,904			478,797
Income tax provision		52,129			165,207			149,484
Net income	$	95,003		$	193,697		$	329,313
Net income per share:
Basic	$	0.89		$	1.74		$	2.86
Diluted	$	0.88		$	1.70		$	2.78
Pretax margin		1.0	%		2.5	%		3.7	%
Health plan services medical care ratio (MCR) (a)		86.9	%		85.4	%		83.0	%
Government contracts cost ratio (b)		95.3	%		92.2	%		94.0	%
G&A expense ratio (c)		10.4	%		11.1	%		11.2	%
Selling costs ratio (d)		2.9	%		2.9	%		2.4	%
Health plan services premiums per member per month (PMPM) (e)	$	277.79		$	263.54		$	243.70
Health plan services costs PMPM (e)	$	241.27		$	225.00		$	202.22

(a) MCR is calculated as health plan services cost divided by health plan services premiums revenue.

(b) Government contracts cost ratio is calculated as government contracts cost divided by government contracts revenue.

(c) The G&A expense ratio is computed as G&A expenses divided by the sum of health plan services premium revenues and administrative services fees and other income.

(d) The selling costs ratio is computed as selling expenses divided by health plan services premium revenues.

(e) PMPM is calculated based on total at-risk member months and excludes ASO member months.

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Summary of Operating Results

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

Net income for 2008 decreased to $95.0 million from $193.7 million in 2007. Earnings per share fell to $0.89 per basic share and $0.88 per diluted share for 2008 compared with $1.74 per basic share and $1.70 per diluted share for 2007. Pretax margin was 1.0% for 2008 compared to 2.5% for 2007. Included in the 2008 operating results are $175.1 million in Charges including the following:

• $119.6 million recorded as part of G&A expenses primarily for severance and other costs associated with Health Net’s operations strategy which is aimed at achieving substantial reductions in G&A by 2010. This amount also includes attorney’s fees and regulatory fines associated with our rescission practices and in connection with the settlement agreement for the McCoy, Wachtel and Scharfman lawsuits. See “Item 3. Legal Proceedings” for additional information regarding these matters;

• $37.5 million recorded as part of health plan services expenses for estimated litigation and regulatory actions related to the Company’s rescission practices in Arizona and California and claim-related matters in connection with the settlement agreement for the McCoy, Wachtel and Scharfman lawsuits;

• $14.6 million loss recorded as part of net investment income from other-than-temporary impairments in our available-for-sale investments and money market funds; and

• $3.4 million recorded as part of administrative services fees and other income for an impairment of assets of a small, non-core subsidiary.

Total health plan enrollment, including Medicare Part D, decreased to 3,720,000 members at December 31, 2008 from 3,754,000 members at December 31, 2007, primarily due to a decline of 225,000 commercial and ASO members and 34,000 Medicaid members, partially offset by an increase of 166,000 Medicare Part D members and 59,000 Medicare Advantage members. Our TRICARE membership increased to approximately 3.0 million beneficiaries at December 31, 2008 from 2.9 million beneficiaries at December 31, 2007.

Health Net’s total revenues increased 9% in 2008 to $15.4 billion from $14.1 billion in 2007. Health plan services premium revenues increased 8% to $12.4 billion in 2008 compared to $11.4 billion in 2007. Our total premium revenue yield on a PMPM basis was 5% in 2008 compared to 8% in 2007. The health plan services medical care ratio (MCR) was 86.9% in 2008 compared to 85.4% in 2007. The MCR for 2008 and 2007 included 40 and 180 basis points, respectively, impact from the Charges.

Our Government contracts revenues increased 13% in 2008 to $2.8 billion from $2.5 billion in 2007. The Government contracts cost ratio increased to 95.3% in 2008 compared to 92.2% in 2007.

Our G&A expense ratio improved by 70 basis points to 10.4% in 2008 compared to 11.1% in 2007. The G&A expense ratio for 2008 and 2007 included the impact of 100 basis points and 90 basis points, respectively, of G&A expenses related to the operations strategy and litigation and regulatory-related charges. Our selling costs ratio remained stable at 2.9% in 2008 and in 2007.

Net cash used in operating activities totaled $159.0 million for the year ended December 31, 2008 compared to net cash provided by operating activities of $605.5 million for the same period in 2007. This decrease in cash was driven by payments made in 2008 related to operations strategy and regulatory related matters and an increase in our CMS receivables relating to catastrophic and low-income subsidies.

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Net income for 2007 decreased to $193.7 million from $329.3 million in 2006. Earnings per share fell to $1.74 per basic share and $1.70 per diluted share for 2007 compared with $2.86 per basic share and $2.78 per diluted share for 2006. Pretax margin was 2.5% for 2007 compared to 3.7% for 2006. The primary drivers of these declines were charges incurred related to litigation and regulatory matters and debt refinancing activities.

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In 2007, we recorded a $306.8 million pre-tax, or $222.4 million after-tax, charge incurred as a result of us reaching an agreement in principle to settle the McCoy, Wachtel and Scharfman class action lawsuits; the proposed resolution of regulatory issues with the New Jersey Department of Banking and Insurance; arbitration settlement; and other immaterial litigation matters. See “Item 3. Legal Proceedings” for additional information regarding these matters. The charge amount was comprised of the following:

• $201.5 million recorded as part of health plan services expenses during the year ended December 31, 2007 for claim-related matters, class disbursements and remediations; and

• $105.3 million recorded as part of G&A expenses during the year ended December 31, 2007 for attorney’s fees, regulatory fines, arbitration settlement and estimated liability for litigation unrelated to the class action lawsuits.

Results in 2006 reflect the impact of a $37.1 million litigation charge related to estimated legal defense costs for the McCoy, Wachtel and Scharfman litigation and $70.1 million of expenses related to the refinancing of our senior notes. See “Item 3. Legal Proceedings” for additional information on these litigation matters. See “Liquidity and Capital Resources—Capital Structure” for additional information on the refinancing of our senior notes.

Total health plan enrollment, including Medicare Part D, increased to 3,754,000 members at December 31, 2007 from 3,699,000 members at December 31, 2006, primarily due to a 73,000-member increase in our commercial small group/individual membership and a 116,000-member increase in our Medicare membership, partially offset by 140,000-member decrease in our commercial large group and ASO membership. Our strategy of targeting the small group and individual market resulted in changing the mix of our membership: approximately 35% of our commercial risk enrollment was in the small group and individual market at the end of 2007, up from 31% at the end of 2006. We continued to expand our Medicare membership, which increased by 116,000 members in 2007. On January 1, 2007, we began offering Medicare Advantage Private-Fee-For Service plans, and we began marketing our Medicare Part D plans in all 50 states and the District of Columbia. We also increased the number of Part D plan choices that we offer seniors from two in 2006 to three in 2007, one of which provides beneficiaries with coverage of generic drug expenses through the coverage gap, or “donut hole.” Our TRICARE membership was stable at 2.9 million beneficiaries, and we expanded our relationship with the Department of Defense by providing behavioral health counseling services starting in 2006. In addition, our behavioral health care business unit was awarded a five-year contract in 2007 to develop, administer and monitor the non-medical counseling program for military service members known as Military Family and Life Consultant Program (MFLC). The total contract is valued at approximately $250 million.

Health Net’s total revenues increased 9% in 2007 to $14.1 billion from $12.9 billion in 2006. Health plan services premium revenues increased 10% to $11.4 billion in 2007 compared to $10.4 billion in 2006. Our commercial revenue yield was 9.2% in 2007 compared to 7.6% in 2006. The health plan services MCR was 85.4% in 2007 compared to 83.0% in 2006. The MCR for 2007 included the impact of the $201.5 million, or 180 basis points, of health plan services expenses related to the litigation and regulatory-related charge noted above.

Our Government contracts revenues increased 5% in 2007 to $2.5 billion from $2.4 billion in 2006. The Government contracts cost ratio improved to 92.2% in 2007 compared to 94.0% in 2006.

Our G&A expense ratio improved by 10 basis points to 11.1% in 2007 compared to 11.2% in 2006. The G&A expense ratio for 2007 included the impact of $105.3 million, or 90 basis points, of G&A expenses related to the litigation and regulatory-related charge. Our selling costs ratio increased by 50 basis points to 2.9% in 2007 compared to 2.4% in 2006.

Net cash provided by operating activities increased to $605.5 million in 2007 compared to $277.9 million for 2006, reflecting TRICARE payment for Option 3 Period underwriting fee and the growth in our Medicare Part D business.

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Consolidated Segment Results

The following table summarizes the operating results of our reportable segments for the last three fiscal years:

	Year Ended December 31,
	2008		2007		2006
	(Dollars in millions)
Pretax income:
Health plan services segment	$	14.4	$	164.8	$	444.5
Government contracts segment		132.7		194.1		141.5
Total segment pretax income	$	147.1	$	358.9	$	586.0
Debt refinancing charge		—		—		(70.1	)
Litigation, severance and related benefit costs		—		—		(37.1	)
Income from operations before income taxes as reported	$	147.1	$	358.9	$	478.8

Health Plan Services Segment Membership

The following table below summarizes our health plan membership information by program and by state:

	Commercial			ASO			Medicare			Medicaid			Health Plan Total
	2008	2007	2006	2008	2007	2006	2008	2007	2006	2008	2007	2006	2008	2007	2006
	(Membership in thousands)
Arizona	123	137	125	—	—	—	67	51	35	—	—	—	190	188	160
California	1,352	1,468	1,483	5	6	6	133	112	104	765	712	710	2,255	2,298	2,303
Connecticut	139	161	183	25	32	67	57	45	34	—	90	84	221	328	368
New Jersey	73	90	103	3	17	19	—	—	—	47	44	46	123	151	168
New York	204	234	224	11	13	17	6	3	6	—	—	—	221	250	247
Oregon	133	135	133	—	—	—	22	21	20	—	—	—	155	156	153
Other States	—	—	—	—	—	—	10	4	—	—	—	—	10	4	—
	2,024	2,225	2,251	44	68	109	295	236	199	812	846	840	3,175	3,375	3,399
Medicare Part D	—	—	—	—	—	—	545	379	300	—	—	—	545	379	300
Total	2,024	2,225	2,251	44	68	109	840	615	499	812	846	840	3,720	3,754	3,699

December 31, 2008 Compared to December 31, 2007

Our total health plan membership decreased by 34,000 members, or 1%, to 3.7 million members at December 31, 2008 when compared to December 31, 2007. The decrease was driven by a decline of 225,000 commercial and ASO members and 34,000 Medicaid members, partially offset by an increase of 166,000 Medicare Part D members, and 59,000 Medicare Advantage members.

Membership in our commercial health plans decreased by 201,000 members, or 9%, at December 31, 2008 compared to December 31, 2007. This decrease was primarily attributable to our California plan, which experienced declines of 63,000 small group/individual members and 53,000 large group members, and our Northeast plans, which experienced declines of 48,000 large group members and 21,000 small group/individual members. Our Arizona and Oregon plans experienced declines of 14,000 and 2,000 members, respectively. Our ASO enrollment declined by 24,000 members, or 35%, at December 31, 2008 compared to December 31, 2007, due to membership losses in our Northeast plans.

Membership in our Medicare Advantage program increased by 59,000 members at December 31, 2008 compared to December 31, 2007, due to membership growth primarily in California, Arizona and Connecticut. Medicare Part D membership increased by 166,000 members at December 31, 2008 compared to December 31, 2007.

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In January 2008, we were directed by CMS to temporarily cease the sale of our stand-alone PDP products due to certain administrative deficiencies relating to our ability to timely process stand-alone PDP enrollment applications. On March 18, 2008, CMS lifted this suspension based on its acceptance of our Corrective Action Plan and our demonstrated correction of the deficiencies. This temporary suspension did not have a material adverse effect on our Medicare business.

We participate in state Medicaid programs in California and New Jersey. California membership, where the program is known as Medi-Cal, comprised 94% and 84% of our Medicaid membership at December 31, 2008 and 2007, respectively. Membership in our Medicaid programs decreased by 34,000 members at December 31, 2008 compared to December 31, 2007 primarily due to our withdrawal from the Connecticut Medicaid Program in April 2008, partially offset by a gain of 53,000 members in California due to higher enrollment in the Fresno and San Diego counties and in the Healthy Families program. We provided administrative services only to Connecticut Medicaid members during the first quarter of 2008 and completed our exit from the Connecticut Medicaid programs as of April 1, 2008.

December 31, 2007 Compared to December 31, 2006

Total health plan membership increased by 2% to 3.8 million members at December 31, 2007 from 3.7 million members at December 31, 2006. The increase was primarily driven by the addition of 79,000 stand-alone PDP members and 37,000 Medicare Advantage members, partially offset by a decrease of 67,000 commercial and ASO members.

Membership in our commercial health plans decreased by 67,000 members, or 3%, at December 31, 2007 compared to December 31, 2006. This decrease was primarily attributable to the mix shift from large group to small group/individual enrollment resulting in a net loss of 26,000 commercial risk members and a 41,000 ASO member loss. This mix shift was predominantly seen in our California plan, which experienced a decline of 73,000 large group members primarily from a loss of two large accounts, partially offset by a net gain of 58,000 small group and individual members. Our Northeast plans experienced a decline of 37,000 members in the large group market, which was partially offset by a net gain of 16,000 members in our New York small group market. As a result of our targeted mix shift, our small group and individual enrollment comprised approximately 35% of our commercial risk enrollment, excluding ASO, at December 31, 2007, up from 31% at December 31, 2006.

Membership in our Medicare Advantage program increased by 37,000 members at December 31, 2007 compared to December 31, 2006, due to membership growth primarily in Arizona and Connecticut. Our stand-alone Medicare PDP membership increased by 79,000 members at December 31, 2007 compared to December 31, 2006.

Membership in our Medicaid programs increased by 6,000 members at December 31, 2007 compared to December 31, 2006, primarily due to enrollment increases in Connecticut.

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Health Plan Services Segment Results

The following table summarizes the operating results for the Health Plan Services segment for the last three fiscal years:

	Year Ended December 31,
	2008			2007			2006
	(Dollars in millions, except PMPM data)
Health plan services segment:
Commercial premium revenue	$	7,797.5		$	7,468.0		$	6,903.5
Medicare premium revenue		3,521.5			2,778.9			2,304.4
Medicaid premium revenue		1,073.0			1,188.4			1,156.8
Health plan services premium revenues	$	12,392.0		$	11,435.3		$	10,364.7
Health plan services costs		(10,762.7	)		(9,762.9	)		(8,600.4	)
Net investment income		91.0			120.2			111.0
Administrative services fees and other income		48.3			51.1			56.6
G&A		(1,291.0	)		(1,275.6	)		(1,165.3	)
Selling		(360.4	)		(327.8	)		(245.3	)
Depreciation and amortization		(59.9	)		(43.0	)		(25.6	)
Interest		(42.9	)		(32.5	)		(51.2	)
Pretax income	$	14.4		$	164.8		$	444.5
MCR:		86.9	%		85.4	%		83.0	%
Commercial		85.9	%		85.7	%		83.2	%
Medicare		89.9	%		85.4	%		83.3	%
Medicaid		83.7	%		83.1	%		80.9	%
Health plan services premium PMPM	$	277.79		$	263.54		$	243.70
Health plan services costs PMPM	$	241.27		$	225.00		$	202.22
G&A expense ratio		10.4	%		11.1	%		11.2	%
Selling costs ratio		2.9	%		2.9	%		2.4	%

Health Plan Services Premiums

Total health plan services premiums increased by $956.7 million, or 8%, for the year ended December 31, 2008 as compared to the same period in 2007, and increased by $1,070.6 million, or 10%, for the year ended December 31, 2007 as compared to the same period in 2006. On a PMPM basis, premium yields increased by 5% for the year ended December 31, 2008 as compared to the same period in 2007, and increased by 8% for the year ended December 31, 2007 as compared to the same period in 2006.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Commercial premium revenues increased by $329.5 million, or 4%, for the year ended December 31, 2008 as compared to the same period in 2007. These increases were primarily attributable to our ongoing pricing discipline and premium rate increases, partially offset by membership declines.

Medicare premiums increased by $742.6 million, or 27%, for the year ended December 31, 2008 as compared to the same period in 2007. This increase was primarily due to an increase in members participating in the Medicare Advantage and Medicare Part D prescription drug program. In addition, we recognized $137.7 million in Medicare risk factor estimates for the 2008 payment year in our health plan services premium revenues in the year ended December 31, 2008. See “—Health Plan Services Costs” for detail regarding the increase in capitation expense related to the Medicare rate adjustment.

Medicaid premiums decreased by $115.4 million, or 10%, for the year ended December 31, 2008 as compared to the same period in 2007 primarily due to a decrease in Connecticut Medicaid membership. We

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served the Connecticut Medicaid members on an ASO basis through the end of the first quarter of 2008, and we completed our exit from the Connecticut Medicaid program in April 2008. We recognized $0 and $185 million of premium revenue from our Connecticut Medicaid program during the years ended December 31, 2008 and 2007, respectively. Partially offsetting the decrease in Medicaid premiums from the cessation of the Connecticut program was a $19 million increase from a change in estimate due to revised application of California Medi-Cal program premium rates for 2001 and 2002 plan years.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Commercial premium revenues increased by $564.5 million, or 8%, for the year ended December 31, 2007 as compared to the same period in 2006. The Guardian Transaction (see Note 3—Purchases, Acquisitions and Sales to our consolidated financial statements for information regarding the Guardian Transaction) added approximately $266 million of premium revenue in 2007. The commercial premium PMPM increased by an average of 9% in the year ended December 31, 2007 compared to the same period in 2006. These increases were primarily attributable to the impact of the Guardian Transaction and our ongoing pricing discipline.

Medicare premiums increased by $474.5 million, or 21%, for the year ended December 31, 2007 as compared to the same period in 2006. This increase was primarily due to an increase in members participating in the Medicare Advantage and Medicare Part D prescription drug program and Medicare risk factor adjustments totaling $95.1 million in the year ended December 31, 2007. See “—Health Plan Services Costs” for detail regarding the increase in capitation expense related to the Medicare rate adjustment. Of this amount, $80.3 million, $13.2 million and $1.6 million were for the 2007, 2006 and 2003 payment years, respectively. The premium yields were essentially flat in 2007 compared to 2006.

Medicaid premiums increased by $31.6 million, or 3%, for the year ended December 31, 2007 as compared to the same period in 2006 primarily due to an increase in Medicaid premium PMPM, which was 5% for the year ended December 31, 2007 over the same period in 2006. In the Connecticut Medicaid program, we came to an agreement with the State of Connecticut where we continued to serve approximately 90,000 members on an ASO basis through the first quarter of 2008. We completed our exit from the Connecticut Medicaid Program in April 2008. We recognized approximately $185 million of premium revenue from our Connecticut Medicaid program during 2007.

Health Plan Services Costs

Health plan services costs increased by $999.8 million, or 10%, for the year ended December 31, 2008 as compared to the same period in 2007, and increased by $1,162.5 million, or 14%, for the year ended December 31, 2007 as compared to the same period in 2006. Health plan MCR was 86.9% at December 31, 2008 compared to 85.4% at December 31, 2007 and 83.0% at December 31, 2006.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Commercial health care costs increased by $296.0 million, or 5%, for the year ended December 31, 2008 as compared to the same period in 2007. The increase in the commercial health care cost trend on a PMPM basis was 9% for the year ended December 31, 2008 over the same period in 2007. Commercial MCR increased to 85.9% for the year ended December 31, 2008 from 85.7% for the year ended December 31, 2007. Physician and hospital costs on a PMPM basis rose about 9% and 13% from higher paid claims costs, respectively, while the utilization was relatively flat with commercial bed days increasing by less than one-half of a percent in 2008 over 2007. Pharmacy costs rose approximately 12% due to higher utilization on a PMPM basis for the year ended December 31, 2008 over the same period in 2007. The litigation and regulatory-related charge recorded in 2008 impacted the commercial MCR by 50 basis points and commercial health care cost trend on a PMPM basis by 290 basis points. The litigation and regulatory-related charge recorded in 2007 impacted the commercial MCR by 270 basis points and commercial health care cost trend on a PMPM basis by 360 basis points.

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Medicare health care costs increased by $793.1 million, or 33%, for the year ended December 31, 2008 as compared to the same period in 2007, and Medicare MCR, including Medicare Advantage and Part D, increased by 450 basis points for the same comparative periods. These increases were primarily driven by a 37% enrollment growth and were primarily comprised of higher inpatient and outpatient hospital and pharmacy costs and utilization. Medicare Advantage health care cost PMPM increased by 6% for the year ended December 31, 2008, as compared to the same period in 2007. Part D health care cost PMPM increased by 20 basis points for the year ended December 31, 2008, as compared to the same period in 2007. Also contributing to the Medicare health care cost increase is $32.9 million of capitation expense related to the Medicare risk factor estimates for the 2008 plan year. See “—Health Plan Services Premiums” for detail regarding the increase in premium revenue related to the Medicare rate adjustment.

Medicaid health care costs decreased by $89.3 million, or 9%, for the year ended December 31, 2008 as compared to the same period in 2007. The decrease in the Medicaid health care cost PMPM was 4% for the year ended December 31, 2008 over the same period in 2007. These decreases were primarily driven by lower outpatient hospital and pharmacy costs and utilization. Medicaid MCR increased by 60 basis points for the year ended December 31, 2008.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Commercial health care costs increased by $657.6 million, or 11%, for the year ended December 31, 2007 as compared to the same period in 2006. The increase in the commercial health care cost trend on a PMPM basis was 12.5% for the year ended December 31, 2007 over the same period in 2006. Commercial MCR increased to 85.7% for the year ended December 31, 2007 from 83.2% for the year ended December 31, 2006. These increases were primarily due to a $201.5 million charge recorded the third quarter of 2007 in health care costs for proposed remediation claim settlements related to litigation and regulatory-related matters. See “Item 3. Legal Proceedings” for additional information on these litigation matters. The charge recorded in 2007 impacted the commercial MCR by 270 basis points and commercial health care cost trend on a PMPM basis by 360 basis points. Physician and hospital costs rose about 9% and 10% from higher paid claims, respectively. Commercial bed days rose by less than 1% in 2007 over 2006. Pharmacy costs rose about 6% due to higher utilization on a PMPM basis for the year ended December 31, 2007 over the same period in 2006.

Medicare health care costs increased by $453.5 million, or 24%, for the year ended December 31, 2007 as compared to the same period in 2006. Medicare health care costs increased as a result of higher hospital costs and higher pharmacy costs mainly in Arizona and the Northeast and increased capitation expense from Medicare risk factor adjustments totaling $27.2 million, which was recognized in the year ended December 31, 2007. Of this amount, $22.5 million, $3.9 million and $0.8 million were for the 2007, 2006, and 2003 payment years, respectively. See “—Health Plan Services Premiums” for detail regarding the increase in premium revenue related to the Medicare rate adjustment. Medicare MCR, including Medicare Advantage and Part D, increased by 210 basis points for the year ended December 31, 2007.

Medicaid health care costs increased by $51.4 million, or 5%, for the year ended December 31, 2007 as compared to the same period in 2006. The increase in the Medicaid health care cost PMPM was 8% for the year ended December 31, 2007 over the same period in 2006. These increases were primarily driven by higher hospital and pharmacy costs. Medicaid MCR increased by 220 basis points at December 31, 2007 compared to December 31, 2006.

Administrative Services Fees and Other Income

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Administrative services fees and other income decreased by $2.8 million, or 6%, for the year ended December 31, 2008 as compared to the same period in 2007. The decrease was primarily due to a decline in ASO fees primarily due to membership losses in our Northeast plans.

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Administrative services fees and other income decreased by $5.5 million, or 10%, for the year ended December 31, 2007 as compared to the same period in 2006. The decrease was primarily due to loss of ASO membership in our Connecticut health plan.

Net Investment Income

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net investment income decreased by $29.1 million, or 24%, for the year ended December 31, 2008 as compared to the same period in 2007. This decrease was primarily due to lower short-term interest rates along with a slight decrease in cash balances and a $14.6 million recognized loss from other-than temporary impairments in our available-for-sale investments and money market funds. This decrease was partially offset by a $7 million increase in our interest rate swap value (see Note 2—Summary of Significant Accounting Policies to our consolidated financial statements).

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net investment income increased by $9.2 million, or 8%, for the year ended December 31, 2007 as compared to the same period in 2006. The increase was primarily from income on higher cash balances in 2007 than in 2006.

General, Administrative and Other Costs

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

G&A costs increased by $15.5 million, or 1%, for the year ended December 31, 2008 as compared to the same period in 2007. The increase in costs was primarily driven by operations strategy related charges and a $7.3 million increase in the allowance related to Medicare receivable. Our G&A expense ratio decreased to 10.4% for the year ended December 31, 2008, compared to 11.1% for the same period in 2007. The Charges recorded in 2008 and 2007 impacted the G&A expense ratio by 100 basis points and 90 basis points, respectively.

The selling costs ratio was 2.9% for the years ended December 31, 2008 and 2007. The selling costs ratio is a function of changes in our membership mix between large group and small and individual group members, and the growth of our Medicare Advantage business.

Amortization and depreciation expense increased by $16.9 million for the year ended December 31, 2008 as compared to the same period in 2007 primarily due to property and equipment purchased during the year, the addition of new assets placed in production related to various information technology system projects and the amortization of intangible assets from the Guardian Transaction. See Note 2—Summary of Significant Accounting Policies to the consolidated financial statements.

Interest expense increased by $10.4 million, or 32%, for the year ended December 31, 2008 as compared to the same period in 2007. The increase was primarily due to increased borrowings on our revolving credit facility and amortization of the discount on our amortizing financing facility completed in December 2007, partially offset by interest on our bridge loan paid off in March 2007 and term loan paid off in May 2007.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

G&A costs increased by $110.2 million, or 9%, for the year ended December 31, 2007 as compared to the same period in 2006. The increase in costs was primarily driven by a $105.3 million charge for attorney’s fees and regulatory fines related to the litigation and regulatory-related matters and arbitration settlement. See “Item 3. Legal Proceedings” for additional information on these litigation matters. Our G&A expense ratio decreased to 11.1% for the year ended December 31, 2007 from 11.2% for the same period in 2006. The charge recorded in 2007 impacted the ratio by 90 basis points.

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The selling costs ratio increased to 2.9% for the year ended December 31, 2007 from 2.4% when compared to the same period in 2006. These increases are consistent with an increase in commercial new sales and higher rate of broker commissions for our small group and individual membership.

Amortization and depreciation expense increased by $17.4 million for the year ended December 31, 2007 as compared to the same period in 2006 primarily due to the addition of new assets placed in production related to various information technology system projects and the amortization of intangible assets from the Guardian Transaction.

Interest expense decreased by $18.7 million, or 37%, for the year ended December 31, 2007 as compared to the same period in 2006. The decreases were primarily due to lower interest rates on our Senior Notes in 2007 compared with the senior notes we redeemed in the third quarter of 2006, and lower interest on our term and bridge loans and revolver borrowings as a result of lower outstanding balances and early termination of the debt.

Government Contracts Segment Membership

	2008	2007	2006
	(Membership in thousands)
Membership under North Region TRICARE contract	3,004	2,895	2,930

Under our TRICARE contract for the North Region, we provided health care services to approximately 3.0 million eligible beneficiaries in MHS as of December 31, 2008. Included in the 3.0 million MHS-eligible beneficiaries as of December 31, 2008 were 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.2 million other MHS-eligible beneficiaries for whom we provide administrative services only. As of December 31, 2008 and 2007, there were approximately 1.5 million and 1.4 million TRICARE eligibles, respectively, enrolled in TRICARE Prime under our North Region contract.

In addition to the 3.0 million eligible beneficiaries that we service under the TRICARE contract for the North Region, we administer contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in 9 states covering approximately 24,000 enrollees.

Government Contracts Segment Results

The following table summarizes the operating results for Government Contracts for the last three fiscal years:

	Year Ended December 31,
	2008			2007			2006
	(Dollars in millions)
Government contracts segment:
Revenues	$	2,835.3		$	2,501.7		$	2,376.0
Costs		2,702.6			2,307.6			2,234.5
Pretax income	$	132.7		$	194.1		$	141.5
Government contracts ratio		95.3	%		92.2	%		94.0	%

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Government contracts revenues increased by $333.6 million, or 13%, for the year ended December 31, 2008 as compared to the same period in 2007. Government contracts costs increased by $395.0 million or 17% for the year ended December 31, 2008 as compared to the same period in 2007. The increases were primarily due to an increase in health care services provided under a new option year in the TRICARE contract, Option Period 5, which began April 1, 2008, and growth in the family counseling business with the Department of Defense.

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Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs, which is negotiated annually during the term of the contract with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate during the year ended December 31, 2008, we recognized an increase in revenue of $17 million compared to a decrease in revenue of $58 million in the year ended December 31, 2007. As a result of changes in the estimate during the year ended December 31, 2008, we recognized an increase in cost of $22 million compared to a decrease in cost of $75 million in the year ended December 31, 2007. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.

The Government contracts ratio increased by 310 basis points for the year ended December 31, 2008 as compared to the same period in 2007 primarily due to increased costs of health care services provided under Option Period 5 in the TRICARE contract.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Government contracts revenues increased by $125.7 million, or 5%, for the year ended December 31, 2007 as compared to the same period in 2006. Government contracts costs increased by $73.1 million or 3% for the year ended December 31, 2007 as compared to the same period in 2006. The increase was primarily due to an increase in health care services provided under a new option year in the TRICARE contract, Option Period 4, which began April 1, 2007 and growing family counseling business with the Department of Defense. In addition, 2007 includes a $36.5 million favorable settlement with the Federal Government regarding prior Option Period 1 health care cost targets.

During the years ended December 31, 2007 and 2006, we recognized a decrease in the revenue estimate of $58 million and $104 million, respectively, and a decrease in the cost estimate of $75 million and $128 million, respectively, related to the change in our estimate for the target cost underruns and overruns.

The Government contracts ratio decreased by 180 basis points for the year ended December 31, 2007 as compared to the same period in 2006 primarily due to the favorable settlement with the Government regarding prior Option 1 healthcare cost targets and ongoing expansion of our behavioral health services provided to our military men and women and their families.

Debt Refinancing

In 2006, we refinanced our 8.375% Senior Notes due 2011 and incurred $70.1 million in costs, including a $51.0 million redemption premium with respect to our senior notes and $11.1 million for the settlement of four interest rate swap contracts (Swap Contracts). We also paid $3.0 million for professional fees and incurred $5.0 million of other non-cash expenses related to such refinancing. The senior notes were redeemed on August 14, 2006.

Litigation, Severance and Related Benefit Costs

2008 Charges

We recorded the following $175.1 million pretax, or $104.1 million after tax, charges during the year ended December 31, 2008:

• $119.6 million recorded as part of G&A expenses primarily for severance and other costs associated with Health Net’s operations strategy which is aimed at achieving substantial reductions in G&A by 2010. This amount also includes attorney’s fees and regulatory fines associated with our rescission practices and in connection with the settlement agreement for the McCoy, Wachtel and Scharfman lawsuits. See “Item 3. Legal Proceedings” for additional information regarding these matters;

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• $37.5 million recorded as part of health plan services expenses for estimated litigation and regulatory actions related to the Company’s rescission practices in Arizona and California and claim-related matters in connection with the settlement agreement for the McCoy, Wachtel and Scharfman lawsuits;

• $14.6 million loss recorded as part of net investment income from other-than-temporary impairments in our available-for-sale investments and money market funds; and

• $3.4 million recorded as part of administrative services fees and other income for an impairment of assets of a small, non-core subsidiary.

2007 Charges

In 2007, we recorded a $306.8 million pretax, or $222.4 million after-tax, charge incurred as a result of us reaching an agreement in principle to settle the McCoy, Wachtel and Scharfman class action lawsuits; the proposed resolution of regulatory issues with the New Jersey Department of Banking and Insurance; arbitration settlement; and other immaterial litigation matters. See “Item 3. Legal Proceedings” for additional information regarding these matters. The charge amount was comprised of the following:

• $201.5 million recorded as part of health plan services expenses during the year ended December 31, 2007 for claim-related matters, class disbursements and remediations; and

• $105.3 million recorded as part of G&A expenses during the year ended December 31, 2007 for attorney’s fees, regulatory fines, arbitration settlement and estimated liability for litigation unrelated to the class action lawsuits.

2006 Charges

During the three months ended December 31, 2006, we recorded a pretax charge of approximately $37.1 million in connection with the McCoy, Wachtel and Scharfman class action lawsuits.

Income Tax Provision

Our income tax expense and the effective income tax rate for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
	(Dollars in millions)
Income tax expense	$	52.1		$	165.2		$	149.5
Effective tax rate		35.4	%		46.0	%		31.2	%

The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended December 31, 2008 due primarily to state income taxes, tax-exempt investment income, and favorable outcome related to the prior year nondeductible class action lawsuit expenses.

The effective income tax rate differs from the statutory federal tax rate of 35% for the year ended December 31, 2007 due primarily to state income taxes, tax-exempt investment income, the establishment of a valuation allowance against certain deferred tax assets, and nondeductible class action lawsuit expenses. The effective income tax rate differs from the statutory tax rate of 35% for the year ended December 31, 2006 due primarily to state income taxes, tax-exempt investment income, and business divestitures.

The effective income tax rate decreased from 2007 to 2008 primarily due to the favorable outcome related to the prior year nondeductible class action lawsuit expenses. The effective income tax rate increased from 2006 to 2007 primarily due to the establishment of a valuation allowance in 2007 against deferred tax assets for net operating loss carryforwards and tax credits of a particular business unit potentially impacted by the McCoy class action lawsuit, and nondeductible class action lawsuit expenses incurred in 2007.

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LIQUIDITY AND CAPITAL RESOURCES

Market and Economic Conditions

In the U.S., recent market and economic conditions have been unprecedented in recent history and challenging with tighter credit conditions and slower growth through the third and fourth quarters of 2008. Continued concerns about the U.S. mortgage market, declining real estate market, and the availability of credit have contributed to increased market volatility and diminished expectations for the U.S. economy. In September 2008, added concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), the declared bankruptcy of Lehman Brothers Holdings Inc., the U.S. government provided loan to American International Group Inc. and other federal government interventions in the U.S. credit markets led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have contributed to volatility of unprecedented levels.

As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has caused many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. While we have not experienced a reduction in the capital and funding available to us at this time, continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition. If these market conditions continue, they may limit our ability to timely replace maturing liabilities and access the capital markets to meet liquidity needs, which could adversely affect our financial condition and results of operations. Furthermore, if our customer base experiences cash flow problems and other financial difficulties, it could, in turn, adversely impact membership in our plans. For example, our customers may modify, delay or cancel plans to purchase our products, may reduce the number of individuals to whom they provide coverage, or may make changes in the mix or products purchased from us. In addition, if our customers experience financial issues, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Further, our customers or potential customers may force us to compete more vigorously on factors such as price and service to retain or obtain their business. A significant decline in membership in our plans and the inability of current and/or potential customers to pay their premiums as a result of unfavorable conditions may adversely affect our business, including our revenues, profitability and cash flow.

Cash and Investments

As of December 31, 2008, we valued investment securities available-for-sale at $1.5 billion. Approximately 67% of our portfolio holdings is in agency mortgage-backed bonds and municipal bonds. We also hold high-quality corporate bonds. We evaluate and determine the classification of our investments based on management’s intent; currently, we have classified our investments as available-for-sale. We also closely monitor the fair values of our investment holdings and regularly evaluate them for any other-than-temporary impairments.

Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in a diversified mix of high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining the highest total return on invested funds. We do not own any investments that have direct subprime mortgage exposure.

Our investment portfolio includes $520.0 million, or 34.6% of our portfolio holdings, of mortgage-backed and asset-backed securities. The majority of our mortgage-backed securities are Fannie Mae, Freddie Mac and Ginnie Mae issues, and the average rating of our asset-backed securities is AA+/Aa1. As of December 31, 2008 and December 31, 2007, our asset-backed and mortgage-backed securities had gross unrealized holding losses of $17.2 million and $3.1 million, respectively. We have the intent and ability to hold our debt investments for a sufficient

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period of time to allow for recovery of the principal amounts invested. However, any failure by Fannie Mae or Freddie Mac to honor the obligations under the securities they have issued or guaranteed could cause a significant decline in the value or cash flow of our mortgage-backed securities. Our investment portfolio also includes $10.2 million, or less than 1% of our portfolio holdings, of auction rate securities (ARS). These ARS have long-term nominal maturities for which the interest rates are reset through a dutch auction process every 7, 28 or 35 days. At December 31, 2008, these ARS had at one point or are continuing to experience “failed” auctions. These securities are entirely municipal issues and rates are set at the maximum allowable rate as stipulated in the applicable bond indentures. We continue to receive income on all ARS. If all or any portion of the ARS continue to experience failed auctions, it could take an extended amount of time for us to realize our investments’ recorded value.

As discussed in Note 4 to our consolidated financial statements, we recognized a $14.6 million loss from other-than-temporary impairments of investment securities and money market funds in the third quarter of 2008. After this write-down, we had gross unrealized losses of $32.8 million as of December 31, 2008, compared to $7.0 million as of December 31, 2007. While we believe that these impairments are temporary and that we have the intent and ability to hold such securities until maturity or recovery, given the current market conditions, there is a continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be recorded in future periods.

In September 2008, The Reserve announced its intention to liquidate all of its money market funds and froze all redemptions until an orderly liquidation process could be implemented. As a result, we reclassified $372 million in estimated net asset value we had invested in The Reserve money market funds from cash equivalents to investments available for sale as of September 30, 2008. As of December 31, 2008, we held $50.4 million of their Primary Fund and $69.2 million of their U.S. Government Fund due to redemptions during the fourth quarter of 2008. On January 16, 2009, The Reserve paid out in full the balance in the U.S. Government Fund and on February 20, 2009, we received $17.1 million of the Primary Fund from the Reserve. The Reserve expects to distribute the remaining amounts in the Primary Fund by the end of 2009.

Liquidity

We believe that cash flow from operating activities, existing working capital, lines of credit and cash reserves are adequate to allow us to fund existing obligations, repurchase shares under our stock repurchase program, introduce new products and services, and continue to develop health care-related businesses. We regularly evaluate cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. Based on the composition and quality of our investment portfolio, our expected ability to liquidate our investment portfolio as needed, and our expected operating and financing cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment. However, continued turbulence in U.S. and international markets could adversely affect our liquidity.

Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation and can extend for periods beyond a year. Amounts receivable under government contracts were $241.3 million and $190.0 million as of December 31, 2008 and December 31, 2007, respectively. Our cash flow from operating activities is also impacted by the timing of collections on our amounts receivable from CMS. Our receivable related to our Medicare business was $315.5 million, including about $150 million expected to be settled in the fourth quarter of 2009, as of December 31, 2008 and $107.2 million as of December 31, 2007.

During 2008, we recognized $175.1 million in pretax charges related to our operations strategy and litigation and regulatory related matters. The majority of these charges were settled in cash and were funded by cash flow from operating and financing activities. For additional information regarding these charges, see “—Summary of Operating Results” above.

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Our total cash and cash equivalents as of December 31, 2008 and 2007 were $668.2 million and $1,007.0 million, respectively. The changes in cash and cash equivalents are summarized as follows:

	2008			2007			2006
	(Dollars in millions)
Net cash (used in) provided by operating activities	$	(159.0	)	$	605.5		$	277.9
Net cash (used in) investing activities		(67.8	)		(230.2	)		(184.9	)
Net cash (used in) financing activities		(112.0	)		(73.1	)		(130.7	)
Net (decrease) increase in cash and cash equivalents	$	(338.8	)	$	302.2		$	(37.7	)

Operating Cash Flows

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net cash from operating activities decreased by $764.5 million for the year ended December 31, 2008 compared to the same period in 2007. This decrease was primarily due to the $283 million paid in 2008 related to operations strategy and litigation and regulatory related matters, a $218 million increase in our net CMS catastrophic and low-income subsidies receivables, and approximately $83 million Medicare Part D payments received in 2007 for the final settlement of the 2006 plan year.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net cash from operating activities increased by $327.6 million for the year ended December 31, 2007 compared to the same period in 2006. This increase was primarily due to increase in cash flows from a TRICARE payment for Option 3 period underwriting fees of $100 million and the growth in our Medicare business, including approximately $83 million Medicare Part D payments received for the final settlement of the 2006 plan year.

Investing Activities

Our cash flow from investing activities is primarily impacted by the sales, maturities and purchases of our available-for-sale investment securities and restricted investments. Our investment objective is to maintain safety and preservation of principal by investing in high-quality, investment grade securities while maintaining liquidity in each portfolio sufficient to meet our cash flow requirements and attaining the highest total return on invested funds.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net cash used in investing activities decreased by $162.4 million compared to the year ended December 31, 2007 primarily due to the $252 million redemption from The Reserve Funds, partially offset by $97 million decrease in net proceeds from property and equipment sale.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net cash used in investing activities increased by $45.3 million compared to the year ended December 31, 2006 primarily due to a net increase in purchases of investments available-for-sale portfolio of $140 million, partially offset by an increase in net proceeds of $93 million from the sales of property and equipment, including our Shelton, CT and Tucson, AZ facilities.

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Financing Activities

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net cash used in financing activities increased by $38.9 million primarily due to a decrease in stock option exercise proceeds of $66 million, decrease in excess tax benefits from share based compensation of $17 million and a net increase in share repurchases of $11 million, partially offset by an increase in net borrowings of $55 million.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net cash used in financing activities decreased by $57.6 million primarily due to an increase in net borrowings of $36 million and decrease in share repurchases of $21 million. See “—Capital Structure” below on more information regarding these transactions.

Capital Structure

Stock Repurchase Program

We have a $700 million stock repurchase program authorized by our Board of Directors. Subject to Board approval, additional amounts are added to the repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from the employee stock options. We repurchased 6,851,595 shares of our common stock during the year ended December 31, 2008, for aggregate consideration of approximately $242.8 million. We used net free cash available to fund the share repurchases. As of December 31, 2008, the remaining authorization under our stock repurchase program was $103.3 million and, since its inception, we had repurchased an aggregate of 36,623,347 shares of our common stock at an average price of $34.40 for aggregate consideration of approximately $1,259.8 million (which amount includes exercise proceeds and tax benefits the Company had received from the exercise of employee stock options).

On November 4, 2008, we announced that our stock repurchase program is on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, will be undertaking a review of the Company’s strategic direction.

Amortizing Financing Facility

On December 19, 2007, we entered into a five-year, non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender and we entered into amendments to the financing facility on April 29, 2008 and November 10, 2008, which were administrative in nature. The proceeds from the financing facility were used for general corporate purposes.

The financing facility requires one of our subsidiaries to pay semi-annual distributions, in the amount of $17.5 million, to a participant in the financing facility. Unless terminated earlier, the final payment under the facility is scheduled to be made on December 19, 2012.

The financing facility includes limitations (subject to specified exclusions) on our and certain of our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; engage in transactions with affiliates; enter into agreements which will restrict the ability to pay dividends or other distributions with respect to any shares of capital stock or the ability to make or repay loans or advances; make dividends; and alter the character of ours or their business conducted on the closing date of the financing facility. In addition, the financing facility also requires that we maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio and maintain certain minimum public debt ratings throughout the term of the financing facility. As of December 31, 2008, we were in compliance with all of the covenants under the financing facility.

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The financing facility provides that it may be terminated through a series of put and call transactions (1) at the option of one of our wholly-owned subsidiaries at any time after December 20, 2009, or (2) upon the occurrence of certain defined early termination events. These early termination events, include, but are not limited to:

• nonpayment of certain amounts due by us or certain of our subsidiaries under the financing facility (if not cured within the related time period set forth therein);

• a change of control (as defined in the financing facility);

• our failure to maintain the following ratings on our senior indebtedness by any two of the following three rating agencies: (1) a rating of at least BB by Standard & Poor’s Ratings Services (S&P), (2) a rating of at least BB by Fitch, Inc. (Fitch), and (3) a rating of at least Ba2 by Moody’s Investors Service, Inc. (Moody’s). As of December 31, 2008 and February 12, 2009, the ratings with S&P, Fitch and Moody’s on our senior indebtedness were BB, BB+ and Ba3, respectively;

• cross-acceleration to other indebtedness of our Company in excess of $50 million, including our revolving credit facility;

• certain ERISA-related events;

• noncompliance by Health Net with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the financing facility);

• events in bankruptcy, insolvency or reorganization of our Company;

• undischarged, uninsured judgments in the amount of $50 million or more against our Company; or

• certain changes in law that could adversely affect a participant in the financing facility.

In addition, in connection with the financing facility, we entered into a guaranty which will require us to guarantee the payment of the semi-annual distributions and any other amounts payable by one of our subsidiaries to the financing facility participants under certain circumstances provided under the financing facility. Also in connection with the financing facility, we entered into an interest rate swap agreement with a non-U.S. bank affiliated with one of the financing facility participants. Under the interest rate swap agreement, we pay a floating payment in an amount equal to LIBOR times a notional principal amount and receive a fixed payment in an amount equal to 4.3% times the same notional principal amount from the non-U.S. bank counterparty in return in accordance with a schedule set forth in the interest rate swap agreement.

Senior Notes

On May 18, 2007, we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively, the “Senior Notes”). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of December 31, 2008, we were in compliance with all of the covenants under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

• 100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

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• the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:

• failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

• failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

• failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

• (A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or

• events in bankruptcy, insolvency or reorganization of our Company.

Revolving Credit Facility

On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. Our revolving credit facility provides for aggregate borrowings in the amount of $900 million, which includes a $400 million sub-limit for the issuance of standby letters of credit and a $50 million sub-limit for swing line loans. In addition, we have the ability from time to time to increase the facility by up to an additional $250 million in the aggregate, subject to the receipt of additional commitments. The revolving credit facility matures on June 25, 2012.

Amounts outstanding under the new revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

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Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of control. If an event of default occurs and is continuing under the facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

As of December 31, 2008, we were in compliance with all covenants under our revolving credit facility.

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of December 31, 2008, we had outstanding an aggregate of $322.9 million in letters of credit and outstanding borrowings under the revolving credit facility of $150 million. As a result, the maximum amount available for borrowing under the revolving credit facility was $427.1 million as of December 31, 2008, and no amount had been drawn on the letters of credit. As of February 12, 2009, we had $115 million of outstanding borrowings under the revolving credit facility.

Statutory Capital Requirements

Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. Management believes that as of December 31, 2008, all of our active health plans and insurance subsidiaries met their respective regulatory requirements, in all material respects.

By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum statutory net worth requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or risk-based capital (RBC) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (ACL), which represents the minimum amount of net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile. We generally manage our aggregate regulated subsidiary capital above 300% of ACL, although RBC standards are not yet applicable to all of our regulated subsidiaries. At December 31, 2008, we had sufficient capital to exceed this level.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. During the year ended December 31, 2008, we made capital contributions of $240.6 million to various subsidiaries to maintain RBC or other statutory capital requirements. Health Net, Inc. made a capital contribution in the amount of $3.0 million to one of its subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations thereafter through February 20, 2009.

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Legislation has been or may be enacted in certain states in which our subsidiaries operate imposing substantially increased minimum capital and/or statutory deposit requirements for HMOs in such states. Such statutory deposits may only be drawn upon under limited circumstances relating to the protection of policyholders.

As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.

Contractual Obligations

Our significant contractual obligations as of December 31, 2008 are summarized below for the years ending December 31:

	Total			2009			2010			2011			2012			2013		Thereafter
	(Dollars in Millions)
Long-term debt principal	$	547.8		$	35.0		$	35.0		$	35.0		$	35.0		$	7.8	$	400.0
Long-term debt interest		213.7			25.5			25.5			25.5			25.5			25.5		86.2
Floating-rate borrowings principal		150.0			35.0			—			—			115.0			—		—
Floating-rate borrowings interest		9.9			2.5			2.2			2.9			2.3			—		—
Valuation of interest rate swap contracts		(8.9	)		(3.0	)		(3.5	)		(1.7	)		(0.7	)		—		—
Operating leases		301.8			64.9			59.4			52.3			35.2			29.3		60.7
Long-term purchase obligations		562.0			140.8			133.4			126.4			85.4			70.5		5.5
FIN 48 liabilities, including interest and penalties (b)		2.2			2.2			—			—			—			—		—
Deferred compensation		41.5			4.9			3.2			2.0			2.3			1.8		27.3	(a)
Estimated future payments for pension and other benefits		25.4			1.6			1.7			1.9			2.1			2.3		15.8	(a)

(a) Represents estimated future payments from 2014 through 2018.

(b) The FIN 48 obligations shown above represent uncertain tax positions expected to be paid within the reporting periods presented. In addition to the obligations shown above, approximately $55.9 million of unrecognized tax benefits have been recorded as a liability in accordance with FIN 48, and we are uncertain as to if or when such amounts may be settled or paid.

Operating Leases

We lease office space under various operating leases. Certain leases are cancelable with substantial penalties. See “Item 2. Properties” for additional information regarding our leases.

On March 29, 2007, we sold our 68-acre commercial campus in Shelton, Connecticut (the “Shelton Property”) to The Dacourt Group, Inc. (“Dacourt”) and leased it back from Dacourt under an operating lease agreement for an initial term of ten years with an option to extend for two additional terms of ten years each. The total future minimum lease commitments under the lease are approximately $70.1 million.

Effective January 1, 2005, we entered into an operating lease agreement to renew our leased office space in Woodland Hills, California for our corporate headquarters. The new lease is for a term of 10 years and has provisions for space reduction at specific times over the term of the lease, but it does not provide for complete cancellation rights. The total future minimum lease commitments under the lease are approximately $19.2 million.

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Long-Term Purchase Obligations

We have entered into long-term agreements to purchase various services, which may contain certain termination provisions and have remaining terms in excess of one year as of December 31, 2008.

We have entered into long-term agreements to receive services related to pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. The remaining terms are approximately three years for each of these contracts. Termination of these agreements is subject to certain termination provisions. The total future minimum commitments under these agreements are $122.0 million and are included in the table above.

On August 19, 2008, we entered into a five and one-half year agreement with International Business Machines Corporation (IBM) to outsource our IT infrastructure management services including data center services, IT security management and help desk support. The total future minimum commitments under the agreement are $295.0 million.

On September 30, 2008, we entered into a five year and three month agreement with Cognizant Technology Solutions U.S. Corporation (Cognizant) to outsource our software applications development and management activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with services including the following: application development, testing and monitoring services, application maintenance and support services, project management services and cross functional services. The total future commitments under the agreement are $107.8 million.

We have excluded from the table above amounts already recorded in our current liabilities on our consolidated balance sheet as of December 31, 2008. We have also excluded from the table above various contracts we have entered into with our health care providers, health care facilities, the federal government and other contracts that we have entered into for the purpose of providing health care services. We have excluded those contracts that allow for cancellation without significant penalty, obligations that are contingent upon achieving certain goals and contracts for goods and services that are fulfilled by vendors within a short time horizon and within the normal course of business.

On January 23, 2009, we also entered into a five year and two months agreement with Cognizant to outsource a substantial portion of our claims processing activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with claims adjudication, adjustment, audit and process improvement services. The total future commitments under the agreement are $13.3 million.

The future contractual obligations in the contractual obligations table are estimated based on information currently available. The timing of and the actual payment amounts may differ based on actual events.

Surety Bonds

In order to secure judgment pending our appeal in the AmCareco litigation, we obtained surety bonds totaling $114.7 million, which are further secured by letters of credit issued in December 2005 in the amounts of $90.1 million. See Notes 6 and 13 to the consolidated financial statements for additional information.

Off-Balance Sheet Arrangements

As of December 31, 2008, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

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Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 estimates. Principal areas requiring the use of estimates include revenue recognition, health care costs, reserves for contingent liabilities, amounts receivable or payable under government contracts, goodwill and recoverability of long-lived assets and investments and income taxes. Accordingly, we consider accounting policies on these areas to be critical in preparing our consolidated financial statements. A significant change in any one of these amounts may have a significant impact on our consolidated results of operations and financial condition. A more detailed description of the significant accounting policies that we use in preparing our financial statements is included in the notes to our consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K.

Health Plan Services

Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage (for which premiums are based on a predetermined prepaid fee), Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts (including Part D) to provide care and services to enrolled Medicare recipients. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance of the month in which enrollees are entitled to health care services are recorded as unearned premiums.

Approximately 37%, 35%, and 33% in 2008, 2007 and 2006, respectively, of our health plan services premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount.

Our Medicare contracts are with CMS. CMS deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors. The CMS risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient and physician treatment settings. We and the health care providers collect, compile and submit the necessary and available diagnosis data to CMS within prescribed deadlines. We estimate risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to CMS.

From time to time, we make adjustments to our revenues based on retroactivity. These retroactivity adjustments reflect changes in the number of enrollees subsequent to when the revenue is billed. We estimate the amount of future retroactivity each period and accordingly adjust the billed revenue. The estimated adjustments are based on historical trends, premiums billed, the volume of contract renewal activity during the period and other information. We refine our estimates and methodologies as information on actual retroactivity becomes available.

On a monthly basis, we estimate the amount of uncollectible receivables to reflect allowances for doubtful accounts. The allowances for doubtful accounts are estimated based on the creditworthiness of our customers, our historical collection rates and the age of our unpaid balances. During this process, we also assess the recoverability of the receivables, and an allowance is recorded based upon their net realizable value. Those receivables that are deemed to be uncollectible, such as receivables from bankrupt employer groups, are fully written off against their corresponding asset account, with a debit to the allowance to the extent such an allowance was previously recorded.

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Reserves for claims and other settlements include reserves for claims (incurred but not reported claims (IBNR) and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Health Plan Services reporting segment. As of December 31, 2008, 72% of reserves for claims and other settlements were attributed to claims reserves. See Note 17 to our consolidated financial statements for a reconciliation of changes in the reserve for claims.

We estimate the amount of our reserves for claims primarily by using standard actuarial developmental methodologies. This method is also known as the chain-ladder or completion factor method. The developmental method estimates reserves for claims based upon the historical lag between the month when services are rendered and the month claims are paid while taking into consideration, among other things, expected medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership. A key component of the developmental method is the completion factor which is a measure of how complete the claims paid to date are relative to the estimate of the claims for services rendered for a given period. While the completion factors are reliable and robust for older service periods, they are more volatile and less reliable for more recent periods since a large portion of health care claims are not submitted to us until several months after services have been rendered. Accordingly, for the most recent months, the incurred claims are estimated from a trend analysis based on per member per month claims trends developed from the experience in preceding months. This method is applied consistently year over year while assumptions may be adjusted to reflect changes in medical cost inflation, seasonal patterns, product mix, benefit plan changes and changes in membership.

An extensive degree of actuarial judgment is used in this estimation process, considerable variability is inherent in such estimates, and the estimates are highly sensitive to changes in medical claims submission and payment patterns and medical cost trends. As such, the completion factors and the claims per member per month trend factor are the most significant factors used in estimating our reserves for claims. Since a large portion of the reserves for claims is attributed to the most recent months, the estimated reserves for claims are highly sensitive to these factors. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:

Completion Factor (a) Percentage-point Increase (Decrease)                     in Factor	Health Plan Services Increase (Decrease) in Reserves for Claims
2%	$	(59.8) million
1%	$	(30.4) million
(1)%	$	31.6 million
(2)%	$	64.4 million
Medical Cost Trend (b) Percentage-point Increase (Decrease)                     in Factor	Health Plan Services Increase (Decrease) in Reserves for Claims
2%	$	28.6 million
1%	$	14.3 million
(1)%	$	(14.3) million
(2)%	$	(28.6) million

(a) Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to the estimate of total claims for a given period. Therefore, an increase in completion factor percent results in a decrease in the remaining estimated reserves for claims.

(b) Impact due to change in annualized medical cost trend used to estimate the per member per month cost for the most recent three months.

Other relevant factors include exceptional situations that might require judgmental adjustments in setting the reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or other factors. All of these factors are used in estimating reserves for claims and are important to our reserve

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methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and methodology described above from year to year, while also giving due consideration to the potential variability of these factors. Because reserves for claims include various actuarially developed estimates, our actual health care services expense may be more or less than our previously developed estimates. Claims processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed, with any adjustments reflected in current operations.

HN of California, our California HMO, generally contracts with various medical groups to provide professional care to certain of its members on a capitated, or fixed per member per month fee basis. Capitation contracts generally include a provision for stop-loss and non-capitated services for which we are liable. Professional capitated contracts also generally contain provisions for shared risk. We have risk-sharing arrangements with certain of our providers related to approximately 1,167,000 members, primarily in the California commercial market. Shared-risk arrangements provide for us to share with our providers the variance between actual costs and predetermined goals.

Our HMOs in other states also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees. Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitation basis.

We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Significant factors that can lead to a change in our profitability estimates include premium yield and health care cost trend assumptions, risk share terms and non-performance of a provider under a capitated agreement resulting in membership reverting to fee-for-service arrangements with other providers. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the period the losses are determined and are classified as Health Plan Services. We held no premium deficiency reserves as of December 31, 2008.

Government Contracts

The TRICARE North Region contract is made up of two major revenue components, health care and administrative services. Health care services revenue includes health care costs, including paid claims and estimated IBNR expenses, for care provided for which we are at risk and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. Administrative services revenue encompasses all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contracts with the government. Health care costs and associated revenues are recognized as the costs are incurred and the associated revenue is earned. Revenue related to administrative services is recognized as the services are provided and earned. Revenues associated with the transition to the TRICARE contract for the North Region are recognized over the entire term of the contract.

There are different variables that impact the estimate of the IBNR reserves for our TRICARE business than those that impact our managed care businesses. These variables consist of changes in the level of our nation’s military activity, including the call-up of reservists in support of heightened military activity, continual changes in the number of eligible beneficiaries, changes in the health care facilities in which the eligible beneficiaries seek treatment, and revisions to the provisions of the contract in the form of change orders. Each of these factors is subject to significant judgment, and we have incorporated our best estimate of these factors in estimating the reserve for IBNR claims.

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As part of our TRICARE contract for the North Region, we have a risk-sharing arrangement with the federal government whereby variances in actual claim experience from the targeted medical claim amount negotiated in our annual bid are shared. Due to this risk-sharing arrangement provided for in the TRICARE contract for the North Region, the changes in the estimate of the IBNR reserves are not expected to have a material effect on the favorable or adverse development of our liability under the TRICARE contract.

Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided. Under our TRICARE contract for the North Region we recognize amounts receivable and payable under the government contracts related to estimated health care IBNR expenses which are reported separately on the accompanying consolidated balance sheet as of December 31, 2008. These amounts are the same since all of the estimated health care IBNR expenses incurred are offset by an equal amount of revenues earned.

Some of the amounts receivable under government contracts are comprised primarily of contractually defined billings, deferred underwriting fees under the terms of the contract and change orders for services not originally specified in the contracts. Change orders arise because the government often directs us to implement changes to our contracts before the scope and/or value is defined or negotiated. We start to incur costs immediately, before we have proposed a price to the government. In these situations, we make no attempt to estimate and record revenue. Our policy is to defer the costs as incurred until we have submitted a cost proposal to the government, at which time we will record the costs and the appropriate value for revenue, using our best estimate of what will ultimately be negotiated. In the normal course of contracting with the federal government, we may make claims for contract and price adjustments arising from cost overruns against the government. We recognize such claims when the amounts become determinable, supportable and the collectibility is reasonably assured.

Reserves For Contingent Liabilities

In the course of our operations, we are involved on a routine basis in various disputes with members, health care providers, and other entities, as well as audits by government agencies that relate to our services and/or business practices that expose us to potential losses.

We recognize an estimated loss, which may represent damages, settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss will be incurred and that the amount of the loss can be reasonably estimated. Our loss estimates are based in part on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other relevant information available.

Goodwill

Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of the value of employer group contracts, provider networks and customer relationships, which are all subject to amortization.

We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting units. Health Plans Services is our only reporting unit with goodwill as of December 31, 2008 and 2007. We test goodwill for impairment annually based on the estimated fair value of our Health Plan Services reporting unit. We test for impairment on a more frequent basis in cases where events and changes in circumstances would indicate that we might not recover the carrying value of goodwill. Our measurement of fair

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value is primarily based on the income approach to fair value determination. The income approach is based on a discounted cash flow methodology. The discounted cash flow methodology is based upon converting expected cash flows to present value. Annual cash flows are estimated for each year of a defined multi-year period until the growth pattern becomes stable. The interim cash flows expected after the growth pattern becomes stable are calculated using an appropriate capitalization technique and then discounted. There are numerous assumptions and estimates underlying the determination of the estimated fair value of our reporting units, including certain assumptions and estimates related to future earnings and membership levels based on current and future plans and initiatives, long-term strategies and our annual planning and forecasting process as well as the weighted average cost of capital used in the discounting process. If these planned initiatives do not accomplish their targeted objectives, the assumptions and estimates underlying the goodwill impairment tests could be adversely affected and have a material effect upon our financial condition, results of operations or liquidity.

During the year ended December 31, 2008, we recorded higher than expected health care costs and lowered our earnings guidance. The reduction in guidance was primarily driven by lower than expected commercial enrollment, higher than expected commercial health care cost trends, and the volatile economic environment. As a result of this revised outlook combined with a decline in our market capitalization, we updated our annual impairment test on our goodwill asset as of September 30, 2008 and as of December 31, 2008, which indicated that there was no impairment.

Recoverability of Long-Lived Assets and Investments

We periodically assess the recoverability of our long-lived assets including property and equipment and other long-term assets and investments where events and changes in circumstances would indicate that we might not recover the carrying value as follows:

Long-lived Assets Held and Used

We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

If we identify an indicator of impairment, we assess recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. We recognized such an impairment of $47.9 million in 2008 representing impairments of investment securities and long-lived assets, including property and equipment.

Income Taxes

We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS No. 109). We continually review the adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be realized.

We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on

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the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities upon examination, in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which we adopted as of January 1, 2007. Prior to 2007, we maintained a liability pursuant to SFAS No. 5, Accounting for Contingencies. FIN 48 clarifies the accounting for uncertain taxes recognized in a company’s financial statements in accordance with SFAS No. 109. The interpretation requires us to analyze the amount at which each tax position meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax asset balances. The interpretation also requires that any differences between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements be recorded in a liability for unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities and classified as current or noncurrent based upon the expected period of payment. See Note 11 to the consolidated financial statements for additional disclosures related to FIN 48 policies and the impact of adoption.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential changes in an issuer’s credit rating or credit perception that will affect the value of financial instruments.

We attempt to manage the interest rate risks related to our investment portfolios by actively managing the asset duration of our investment portfolios. The overall goal for the investment portfolios is to provide a source of liquidity and support the ongoing operations of our business units. Our philosophy is to actively manage assets to maximize total return over a multiple-year time horizon, subject to appropriate levels of risk. Each business unit has additional requirements with respect to liquidity, current income and contribution to surplus. We manage these risks by setting risk tolerances, targeting asset-class allocations, diversifying among assets and asset characteristics, and using performance measurement and reporting.

We use a value-at-risk (VAR) model, which follows a variance/co-variance methodology, to assess the market risk for our investment portfolio. VAR is a method of assessing investment risk that uses standard statistical techniques to measure the worst expected loss in the portfolio over an assumed portfolio disposition period under normal market conditions. The determination is made at a given statistical confidence level.

We assumed a portfolio disposition period of 30 days with a confidence level of 95% for the computation of VAR for 2008. The computation further assumes that the distribution of returns is normal. Based on such methodology and assumptions, the computed VAR was approximately $16.8 million as of December 31, 2008.

Our calculated VAR exposure represents an estimate of reasonably possible net losses that could be recognized on our investment portfolios assuming hypothetical movements in future market rates and are not necessarily indicative of actual results which may occur. It does not represent the maximum possible loss nor any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our investment portfolios during the year.

Except for those securities held by trustees or regulatory agencies (see Note 2 to our consolidated financial statements), all of our investment securities are designated as “available-for-sale” assets. As such, they are reflected at their estimated fair value, with the difference between amortized cost and estimated fair value

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reflected in accumulated other comprehensive income, a component of Stockholders’ Equity (see Note 4 to the consolidated financial statements). Virtually, all of our investment securities are fixed income securities. Approximately 35% of our available-for-sale investment securities are mortgage-backed securities (MBS) and asset-backed securities (ABS). Approximately 98% of the MBS are backed by federal agencies. Therefore, we believe that our exposure to credit-related market value risk for our MBS is limited. Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to increase. However, these securities may be negatively impacted by illiquidity in the market. The recent disruptions in the credit markets have negatively impacted the liquidity of investments. However, such disruptions did not have a material impact to the liquidity of our investments. A worsening of credit market disruptions or sustained market downturns could have negative effects on the liquidity and value of our investment assets.

Borrowings under our revolving credit facility, which totaled $150.0 million as of December 31, 2008, are subject to variable interest rates. For additional information regarding our revolving credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our floating rate borrowings, if any, are presumed to have equal book and fair values because the interest rates paid on these borrowings, if any, are based on prevailing market rates.

The fair value of our fixed rate borrowings, including our Senior Notes and financing facility as of December 31, 2008, was approximately $291.3 million, which was based on quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The following table presents the expected cash outflows relating to market risk sensitive debt obligations as of December 31, 2008. These cash outflows include expected principal and interest payments consistent with the terms of the outstanding debt as of December 31, 2008.

	2009			2010			2011			2012			2013		Thereafter		Total
	(Amounts in millions)
Fixed-rate borrowings:
Principal	$	35.0		$	35.0		$	35.0		$	35.0		$	7.8	$	400.0	$	547.8
Interest		25.5			25.5			25.5			25.5			25.5		86.2		213.7
Valuation of interest rate swap contracts		(3.0	)		(3.5	)		(1.7	)		(0.7	)		—		—		(8.9	)
Cash outflow on fixed-rate borrowings	$	57.5		$	57.0		$	58.8		$	59.8		$	33.3	$	486.2	$	752.6
	2009			2010			2011			2012			2013		Thereafter		Total
	(Amounts in millions)
Floating-rate borrowings:
Principal	$	35.0		$	—		$	—		$	115.0		$	—	$	—	$	150.0
Interest		2.5			2.2			2.9			2.3			—		—		9.9
Cash outflow on fixed-rate borrowings	$	37.5		$	2.2		$	2.9		$	117.3		$	—	$	—	$	159.9
Total Cash outflow on borrowings	$	95.0		$	59.2		$	61.7		$	177.1		$	33.3	$	486.2	$	912.5

Item 8. Financial Statements and Supplementary Data.

The financial statements listed on the accompanying Index to Consolidated Financial Statements set forth on page F-1 and covered by the Report of Independent Registered Public Accounting Firm are incorporated in this Item 8 by reference and filed as part of this Annual Report on Form 10-K.

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

Not applicable.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of such period.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2008.

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

Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements included in this 2008 Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting as of December 31, 2008, which is included herein.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Health Net, Inc.

Woodland Hills, California

We have audited the internal control over financial reporting of Health Net, Inc., and subsidiaries (“the Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2008 of the Company and our report dated February 26, 2009 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ DELOITTE & TOUCHE, LLP

Los Angeles, California

February 26, 2009

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Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers of the Registrant and Corporate Governance.

The information required by this Item as to (1) directors and executive officers of the Company and (2) compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the Company’s definitive proxy statement, which will be filed with the SEC within 120 days of December 31, 2008, under the captions “Director Nominees,” “Information Concerning Current Members of the Board of Directors and Nominees,” “Executive Officers,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference and made a part hereof.

On May 30, 2008, the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

We have adopted a Code of Business Conduct and Ethics that applies to our employees, directors and officers, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is posted on our Internet web site, www.healthnet.com. We intend to post on our Internet web site any amendment to or waiver from the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer or principal accounting officer and that is required to be disclosed under applicable rules and regulations of the SEC.

Item 11. Executive Compensation.

The information required by this Item is set forth in the Company’s definitive proxy statement, which will be filed with the SEC within 120 days of December 31, 2008, under the captions “Compensation Discussion & Analysis,” “Executive Compensation,” “Directors’ Compensation” and “Report of the Compensation Committee of the Board of Directors.” Such information is incorporated herein by reference and made a part hereof.

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

The information required by this Item is set forth in the Company’s definitive proxy statement, which will be filed with the SEC within 120 days of December 31, 2008, under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.” Such information is incorporated herein by reference and made a part hereof.

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

The information required by this Item is set forth in the Company’s definitive proxy statement, which will be filed with the SEC within 120 days of December 31, 2008, under the caption “Certain Relationships and Related Party Transactions” and “Corporate Governance—Director Independence.” Such information is incorporated herein by reference and made a part hereof.

Item 14. Principal Accountant Fees and Services.

The information required by this Item is set forth in the Company’s definitive proxy statement, which will be filed with the SEC within 120 days of December 31, 2008, under the caption “Principal Independent Registered Accounting Firm Fees and Services.” Such information is incorporated herein by reference and made a part hereof.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements, Schedules and Exhibits

1. Financial Statements

The financial statements listed on the accompanying Index to Consolidated Financial Statements set forth on page F-1 and covered by the Report of Independent Registered Public Accounting Firm are incorporated into this Item 15(a) by reference and filed as part of this Annual Report on Form 10-K.

2. Financial Statement Schedules

The financial statement schedules listed on the accompanying Index to Consolidated Financial Statements set forth on page F-1 and covered by the Report of Independent Registered Public Accounting Firm are incorporated into this Item 15(a) by reference and filed as part of this Annual Report on Form 10-K.

3. Exhibits

The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference:

EXHIBIT INDEX

Exhibit Number	Description
3.1	Sixth Amended and Restated Certificate of Incorporation of Health Net, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 28, 2006 and incorporated herein by reference).
3.2	Ninth Amended and Restated Bylaws of Health Net, Inc. (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
3.3	Amendment Number One to Ninth Amended and Restated Bylaws of Health Net, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 7, 2005 (File No. 1-12718) and incorporated herein by reference).
4.1	Specimen Common Stock Certificate (filed as Exhibit 8 to the Company’s Registration Statement on Form 8-A/A (Amendment No. 3) (File No. 1-12718) on July 26, 2004 and incorporated herein by reference).
4.2	Rights Agreement dated as of July 27, 2006, by and between Heath Net, Inc. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 28, 2006 (File No. 1-12718) and incorporated herein by reference).
4.3	Indenture, dated as of May 18, 2007, by and between Health Net, Inc. as issuer, and The Bank of New York Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference).
4.4	Officer’s Certificate, dated May 18, 2007, establishing the terms and form of the Company’s $300,000,000 aggregate principal amount of its 6.375% Senior Notes due 2017 (the “Notes”) (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference).

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Exhibit Number	Description
4.5	Officer’s Certificate, dated May 31, 2007, establishing the terms and form of the Company’s $100,000,000 aggregate principal amount of its 6.375% Senior Notes due 2017 (the “Additional Notes”) (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2007 (File No. 1-12718) and incorporated herein by reference).
†*10.1	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Karin Mayhew, a copy of which is filed herewith.
†*10.2	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Patricia T. Clarey, a copy of which is filed herewith.
†*10.3	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Jay M. Gellert, a copy of which is filed herewith.
†*10.4	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between James E. Woys and Health Net, Inc., a copy of which is filed herewith.
†*10.5	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Joseph C. Capezza and Health Net, Inc., a copy of which is filed herewith.
†*10.6	Amended and Restated Employment Letter Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Stephen D. Lynch, a copy of which is filed herewith.
†*10.7	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Linda Tiano, a copy of which is filed herewith.
†*10.8	Amended and Restated Employment Agreement, dated as of February 17, 2009, by and between Health Net, Inc. and John Sivori, a copy of which is filed herewith.
†*10.9	Amended and Restated Employment Agreement, dated as of February 17, 2009, by and between Health Net, Inc. and Steve Tough, a copy of which is filed herewith.
*10.10	Certain Compensation Arrangements With Respect to the Company’s Non-Employee Directors, as amended and restated on February 18, 2008 (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 1-12718) and incorporated herein by reference).
*10.11	Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.12	Form of Restricted Stock Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.13	Form of Restricted Stock Unit Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.14	Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.15	Form of 2007 Performance Award Agreement for CEO of Health Net, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 28, 2007 (File No. 1-12718) and incorporated herein by reference).

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Exhibit Number	Description
*10.16	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the 2006 Long-Term Incentive Plan (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.17	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.18	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the Health Net, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
†*10.19	Health Net, Inc. Deferred Compensation Plan, as amended and restated effective November 12, 2007, a copy of which is filed herewith.
*10.20	Amendment No. 1 to the Health Net, Inc. Deferred Compensation Plan dated December 3, 2008 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
†*10.21	Health Net, Inc. Deferred Compensation Plan for Directors, as amended and restated effective November 12, 2007, a copy of which is filed herewith.
*10.22	Amendment No. 1 to the Health Net, Inc. Deferred Compensation Plan for Directors dated December 3, 2008 (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
*10.23	Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement effective September 1, 1998 between Foundation Health Systems, Inc. and Union Bank of California (filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.24	Amendment Number One to the Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement between Health Net, Inc. and Union Bank of California, adopted January 1, 2001 (filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.25	Foundation Health Systems, Inc. Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.26	Amendment to Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.27	Foundation Health Systems, Inc. 1997 Stock Option Plan (as amended and restated on May 4, 2000) (filed as Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.28	Amendment to 1997 Stock Option Plan (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).

86

Exhibit Number	Description
*10.29	Second Amendment to 1997 Stock Option Plan (filed as Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (file No. 1-12718) and incorporated herein by reference).
*10.30	Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 16, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.31	Amendment No. 1 to Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 6, 2006 (File No. 1-12718) and incorporated herein by reference).
†*10.32	Amendment No. 2 to Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan dated January 14, 2009, a copy of which is filed herewith.
*10.33	Health Net, Inc. 2002 Stock Option Plan (filed as Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (file No. 1-12718) and incorporated herein by reference).
*10.34	Health Net, Inc. 2005 Long-Term Incentive Plan (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718) and incorporated herein by reference).
†*10.35	Amendment No. 1 to Health Net, Inc. 2005 Long-Term Incentive Plan dated December 4, 2008, a copy of which is filed herewith.
†*10.36	Amendment No. 2 to Health Net, Inc. 2005 Long-Term Incentive Plan dated January 14, 2009, a copy of which is filed herewith.
*10.37	Health Net, Inc. 2006 Long-Term Incentive Plan (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 15, 2006 and incorporated herein by reference).
†*10.38	Amendment No. 1 to Health Net, Inc. 2006 Long-Term Incentive Plan dated January 14, 2009, a copy of which is filed herewith.
*10.39	Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718) and incorporated herein by reference).
*10.40	Amendment One to the Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718 and incorporated herein by reference).
†*10.41	Amendment No. 2 to the Health Net, Inc. 2006 Executive Officer Incentive Plan dated November 12, 2008, a copy of which is filed herewith.
*10.42	Health Systems International, Inc. Second Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.31 to Registration Statement on Form S-4 (File No. 33-86524) on November 18, 1994 and incorporated herein by reference).
*10.43	Foundation Health Systems, Inc. Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.44	Health Net, Inc. Management Incentive Plan adopted December 2004 (filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).

87

Exhibit Number	Description
†*10.45	Amendment No. 1 to Health Net, Inc. Management Incentive Plan dated November 12, 2008, a copy of which is filed herewith.
†*10.46	Health Net, Inc. 401(k) Savings Plan as amended and restated effective January 1, 2008, a copy of which is filed herewith.
*10.47	Amended and Restated Health Net, Inc. Supplemental Executive Retirement Plan effective as of January 1, 2008 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
*10.48	Amended and Restated Deferred Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.99 to Foundation Health Corporation’s Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
*10.49	Amendment Number One Through Three to the Amended and Restated Deferred Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.50	Foundation Health Corporation Executive Retiree Medical Plan (as amended and restated effective April 25, 1995) (filed as Exhibit 10.101 to Foundation Health Corporation’s Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
10.51	Participation Agreement dated as of December 19, 2007, by and among Health Net Funding, Inc., Health Net, Inc., Lodgemore Holdings, Inc. ING Bank, N.V. and Health Net Financing, L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 20, 2007 (File No. 1-12718) and incorporated herein by reference).
10.52	First Amendment to Participation Agreement, dated as of April 29, 2008, by and among Health Net, Inc., Health Net Funding, Inc., Lodgemore Holdings, Inc., ING Bank, N.V. and Health Net Financing, LP (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-12718) and incorporated herein by reference).
†10.53	Omnibus Amendment to Participation Agreement and Put Option Agreement dated as of November 10, 2008 by and among Health Net Funding, Inc., Health Net, Inc., Lodgemore Holdings Inc., ING Bank N.V. and Health Net Financing, L.P., a copy of which is filed herewith.
10.54	Credit Agreement, dated as of June 25, 2007, by and among Health Net, Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank, N.A., as Syndication Agent, Citicorp USA, Inc., as Documentation Agent, the other lenders party thereto and Banc of America Securities LLC and J.P. Morgan Securities Inc., as Joint Lead Arrangers and as Co-Book Managers (filed as Exhibit 10 to the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2007 (File No. 1-12718) and incorporated herein by reference).
10.55	First Amendment to Credit Agreement, dated as of April 29, 2008, by and among Health Net, Inc., Bank of America, N.A., as Administrative Agent and the other lenders party thereto (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-12718) and incorporated herein by reference).
^10.56	Master Agreement, dated August 19, 2008, between Health Net, Inc. and International Business Machines Corporation (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-12718) and incorporated herein by reference).

88

Exhibit Number	Description
^10.57	Master Services Agreement, dated September 30, 2008, between Health Net, Inc. and Cognizant Technology Solutions U.S. Corporation (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-12718) and incorporated herein by reference).
*10.58	Form of Amended and Restated Indemnification Agreement for directors and executive officers of Health Net, Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
10.59	First Amendment to Office Lease, dated May 14, 2001, by and between Health Net (a California corporation) and LNR Warner Center, LLC (filed as Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12718) and incorporated herein by reference).
10.60	Lease Agreements, dated as of March 5, 2001, by and between Health Net, Inc. and Landhold, Inc. (filed as Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-12718) and incorporated herein by reference).
†10.61	Amendment No. 1 to Lease Agreement, dated as of November 22, 2002, by and between Gold Pointe C, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.62	Amendment No. 2 to Lease Agreement, dated as of April 28, 2006, by and between McMorgan Institutional Real Estate Fund I, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.63	Amendment No. 1 to Lease Agreement, dated as of November 22, 2002, by and between Gold Pointe D, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.64	Standard Lease Agreement, dated as of July 24, 2006, by and between Panattoni Development Company and Health Net, Inc., a copy of which is filed herewith.
†10.65	First Amendment to Lease and Acknowledgment, dated as of February 8, 2007, by and between Panattoni Development Company and Health Net of California, Inc., a copy of which is filed herewith.
†10.66	Office Building Lease, dated as of July 13, 1995, by and between Aerojet-General Corporation and Foundation Health, a copy of which is filed herewith.
†10.67	Addendums 1-12 to Office Building Lease, by and between Aerojet-General Corporation and Health Net Federal Services, LLC, a copy of which is filed herewith.
10.68	Office Lease Agreement, dated as of December 22, 2003, by and between Health Net, Inc. and Douglas Emmett Realty Fund 2000 L.P. (filed as Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-12718) and incorporated herein by reference).
10.69	Office Lease, dated September 20, 2000, by and among Health Net of California, Inc., DCA Homes, Inc. and Lennar Rolling Ridge, Inc. (filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
10.70	Office Lease Agreement, dated August 18, 2000, by and between Physicians Health Services of Connecticut, Inc. (predecessor to Health Net of Connecticut, Inc.) and Beard Sawmill, LLC (filed as Exhibit 10.68 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).

89

Exhibit Number	Description
10.71	First Amendment to Office Lease Agreement, dated December 23, 2002, by and between Health Net of Connecticut, Inc. and Beard Sawmill, LLC (filed as Exhibit 10.67 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).
10.72	Second Amendment to Office Lease Agreement, dated June 14, 2004, by and between Health Net of Connecticut, Inc. and Beard Sawmill, LLC (filed as Exhibit 10.66 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).
10.73	Absolute Net Lease, dated as of March 29, 2007, by and between HN Property Owner LLC and Health Net of the Northeast (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 1-12718) and incorporated herein by reference).
†11	Statement relative to computation of per share earnings of the Company (included in Note 2 to the consolidated financial statements included as part of this Annual Report on Form 10-K).
†21	Subsidiaries of Health Net, Inc., a copy of which is filed herewith.
†23	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, a copy of which is filed herewith.
†31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.
†31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.
†32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.

* Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K.

† A copy of the exhibit is being filed with this Annual Report on Form 10-K.

^ This exhibit has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

90

SIGNATURES

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

HEALTH NET, INC.
By:	/s/    JOSEPH C. CAPEZZA
	Joseph C. Capezza
	Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    JAY M. GELLERT         Jay M. Gellert	President and Chief Executive Officer and Director (Principal Executive Officer)	February 17, 2009
/s/    JOSEPH C. CAPEZZA         Joseph C. Capezza	Chief Financial Officer (Principal Financial Officer)	February 17, 2009
/s/    BRET A. MORRIS         Bret A. Morris	Senior Vice President and Corporate Controller (Principal Accounting Officer)	February 17, 2009
/s/    THEODORE F. CRAVER, JR.         Theodore F. Craver, Jr.	Director	February 17, 2009
/s/    VICKI B. ESCARRA         Vicki B. Escarra	Director	February 17, 2009
/s/    THOMAS T. FARLEY         Thomas T. Farley	Director	February 17, 2009
/s/    GALE S. FITZGERALD         Gale S. Fitzgerald	Director	February 17, 2009
/s/    PATRICK FOLEY         Patrick Foley	Director	February 17, 2009
/s/    ROGER F. GREAVES         Roger F. Greaves	Director	February 17, 2009
/s/    BRUCE G. WILLISON         Bruce G. Willison	Director	February 17, 2009
/s/    FREDERICK C. YEAGER         Frederick C. Yeager	Director	February 17, 2009

91

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following consolidated financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K:

Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2008	F-3
Consolidated Balance Sheets as of December 31, 2008 and 2007	F-4
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December  31, 2008	F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008	F-6
Notes to Consolidated Financial Statements	F-7
Financial Statement Schedules
Schedule I—Condensed Financial Information of Registrant (Parent Company Only)	F-55
Schedule II—Valuation and Qualifying Accounts and Reserves	F-59

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Health Net, Inc.

Woodland Hills, California

We have audited the accompanying consolidated balance sheets of Health Net, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Page F-1. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all material respects, the financial position of Health Net, Inc. and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 11 to the consolidated financial statements, on January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. Also, as discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation in 2006 upon adoption of FASB Statement No. 123(R), “Share-Based Payment.”

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/    DELOITTE & TOUCHE LLP

Los Angeles, California

February 26, 2009

F-2

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

	Year Ended December 31,
	2008		2007		2006
Revenues
Health plan services premiums	$	12,392,006	$	11,435,314	$	10,364,740
Government contracts		2,835,261		2,501,677		2,376,014
Net investment income		91,042		120,176		111,042
Administrative services fees and other income		48,280		51,104		56,554
Total revenues		15,366,589		14,108,271		12,908,350
Expenses
Health plan services (excluding depreciation and amortization)		10,762,657		9,762,896		8,600,443
Government contracts		2,702,573		2,307,610		2,234,535
General and administrative		1,291,059		1,275,555		1,165,313
Selling		360,381		327,827		245,304
Depreciation and amortization		59,878		42,982		25,591
Interest		42,909		32,497		51,179
Debt refinancing charge		—		—		70,095
Litigation		—		—		37,093
Total expenses		15,219,457		13,749,367		12,429,553
Income from operations before income taxes		147,132		358,904		478,797
Income tax provision		52,129		165,207		149,484
Net income	$	95,003	$	193,697	$	329,313
Net income per share:
Basic	$	0.89	$	1.74	$	2.86
Diluted	$	0.88	$	1.70	$	2.78
Weighted average shares outstanding:
Basic		106,532		111,316		115,128
Diluted		107,610		113,829		118,310

See accompanying notes to consolidated financial statements.

F-3

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

	December 31,
	2008			2007
ASSETS
Current Assets:
Cash and cash equivalents	$	668,201		$	1,007,017
Investments—available for sale (amortized cost: 2008—$1,516,316, 2007—$1,557,411)		1,504,658			1,557,278
Premiums receivable, net of allowance for doubtful accounts (2008—$13,567, 2007—$6,724)		307,529			264,691
Amounts receivable under government contracts		241,269			189,976
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		302,022			266,767
Other receivables		254,026			72,518
Deferred taxes		87,712			132,818
Other assets		179,649			210,039
Total current assets		3,545,066			3,701,104
Property and equipment, net		202,356			178,758
Goodwill		751,949			751,949
Other intangible assets, net		91,289			109,386
Deferred taxes		81,771			47,765
Other noncurrent assets		143,919			144,093
Total Assets	$	4,816,350		$	4,933,055
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements	$	1,338,149		$	1,300,432
Health care and other costs payable under government contracts		69,876			69,014
IBNR health care costs payable under TRICARE North contract		302,022			266,767
Unearned premiums		180,548			176,981
Loans payable and other financing arrangement		27,335			35,000
Accounts payable and other liabilities		294,840			463,823
Total current liabilities		2,212,770			2,312,017
Senior notes payable		398,276			398,071
Borrowings under amortizing financing facility		103,992			112,363
Borrowings under revolving credit facility		150,000			—
Other noncurrent liabilities		199,186			235,022
Total Liabilities		3,064,224			3,057,473
Commitments and contingencies
Stockholders’ Equity:
Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)		—			—
Common stock ($0.001 par value, 350,000 shares authorized; issued 2008—143,753 shares; 2007—143,477)		144			144
Additional paid-in capital		1,182,067			1,151,251
Treasury common stock, at cost (2008—40,045 shares of common stock; 2007—33,178 shares of common stock)		(1,367,319	)		(1,123,750	)
Retained earnings		1,944,100			1,849,097
Accumulated other comprehensive loss		(6,866	)		(1,160	)
Total Stockholders’ Equity		1,752,126			1,875,582
Total Liabilities and Stockholders’ Equity	$	4,816,350		$	4,933,055

See accompanying notes to consolidated financial statements.

F-4

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

	Common Stock				Restricted Common Stock			Unearned Compensation			Additional Paid-In Capital			Common Stock Held in Treasury					Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Total
	Shares		Amount											Shares		Amount
Balance as of January 1, 2006	137,898		$	137	$	6,883		$	(2,137	)	$	906,789		(23,182	)	$	(633,375	)	$	1,324,165	$	(13,387	)	$	1,589,075
Comprehensive income:
Net income																				329,313					329,313
Minimum pension liability adjustment (pre-SFAS No. 158)																						39			39
Change in unrealized loss on investments, net of tax impact of $2,585																						4,111			4,111
Total comprehensive income																									333,463
Exercise of stock options	2,852			3								74,968													74,971
Share-based compensation expense												21,074													21,074
Tax benefit related to equity compensation plans												19,803													19,803
Defined benefit pension plans adjustment (adoption of SFAS No. 158)																						(2,000	)		(2,000	)
Repurchases of common stock														(5,633	)		(257,919	)							(257,919	)
Forfeiture of restricted stock	(60	)										(1,113	)												(1,113	)
Amortization of restricted stock grants												1,611													1,611
Reclassification in connection with adopting SFAS No. 123(R)						(6,883	)		2,137			4,746													—
Balance as of December 31, 2006	140,690		$	140	$	—		$	—		$	1,027,878		(28,815	)	$	(891,294	)	$	1,653,478	$	(11,237	)	$	1,778,965
Implementation of FIN 48																				1,922					1,922
Adjusted balance as of January 1, 2007	140,690		$	140	$	—		$	—		$	1,027,878		(28,815	)	$	(891,294	)	$	1,655,400	$	(11,237	)	$	1,780,887
Comprehensive income:
Net income																				193,697					193,697
Change in unrealized loss on investments, net of tax impact of $5,738																						8,885			8,885
Defined benefit pension plans:
Prior service cost and net loss																						1,192			1,192
Total comprehensive income																									203,774
Exercise of stock options	2,657			4								73,005													73,009
Share-based compensation expense												24,294													24,294
Tax benefit related to equity compensation plans												26,197													26,197
Repurchases of common stock and accelerated stock repurchase settlement	133											(125	)	(4,363	)		(232,456	)							(232,581	)
Forfeiture of restricted stock	(3	)										(94	)												(94	)
Amortization of restricted stock grants												96													96
Balance as of January 1, 2008	143,477		$	144	$	—		$	—		$	1,151,251		(33,178	)	$	(1,123,750	)	$	1,849,097	$	(1,160	)	$	1,875,582
Comprehensive income:
Net income																				95,003					95,003
Change in unrealized loss on investments, net of tax impact of $4,319																						(7,207	)		(7,207	)
Defined benefit pension plans:
Prior service cost and net loss																						1,501			1,501
Total comprehensive income																									89,297
Exercise of stock options and vesting of restricted stock units	276											6,679													6,679
Share-based compensation expense												24,065													24,065
Tax benefit related to equity compensation plans												72													72
Repurchases of common stock and accelerated stock repurchase agreement														(6,867	)		(243,569	)							(243,569	)
Balance as of December 31, 2008	143,753		$	144	$	—		$	—		$	1,182,067		(40,045	)	$	(1,367,319	)	$	1,944,100	$	(6,866	)	$	1,752,126

See accompanying notes to consolidated financial statements.

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HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Year Ended December 31,
	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	95,003		$	193,697		$	329,313
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation		59,878			42,982			25,591
Asset and investment impairment charges		47,869			—			—
Debt refinancing charge		—			—			70,095
Share-based compensation expense		24,065			24,298			20,115
Deferred income taxes		15,420			(98,629	)		51,271
Excess tax benefit on share-based compensation		(815	)		(17,987	)		(11,889	)
Other changes		(5,976	)		(7,955	)		13,624
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Premiums receivable and unearned premiums		(39,271	)		(74,184	)		11,907
Other current assets, receivables and noncurrent assets		(153,310	)		143,783			(178,337	)
Amounts receivable/payable under government contracts		(50,431	)		26,223			(86,925	)
Reserves for claims and other settlements		37,717			251,636			8,624
Accounts payable and other liabilities		(189,111	)		121,618			24,548
Net cash (used in) provided by operating activities		(158,962	)		605,482			277,937
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		1,219,291			807,649			464,787
Maturities of investments		257,149			213,833			113,125
Purchases of investments		(1,473,664	)		(1,180,854	)		(635,611	)
Sales of property and equipment		4			96,748			4,242
Purchases of property and equipment		(95,641	)		(64,850	)		(72,807	)
Cash paid related to the acquisition of businesses		—			(80,277	)		(73,999	)
Sales (purchases) of restricted investments and other		24,990			(22,444	)		15,384
Net cash used in investing activities		(67,871	)		(230,195	)		(184,879	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		6,636			72,622			70,294
Excess tax benefit on share-based compensation		815			17,987			11,889
Repurchases of common stock		(243,172	)		(232,220	)		(253,502	)
Borrowings under financing arrangements		520,000			668,535			497,334
Repayment of borrowings under financing arrangements		(396,262	)		(600,000	)		(465,045	)
Other		—			—			8,293
Net cash used in financing activities		(111,983	)		(73,076	)		(130,737	)
Net (decrease) increase in cash and cash equivalents		(338,816	)		302,211			(37,679	)
Cash and cash equivalents, beginning of year		1,007,017			704,806			742,485
Cash and cash equivalents, end of year	$	668,201		$	1,007,017		$	704,806
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	31,330		$	42,495		$	51,994
Income taxes paid		97,715			183,843			74,003
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Imputed interest discount and deferred revenue	$	9,745		$	27,637			—
Reclassification of certain properties held for sale		—			—		$	21,772

See accompanying notes to consolidated financial statements.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Description of Business

Health Net, Inc. (referred to herein as the Company, we, us, our or HNT) is an integrated managed care organization that delivers managed health care services. We are among the nation’s largest publicly traded managed health care companies. Our health plans and government contracts subsidiaries provide health benefits through our health maintenance organizations (HMOs), insured preferred provider organizations (PPOs) and point of service (POS) plans to approximately 6.7 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid and TRICARE programs. Our subsidiaries also offer managed health care products related to behavioral health and prescription drugs. We also own health and life insurance companies licensed to sell exclusive provider organization (EPO), PPO, POS and indemnity products as well as auxiliary non-health products such as life and accidental death and dismemberment, dental, vision, behavioral health and disability insurance. These products are offered by our health and life insurance subsidiaries, which are licensed to sell insurance in 50 states and the District of Columbia.

We currently operate within two reportable segments: Health Plan Services and Government Contracts. Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries.

Our Government Contracts reportable segment includes government-sponsored managed care plans through the TRICARE program and other health care-related government contracts, including our behavioral health contracts with the Department of Defense. The Government Contracts reportable segment administers a large managed care contract with the U.S. Department of Defense under the TRICARE program in the North Region. The North Region covers Connecticut, Delaware, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, Wisconsin and the District of Columbia and a small portion of Tennessee, Missouri and Iowa. The Company administers health care programs covering approximately 3.0 million eligible individuals in the Military Health System under the TRICARE contract.

Our current TRICARE contract for the North Region is scheduled to conclude on March 31, 2009 unless extended by the Department of Defense. Health Net and the Department of Defense are currently negotiating an extension of the TRICARE North contract for an additional one-year option period, which, if exercised, would extend the TRICARE North contract to March 31, 2010. Health Net and the Department of Defense are also negotiating two subsequent six-month option periods, which, if exercised, would extend the TRICARE North contract to March 31, 2011.

Note 2—Summary of Significant Accounting Policies

Consolidation and Basis of Presentation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates require the Company to apply complex assumptions and judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and will likely change in subsequent periods. Actual results could differ from those estimates. Principal areas requiring the use of estimates include the determination of Medicare risk factor adjustments, risk sharing revenues, allowances for doubtful accounts, reserves for claims and other settlements, reserves for contingent liabilities (including litigation and workers’ compensation reserves), amounts receivable or payable under government contracts, income taxes and assumptions when determining net realizable values on long-lived assets.

Revenue Recognition

Health plan services premium revenues include HMO, POS and PPO premiums from employer groups and individuals and from Medicare recipients who have purchased supplemental benefit coverage, for which premiums are based on a predetermined prepaid fee, Medicaid revenues based on multi-year contracts to provide care to Medicaid recipients, and revenue under Medicare risk contracts to provide care to enrolled Medicare recipients, and revenues from behavioral health services. Revenue is recognized in the month in which the related enrollees are entitled to health care services. Premiums collected in advance are recorded as unearned premiums.

The TRICARE contract for the North Region is made up of two major revenue components, health care services and administrative services. Health care services revenue includes health care costs, including paid claims and estimated incurred but not reported (IBNR) expenses, for care provided for which we are at risk and underwriting fees earned for providing the health care and assuming underwriting risk in the delivery of care. Administrative services revenue encompasses all other services provided to both the government customer and to beneficiaries, including services such as medical management, claims processing, enrollment, customer services and other services unique to the managed care support contracts with the government. Revenue is recognized as earned when the services are provided.

Other government contracts revenues are recognized in the month in which the eligible beneficiaries are entitled to health care services or in the month in which the administrative services are performed or the period that coverage for services is provided.

Amounts receivable under government contracts are comprised primarily of contractually defined billings, deferred underwriting fees under the terms of the contract and change orders for services not originally specified in the contracts. Change orders arise because the government often directs us to implement changes to our contracts before the scope and/or value is defined or negotiated. We start to incur costs immediately, before we have proposed a price to the government. In these situations, we make no attempt to estimate and record revenue. Our policy is to defer the costs as incurred until we have submitted a cost proposal to the government, at which time we will record the costs and the appropriate value for revenue, using our best estimate of what will ultimately be negotiated.

We provide administrative services only (ASO) products to large employer groups in California, Connecticut, New Jersey and New York. Under these arrangements, we provide claims processing, customer services, medical management, provider network access and other administrative services. Administrative services fees are recognized as revenue in the period services are provided.

Health Care Services and Government Contract Expenses

The cost of health care services is recognized in the period in which services are provided and includes an estimate of the cost of services that have been incurred but not yet reported. Such costs include payments to

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing the extent of such care. Our health care cost can also include from time to time remediation of certain claims as a result of periodic reviews by various regulatory agencies. We estimate the amount of the provision for service costs incurred but not reported using standard actuarial methodologies based upon historical data including the period between the date services are rendered and the date claims are received and paid, denied claim activity, expected medical cost inflation, seasonality patterns and changes in membership. The estimates for service costs incurred but not reported are made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. Such estimates are subject to the impact of changes in the regulatory environment and economic conditions. Given the inherent variability of such estimates, the actual liability could differ significantly from the amounts provided. While the ultimate amount of claims and losses paid are dependent on future developments, management is of the opinion that the recorded reserves are adequate to cover such costs. These estimated liabilities are reduced by estimated amounts recoverable from third parties for subrogation.

Our HMOs, primarily in California, generally contract with various medical groups to provide professional care to certain of their members on a capitated, or fixed per member per month fee basis. Capitation contracts generally include a provision for stop-loss and non-capitated services for which we are liable. Professional capitated contracts also generally contain provisions for shared risk, whereby the Company and the medical groups share in the variance between actual costs and predetermined goals. Additionally, we contract with certain hospitals to provide hospital care to enrolled members on a capitation basis. Our HMOs also contract with hospitals, physicians and other providers of health care, pursuant to discounted fee-for-service arrangements, hospital per diems, and case rates under which providers bill the HMOs for each individual service provided to enrollees.

Approximately 37%, 35%, and 33% in 2008, 2007 and 2006, respectively, of our health plan services premium revenues were generated under Medicare and Medicaid/Medi-Cal contracts. These revenues are subject to audit and retroactive adjustment by the respective fiscal intermediaries. Laws and regulations governing these programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount.

We assess the profitability of contracts for providing health care services when operating results or forecasts indicate probable future losses. Contracts are grouped in a manner consistent with the method of determining premium rates. Losses are determined by comparing anticipated premiums to estimates for the total of health care related costs less reinsurance recoveries, if any, and the cost of maintaining the contracts. Losses, if any, are recognized in the period the loss is determined and are classified as Health Plan Services cost. We had no premium deficiency reserves as of December 31, 2008 and 2007.

Under the TRICARE contract for the North Region, we record amounts receivable and payable for estimated health care IBNR expenses and report such amounts separately on the accompanying consolidated balance sheet. These amounts are equal since the estimated health care IBNR expenses incurred are offset by an equal amount of revenues earned.

Medicare Part D

Effective January 1, 2006, Health Net began offering the Medicare Part D benefit as a fully insured product to our existing and new members. The Part D benefit consists of pharmacy benefits for Medicare beneficiaries. Part D renewal occurs annually, but it is not a guaranteed renewable product. We report Part D as part of our health plan services reportable segment. The majority of our Part D members in the Prescription Drug Plan (PDP) fall into the low-income category.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Health Net has two primary contracts under Part D, one with the Centers for Medicare and Medicaid Services (CMS) and one with the Part D enrollees. The CMS contract covers the portions of the revenue and expenses that will be paid for by CMS. The enrollee contract covers the services to be performed by Health Net for the premiums paid by the enrollees. The insurance contracts are directly underwritten with the enrollees, not CMS, and therefore there is a direct insurance relationship with the enrollees. The premiums are received directly from the enrollees and from CMS for low-income subsidy members.

Part D offers two types of plans: Prescription Drug Plan (PDP) and Medicare Advantage Plus Prescription Drug (MAPD). PDP covers only prescription drugs and can be combined with traditional Medicare, certain Medicare Advantage Plans or Medicare supplemental plans. MAPD covers both prescription drugs and medical care.

The revenue recognition of the revenue and cost reimbursement components under Part D is described below:

CMS Premium Direct Subsidy—Health Net receives a monthly premium from CMS based on an original bid amount. This payment for each individual is a fixed amount per member for the entire plan year and is based upon that individual’s risk score status. The CMS premium is recognized evenly over the contract period and reported as part of health plan services premium revenue.

Member Premium—Health Net receives a monthly premium from members based on the original bid submitted to CMS. The member premium, which is fixed for the entire plan year is recognized evenly over the contract period and reported as part of health plan services premium revenue.

Low-Income Premium Subsidy—For qualifying low-income members, CMS will reimburse Health Net, on the member’s behalf, some or all of the monthly member premium depending on the member’s income level in relation to the Federal Poverty Level. The low-income premium subsidy is recognized evenly over the contract period and reported as part of health plan services premium revenue.

Catastrophic Reinsurance Subsidy—CMS will reimburse Health Net for 80% of the drug costs after a member reaches his or her out of pocket catastrophic threshold of $4,050, $3,850 and $3,600 for the years ended December 31, 2008, 2007 and 2006, respectively. The CMS prospective payment (a flat PMPM cost reimbursement estimate) is received monthly based on the original CMS bid. After the year is complete, a settlement is made based on actual experience. Catastrophic reinsurance subsidy is accounted for as deposit accounting.

Low-Income Member Cost Sharing Subsidy—For qualifying low-income members, CMS will reimburse Health Net, on the member’s behalf, some or all of a member’s cost sharing amounts (e.g. deductible, co-pay/coinsurance). The amount paid for the member by CMS is dependent on the member’s income level in relation to the Federal Poverty Level. Health Net receives prospective payments on a monthly basis, and they represent a cost reimbursement that is finalized and settled after the end of the year. Low-income member cost sharing subsidy is accounted for as deposit accounting.

CMS Risk Share—Premiums from CMS are subject to risk corridor provisions which compare costs targeted in our annual bids to actual prescription drug costs, limited to actual costs that would have been incurred under the standard coverage as defined by CMS. Variances of more than 5% above or below the original bid submitted by us may result in CMS making additional payments to us or require us to refund to CMS a portion of the premiums we received. We estimate and recognize an adjustment to premium revenues related to the risk corridor payment settlement based upon pharmacy claims experience. The estimate of the settlement associated with these risk corridor provisions requires us to consider factors that may not be certain including member

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

eligibility status differences with CMS. The risk-share adjustment, if any, is recorded as an adjustment to premium revenues and premiums receivable.

Health care costs and general and administrative expenses associated with Part D are recognized as the costs and expenses are incurred.

CMS Risk Factor Adjustments

We have an arrangement with CMS for certain of our Medicare products whereby periodic changes in our risk factor adjustment scores for certain diagnostic codes result in changes to our health plan services premium revenues. We recognize such changes when the amounts become determinable, supportable and the collectibility is reasonably assured.

We recognized $137.7 million of Medicare risk factor estimates, which were for the 2008 payment year in our health plan services premium revenues in the year ended December 31, 2008. We also recognized $32.9 million of capitation expense related to the Medicare risk factor estimates, which were for the 2008 payment year in our health plan services costs in the year ended December 31, 2008.

We recognized $95.1 million of Medicare risk factor estimates in our health plan services premium revenues in the year ended December 31, 2007. Of this amount, $80.3 million, $13.2 million and $1.6 million were for the 2007, 2006 and 2003 payment years, respectively. We also recognized $27.2 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs in the year ended December 31, 2007. Of this amount, $22.5 million, $3.9 million and $ 0.8 million were for the 2007, 2006, and 2003 payment years, respectively.

We recognized $92.0 million of Medicare risk factor estimates in our health plan services premium revenues in the year ended December 31, 2006. Of this amount, $51.9 million, $37.0 million and $3.1 million were for the 2006, 2005 and 2004 payment years, respectively. We also recognized $29.1 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs in the year ended December 31, 2006. Of this amount, $14.9 million, $13.2 million and $1.0 million were for the 2006, 2005, and 2004 payment years, respectively.

TRICARE Contract Target Costs

Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs, which is negotiated annually during the term of the contract with underruns and overruns of our target cost borne 80% by the government and 20% by us. In the normal course of contracting with the federal government, we recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable, and the collectibility is reasonably assured. As a result of changes in the estimate during the year ended December 31, 2008, we recognized an increase in revenue of $17 million and an increase in cost of $22 million. As a result of changes in the estimate during the years ended December 31, 2007 and 2006, we recognized decreases in revenue of $58 million and $104 million, respectively, and decreases in costs of $75 million and $128 million, respectively. In addition, 2007 includes a $36.5 million favorable settlement with the Federal Government regarding prior Option Period 1 health care cost targets. The administrative price is paid on a monthly basis, one month in arrears and certain components of the administrative price are subject to volume-based adjustments.

Share-Based Compensation Expense

As of December 31, 2008, we had various long-term incentive plans that permit the grant of stock options and other equity awards to certain employees, officers and non-employee directors, which are described more

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

fully in Note 8. Prior to January 1, 2006, we accounted for stock-based compensation under the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related Interpretations, as permitted under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123).

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” (SFAS No. 123(R)) using the modified—prospective transition method. Under such transition method, compensation cost recognized in the year ended December 31, 2006 includes: (a) compensation cost for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. The compensation cost that has been charged against income under our various long-term incentive plans was $24.1 million, $24.3 million and $20.1 million during the years ended December 31, 2008, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $9.3 million, $9.4 million and $7.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Cash flows resulting from the tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as financing cash flows and such amounts are approximately $0.8 million, $18.0 million and $11.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Prior to the adoption of SFAS No. 123(R) and upon issuance of the restricted shares pursuant to the restricted stock agreements, an unamortized compensation expense equivalent to the market value of the shares on the date of grant was charged to stockholders’ equity as unearned compensation and amortized over the applicable restricted periods. As a result of adopting SFAS No. 123(R) on January 1, 2006, we transferred the remaining unearned compensation balance in our stockholders’ equity to additional paid in capital. Prior to the adoption of SFAS No. 123(R), we recorded forfeitures of restricted stock, if any, and any compensation cost previously recognized for unvested awards was reversed in the period of forfeiture.

Forfeiture rates for share based awards are estimated upfront and true-up adjustments are recorded for the actual forfeitures.

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with maturity of three months or less when purchased.

Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. We periodically assess our available-for-sale investments for other-than-temporary impairment. Any such other-than-temporary impairment loss is recognized as a realized loss and measured as the excess of carrying value over fair value at the time the assessment is made. During the year ended December 31, 2008, we recognized a $14.6 million loss from other-than-temporary impairments. During the years ended December 31, 2007 and 2006, we had no other-than-temporary impairment loss (see Note 4 for additional information regarding our loss from other-than-temporary impairments).

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Financial Instruments

The estimated fair value amounts of cash equivalents, investments available for sale, trade accounts and notes receivable and notes payable have been determined by us using available market information and appropriate valuation methodologies. The carrying amounts of cash equivalents approximate fair value due to the short maturity of those instruments. Fair values for debt and equity securities are generally based upon quoted market prices. Where quoted market prices were not readily available, fair values were estimated using valuation methodologies based on available and observable market information. Such valuation methodologies include reviewing the value ascribed to the most recent financing, comparing the security with securities of publicly traded companies in a similar line of business, and reviewing the underlying financial performance including estimating discounted cash flows. The carrying value of trade receivables, long-term notes receivable and nonmarketable securities approximate the fair value of such financial instruments. The fair value of notes payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt with the same remaining maturities. The fair value of our fixed rate borrowings, including our Senior Notes and financing facility was $291.3 million as of December 31, 2008. The fair value of our fixed rate borrowings, including our Senior Notes and financing facility was $541.4 million as of December 31, 2007. The fair value of our variable rate borrowings, from our revolving credit facility, as of December 31, 2008 was $150 million, which was equal to the carrying value because the interest rates paid on these borrowings were based on prevailing market rates. See Note 6 for our financing arrangements.

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds which may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of December 31, 2008 and December 31, 2007, the restricted cash and cash equivalents balances totaled $63.5 million and $30.5 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $55.3 million and $79.3 million as of December 31, 2008 and 2007, respectively, and are included in investments available-for-sale.

In connection with our purchase of The Guardian Life Insurance Company of America’s interest in the HealthCare Solutions business in 2007 (see Note 3), we established escrowed funds to secure the payment of projected run-out claims for the purchased block of business. As of December 31, 2008 and December 31, 2007, this restricted cash balance amounted to $5.9 million and $37.0 million, respectively, and is included in other noncurrent assets on the accompanying consolidated balance sheets.

Interest Rate Swap Contracts

On December 19, 2007, we entered into a five-year, $175 million amortizing financing facility with a non-U.S. lender (see Note 6). In connection with the financing facility, we entered into an interest rate swap agreement under which we pay an amount equal to LIBOR times a notional principal amount and receive in return an amount equal to 4.3% times the same notional principal amount. The interest rate swap does not qualify for hedge accounting. Accordingly, the interest rate swap is reflected at positive fair value of $8.0 million and $1.1 million in our consolidated balance sheet with an offset to net investment income in our consolidated statement of operations for the change in fair value during the years ended December 31, 2008 and 2007, respectively.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and Equipment

Property and equipment are stated at historical cost less accumulated depreciation. Property and equipment that are held for sale are reported as part of current assets. Depreciation is computed using the straight-line method over the lesser of estimated useful lives of the various classes of assets or the remaining lease term, in the case of leasehold improvements. The useful life for buildings and improvements is estimated at 35 to 40 years, and the useful lives for furniture, equipment and software range from three to ten years (see Note 5).

We capitalize certain consulting costs, payroll and payroll-related costs for employees related to computer software developed for internal use. We generally amortize such costs over a three to five-year period. Expenditures for maintenance and repairs are expensed as incurred. Major improvements, which increase the estimated useful life of an asset, are capitalized. Upon the sale or retirement of assets, the recorded cost and the related accumulated depreciation are removed from the accounts, and any gain or loss on disposal is reflected in operations.

We periodically assess long-lived assets or asset groups including property and equipment for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. If we identify an indicator of impairment, we assess recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. Long-lived assets are classified as held for sale and included as part of current assets when certain criteria are met. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value less cost to sell. Fair value is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risk involved. During the year ended December 31, 2008, we recorded $26.9 million in impairment charges in general and administrative expenses for software internally developed and under development, information technology equipment, furniture and other equipment in connection with our operations strategy. During the years ended December 31, 2007 and 2006, we recorded no impairment charges.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets arise primarily as a result of various business acquisitions and consist of identifiable intangible assets acquired and the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed (goodwill). Identifiable intangible assets primarily consist of the value of employer group contracts, provider networks and customer relationships, which are all subject to amortization.

We perform our annual impairment test on our recorded goodwill as of June 30 or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets for each of our reporting units. Health Plans Services is our only reporting unit with goodwill as of December 31, 2008 and 2007. We test goodwill for impairment annually based on the estimated fair value of our Health Plan Services reporting unit. We test for impairment on a more frequent basis in cases where events and changes in circumstances would indicate that we might not recover the carrying value of goodwill. Our measurement of fair value is primarily based on the income approach to fair value determination. The income approach is based on a discounted cash flow methodology. The discounted cash flow methodology is based upon converting expected cash flows to present value. Annual cash flows are estimated for each year of a defined multi-year period until the growth pattern becomes stable. The interim cash flows expected after the growth pattern becomes stable are calculated using an appropriate capitalization technique and then discounted. There are numerous assumptions and estimates underlying the determination of the estimated fair value of our reporting units, including certain assumptions and estimates related to future earnings and membership levels based on current and future plans

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and initiatives, long-term strategies and our annual planning and forecasting process as well as the weighted average cost of capital used in the discounting process. If these planned initiatives do not accomplish their targeted objectives, the assumptions and estimates underlying the goodwill impairment tests could be adversely affected and have a material effect upon our financial condition, results of operations or liquidity.

During the year ended December 31, 2008, we recorded higher than expected health care costs and lowered our earnings guidance. The reduction in guidance was primarily driven by lower than expected commercial enrollment, higher than expected commercial health care cost trends, and the volatile economic environment. As a result of this revised outlook combined with a decline in our market capitalization, we updated our annual impairment test on our goodwill asset as of September 30, 2008 and as of December 31, 2008, which indicated that there was no impairment.

The changes in the carrying amount of goodwill by reporting unit are as follows:

	Health Plan Services		Total
	(Dollars in millions)
Balance as of December 31, 2008 and 2007	$	752.0	$	752.0

The intangible assets that continue to be subject to amortization using the straight-line method over their estimated lives are as follows:

	Gross Carrying Amount		Accumulated Amortization			Net Balance		Weighted Average Life (in years)
	(Dollars in millions)
As of December 31, 2007:
Provider networks	$	40.5	$	(27.7	)	$	12.8	19.4
Employer groups (Note 3)		75.0		(6.5	)		68.5	6.5
Customer relationships and other (Note 3)		29.5		(4.9	)		24.6	11.1
Trade name (Note 3)		3.1		(1.2	)		1.9	1.5
Covenant not–to-compete (Note 3)		2.2		(0.6	)		1.6	2.0
	$	150.3	$	(40.9	)	$	109.4
As of December 31, 2008:
Provider networks	$	40.5	$	(30.1	)	$	10.4	19.4
Employer groups (Note 3)		76.8		(18.3	)		58.5	6.5
Customer relationships and other (Note 3)		29.5		(7.6	)		21.9	11.1
Trade name (Note 3)		3.2		(3.2	)		—	1.5
Covenant not–to-compete (Note 3)		2.2		(1.7	)		0.5	2.0
	$	152.2	$	(60.9	)	$	91.3

The amortization expense was $20.0 million, $12.7 million and $4.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Estimated annual pretax amortization expense for other intangible assets for each of the next five years ending December 31 is as follows (dollars in millions):

Year	Amount
2009	$	16.3
2010		15.8
2011		15.5
2012		15.4
2013		14.0

Policy Acquisition Costs

Policy acquisition costs are those costs that vary directly with and related to the acquisition of new and renewal commercial health insurance business. Such costs include broker commissions, costs of policy issuance and underwriting, and other costs we incur to acquire new commercial business or renew existing business. Our commercial health insurance business typically has a one-year term and may be canceled upon a 30-day notice. We expense these costs as incurred in accordance with the Health Care Organization Audit and Accounting Guide and report them as selling expenses in our consolidated statements of operations.

Reserves for Contingent Liabilities

In the course of our operations, we are involved on a routine basis in various disputes with members, health care providers, and other entities, as well as audits by government agencies that relate to our services and/or business practices that expose us to potential losses.

We recognize an estimated loss, which may represent damages, assessment of regulatory fines or penalties, settlement costs, future legal expenses or a combination of the foregoing, as appropriate, from such loss contingencies when it is both probable that a loss will be incurred and that the amount of the loss can be reasonably estimated. Our loss estimates are based in part on an analysis of potential results, the stage of the proceedings, consultation with outside counsel and any other relevant information available.

Insurance Programs

The Company is insured for various errors and omissions, property, casualty and other risks. The Company maintains various self-insured retention amounts, or “deductibles,” on such insurance coverage. The Company also maintains litigation reserves to cover those self-insured retention amounts for errors and omissions claims based on historical claims filed, as well as estimates of claims incurred but not reported.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments and premiums receivable. All cash equivalents and investments are managed within established guidelines, which provide us diversity among issuers. Concentrations of credit risk with respect to premiums receivable are limited due to the large number of payers comprising our customer base. Our 10 largest employer group premiums receivable balances within each of our plans accounted for 48% and 27% of our total premiums receivable as of December 31, 2008 and 2007, respectively. Our Medicare receivable from CMS represented 56% of total receivables as of December 31, 2008, compared with 32% as of December 31, 2007. Our 10 largest employer group premiums within each of our plans accounted for 18%, 18% and 20% of our health plan services premiums for the years then ended December 31, 2008, 2007 and 2006, respectively. The

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

federal government is the only customer of our Government Contracts segment, with premiums and fees accounting for 100% of our Government Contracts revenue. In addition, the federal government is a significant customer of the Company’s Health Plan Services segment as a result of its contract with CMS for coverage of Medicare-eligible individuals. Medicare revenues accounted for 28%, 24% and 22% of our health plan premiums in 2008, 2007 and 2006, respectively.

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents (this reflects the potential dilution that could occur if stock options were exercised and restricted stock units (RSUs) and restricted shares were vested) outstanding during the periods presented.

Common stock equivalents arising from dilutive stock options, restricted common stock and RSUs are computed using the treasury stock method; for the years ended December 31, 2008, 2007 and 2006, this amounted to 1,078,000, 2,513,000 and 3,182,000 shares, respectively, which include 299,000, 239,000 and 145,000 aggregate common stock equivalents from dilutive RSUs and restricted common stock, respectively.

Options to purchase an aggregate of 3,051,000, 1,256,000 and 1,258,000 shares of common stock were considered anti-dilutive during 2008, 2007 and 2006, respectively, and were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common stock for each respective period. These options expire at various times through November 2018 (see Note 8).

We have a $700 million stock repurchase program authorized by our Board of Directors. The remaining authorization under our stock repurchase program as of December 31, 2008 was $103.3 million (see Note 9). On November 4, 2008, we announced that our stock repurchase program is on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, will be undertaking a review of the Company’s strategic direction.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income, net unrealized appreciation (depreciation), after tax, on investments available-for-sale and prior service cost and net loss related to our defined benefit pension plan (see Note 10).

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our accumulated other comprehensive income (loss) are as follows:

	For the Years Ended December 31,
	2008			2007
	(Dollars in millions)
Investments:
Unrealized losses on investments available for sale as of January 1	$	(0.1	)	$	(8.9	)
Net change in unrealized (losses) gains on investments available for sale		(10.1	)		12.0
Reclassification of unrealized losses (gains) to earnings		2.9			(3.2	)
Unrealized losses on investments available for sale as of December 31		(7.3	)		(0.1	)
Defined benefit pension plans:
Prior service cost and net loss amortization as of January 1		(1.1	)		(2.3	)
Net change in prior service cost and net loss amortization		1.5			1.2
Prior service cost and net loss amortization as of December 31		0.4			(1.1	)
Accumulated other comprehensive income (loss)	$	(6.9	)	$	(1.2	)

Taxes Based on Premiums

We provide services in certain states, which require premium taxes to be paid by us based on membership or billed premiums. These taxes are paid in lieu of or in addition to state income taxes and totaled $48.0 million in 2008, $43.6 million in 2007 and $36.2 million in 2006. These amounts are recorded in general and administrative expenses on our consolidated statements of operations.

Income Taxes

We record deferred tax assets and liabilities based on differences between the book and tax bases of assets and liabilities. The deferred tax assets and liabilities are calculated by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. We establish a valuation allowance in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS No. 109). We continually review the adequacy of the valuation allowance and recognize the benefits from our deferred tax assets only when an analysis of both positive and negative factors indicate that it is more likely than not that the benefits will be realized.

We file tax returns in many tax jurisdictions. Often, application of tax rules within the various jurisdictions is subject to differing interpretation. Despite our belief that our tax return positions are fully supportable, we believe that it is probable certain positions will be challenged by taxing authorities, and we may not prevail on the positions as filed. Accordingly, we maintain a liability for the estimated amount of contingent tax challenges by taxing authorities upon examination, in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which we adopted as of January 1, 2007. Prior to 2007, we maintained a liability pursuant to SFAS No. 5, Accounting for Contingencies. FIN 48 clarifies the accounting for uncertain taxes recognized in a company’s financial statements in accordance with SFAS No. 109. The interpretation requires us to analyze the amount at which each tax position meets a “more likely than not” standard for sustainability upon examination by taxing authorities. Only tax benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax asset balances. The interpretation also requires that any differences between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements be recorded in a liability for unrecognized tax benefits. The

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities and classified as current or noncurrent based upon the expected period of payment. See Note 11 to the consolidated financial statements for additional disclosures related to FIN 48 policies and the impact of adoption.

Recently Issued Accounting Pronouncements

In October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). This FSP clarifies the application of SFAS No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate. The adoption of FSP FAS 157-3 did not have a material impact on our financial statements or require a change in accounting estimate.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP 142-3 amends the factors to be considered in developing renewal and extension assumptions used to determine the useful life of a recognized intangible asset accounted for under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective prospectively to intangible assets acquired after January 1, 2009. We do not expect the adoption of FSP FAS 142-3 to have a material impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of SFAS No. 133 (SFAS No. 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risks and accounting designation. Fair values of derivatives and their gains and losses are required to be disclosed in a tabular format. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 as of January 1, 2009 to have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). This statement replaces SFAS No. 141, Business Combinations. While retaining the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations, SFAS No. 141 (R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The standard also provides requirements for recognition and measurement of the goodwill acquired in the business combination or gain from a bargain purchase and establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is in the fiscal year beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 141 (R) to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements- an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting

F-19

HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financials statements. Under the new standard, noncontrolling interests no longer will be classified within a mezzanine section of the balance sheet but will be reported as a part of equity. The standard also changes a way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a material impact on our consolidated financial statements.

Note 3—Purchases, Acquisitions and Sales

Purchase of The Guardian Life Insurance Company of America’s (The Guardian) Interest in HealthCare Solutions

In 1995, we entered into marketing and risk sharing arrangements with The Guardian covering primarily small group membership in the States of Connecticut, New York and New Jersey. Under these arrangements, our managed care and indemnity products were marketed to existing insureds of The Guardian. In addition, these products were distributed through the brokerage community in an integrated marketing effort under the trade name HealthCare Solutions (HCS). As part of these arrangements, we and The Guardian each retained 50% of the premiums and claims. In addition, we recovered from The Guardian a specified portion of the administrative expenses and the direct marketing costs, which were shared equally.

On February 27, 2007, we announced that we entered into an agreement with The Guardian to, in substance, purchase The Guardian’s 50% interest in HCS (the “Guardian Transaction”). On May 31, 2007, we completed the Guardian Transaction, which included terminating all pre-existing marketing and risk sharing arrangements and acquiring certain intangible rights from The Guardian. As a result, we recognize 100% of the HCS revenues, claims and administrative and marketing expenses. In connection with the Guardian Transaction, we paid The Guardian $80.3 million in cash, which was all allocated to acquired intangibles and was based on the future profits we expect to generate by owning 100% of the employer group contract relationships associated with the HCS business.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other intangible assets with indefinite useful lives are not amortized, but instead are subject to impairment tests. Identified intangible assets with definite useful lives are amortized on a straight-line basis over their estimated remaining lives. We have allocated the entire purchase price of $80.3 million to intangible assets with definite useful lives (see Note 2). All of the assets acquired were assigned to our Health Plan Services reportable segment.

The on-going financial results of the HCS business since May 31, 2007 are included in our Health Plan Services reportable segment for the year ended December 31, 2007 and are not material to our consolidated results of operations.

Sale-Leaseback of Shelton, Connecticut Property

On March 29, 2007, we sold our 68-acre commercial campus in Shelton, Connecticut (the Shelton Property) to The Dacourt Group, Inc. (Dacourt) and leased it back from Dacourt under an operating lease agreement for an initial term of ten years with an option to extend for two additional terms of ten years each. We received net cash proceeds of $83.9 million and recorded a deferred gain of $60.9 million, which is amortized into income as contra-G&A expense over the lease term.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sale-Leaseback of Tucson, Arizona Property

On June 29, 2007, we sold our commercial campus in Tucson, Arizona (the Tucson Property) to West Coast Capital Partners, LLC (West Coast) and leased it back from West Coast under an operating lease agreement for an initial term of one year, with an option to extend for two additional one-year terms, which we exercised. We received net cash proceeds of $12.7 million and recorded a gain of $6.1 million as contra-G&A expense in the statement of operations in the three months ended June 30, 2007.

Sale of Pennsylvania Subsidiaries

On July 31, 2006, we completed the sale of the subsidiary that formerly held our Pennsylvania health plan and certain of its affiliates (Pennsylvania Subsidiaries). We recognized an estimated $32 million tax benefit and a $0.4 million pretax loss related to this sale in the year ended December 31, 2006. See Note 11 for further information regarding our tax accounting policies related to sales of subsidiaries.

The Pennsylvania Subsidiaries were historically reported as part of our Health Plan Services reportable segment. The revenues and expenses of the Pennsylvania Subsidiaries were negligible for the year ended December 31, 2006.

Acquisition of Universal Care Business

On March 31, 2006, we completed the acquisition of certain health plan businesses of Universal Care, Inc. (Universal Care), a California-based health care company, and paid $74.0 million, including transaction-related costs. The purchase price was allocated to goodwill and intangibles (see Note 2). With this acquisition, we added 83,000 members as of December 31, 2006.

Note 4—Investments

Investments classified as available-for-sale, which consist primarily of debt securities, are stated at fair value. Unrealized gains and losses are excluded from earnings and reported as other comprehensive income, net of income tax effects. The cost of investments sold is determined in accordance with the specific identification method and realized gains and losses are included in net investment income. We periodically assess our available-for-sale investments for other-than-temporary impairment. Any such other-than-temporary impairment loss is recognized as a realized loss and measured as the excess of amortized cost over fair value at the time the assessment is made.

During the year ended December 31, 2008, we recognized a $14.6 million loss from other-than-temporary impairments of our cash equivalents and available-for-sale investments. Such other-than-temporary impairments primarily were as a result of investments in corporate debt from Lehman Brothers, money market funds from The Reserve Primary Institutional Fund and preferred stock from Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Included in the $14.6 million loss is $8.3 million of our investments in Lehman Brothers corporate debt, which were written down to a cost basis of zero. In September 2008, Lehman Brothers Holdings Inc. filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Accordingly, we deemed the recovery of our investments in Lehman Brothers bonds as remote and recognized a loss from other-than-temporary impairment of $8.3 million during the year ended December 31, 2008.

Due to the Lehman bankruptcy, our investment in The Reserve Primary Institutional Fund fell below a net asset value of $1 per share. Lehman short-term debt is one of the underlying investments in this fund. Consistent

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

with our treatment of our Lehman Brothers investments, we recognized a loss from other-than-temporary impairment of $4.1 million (included in the $14.6 million loss) during the year ended December 31, 2008, in connection with our investments in The Reserve Primary Institutional Fund.

In September 2008, The Reserve announced its intention to liquidate all of its money market funds and froze all redemptions until an orderly liquidation process could be implemented. As a result, we reclassified $372 million in estimated net asset value we had invested in The Reserve money market funds from cash equivalents to investments available for sale as of September 30, 2008. As of December 31, 2008, we held $50.4 million of their Primary Institutional Fund and $69.2 million of their U.S. Government Fund. On January 16, 2009, The Reserve paid out in full the balance in the U.S. Government Fund and on February 20, 2009, we received $17.1 million of the Primary Fund from The Reserve. The Reserve expects to distribute the remaining amounts in the Primary Institutional Fund by the end of 2009.

Actions taken by the U.S. government to seize control of Fannie Mae and Freddie Mac due to the financial condition and liquidity issues of these government-sponsored entities coupled with weakness in the banking and financial services sectors led us to conclude that the recovery of our investments in these securities is not expected in the near term. In the year ended December 31, 2008, we recognized a loss from other-than-temporary impairments of Fannie Mae and Freddie Mac preferred stock totaling $1.2 million, and our investments in those securities were written down to a cost basis of zero.

In addition, we recognized $1 million in losses from other-than-temporary impairments of other corporate debt and preferred stock primarily issued by financial institutions or banks. Due to credit downgrades and declines in fair values in light of current market conditions, we deemed such impairments to be other-than-temporary.

As of December 31, 2008 and 2007, the amortized cost, gross unrealized holding gains and losses, and fair value of our available-for-sale investments after giving effect to other-than-temporary impairments were as follows:

	2008
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Asset-backed securities	$	527.4	$	9.8	$	(17.2	)	$	520.0
U.S. government and agencies		69.5		0.5		—			70.0
Obligations of states and other political subdivisions		577.9		7.3		(9.8	)		575.4
Corporate debt securities		341.1		3.4		(5.8	)		338.7
Other securities		0.4		0.2		—			0.6
	$	1,516.3	$	21.2	$	(32.8	)	$	1,504.7

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	2007
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Carrying Value
	(Dollars in millions)
Asset-backed securities	$	504.9	$	2.5	$	(3.1	)	$	504.3
U.S. government and agencies		197.7		0.4		(0.5	)		197.6
Obligations of states and other political subdivisions		563.0		2.8		(1.4	)		564.4
Corporate debt securities		290.0		1.0		(2.0	)		289.0
Other securities		1.8		0.1		—			1.9
	$	1,557.4	$	6.8	$	(7.0	)	$	1,557.2

As of December 31, 2008, the contractual maturities of our available-for-sale investments were as follows:

	Amortized Cost		Estimated Fair Value
	(Dollars in millions)
Due in one year or less	$	227.2	$	227.2
Due after one year through five years		169.2		169.3
Due after five years through ten years		316.4		314.1
Due after ten years		275.7		273.5
Asset-backed securities		527.4		520.0
Other securities		0 .4		0.6
Total available for sale	$	1,516.3	$	1,504.7

Proceeds from sales of investments available for sale during 2008 were $1,219.3 million, resulting in gross realized gains and losses of $10.5 million and $14.9 million, respectively. Included in the 2008 gross realized losses of $14.9 million is an other-than-temporary impairment write-down of $14.6 million. Proceeds from sales of investments available for sale during 2007 were $807.6 million, resulting in gross realized gains and losses of $6.2 million and $1.2 million, respectively. Proceeds from sales of investments available for sale during 2006 were $464.8 million, resulting in gross realized gains and losses of $6.5 million and $3.4 million, respectively.

The following table shows our investments’ gross unrealized losses and fair value for individual securities that have been in a continuous loss position through December 31, 2008:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed	$	91.4	$	(10.7	)	$	40.7	$	(6.5	)	$	132.1	$	(17.2	)
Obligation of states and other political subdivisions		141.4		(4.9	)		52.3		(4.9	)		193.7		(9.8	)
Corporate debt		111.0		(4.7	)		16.0		(1.1	)		127.0		(5.8	)
Other securities		0.4		—			—		—			0.4		—
	$	344.2	$	(20.3	)	$	109.0	$	(12.5	)	$	453.2	$	(32.8	)

F-23

HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table shows the number of our individual securities that have been in a continuous loss position at December 31, 2008:

	Less than 12 Months	12 Months or More	Total
Asset-backed	48	20	68
Obligation of states and other political subdivisions	61	15	76
Corporate debt	55	8	63
Other securities	1	—	1
	165	43	208

The following table shows our investments’ gross unrealized losses and fair value for individual securities that have been in a continuous loss position through December 31, 2007:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in millions)
Asset-backed	$	23.1	$	(0.2	)	$	188.7	$	(2.9	)	$	211.8	$	(3.1	)
U.S. government and agencies		3.7		—			100.3		(0.5	)		104.0		(0.5	)
Obligation of states and other political subdivisions		110.8		(1.0	)		69.7		(0.4	)		180.5		(1.4	)
Corporate debt		26.5		(0.4	)		111.3		(1.6	)		137.8		(2.0	)
	$	164.1	$	(1.6	)	$	470.0	$	(5.4	)	$	634.1	$	(7.0	)

The above referenced investments are interest-yielding debt securities of varying maturities. The unrealized loss position for these securities is due to market volatility. Generally, in a rising interest rate environment, the estimated fair value of fixed income securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of fixed income securities would be expected to increase. However, these securities may be negatively impacted by illiquidity in the market.

The investments listed above are investment grade securities with an average rating of “AA” and “Aa1” as rated by S&P and/or Moody’s, respectively. At this time, there is no indication of default on interest and/or principal payments. We have the ability and current intent to hold to recovery all securities with an unrealized loss position.

Note 5—Property and Equipment

Property and equipment is comprised of the following as of December 31:

	2008			2007
	(Dollars in millions)
Land	$	1.7		$	1.7
Leasehold improvements under development		4.6			2.6
Buildings and improvements		49.4			43.4
Furniture, equipment and software		304.1			247.6
		359.8			295.3
Less accumulated depreciation		(157.4	)		(116.5	)
Property and equipment, net	$	202.4		$	178.8

F-24

HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our depreciation expense was $40.8 million, $30.3 million and $21.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 6—Financing Arrangements

Amortizing Financing Facility

On December 19, 2007, we entered into a five-year, non-interest bearing, $175 million amortizing financing facility with a non-U.S. lender, and on April 29, 2008, and November 10, 2008, we entered into amendments to the financing facility, which were administrative in nature. In connection with the financing facility, we entered into an interest rate swap agreement (see Note 2). Under the interest rate swap agreement, we pay an amount equal to LIBOR times a notional principal amount and receive in return an amount equal to 4.3% times the same notional principal amount. The financing facility requires one of our subsidiaries to pay semi-annual distributions, in the amount of $17.5 million, to a participant in the financing facility. Unless terminated earlier, the final payment under the facility is scheduled to be made on December 19, 2012.

The financing facility includes limitations (subject to specified exclusions) on our and certain of our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; engage in transactions with affiliates; enter into agreements which will restrict the ability to pay dividends or other distributions with respect to any shares of capital stock or the ability to make or repay loans or advances; make dividends; and alter the character of the business we and our subsidiaries conducted on the closing date of the financing facility. In addition, the financing facility also requires that we maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio and maintain certain minimum public debt ratings throughout the term of the financing facility. As of December 31, 2008, we were in compliance with all of the covenants under the financing facility.

The financing facility provides that it may be terminated through a series of put and call transactions (1) at the option of one of our wholly-owned subsidiaries at any time after December 20, 2009, or (2) upon the occurrence of certain defined early termination events. These early termination events, include, but are not limited to:

• nonpayment of certain amounts due by us or certain of our subsidiaries under the financing facility (if not cured within the related time period set forth therein);

• a change of control (as defined in the financing facility);

• our failure to maintain the following ratings on our senior indebtedness by any two of the following three rating agencies: (1) a rating of at least BB by Standard & Poor’s Ratings Services (S&P), (2) a rating of at least BB by Fitch, Inc. (Fitch), and (3) a rating of at least Ba2 by Moody’s Investors Service, Inc. (Moody’s). As of December 31, 2008, the ratings with S&P, Fitch and Moody’s on our senior indebtedness were BB, BB+ and Ba3, respectively;

• cross-acceleration to other indebtedness of our Company in excess of $50 million, including our revolving credit facility;

• certain ERISA-related events;

• noncompliance by Health Net with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the financing facility);

• events in bankruptcy, insolvency or reorganization of our Company;

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• undischarged, uninsured judgments in the amount of $50 million or more against our Company; or

• certain changes in law that could adversely affect a participant in the financing facility.

In addition, in connection with the financing facility, we entered into a guaranty which will require us to guarantee the payment of the semi-annual distributions and any other amounts payable by one of our subsidiaries to the financing facility participants under certain circumstances provided under the financing facility. Also in connection with the financing facility, we entered into an interest rate swap agreement with a non-U.S. bank affiliated with one of the financing facility participants. Under the interest rate swap agreement, we pay a floating payment in an amount equal to LIBOR times a notional principal amount and receive a fixed payment in an amount equal to 4.3% times the same notional principal amount from the non-U.S. bank counterparty in return in accordance with a schedule set forth in the interest rate swap agreement.

As of December 31, 2008, our current and noncurrent amortizing financing facility payables were $27.3 million and $104.0 million, respectively. As of December 31, 2007, our current and noncurrent amortizing financing facility payables were $35.0 million and $112.4 million, respectively.

Senior Notes

On May 18, 2007 we issued $300 million in aggregate principal amount of 6.375% Senior Notes due 2017. On May 31, 2007, we issued an additional $100 million of 6.375% Senior Notes due 2017 which were consolidated with, and constitute the same series as, the Senior Notes issued on May 18, 2007 (collectively, Senior Notes). The aggregate net proceeds from the issuance of the Senior Notes were $393.5 million and were used to repay outstanding debt.

The indenture governing the Senior Notes limits our ability to incur certain liens, or consolidate, merge or sell all or substantially all of our assets. In the event of the occurrence of both (1) a change of control of Health Net, Inc. and (2) a below investment grade rating by any two of Fitch, Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, we will be required to make an offer to purchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes plus accrued and unpaid interest to the date of repurchase. As of December 31, 2008, no default or event of default had occurred under the indenture governing the Senior Notes.

The Senior Notes may be redeemed in whole at any time or in part from time to time, prior to maturity at our option, at a redemption price equal to the greater of:

• 100% of the principal amount of the Senior Notes then outstanding to be redeemed; or

• the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 30 basis points

plus, in each case, accrued and unpaid interest on the principal amount being redeemed to the redemption date.

Each of the following will be an Event of Default under the indenture governing the Senior Notes:

• failure to pay interest for 30 days after the date payment is due and payable; provided that an extension of an interest payment period by us in accordance with the terms of the Senior Notes shall not constitute a failure to pay interest;

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• failure to pay principal or premium, if any, on any note when due, either at maturity, upon any redemption, by declaration or otherwise;

• failure to perform any other covenant or agreement in the notes or indenture for a period of 60 days after notice that performance was required;

• (A) our failure or the failure of any of our subsidiaries to pay indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, at the later of final maturity and the expiration of any related applicable grace period and such defaulted payment shall not have been made, waived or extended within 30 days after notice or (B) acceleration of the maturity of indebtedness for money we borrowed or any of our subsidiaries borrowed in an aggregate principal amount of at least $50,000,000, if that acceleration results from a default under the instrument giving rise to or securing such indebtedness for money borrowed and such indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days after notice; or

• events in bankruptcy, insolvency or reorganization of our Company.

Our Senior Notes payable balance was $398.3 million and $398.1 million as of December 31, 2008 and 2007, respectively.

Revolving Credit Facility

On June 25, 2007, we entered into a $900 million five-year revolving credit facility with Bank of America, N.A. as Administrative Agent, Swingline Lender, and L/C Issuer, and the other lenders party thereto. We entered into an amendment to the credit facility on April 29, 2008, which was administrative in nature. As of December 31, 2008, $150 million was outstanding under our revolving credit facility and the maximum amount available for borrowing under the revolving credit facility was $427.1 million (see “—Letters of Credit” below).

Amounts outstanding under our revolving credit facility will bear interest, at our option, at (a) the base rate, which is a rate per annum equal to the greater of (i) the federal funds rate plus one-half of one percent and (ii) Bank of America’s prime rate (as such term is defined in the facility), (b) a competitive bid rate solicited from the syndicate of banks, or (c) the British Bankers Association LIBOR rate (as such term is defined in the facility), plus an applicable margin, which is initially 70 basis points per annum and is subject to adjustment according to our credit ratings, as specified in the facility.

Our revolving credit facility includes, among other customary terms and conditions, limitations (subject to specified exclusions) on our and our subsidiaries’ ability to incur debt; create liens; engage in certain mergers, consolidations and acquisitions; sell or transfer assets; enter into agreements which restrict the ability to pay dividends or make or repay loans or advances; make investments, loans, and advances; engage in transactions with affiliates; and make dividends. In addition, we are required to maintain a specified consolidated leverage ratio and consolidated fixed charge coverage ratio throughout the term of the revolving credit facility.

Our revolving credit facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness of the Company or our subsidiaries in excess of $50 million; certain ERISA-related events; noncompliance by us or any of our subsidiaries with any material term or provision of the HMO Regulations or Insurance Regulations (as each such term is defined in the facility); certain voluntary and involuntary bankruptcy events; inability to pay debts; undischarged, uninsured judgments greater than $50 million against us and/or our subsidiaries; actual or asserted invalidity of any loan document; and a change of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

control. If an event of default occurs and is continuing under the credit facility, the lenders thereunder may, among other things, terminate their obligations under the facility and require us to repay all amounts owed thereunder.

Redemption of 8.375% Senior Notes

On August 14, 2006, we redeemed $400 million in aggregate principal amount of 8.375% senior notes, which were scheduled to mature in April 2011 and refinanced the 8.375% senior notes with $500 million of bridge and term loans. In connection with this refinancing, we incurred $70.1 million in costs, including $51.0 million in redemption premiums with respect to these senior notes, $11.1 million for the termination and settlement of our interest rate swap agreements and $8.0 million for professional fees and other expenses.

Letters of Credit

We can obtain letters of credit in an aggregate amount of $400 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. As of December 31, 2008 and 2007, we had outstanding letters of credit for $322.9 million and $120.8 million, respectively, resulting in the maximum amount available for borrowing under the revolving credit facility of $427.1 million and $779.2 million, respectively. As of December 31, 2008 and 2007, no amounts have been drawn on any of these letters of credit.

The weighted average annual interest rate on our financing arrangements was approximately 5.7%, 6.5% and 8.9% for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 7—Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which we adopted on January 1, 2008. SFAS No. 157 does not require any new fair value measurements, but it defines fair value, establishes a framework for measuring fair value in accordance with existing GAAP, and expands disclosures about fair value measurements. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value and the level of market price observability.

Investments measured and reported at fair value using Level inputs, as defined by SFAS No. 157, are classified and disclosed in one of the following categories:

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include U.S. treasury securities and listed equities. As required by SFAS No. 157, we do not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include asset-backed securities, corporate bonds and loans, municipal bonds, auction rate securities and interest rate swap asset.

Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.

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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following table presents information about our assets measured at fair value on a recurring basis at December 31, 2008, and indicate the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.

	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Assets:
Investments—available for sale
Asset-backed securities	$	—	$	520.0	$	—	$	520.0
U.S. government and agencies		36.9		33.1		—		70.0
Obligations of states and other political subdivisions		—		565.2		10.2		575.4
Corporate debt securities		—		338.7		—		338.7
Other securities		0.6		—		—		0.6
	$	37.5	$	1,457.0	$	10.2	$	1,504.7
Interest rate swap asset		—		8.0		—		8.0
Total assets at fair value	$	37.5	$	1,465.0	$	10.2	$	1,512.7

The changes in the balances of Level 3 financial assets for the year ended December 31, 2008 were as follows (dollars in millions):

	2008
	(Dollars in millions)
Beginning balance	$	—
Total gains and losses
Realized in net income		—
Unrealized in accumulated other comprehensive income		—
Purchases, sales, issuances and settlements		(11.6	)
Transfers into Level 3		21.8
Ending balance at December 31, 2008	$	10.2
Change in unrealized gains (losses) included in net income related to assets still held	$	—

During the year ended December 31, 2008, certain auction rate securities experienced “failed” auctions. As a result, these securities’ fair values were determined to be equal to their par values due to the short time periods between coupon resets and the issuers’ credit worthiness.

Note 8—Long-Term Equity Compensation

For the year ended December 31, 2008, the compensation cost that has been charged against income under our long-term incentive plans (the Plans) was $24.1 million. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $9.3 million (See Note 2).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Plans permit the grant of stock options and other equity awards, including but not limited to restricted stock, restricted stock units (RSUs) and performance share awards to certain employees, officers and non-employee directors. The grant of any award other than an option reduces the number of shares of common stock available for issuance under the 2006 Long-Term Incentive Plan by two shares of common stock for each award and is deemed to be an award of two shares of common stock for each share subject to the award. Stock options are granted with an exercise price at or above the fair market value of the Company’s common stock on the date of grant. Stock options carry a maximum term of ten years, and, in general, stock options and other equity awards vest based on one to five years of continuous service, except for certain awards where vesting may be accelerated by virtue of attaining certain performance targets. As of December 31, 2008, there were no outstanding options or awards that had market or performance condition accelerated vesting provisions. Certain stock options and other equity awards also provide for accelerated vesting under the circumstances set forth in the Plans and equity award agreements upon the occurrence of a change in control (as defined in the Plans). At the end of the ten-year term, unexercised stock options are set to expire.

Performance share awards were granted in 2007 and 2008 with 100% cliff vesting at the end of a three-year performance period and provide for vesting in 0% to 200% of shares granted. Shares delivered pursuant to each performance share award will take into account the Company’s attainment of specific performance conditions as outlined in each performance share award agreement.

As of December 31, 2008, we have reserved up to an aggregate of 10.8 million shares of our common stock for issuance under the Plans.

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on our stock and historical volatility of our stock. We estimated the expected term of options by using historical data to estimate option exercise and employee termination within a lattice-based valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from a lattice-based option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury Strip yields in effect at the time of grant with maturity dates approximately equal to the expected life of the option at the grant date.

The following table provides the weighted-average values of assumptions used in the calculation of grant-date fair values during the years ended December 31:

	2008		2007		2006
Risk-free interest rate	2.96	%	4.53	%	4.83	%
Expected option lives (in years)	5.3		4.8		4.4
Expected volatility for options	34.2	%	27.3	%	27.7	%
Expected dividend yield	None		None		None

The weighted-average grant-date fair values for options granted during 2008, 2007 and 2006 were $8.56, $16.91 and $14.52, respectively. The total intrinsic value of options exercised was $3.9 million, $69.4 million and $52.6 million during the years ended December 31, 2008, 2007 and 2006, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of option activity under our various plans as of December 31, 2008, and changes during the year then ended is presented below:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2008	6,542,016		$	30.38
Granted	325,047			24.00
Exercised	(244,984	)		27.23
Forfeited or expired	(491,566	)		35.33
Outstanding at December 31, 2008	6,130,513		$	29.77	5.05	$	251,535
Vested or expected to vest at December 31, 2008 (reflecting estimated forfeiture rates effective January 1, 2008)	5,992,632		$	29.57	4.98	$	251,535
Exercisable at December 31, 2008	4,882,717		$	27.58	4.34	$	242,205

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$  7.63 – 20.00	291,172	4.07	$	11.43	192,672	$	10.95
20.01 – 25.00	2,695,245	3.52		23.24	2,657,245		23.23
25.01 – 30.00	1,471,848	5.84		28.67	1,109,722		28.67
30.01 – 40.00	440,259	5.91		33.67	353,050		33.44
40.01 – 50.00	1,014,776	7.18		47.00	504,648		46.88
50.01 – 58.07	217,213	8.18		54.30	65,380		54.09
$  7.63 – 58.07	6,130,513	5.05	$	29.77	4,882,717	$	27.58

We have entered into restricted stock and RSU agreements with certain employees. We have awarded shares of restricted common stock under the restricted stock agreements and rights to receive common stock under the RSU agreements to certain employees. Each RSU represents the right to receive, upon vesting, one share of common stock. Awards of restricted stock and RSUs are subject to restrictions on transfer and forfeiture prior to vesting. During the years ended December 31, 2008, 2007 and 2006, we did not award any restricted stock. During the years ended December 31, 2008, 2007 and 2006, we awarded 1,000,699, 945,479 and 607,379 RSUs, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the status of the Company’s restricted common stock as of December 31, 2008, and changes during the year then ended is presented below:

	Restricted Shares		Weighted Average Grant-Date Fair Value
Balance at January 1, 2008	1,250		$	23.64
Granted	—			—
Vested	(1,250	)		23.64
Forfeited	—			—
Balance at December 31, 2008	—		$	—
Expected to vest at December 31, 2008	—		$	—

A summary of RSU activity under our various plans as of December 31, 2008, and changes during the year then ended is presented below:

	Number of Restricted Stock Units		Weighted Average Grant-Date Fair Value		Weighted Average Purchase Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2008	1,338,330		$	48.30	$	0.001
Granted	1,000,699			47.47		0.001
Vested	(31,250	)		46.76		0.001
Forfeited	(338,700	)		51.02		0.001
Outstanding at December 31, 2008	1,969,079		$	49.59	$	0.001	8.46	$	21,441,301
Expected to vest at December 31, 2008 (reflecting estimated forfeiture rates effective January 1, 2008)	1,349,228		$	49.61	$	0.001	8.37	$	14,691,744

The fair value of restricted common stock and RSUs is determined based on the market value of the shares on the date of grant. We did not grant any restricted common stock during the years ended December 31, 2008, 2007 and 2006. The aggregate intrinsic values of restricted shares vested during the years ended December 31, 2008, 2007 and 2006, were $40 thousand, $4.6 million and $6.0 million, respectively. The weighted-average grant-date fair values of RSUs granted during the years ended December 31, 2008, 2007 and 2006 were $47.47, $54.13 and $47.16, respectively. The aggregate intrinsic values of RSUs vested during the years ended December 31, 2008, 2007 and 2006, were $0.5 million, $10 thousand and $0, respectively. Compensation expense recorded for the restricted common stock was $2,000, $2,000 and $498,000 during the years ended December 31, 2008, 2007 and 2006, respectively. Compensation expense recorded for the RSUs was $19,274,000, $14,973,000 and $4,049,000 during the years ended December 31, 2008, 2007 and 2006, respectively.

As of December 31, 2008, the total remaining unrecognized compensation cost related to non-vested stock options, RSUs and restricted stock was $10.0 million, $48.9 million and $0, respectively, which is expected to be recognized over a weighted-average period of 1.05 years, 1.44 years and 0 years, respectively.

Under the Company’s various stock option and long-term incentive plans, employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and exercise price obligations arising from the vesting of stock options and other equity awards made there-under. During the year ended December 31, 2008, we withheld 15,057 shares of common stock at the

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election of employees and non-employee directors to satisfy their tax withholding and exercise price obligations arising from the vesting of stock options and restricted stock awards.

We become entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the stock options, restricted shares and RSUs when vesting occurs, the restrictions are released and the shares are issued. Stock options, restricted common stock and RSUs are forfeited if the employees terminate their employment prior to vesting.

Note 9—Capital Stock

As of December 31, 2008, there were 143,753,000 shares of our Common Stock issued and 40,045,000 shares of Common Stock held in treasury, resulting in 103,708,000 shares of our Common Stock outstanding.

Shareholder Rights Plan

On July 27, 2006, our Board of Directors approved the extension of the benefits afforded by our former shareholder rights plan, which expired at the close of business on July 31, 2006, by adopting a new shareholder rights plan pursuant to a Rights Agreement with Wells Fargo Bank, N.A. (the “Rights Agent”), dated as of July 27, 2006 (the “Rights Agreement”).

In connection with the Rights Agreement, on July 27, 2006, our Board of Directors declared a dividend distribution of one right (a “Right”) for each outstanding share of Common Stock to stockholders of record at the close of business on August 7, 2006 (the “Record Date”). Our Board of Directors also authorized the issuance of one Right for each share of Common Stock issued after the Record Date and prior to the earliest of the Distribution Date (as defined below) the redemption of the Rights and the expiration of the Rights and, in certain circumstances, after the Distribution Date. Subject to certain exceptions and adjustment as provided in the Rights Agreement, each Right entitles the registered holder to purchase from us one one-thousandth (1/1000^th) of a share of Series A Junior Participating Preferred Stock, par value of $0.001 per share, at a purchase price of $170.00 per Right (the “Purchase Price”). The terms of the Rights are set forth in the Rights Agreement.

Rights will attach to all common stock certificates representing shares then outstanding and no separate Rights certificates will be distributed. Subject to certain exceptions contained in the Rights Agreement, the Rights will separate from the Common Stock on the date that is 10 business days following (i) any person, together with its affiliates and associates (an Acquiring Person), becoming the beneficial owner of 15% or more of the outstanding common stock, (ii) the commencement of a tender or exchange offer that would result in any person, together with its affiliates and associates, becoming the beneficial owner of 15% or more of the outstanding common stock or (iii) the determination by the Board of Directors that a person, together with its affiliates and associates, has become the beneficial owner of 10% or more of the common stock and that such person is an “Adverse Person,” as defined in the Rights Agreement (the earliest of such dates being called the “Distribution Date”). The Rights Agreement provides that certain passive institutional investors that beneficially own less than 20% of the outstanding shares of our common stock shall not be deemed to be Acquiring Persons.

The Rights will first become exercisable on the Distribution Date and will expire at the close of business on July 31, 2016 unless such date is extended or the Rights are earlier redeemed by us as described below.

Subject to certain exceptions contained in the Rights Agreement, in the event that any person shall become an Acquiring Person or be declared to be an Adverse Person, then the Rights will “flip-in” and entitle each holder of a Right, other than any Acquiring Person or Adverse Person and such person’s affiliates and associates, to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

purchase, upon exercise at the then-current exercise price of such Right, that number of shares of common stock having a market value of two times such exercise price.

In addition, and subject to certain exceptions contained in the Rights Agreement, in the event that we are acquired in a merger or other business combination in which the common stock does not remain outstanding or is changed or 50% of the assets, cash flow or earning power of the Company is sold or otherwise transferred to any other person, the Rights will “flip-over” and entitle each holder of a Right, other than an Acquiring Person or an Adverse Person and such person’s affiliates and associates, to purchase, upon exercise at the then current exercise price of such Right, such number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times such exercise price.

We may redeem the Rights at any time until the earlier of (i) 10 days following the date that any Acquiring Person becomes the beneficial owner of 15% or more of the outstanding common stock and (ii) the date the Rights expire at a price of $.01 per Right. In addition, at any time after a person becomes an Acquiring Person or is determined to be and Adverse Person and prior to such person becoming (together with such person’s affiliates and associates) the beneficial owner of 50% or more of the outstanding Common Stock, at the election of our Board of Directors, the outstanding Rights (other than those beneficially owned by an Acquiring Person, Adverse Person or an affiliate or associate of an Acquiring Person or Adverse Person) may be exchanged, in whole or in part, for shares of Common Stock, or shares of preferred stock of the Company having essentially the same value or economic rights as such shares.

Stock Repurchase Program

We have a $700 million stock repurchase program authorized by our Board of Directors. Subject to Board approval, additional amounts are added to the repurchase program from time to time based on exercise proceeds and tax benefits the Company receives from employee stock options. We repurchased 6,851,595 shares of our common stock during the year ended December 31, 2008, for aggregate consideration of approximately $242.8 million.

The remaining authorization under our stock repurchase program as of December 31, 2008 was $103.3 million. As of December 31, 2008, we had repurchased a cumulative aggregate of 36,623,347 shares of our common stock under our stock repurchase program at an average price of $34.40 per share for aggregate consideration of $1,259.8 million (which amount includes exercise proceeds and tax benefits the Company had received from the exercise of employee stock options). We used net free cash available to fund the share repurchases.

On December 14, 2006, we entered into an accelerated share repurchase (ASR) agreement with JP Morgan and repurchased 2,689,538 shares at an initial purchase price of $47.22 per share, or $127 million. Under the ASR agreement, JP Morgan purchased an equivalent number of shares in the open market. The repurchased shares were subject to a price adjustment based on JP Morgan’s volume-weighted average purchase price for the shares. If JP Morgan’s volume-weighted average purchase price for the shares was greater than $47.22 per share, we were required to pay JP Morgan an amount equal to the difference between the volume-weighted average purchase price and $47.22 (True-Up). Under the ASR agreement, we could elect to settle the True-Up in shares of Health Net common stock or cash. On March 15, 2007, we settled the True-Up of approximately $7.1 million by delivering 132,806 shares of our common stock to JP Morgan. The settlement is recorded in our statement of stockholders’ equity.

We may repurchase shares of our common stock under the stock repurchase program from time to time in open market transactions, privately negotiated transactions, or through accelerated share repurchase programs, or

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions.

Our stock repurchase program does not have an expiration date. The stock purchase program may be suspended or discontinued at any time.

On November 4, 2008, we announced that our stock repurchase program is on hold as a consequence of the uncertain financial environment and the announcement by Health Net’s Board of Directors that Jay Gellert, our President and Chief Executive Officer, will be undertaking a review of the Company’s strategic direction.

Note 10—Employee Benefit Plans

Defined Contribution Retirement Plans

We and certain of our subsidiaries sponsor defined contribution retirement plans intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the Code). The plans were amended in December 2008 to comply with, among other things, Section 415 of the Code. Participation in the plans is available to substantially all employees who meet certain eligibility requirements and elect to participate. Employees may contribute up to the maximum limits allowed by Sections 401(k) and 415 of the Code, with Company contributions based on matching or other formulas. Our expense under these plans totaled $19.8 million, $20.6 million and $16.0 million for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in general and administrative expense in our consolidated statements of operations.

Deferred Compensation Plans

We have a voluntary deferred compensation plan pursuant to which certain management and highly compensated employees are eligible to defer a certain portion of their regular compensation and bonuses. The compensation deferred under this plan is credited with earnings or losses measured by the mirrored rate of return on investments elected by plan participants. This plan is unfunded. Each plan participant is fully vested in all deferred compensation and earnings credited to his or her account. In December 2008, the plan was amended to comply with, among other things, Section 409A of the Code.

As of December 31, 2008 and 2007, the liability under these plans amounted to $41.5 million and $48.6 million, respectively. These liabilities are included in other noncurrent liabilities on our consolidated balance sheets. Deferred compensation expense is recognized for the amount of earnings or losses credited to participant accounts. Our expense under these plans totaled $5.7 million, $3.3 million and $4.6 million for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in general and administrative expense in our consolidated statements of operations.

Pension and Other Postretirement Benefit Plans

In 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (SFAS No. 158). SFAS No. 158 requires an entity to recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the employer’s fiscal year end, and recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. SFAS No. 158 does not change the amount of net periodic benefit cost included in net income or address the various measurements issues associated with postretirement benefit plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

accounting. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006 for public entities. The requirement to measure the funded status of a plan as of the date of its year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We adopted the provisions of SFAS No. 158 at December 31, 2006, which resulted in an increase in pension obligation of $2.0 million and a decrease in accumulated other comprehensive income for the same amount.

Pension Plans—We have an unfunded non-qualified defined benefit pension plan, the Supplemental Executive Retirement Plan. The plan was amended and restated effective in January 2008 to comply with Section 409A of the Code. This plan is noncontributory and covers key executives as selected by the Board of Directors. Benefits under the plan are based on years of service and level of compensation during the final five years of service.

Postretirement Health and Life Plans—Certain of our subsidiaries sponsor postretirement defined benefit health care and life insurance plans that provide postretirement medical and life insurance benefits to directors, key executives, employees and dependents who meet certain eligibility requirements. The Health Net health care plan is non-contributory for employees retired prior to December 1, 1995 who have attained the age of 62; employees retiring after December 1, 1995 who have attained age 62 contribute from 25% to 100% of the cost of coverage depending upon years of service. The plan was amended in 2008 to vest benefits for eligible associates who were terminated in connection with the Company’s operations strategy. We have two other benefit plans that we have acquired as part of the acquisitions made in 1997. One of the plans is frozen and non-contributory, whereas the other plan is contributory by certain participants. Under these plans, we pay a percentage of the costs of medical, dental and vision benefits during retirement. The plans include certain cost-sharing features such as deductibles, co-insurance and maximum annual benefit amounts that vary based principally on years of credited service.

The following table sets forth the plans’ obligations and funded status at December 31:

	Pension Benefits						Other Benefits
	2008			2007			2008			2007
	(Dollars in millions)
Change in benefit obligation:
Benefit obligation, beginning of year	$	26.2		$	25.2		$	9.5		$	9.7
Service cost		1.2			1.3			0.2			0.3
Interest cost		1.6			1.4			0.6			0.5
Benefits paid		(1.0	)		(0.9	)		(0.5	)		(0.4	)
Actuarial (gain) loss		(2.3	)		(0.8	)		0.3			(0.6	)
Benefit obligation, end of year	$	25.7		$	26.2		$	10.1		$	9.5
Change in fair value of plan assets:
Plan assets, beginning of year	$	—		$	—		$	—		$	—
Employer contribution		1.0			0.9			0.5			0.4
Benefits paid		(1.0	)		(0.9	)		(0.5	)		(0.4	)
Plan assets, end of year	$	—		$	—		$	—		$	—
Underfunded status, end of year	$	(25.7	)	$	(26.2	)	$	(10.1	)	$	(9.5	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amounts recognized in our consolidated balance sheet as of December 31 consist of:

	Pension Benefits						Other Benefits
	2008			2007			2008			2007
	(Dollars in millions)
Noncurrent assets		—			—			—			—
Current liabilities	$	(1.0	)	$	(1.0	)	$	(0.6	)	$	(0.5	)
Noncurrent liabilities		(24.7	)		(25.2	)		(9.5	)		(9.0	)
Net amount recognized	$	(25.7	)	$	(26.2	)	$	(10.1	)	$	(9.5	)

Amounts recognized in accumulated other comprehensive income as of December 31 consist of:

	Pension Benefits					Other Benefits
	2008			2007		2008		2007
	(Dollars in millions)
Prior service cost	$	0.5		$	0.8	$	0.1	$	0.1
Net loss (gain)		(1.0	)		0.4		0.1		(0.2	)
	$	(0.5	)	$	1.2	$	0.2	$	(0.1	)

The following table sets forth our plans with an accumulated benefit obligation in excess of plan assets at December 31:

	Pension Benefits				Other Benefits
	2008		2007		2008		2007
	(Dollars in millions)
Projected benefit obligation	$	25.7	$	26.2	$	10.1	$	9.5
Accumulated benefit obligation		18.4		17.7		10.1		9.5
Fair value of plan assets	$	—	$	—	$	—	$	—

Components of net periodic benefit cost recognized in our consolidated statements of operations as general and administrative expense for years ended December 31:

	Pension Benefits						Other Benefits
	2008		2007		2006		2008		2007		2006
	(Dollars in millions)
Service Cost	$	1.2	$	1.3	$	1.1	$	0.2	$	0.3	$	0.4
Interest Cost		1.6		1.4		1.2		0.6		0.5		0.6
Amortization of prior service cost		0.5		0.5		0.5		—		—		—
Amortization of net (gain) loss		—		—		0.1		—		0.1		0.1
Net periodic benefit cost	$	3.3	$	3.2	$	2.9	$	0.8	$	0.9	$	1.1

The estimated net (gain) loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $49,000 and $0.5 million, respectively.

All of our pension and other postretirement benefit plans are unfunded. Employer contributions equal benefits paid during the year. Therefore, no return on assets is expected.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Additional Information

	Pension Benefits				Other Benefits
	2008		2007		2008		2007
Assumptions
Weighted average assumptions used to determine benefit obligations at December 31:
Discount rate	6.6	%	6.5	%	6.6	%	6.5	%
Rate of compensation increase	5.9	%	5.9	%	N/A		N/A

	Pension Benefits						Other Benefits
	2008		2007		2006		2008		2007		2006
Weighted average assumptions used to determine net cost for years ended December 31:
Discount rate	6.5	%	5.8	%	5.5	%	6.5	%	5.8	%	5.5	%
Rate of compensation increase	5.9	%	5.9	%	5.8	%	N/A		N/A		N/A

The discount rates we used to measure our obligations under our pension and other post-retirement plans at December 31, 2008 and 2007 mirror the rate of return expected from high-quality fixed income investments.

	2008		2007
Assumed Health Care Cost Trend Rates at December 31:
Health care cost trend rate assumed for next year	10.0	%	10.2	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5.0	%	5.0	%
Year that the rate reaches the ultimate trend rate	2016		2013

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2008:

	1-Percentage Point Increase		1-Percentage Point Decrease
	(Dollars in millions)
Effect on total of service and interest cost	$	0.1	$	(0.1	)
Effect on postretirement benefit obligation	$	1.0	$	(0.9	)

Contributions

We expect to contribute $1,010,000 to our pension plan and $575,000 to our postretirement health and life plans throughout 2009. The entire amount expected to be contributed, in the form of cash, to the defined benefit pension and postretirement health and life plans during 2009 is expected to be paid out as benefits during the same year.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Estimated Future Benefit Payments

We estimate that benefit payments related to our pension and postretirement health and life plans over the next ten years will be as follows:

	Pension Benefits		Other Benefits
	(Dollars in millions)
2009	$	1.0	$	0.6
2010		1.0		0.7
2011		1.1		0.8
2012		1.2		0.9
2013		1.4		0.9
Years 2014 – 2018		11.9		3.9

Note 11—Income Taxes

We have restated the current and deferred tax expense amounts for the year ended December 31, 2007 from amounts previously reported due to an offsetting clerical error discovered subsequent to the issuance of our consolidated financial statements and notes thereto for the year ended December 31, 2007. This restatement has no impact to the total income tax provision for the year ended December 31, 2007. This restatement also has no impact to the 2007 consolidated balance sheet and statement of operations as previously reported.

The following table summarizes the restatement adjustments and their impact on the components of our income tax expense as previously reported for the year ended December 31, 2007.

	As Previously Reported		Adjustment			As Restated
(In millions)
Current tax expense: Federal	$	50.8	$	172.8		$	223.6
Current tax expense: State		15.9		24.4			40.3
Current tax expense		66.7		197.2			263.9
Deferred income taxes		98.6		(197.2	)	$	(98.6	)

The income tax expense restatement also had the following impact to the Deferred income taxes and Other current assets, receivables and noncurrent assets reported in the Cash flows from operating activities section of the Statement of Cash Flows for the year ended December 31, 2007. This restatement has no impact to the Net cash provided by operating activities as previously reported.

	As Previously Reported			Adjustment			As Restated
(In millions)
Deferred income taxes	$	98.6		$	(197.2	)	$	(98.6	)
Other current assets, receivables and noncurrent assets		(53.5	)		197.2			143.7
Net cash provided by operating activities		605.5			—			605.5

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Significant components of the provision for income taxes are as follows for the years ended December 31:

	2008			2007 As Restated			2006
	(Dollars in millions)
Current tax expense:
Federal	$	37.2		$	223.6		$	79.7
State		(0.1	)		40.3			19.1
Total current tax expense		37.1			263.9			98.8
Deferred tax expense (benefit)		15.4			(98.6	)		51.3
Interest expense, gross of related tax effects		(0.4	)		(0.1	)		(0.6	)
Total income tax provision	$	52.1		$	165.2		$	149.5

A reconciliation of the statutory federal income tax rate and the effective income tax rate on income is as follows for the years ended December 31:

	2008		2007		2006
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal income tax effect	4.8		5.1		2.9
Tax exempt interest income	(4.1	)	(1.4	)	(0.9	)
Fines and penalties	1.1		0.2		—
Class action lawsuit expenses	(3.0	)	2.4		—
Valuation allowance against net operating losses and tax credits	—		5.3		—
Sale of subsidiaries	—		—		(6.2	)
Other, net	1.6		(0.6	)	0.4
Effective income tax rate	35.4	%	46.0	%	31.2	%

Significant components of our deferred tax assets and liabilities as of December 31 are as follows:

	2008			2007
	(Dollars in millions)
DEFERRED TAX ASSETS:
Accrued liabilities	$	138.0		$	173.1
Insurance loss reserves and unearned premiums		22.5			20.4
Tax credit carryforwards		4.4			7.2
Accrued compensation and benefits		72.0			63.4
Deferred gain and revenues		31.3			33.3
Net operating and capital loss carryforwards		57.6			59.7
Other		5.4			0.9
Deferred tax assets before valuation allowance		331.2			358.0
Valuation allowance		(50.4	)		(51.5	)
Net deferred tax assets	$	280.8		$	306.5
DEFERRED TAX LIABILITIES:
Depreciable and amortizable property	$	27.2		$	55.4
Deferred revenue		45.1			34.7
Discount on notes		6.9			10.9
Other		32.1			24.9
Deferred tax liabilities	$	111.3		$	125.9

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2008, 2007 and 2006, income tax benefits attributable to employee stock option and restricted stock transactions of $0.1 million, $26.2 million and $21.3 million, respectively, were allocated to stockholders’ equity.

As of December 31, 2008, we had federal and state net operating loss carryforwards of approximately $117.8 million and $234.9 million, respectively. The net operating loss carryforwards expire at various dates through 2028.

Limitations on utilization may apply to approximately $92 million and $179.1 million of the federal and state net operating loss carryforwards, respectively. Accordingly, valuation allowances have been provided to account for the potential limitations on utilization of these tax benefits. Of the $50.4 million total valuation allowance, $13.1 million will be allocated to reduce goodwill in the event the deferred tax assets for the net operating loss carry-forwards from a prior acquisition are realized.

Our tax provision for 2008 includes the impact of a $1.1 million decrease to valuation allowances as a result of the utilization of previously unrecognized deferred tax assets.

Our tax provision for 2007 includes the impact of a $30.3 million increase to valuation allowances established against deferred tax assets for primarily net operating loss carryforwards and tax credits of a particular subsidiary. The Company weighed both positive and negative evidence in evaluating the realizability of the tax benefits relating to the net operating loss and credit carryforwards and believes, due to a sharp decline in 2007 profit and future profit forecasts of the subsidiary, that it is unlikely any tax benefits relating to these loss and credit carry-forwards will be realized.

Included in our tax provision for 2006 is a $31.8 million tax benefit from the sale of a subsidiary primarily due to the difference in the amount of goodwill included in the carrying value of the stock prior to sale. The difference in carrying value and resulting loss on sale has been reported as a permanent difference in accordance with SFAS No. 109, Accounting for Income Taxes. This practice has been consistently applied with respect to prior, substantially similar transactions.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we increased the liability for unrecognized tax benefits by $77.2 million. Approximately $65.7 million of this increase also increased deferred tax assets, as the amount relates to tax benefits that we expect will be recognized but for which there exists uncertainty as to the timing of the benefits. Also included in the $77.2 million increase is a reclassification of $13.4 million from federal and state taxes payable to the liability for unrecognized benefits. The reclassification was necessary to properly encompass the potential impact of all uncertain tax positions within the liability for unrecognized tax benefits. The remaining impact of adopting FIN 48 was $1.9 million increase to retained earnings, recorded as a cumulative-effect adjustment as of January 1, 2007.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, exclusive of related interest, is as follows:

	2008			2007
	(Dollars in millions)
Gross unrecognized tax benefits at beginning of year	$	55.1		$	105.5
Decreases in unrecognized tax benefits related to a prior year		(0.5	)		(38.4	)
Increases in unrecognized tax benefits related to the current year		3.2			7.9
Settlements with taxing authorities		—			(16.2	)
Lapse in statute of limitations for assessment		(4.6	)		(3.7	)
Gross unrecognized tax benefits at end of year	$	53.2		$	55.1

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Of the $58.1 million total liability at December 31, 2008 for unrecognized tax benefits, approximately $18.4 million would, if recognized, impact the company’s effective tax rate. The remaining $39.7 million would impact deferred tax assets. Of the $59.8 million total liability at December 31, 2007 for unrecognized tax benefits, approximately $20.5 million would, if recognized, impact the company’s effective tax rate. The remaining $39.3 million would impact deferred tax assets.

We recognized interest and any applicable penalties, which could be assessed related to unrecognized tax benefits in income tax provision expense. Accrued interest and penalties are included within the related tax liability in the consolidated balance sheet. During 2008, 2007 and 2006, $(0.4) million, $(0.1) million and $(0.4) million of interest was recorded as income tax provision benefit, respectively. We reported interest accruals of $4.8 million and $4.4 million at December 31, 2008 and 2007, respectively. Provision expense and accruals for penalties were immaterial in all reporting periods.

We file tax returns in the federal as well as several state tax jurisdictions. As of December 31, 2008, tax years subject to examination in the federal jurisdiction are 2006 and forward. The most significant state tax jurisdiction for the company is California, and tax years subject to examination by that jurisdiction are 2003 and forward. Presently we are under examination as a large taxpayer by the Internal Revenue Service covering tax year 2006, and in addition, we are in the process of examination by various state taxing authorities. We do not believe that any ongoing examination will have a material impact on our consolidated balance sheet. In addition, we do not anticipate any significant changes to our liability for unrecognized tax benefits within the next 12 months.

During the year ended December 31, 2007, an examination was closed by the Internal Revenue Service of tax years 2003 through 2005. As a result, we paid approximately $17.0 million to resolve issues relating to the timing of deductions for certain items of deferred revenue, bad debts and a reserve for workers’ compensation. These issues had previously been included as uncertain tax positions in our liability for unrecognized tax benefits and as such, the settlement did not have a material impact on our consolidated statement of operations.

Note 12—Regulatory Requirements

All of our health plans as well as our insurance subsidiaries are required to periodically file financial statements with regulatory agencies in accordance with statutory accounting and reporting practices. Under the Knox-Keene Health Care Service Plan Act of 1975, as amended, California plans must comply with certain minimum capital or tangible net equity requirements. Our non-California health plans, as well as our health and life insurance companies, must comply with their respective state’s minimum regulatory capital requirements and, in certain cases, maintain minimum investment amounts for the restricted use of the regulators in certain limited circumstances. Within the scope of state statutes and/or other parameters established by the regulators, we have discretion as to whether we invest such funds in cash and cash equivalents or other investments. Restricted cash and cash equivalents, as of December 31, 2008 and 2007, totaled $63.5 million and $30.5 million, respectively. Investment securities held by trustees or agencies pursuant to state regulatory requirements were $55.3 million and $79.3 million as of December 31, 2008 and 2007, respectively. See the “Restricted Assets” section in Note 2 for additional information.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet risk based capital (RBC) or other statutory capital requirements under various state laws and regulations. During the year ended December 31, 2008, we made capital contributions of $240.6 million to various subsidiaries to meet RBC or other statutory capital requirements. As a result of the above requirements and other regulatory requirements, certain subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to us. Such restrictions, unless amended or waived, limit the use of any

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends which can be paid by the insurance company subsidiaries to us without prior approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31, 2008 all of our active health plans and insurance subsidiaries met their respective regulatory requirements in all material respects.

Note 13—Commitments and Contingencies

Legal Proceedings

Litigation Related to the Sale of Businesses

AmCareco Litigation

We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the AmCare plans filed suit against us contending that, among other things, we were responsible as a “controlling shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and ultimately be placed into receivership.

On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively, and entered judgments against us in those amounts.

The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims that awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying them attorneys’ fees and punitive damages.

On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment in our favor against those receivers, finding that the receivers’ claims failed as a matter of law. As a result, those receivers’ cross appeals were rendered moot. The Court of Appeal also reversed the trial court judgment in favor of the AmCare-LA receiver, with the exception of a single breach of contract claim, on which it entered judgment in favor of the AmCare-LA receiver in the amount of $2 million. On January 14, 2009, the three receivers filed a request for rehearing by the Court of Appeal. On February 13, 2009, the Court of Appeal denied the request for a rehearing. The receivers have 30 days from that date to file an application for a writ with the Louisiana Supreme Court.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In light of the original trial court judgments against us, on November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered against us on the grounds of ill practice which resulted in the judgments entered. We have alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts between the receivers, their counsel and the trial court during the course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal judge dismissed Health Net’s federal complaint and Health Net appealed to the U.S. Fifth Circuit Court of Appeals. On July 8, 2008, the Fifth Circuit issued an opinion affirming the district court’s dismissal of the federal complaint, albeit on different legal grounds from those relied upon by the district court. The state court nullity action has been stayed pending the resolution of Health Net’s jurisdictional appeal in the federal action and has remained stayed during the pendency of the appeal of the underlying judgments.

These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome, including the outcome of any appeal, cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations, cash flow and/or liquidity could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition.

Litigation Relating to Rescission of Policies

In recent years, there has been growing public attention, especially in California to the practices of health plans and health insurers involving the rescission of members’ policies for misrepresenting their health status on applications for coverage. On October 23, 2007, the California Department of Managed Health Care (DMHC) and the California Department of Insurance (DOI) announced their intention to issue joint regulations limiting the rights of health plans and insurers to rescind coverage. The DMHC has issued draft proposed regulations but has not formally promulgated any regulations to date. The DOI has not issued any proposed regulations. In addition, effective January 1, 2008, newly enacted legislation in California requires health plans and insurers to pay health care providers who, under certain circumstances, have rendered services to members whose policies are subsequently rescinded. The issue of rescissions has also attracted increasing media attention, and both the DMHC and the DOI have been conducting surveys of the rescission practices of health plans, including ours. Other government agencies, including the Attorney General of California, are investigating, or have indicated that they may be interested in investigating, rescissions and related activities.

On October 16, 2007, the DMHC initiated a survey of Health Net of California’s activities regarding the rescission of policies for the period January 1, 2004 through June 30, 2006. Following completion of the survey, on May 15, 2008, Health Net of California entered into a settlement agreement with the DMHC. The settlement agreement requires Health Net of California to (1) pay a $300,000 administrative fine, (2) offer future coverage to all 85 HMO enrollees who had coverage rescinded from January 1, 2004 through May 15, 2008, (3) offer those enrollees an opportunity to participate in an expedited review process where the enrollee could seek to resolve claims for out-of-pocket medical expenses and other damages incurred as a result of the rescission, and (4) file a corrective action plan for various internal procedural changes by June 30, 2008. Health Net of California filed the corrective action plan by the due date and has commenced implementation of the corrective action plan. Failure to substantially implement the actions set forth in the corrective action plan will subject Health Net of California to a potential penalty of up to $3 million.

On April 7, 2008, the DOI commenced an audit of Health Net Life Insurance Company’s rescission practices and related claims settlement practices for the period January 1, 2004 through February 29, 2008. On

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 12, 2008, Health Net Life entered into a settlement agreement with the DOI, which resolves all DOI matters regarding Health Net Life’s rescission practices from January 2004 to date. Under the settlement agreement, Health Net Life paid a $3.6 million penalty in and agreed to certain corrective actions, including offering future coverage to all 926 rescinded PPO insureds and offering an opportunity to participate in an expedited review process that allows former insureds to seek to resolve their claims for damages incurred as a result of their rescission. On October 7, 2008, Health Net Life filed a corrective action proposal for various procedure changes. Failure to substantially comply with the settlement agreement subjects Health Net Life to a potential additional monetary penalty of up to $3.6 million.

We are also party to arbitrations and litigation, including a putative class action lawsuit filed in April 2008 in Los Angeles Superior Court, in which rescinded members allege that we unlawfully rescinded their coverage. The lawsuits generally seek to recover the cost of medical services that were not paid for as a result of the rescission, and in some cases they also seek damages for emotional distress, attorney fees and punitive damages. On February 20, 2008, the Los Angeles City Attorney filed a complaint against Health Net in the Los Angeles Superior Court relating to our underwriting practices and rescission of certain individual policies. The complaint sought equitable relief and civil penalties for, among other things, alleged false advertising, violations of unfair competition laws and violations of the California Penal Code. On February 10, 2009, we entered into settlement agreements that resolved both the putative class action and the Los Angeles City Attorney’s lawsuit. Under the terms of the settlement agreements, we agreed to pay a total of $6.3 million to class members (individuals rescinded between February 20, 2004 and February 10, 2009), in accordance with an agreed upon distribution formula. The class action settlement agreement also provides that we will reimburse class members for certain out-of-pocket expenses related to covered medical services that occurred between the time of their original enrollment and the date of their rescission, and we will also hold them harmless for certain unpaid bills for such services. Under the agreement, our reimbursement and hold harmless obligations are capped at a total of $3 million in the aggregate. We will also pay attorney fees of approximately $2 million. Under the terms of the two agreements, we also agreed that we would not engage in any rescissions in California until January 31, 2010, unless legislation or regulations governing the process for rescissions is enacted, or we implement a third party independent review process that is not objected to by the DMHC or the DOI. The agreement with the City Attorney also provides that we will pay a $2 million civil penalty, as well as contribute $500,000 as cy pres payments to specified non-profit organizations that support childrens’ healthcare. We also agreed as part of the settlements to offer coverage to class members on a going forward basis without medical underwriting, similar to the offer we agreed to make as part of our settlements with the DMHC and DOI. On February 11, 2009, the court gave preliminary approval of the settlements and scheduled a final approval hearing for May 26, 2009. Class members will be given notice of the settlement, and an opportunity to opt out of the agreement, or to file objections to the settlement, which will be considered by the court at the final approval hearing. All of the settlement amounts have been fully accrued for as of December 31, 2008.

We cannot predict the outcome of the anticipated regulatory proposals described above, nor the extent to which we may be affected by the enactment of those or other regulatory or legislative activities relating to rescissions. Such legislation or regulation, including measures that would cause us to change our current manner of operation or increase our exposure to liability, could have a material adverse effect on our results of operations, financial condition and ability to compete in our industry. Similarly, given the complexity and scope of rescission lawsuits, their final outcome cannot be predicted with any certainty. It is possible that in a particular quarter or annual period our results of operations could be adversely affected by an ultimate unfavorable resolution of these cases.

Proceedings Relating to Claims Payment Practices

On March 13, 2008, we entered into a final settlement agreement with the plaintiffs in the McCoy, Wachtel and Scharfman lawsuits, which were nationwide class actions principally relating to our out-of-network claims

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

payment practices. We are currently in the process of implementing the terms of the settlement agreement. We were also the subject of a regulatory investigation conducted by the New Jersey Department of Banking and Insurance (“DOBI”) related principally to the timeliness and accuracy of our claims payment practices for services rendered by out-of-network providers in New Jersey. On August 26, 2008, we entered into a consent order with DOBI and agreed to remediate certain claims and pay a $13 million fine. We completed the remediation of the claims as of August 1, 2008. In the third quarter of 2007, we recorded a $296.8 million charge relating to the settlement of the McCoy, Wachtel and Scharfman cases, including the $13 million fine arising from the consent order with DOBI.

On February 13, 2008, the New York Attorney General (NYAG) announced that his office was conducting an industry-wide investigation into the manner in which health insurers calculate “usual, customary and reasonable” charges for purposes of reimbursing members for out-of-network medical services. The NYAG’s office issued subpoenas to 16 health insurance companies, including us, in connection with this investigation. As described by the NYAG in a press conference on February 13, 2008, the threatened claims appear to be similar in part to those asserted by the plaintiffs in the McCoy, Wachtel and Scharfman cases described above. We are in the process of responding to the subpoena and are cooperating with the NYAG as appropriate in his investigation. On January 13, 2009, the NYAG announced that, as a result of his investigation, his office had entered into a settlement agreement with UnitedHealth Group, Inc., which owns and operates Ingenix, the company that supplied the database used by many health insurers, including us, to determine certain out-of-network reimbursements. Under the terms of the settlement, United will discontinue its ownership and operation of those databases, and will pay $50 million towards creation of a new database to be owned and operated by a non-profit organization in New York. Since the announcement of the agreement with United, the NYAG has reached agreements with some other health plans, under which they agreed to make payments towards the creation of the database and, in some instances, agree to utilize the database if certain conditions are satisfied. At the time of the announcement of the settlement, the NYAG indicated his intent to continue his investigation with respect to other health insurers. In the meantime, the Connecticut Attorney General has also been investigating health plans’ reimbursement of out-of-network services. On March 28, 2008, we received a request for voluntary production from the Connecticut Attorney General that sought information similar to that subpoenaed by the NYAG. We are in the process of responding to the request and are cooperating with the Connecticut Attorney General as appropriate in his investigation.

Miscellaneous Proceedings

In the ordinary course of our business operations, we are also subject to periodic reviews by various regulatory agencies with respect to our compliance with a wide variety of rules and regulations applicable to our business, including, without limitation, rules relating to pre-authorization penalties, payment of out-of-network claims and timely review of grievances and appeals, which may result in remediation of certain claims and the assessment of regulatory fines or penalties.

In addition, in the ordinary course of our business operations, we are also party to various other legal proceedings, including, without limitation, litigation arising out of our general business activities, such as contract disputes, employment litigation, wage and hour claims, real estate and intellectual property claims, claims brought by members seeking coverage or additional reimbursement for services allegedly rendered to our members, but which allegedly were either denied, underpaid or not paid, and claims arising out of the acquisition or divestiture of various business units or other assets. We are also subject to claims relating to the performance of contractual obligations to providers, members, employer groups and others, including the alleged failure to properly pay claims and challenges to the manner in which we process claims. In addition, we are subject to claims relating to the insurance industry in general, such as claims relating to reinsurance agreements and rescission of coverage and other types of insurance coverage obligations.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

These other regulatory and legal proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of any or all of these other regulatory and legal proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of all of these other regulatory and legal proceedings that are pending, after consideration of applicable reserves and potentially available insurance coverage benefits, should not have a material adverse effect on our financial condition and liquidity.

Potential Settlements

We regularly evaluate litigation matters pending against us, including those described above, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain cases, could result in a significant earnings charge in any particular quarter in which we enter into a settlement agreement. We have recorded reserves and accrued costs for future legal costs for certain significant matters described above. These reserves and accrued costs represent our best estimate of probable loss, including related future legal costs for such matters, both known and incurred but not reported, although our recorded amounts might ultimately be inadequate to cover such costs. Therefore, the costs associated with the various litigation matters to which we are subject and any earnings charge recorded in connection with a settlement agreement could have a material adverse effect on our financial condition or results of operations.

Operating Leases and Long-Term Purchase Obligations

Operating Leases

We lease administrative office space throughout the country under various operating leases. Certain leases contain renewal options and rent escalation clauses. Certain leases are cancelable with substantial penalties.

On March 29, 2007, we sold our 68-acre commercial campus in Shelton, Connecticut (the “Shelton Property”) to The Dacourt Group, Inc. (“Dacourt”) and leased it back from Dacourt under an operating lease agreement for an initial term of ten years with an option to extend for two additional terms of ten years each. The total future minimum lease commitments under the lease are approximately $70.1 million.

Effective January 1, 2005, we entered into an operating lease agreement to renew our leased office space in Woodland Hills, California for our corporate headquarters. The new lease is for a term of 10 years and has provisions for space reduction at specific times over the term of the lease, but it does not provide for complete cancellation rights. The total future minimum lease commitments under the lease are approximately $19.2 million.

Long-Term Purchase Obligations

We have entered into long-term agreements to purchase various services, which may contain certain termination provisions and have remaining terms in excess of one year as of December 31, 2008.

We have entered into long-term agreements to receive services related to pharmacy benefit management, pharmacy claims processing services and health quality/risk scoring enhancement services with external third-party service providers. The remaining terms are approximately three years for each of these contracts. Termination of these agreements is subject to certain termination provisions. The total future minimum commitments under these agreements are $122.0 million and are included in the table below.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On August 19, 2008, we entered into a five and one-half year agreement with International Business Machines Corporation (IBM) to outsource our IT infrastructure management services including data center services, IT security management and help desk support. The total future minimum commitments under the agreement are $295.0 million.

On September 30, 2008, we entered into a five year and three month agreement with Cognizant Technology Solutions U.S. Corporation (Cognizant) to outsource our software applications development and management activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with services including the following: application development, testing and monitoring services, application maintenance and support services, project management services and cross functional services. The total future commitments under the agreement are $107.8 million.

On January 23, 2009, we also entered into a five year and two months agreement with Cognizant to outsource a substantial portion of our claims processing activities to Cognizant. Under the terms of the agreement, Cognizant will, among other things, provide us with claims adjudication, adjustment, audit and process improvement services. The total future commitments under the agreement are $13.3 million.

We have also entered into contracts with our health care providers and facilities, the federal government, other IT service companies and other parties within the normal course of our business for the purpose of providing health care services. Certain of these contracts are cancelable with substantial penalties.

As of December 31, 2008, future minimum commitments for operating leases and long-term purchase obligations for the years ending December 31 are as follows:

	Operating Leases		Long-Term Purchase Obligations
	(Dollars in millions)
2009	$	64.9	$	140.8
2010		59.4		133.4
2011		52.3		126.4
2012		35.2		85.4
2013		29.3		70.5
Thereafter		60.7		5.5
Total minimum commitments	$	301.8	$	562.0

Lease expense totaled $71.1 million, $70.7 million and $69.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. Long-term purchase obligation expenses totaled $33.9 million, $39.3 million and $33.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Surety Bonds

During December 2005, the Company elected to post $114.7 million of surety bonds to suspend the effect, and secure appeal, of the final judgment entered against the Company in connection with the AmCareco litigation. The surety bonds are secured by $90.1 million of irrevocable standby letters of credit (the “LC”) issued under the Company’s revolving credit facility in favor of the issuers of the surety bonds.

Under the surety bond and LC arrangement, if the Company were to fail to pay the amount, if any, of a final judgment in connection with the AmCareco litigation following appeal, the issuers of the surety bonds would

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

make payment in satisfaction of the judgment. The Company would, in turn, be responsible for reimbursing the issuing bank under the LC to the extent that the issuers of the surety bonds were to draw on the LC. To the extent the Company incurs liabilities as a result of the arrangements under the surety bonds or the LC, such liabilities would be included on the Company’s consolidated balance sheet.

We will recognize a liability for any amounts actually, or expected to be, funded to these surety bonds or drawn down from the letters of credit. At this time, the Company does not believe it will be required to fund or draw down any amounts related to the surety bonds or the LC. Accordingly, no liability related to the surety bonds or the LC has been recognized in the Company’s financial statements as of December 31, 2008 and 2007.

Note 14—Related Parties

One current executive officer of the Company is a director of an industry-related association, of which the Company is a member and we paid dues of $1.0 million, $1.1 million and $1.1 million in 2008, 2007 and 2006, respectively.

As of December 31, 2008, there were no employee loans outstanding.

Note 15—2006 Litigation Charges

We recorded a $37.1 million litigation charge in the fourth quarter of 2006 in connection with recent developments in the Wachtel v. Health Net, Inc. et al. and McCoy v. Health Net, Inc. et al. cases. These two lawsuits are styled as nationwide class actions and are pending in the United States District Court for the District of New Jersey on behalf of a class of subscribers in a number of our large and small employer group plans. The litigation charge was recorded in anticipation of the Company’s on-going litigation defense expenses in these matters. These lawsuits were preliminarily settled in the third quarter of 2007. See Note 13 for additional information on this litigation matter.

Note 16—Segment Information

We currently operate within two reportable segments: Health Plan Services and Government Contracts. Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment includes government-sponsored managed care plans through the TRICARE program and other health care-related government contracts. Our Government Contracts segment administers one large, multi-year managed health care government contract and other health care related government contracts.

Our two reportable segments are determined by applying the aggregation criteria in SFAS No. 131, “Disclosures About Segments of An Enterprise and Related Information.” The financial results of our two reportable segments are reviewed on a monthly basis by our executive operating team which comprises the chief operating decision maker (CODM). We continuously monitor our reportable segments to ensure that they reflect how our CODM manages our company. The operating segments within our Health Plan Services reportable segment all have similar economic characteristics and they meet the additional following five aggregation criteria:

• Similar managed health care products and services including HMO, PPO and POS,

• Similar production process as they support similar customer groups and products,

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

• Same type of customers, individuals within large and small employer groups and senior and commercial individuals,

• Similar distribution channels primarily consisting of insurance brokers, and

• Similar regulatory environment in that the health care industry is highly regulated at both the federal and state levels.

We evaluate performance and allocate resources based on segment pretax income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 2), except that intersegment transactions are not eliminated. We include investment income, administrative services fees and other income and expenses associated with our corporate shared services and other costs in determining Health Plan Services segment’s pretax income to reflect the fact that these revenues and expenses are primarily used to support Health Plan Services reportable segment. We currently manage our assets on consolidated basis. Accordingly, asset information by reportable segments have not been disclosed.

The debt refinancing charge and litigation, severance and related benefit costs are excluded from our measurement of segment performance since they are not managed within either of our reportable segments.

Presented below are segment data for the three years ended December 31.

2008

	Health Plan Services		Government Contracts		Eliminations			Total
	(Dollars in millions)
Revenues from external sources	$	12,392.0	$	2,835.3	$	—		$	15,227.3
Intersegment revenues		55.1		0.2		(55.3	)		—
Net investment income		91.0		—		—			91.0
Administrative services fees and other income		48.3		—		—			48.3
Interest expense		42.9		—		—			42.9
Depreciation and amortization		59.9		—		—			59.9
Share-based compensation expense		21.9		2.2		—			24.1
Segment pretax income	$	14.4	$	132.7		—		$	147.1

2007

	Health Plan Services		Government Contracts		Eliminations			Total
	(Dollars in millions)
Revenues from external sources	$	11,435.3	$	2,501.7	$	—		$	13,937.0
Intersegment revenues		9.6		—		(9.6	)		—
Net investment income		120.2		—		—			120.2
Administrative services fees and other income		51.1		—		—			51.1
Interest expense		32.5		—		—			32.5
Depreciation and amortization		43.0		—		—			43.0
Share-based compensation expense		22.7		1.6		—			24.3
Segment pretax income	$	164.8	$	194.1	$	—		$	358.9

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2006

	Health Plan Services		Government Contracts		Eliminations			Total
	(Dollars in millions)
Revenues from external sources	$	10,364.7	$	2,376.0	$	—		$	12,740.7
Intersegment revenues		10.1		—		(10.1	)		—
Net investment income		111.0		—		—			111.0
Administrative services fees and other income		56.6		—		—			56.6
Interest expense		51.2		—		—			51.2
Depreciation and amortization		25.6		—		—			25.6
Share-based compensation expense		18.0		2.1		—			20.1
Segment pretax income	$	444.5	$	141.5	$	—		$	586.0

Our health plan services premium revenue by line of business is as follows:

	Year Ended December 31,
	2008		2007		2006
	(Dollars in millions)
Commercial premium revenue	$	7,797.5	$	7,468.0	$	6,903.5
Medicare Risk premium revenue		3,521.5		2,778.9		2,304.4
Medicaid premium revenue		1,073.0		1,188.4		1,156.8
Total Health Plan Services premiums	$	12,392.0	$	11,435.3	$	10,364.7

A reconciliation of the total reportable segments’ measures of profit to the Company’s consolidated income from continuing operations before income taxes and cumulative effect of a change in accounting principle for the years ended December 31, 2008, 2007 and 2006 is as follows:

	2008		2007		2006
	(Dollars in millions)
Total reportable segment pretax income	$	147.1	$	358.9	$	586.0
Debt refinancing charge		—		—		(70.1	)
Litigation, severance and related benefit costs		—		—		(37.1	)
Income from continuing operations before income taxes	$	147.1	$	358.9	$	478.8

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 17—Reserves for Claims and Other Settlements

Reserves for claims and other settlements include reserves for claims (incurred but not reported (IBNR) claims and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Health Plan Services reporting segment. The table below provides a reconciliation of changes in reserve for claims for the years ended December 31, 2008, 2007 and 2006.

	Health Plan Services Year Ended December 31,
	2008			2007		2006
	(Dollars in millions)
Reserve for claims (a), beginning of period	$	838.7		$	754.2	$	768.7
Incurred claims related to:
Current year		6,372.2			5,790.7		5,222.0
Prior years (c)		(8.3	)		0.6		(77.3	)
Total incurred (b)		6,363.9			5,791.3		5,144.7
Paid claims related to:
Current year		5,443.2			4,972.3		4,485.7
Prior years		802.3			734.5		673.5
Total paid (b)		6,245.5			5,706.8		5,159.2
Reserve for claims (a), end of period		957.1			838.7		754.2
Add:
Claims payable		187.8			161.9		195.6
Claims-related remediations (e)		93.1			201.5		—
Reserve for provider disputes		3.9			2.2		8.3
Other (d)		96.2			96.1		90.7
Reserves for claims and other settlements, end of period	$	1,338.1		$	1,300.4	$	1,048.8

(a) Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses.

(b) Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included.

(c) This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each quarter-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years. As of December 31, 2008, incurred claims related to prior years were estimated to be $8.3 million lower than originally estimated at December 31, 2007. The majority of this amount was due to adjustments to our reserves that related to variables and uncertainties associated with our assumptions. In 2008, as our reserve balance for older months of service decreased, and estimates of our incurred costs for older dates of service became more certain and predictable, our estimates of incurred claims related to prior periods were adjusted accordingly.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2007, incurred claims related to prior years were estimated to be $0.6 million higher than originally estimated at December 31, 2006.

As of December 31, 2006, incurred claims related to prior years were estimated to be $77.3 million lower than originally estimated at December 31, 2005.

(d) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

(e) Includes charges for claims-related matters, class disbursements and remediations recognized during 2007 and 2008. See Note 13 for further information on this class action litigation.

The following table shows the Company’s health plan services capitated and non-capitated expenses for the years ended December 31:

	Health Plan Services
	2008		2007		2006
	(Dollars in millions)
Total incurred claims	$	6,363.9	$	5,791.3	$	5,144.7
Capitated expenses and shared risk		2,644.5		2,398.5		2,396.8
Pharmacy and other		1,754.3		1,573.1		1,058.9
Health plan services	$	10,762.7	$	9,762.9	$	8,600.4

For the years ended December 31, 2008, 2007 and 2006, the Company’s capitated, shared risk, pharmacy and other expenses represented 41%, 41% and 40%, respectively, of the Company’s total health plan services.

Note 18—Quarterly Information (Unaudited)

The following interim financial information presents the 2008 and 2007 results of operations on a quarterly basis:

2008

	March 31			June 30			September 30			December 31
	(Dollars in millions, except per share data)
Total revenues (6), (7), (9)	$	3,836.8		$	3,841.5		$	3,818.9		$	3,869.4	(8)
Health plan services costs (6)		2,788.4			2,655.1			2,689.8			2,629.4
Government contracts costs (7)		637.6			658.3			687.8			718.9
(Loss) income from operations before income taxes		(51.0	)		118.1			26.1			54.0
Net (loss) income		(35.7	)(1)		76.7	(2)		18.5	(3)		35.5	(4)
Basic (loss) earnings per share	$	(0.33	)	$	0.71		$	0.17		$	0.34
Diluted (loss) earnings per share (5)	$	(0.33	)	$	0.71		$	0.17		$	0.34

(1) Includes $82.4 million charge related to litigation and regulatory-related matters and operations strategy which is aimed at achieving substantial reductions in G&A.

(2) Includes $13.0 million charge related to litigation and regulatory-related matters and operations strategy.

(3) Includes $17.2 million charge related to operations strategy and $14.6 million charge related to other-than-temporary impairment of investment securities.

(4) Includes $47.9 million charge related to litigation and regulatory-related matters and operations strategy.

(5) The sum of the quarterly amounts may not equal the year-to-date amounts due to rounding.

(6) Includes $41 million, $48 million, $20 million, and $29 million of health plan services premium revenues and $13 million, $11 million, $4 million, and $5 million of health plan services costs due to CMS Medicare risk factor adjustments for the quarters ended March 31, June 30, September 30, and December 31, 2008, respectively.

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HEALTH NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(7) Includes $(4) million, $4 million, $48 million, and $(31) million of government contracts revenue and $(6) million, $5 million, $62 million, and $(39) million of government contracts cost due to TRICARE estimated health care cost adjustments for the quarters ended March 31, June 30, September 30, and December 31, 2008, respectively.

(8) Includes $19 million of 2001-2002 California Medi-Cal premium rate adjustment in the quarter ended December 31, 2008.

(9) Includes $4.1 million, $(3.6) million, $1.0 million, and $5.4 million of changes in the interest rate swap valuations for the quarters ended March 31, June 30, September 30, and December 31, 2008, respectively.

2007

	March 31		June 30(1)		September 30			December 31
	(Dollars in millions, except per share data)
Total revenues (5), (6)	$	3,428.9	$	3,464.2	$	3,631.9		$	3,583.3
Health plan services costs (5)		2,341.1		2,381.3		2,631.2			2,409.3
Government contracts costs (6)		567.1		570.5		613.3			556.7
Income (loss) from operations before income taxes		143.1		148.7		(121.5	)(2)		188.6	(3)
Net income (loss)		88.6		92.0		(103.8	)		116.9
Basic earnings per share	$	0.79	$	0.82	$	(0.93	)	$	1.06
Diluted earnings per share (4)	$	0.77	$	0.80	$	(0.93	)	$	1.04

(1) Includes the impact of Guardian Transaction (see Note 3) effective May 31, 2007.

(2) Includes $296.8 million litigation and regulatory-related charge.

(3) Includes $10.0 million arbitration award.

(4) The sum of the quarterly amounts may not equal the year-to-date amounts due to rounding.

(5) Includes $27 million, $23 million, $27 million, and $18 million of health plan services premium revenues and $9 million, $6 million, $7 million, and $5 million of health plan services costs due to CMS Medicare risk factor adjustments for the quarters ended March 31, June 30, September 30, and December 31, 2007, respectively.

(6) Includes $(44) million, $(19) million, $10 million, and $(5) million of government contracts revenue and $(54) million, $(24) million, $(7) million, and $10 million of government contracts cost due to TRICARE estimated health care cost adjustments for the quarters ended March 31, June 30, September 30, and December 31, 2007, respectively.

F-54

SUPPLEMENTAL SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY ONLY)

HEALTH NET, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Amounts in thousands)

	Year Ended December 31,
	2008			2007			2006
REVENUES:
Net investment income	$	10,359		$	8,294		$	15,269
Other income		2,117			2,641			2,902
Administrative service fees		430,499			411,232			376,562
Total revenues		442,975			422,167			394,733
EXPENSES:
General and administrative		493,330			643,971			392,594
Depreciation and amortization		36,661			21,263			14,280
Interest		37,620			32,005			51,149
Debt refinancing charge		—			—			70,095
Litigation, severance and related benefit costs		—			—			37,093
Total expenses		567,611			697,239			565,211
Loss from operations before income taxes and equity in net income of subsidiaries		(124,636	)		(275,072	)		(170,478	)
Income tax benefit		44,159			126,615			53,221
Equity in net income of subsidiaries		175,480			342,154			446,570
Net income	$	95,003		$	193,697		$	329,313

See accompanying notes to condensed financial statements.

F-55

SUPPLEMENTAL SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY ONLY)

HEALTH NET, INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands)

	December 31, 2008			December 31, 2007
ASSETS
Current Assets:
Cash and cash equivalents	$	82,238		$	271,012
Investment—available for sale		69,806			—
Other assets		22,162			30,772
Deferred taxes		39,444			90,737
Due from subsidiaries		70,117			84,254
Total current assets		283,767			476,775
Property and equipment, net		151,760			125,598
Goodwill		394,783			394,784
Other intangible assets, net		4,323			4,948
Investment in subsidiaries		3,692,590			3,758,637
Other deferred taxes		26,253			—
Notes receivable due from subsidiaries		10,000			10,000
Other assets		69,732			67,734
Total Assets	$	4,633,208		$	4,838,476
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Due to subsidiaries	$	229,936		$	203,195
Other liabilities		118,871			338,179
Total current liabilities		348,807			541,374
Intercompany notes payable—long term		1,856,443			1,876,936
Long term debt		548,276			398,071
Long term deferred taxes		—			8,271
Other liabilities		127,556			138,242
Total Liabilities		2,881,082			2,962,894
Commitments and contingencies
Stockholders’ Equity:
Common stock		144			144
Additional paid-in capital		1,182,067			1,151,251
Treasury common stock, at cost		(1,367,319	)		(1,123,750	)
Retained earnings		1,944,100			1,849,097
Accumulated other comprehensive loss		(6,866	)		(1,160	)
Total Stockholders’ Equity		1,752,126			1,875,582
Total Liabilities and Stockholders’ Equity	$	4,633,208		$	4,838,476

See accompanying notes to condensed financial statements.

F-56

SUPPLEMENTAL SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY ONLY)

HEALTH NET, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Year Ended December 31,
	2008			2007			2006
NET CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES	$	(11,656	)	$	216,043		$	183,188
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investments		124,825			—			—
Purchases of investments		(194,631	)		—			—
Sales of property and equipment		—			34			393
Purchases of property and equipment		(62,198	)		(52,198	)		(55,033	)
Notes receivable due from subsidiaries		—			—			(10,000	)
Cash (paid) received related to the (acquisition) sale of businesses		—			(79,484	)		(70,394	)
Capital contributions returned to Parent		304,543			—			—
Capital contributions to subsidiaries		(240,630	)		(1,002,273	)		—
Sales (purchases) of restricted investments and other		—			(5,915	)		12,456
Net cash (used in) provided by investing activities		(68,091	)		(1,139,836	)		(122,578	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in checks outstanding, net of deposits		(2,240	)		2,240			(12,650	)
Excess tax benefit on share-based compensation		242			10,912			8,083
Net borrowings from subsidiaries		(20,493	)		1,241,551			105,299
Proceeds from exercise of stock options and employee stock purchases		6,636			72,622			70,294
Proceeds from issuance of notes and other financing arrangements		520,000			493,535			497,334
Repayment of debt under financing arrangements		(370,000	)		(600,000	)		(465,045	)
Repurchase of common stock		(243,172	)		(232,220	)		(253,502	)
Net cash (used in) provided by financing activities		(109,027	)		988,640			(50,187	)
Net (decrease) increase in cash and cash equivalents		(188,774	)		64,847			10,423
Cash and cash equivalents, beginning of period		271,012			206,165			195,742
Cash and cash equivalents, end of period	$	82,238		$	271,012		$	206,165
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	31,330		$	42,495		$	51,994
Income taxes paid		97,715			183,843			74,003

See accompanying notes to condensed financial statements.

F-57

SUPPLEMENTAL SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

(PARENT COMPANY ONLY)

HEALTH NET, INC.

NOTE TO CONDENSED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

Health Net, Inc.’s (HNT) investment in subsidiaries is stated at cost plus equity in undistributed earnings (losses) of subsidiaries. HNT’s share of net income (loss) of its unconsolidated subsidiaries is included in consolidated income using the equity method.

This condensed financial information of registrant (parent company only) should be read in conjunction with the consolidated financial statements of Health Net, Inc. and subsidiaries.

F-58

SUPPLEMENTAL SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

HEALTH NET, INC.

(Amounts in thousands)

	Balance at Beginning of Period		Charged to Costs and Expenses		Credited to Other Accounts (1)			Deductions		Balance at End of Period
2008:
Allowance for doubtful accounts:
Premiums receivable	$	6,724	$	20,332	$	(13,489	)	$	—	$	13,567
2007:
Allowance for doubtful accounts:
Premiums receivable	$	7,526	$	10,102	$	(10,904	)	$	—	$	6,724
2006:
Allowance for doubtful accounts:
Premiums receivable	$	7,204	$	6,512	$	(6,190	)	$	—	$	7,526

(1) Credited to premiums receivable on the Consolidated Balance Sheets.

F-59

EXHIBIT INDEX

Exhibit Number	Description
3.1	Sixth Amended and Restated Certificate of Incorporation of Health Net, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 28, 2006 and incorporated herein by reference).
3.2	Ninth Amended and Restated Bylaws of Health Net, Inc. (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
3.3	Amendment Number One to Ninth Amended and Restated Bylaws of Health Net, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 7, 2005 (File No. 1-12718) and incorporated herein by reference).
4.1	Specimen Common Stock Certificate (filed as Exhibit 8 to the Company’s Registration Statement on Form 8-A/A (Amendment No. 3) (File No. 1-12718) on July 26, 2004 and incorporated herein by reference).
4.2	Rights Agreement dated as of July 27, 2006, by and between Heath Net, Inc. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 28, 2006 (File No. 1-12718) and incorporated herein by reference).
4.3	Indenture, dated as of May 18, 2007, by and between Health Net, Inc. as issuer, and The Bank of New York Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference).
4.4	Officer’s Certificate, dated May 18, 2007, establishing the terms and form of the Company’s $300,000,000 aggregate principal amount of its 6.375% Senior Notes due 2017 (the “Notes”) (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 18, 2007 (File No. 1-12718) and incorporated herein by reference).
4.5	Officer’s Certificate, dated May 31, 2007, establishing the terms and form of the Company’s $100,000,000 aggregate principal amount of its 6.375% Senior Notes due 2017 (the “Additional Notes”) (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2007 (File No. 1-12718) and incorporated herein by reference).
†*10.1	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Karin Mayhew, a copy of which is filed herewith.
†*10.2	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Patricia T. Clarey, a copy of which is filed herewith.
†*10.3	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Jay M. Gellert, a copy of which is filed herewith.
†*10.4	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between James E. Woys and Health Net, Inc., a copy of which is filed herewith.
†*10.5	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Joseph C. Capezza and Health Net, Inc., a copy of which is filed herewith.
†*10.6	Amended and Restated Employment Letter Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Stephen D. Lynch, a copy of which is filed herewith.
†*10.7	Amended and Restated Employment Agreement, dated as of December 3, 2008, by and between Health Net, Inc. and Linda Tiano, a copy of which is filed herewith.

Exhibit Number	Description
†*10.8	Amended and Restated Employment Agreement, dated as of February 17, 2009, by and between Health Net, Inc. and John Sivori, a copy of which is filed herewith.
†*10.9	Amended and Restated Employment Agreement, dated as of February 17, 2009, by and between Health Net, Inc. and Steve Tough, a copy of which is filed herewith.
*10.10	Certain Compensation Arrangements With Respect to the Company’s Non-Employee Directors, as amended and restated on February 18, 2008 (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 1-12718) and incorporated herein by reference).
*10.11	Form of Nonqualified Stock Option Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.12	Form of Restricted Stock Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.13	Form of Restricted Stock Unit Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.14	Form of Performance Share Award Agreement utilized for eligible employees of Health Net, Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.15	Form of 2007 Performance Award Agreement for CEO of Health Net, Inc. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on February 28, 2007 (File No. 1-12718) and incorporated herein by reference).
*10.16	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the 2006 Long-Term Incentive Plan (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
*10.17	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.18	Form of Nonqualified Stock Option Agreement utilized for non-employee directors under the Health Net, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2009 (File No. 1-12718) and incorporated herein by reference).
†*10.19	Health Net, Inc. Deferred Compensation Plan, as amended and restated effective November 12, 2007, a copy of which is filed herewith.
*10.20	Amendment No. 1 to the Health Net, Inc. Deferred Compensation Plan dated December 3, 2008 (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
†*10.21	Health Net, Inc. Deferred Compensation Plan for Directors, as amended and restated effective November 12, 2007, a copy of which is filed herewith.
*10.22	Amendment No. 1 to the Health Net, Inc. Deferred Compensation Plan for Directors dated December 3, 2008 (filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).

Exhibit Number	Description
*10.23	Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement effective September 1, 1998 between Foundation Health Systems, Inc. and Union Bank of California (filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12718) and incorporated herein by reference).
*10.24	Amendment Number One to the Health Net, Inc. (formerly Foundation Health Systems, Inc.) Deferred Compensation Plan Trust Agreement between Health Net, Inc. and Union Bank of California, adopted January 1, 2001 (filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.25	Foundation Health Systems, Inc. Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.26	Amendment to Second Amended and Restated 1991 Stock Option Plan (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.27	Foundation Health Systems, Inc. 1997 Stock Option Plan (as amended and restated on May 4, 2000) (filed as Exhibit 10.45 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.28	Amendment to 1997 Stock Option Plan (filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-12718) and incorporated herein by reference).
*10.29	Second Amendment to 1997 Stock Option Plan (filed as Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (file No. 1-12718) and incorporated herein by reference).
*10.30	Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 16, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.31	Amendment No. 1 to Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 6, 2006 (File No. 1-12718) and incorporated herein by reference).
†*10.32	Amendment No. 2 to Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan dated January 14, 2009, a copy of which is filed herewith.
*10.33	Health Net, Inc. 2002 Stock Option Plan (filed as Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (file No. 1-12718) and incorporated herein by reference).
*10.34	Health Net, Inc. 2005 Long-Term Incentive Plan (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718) and incorporated herein by reference).
†*10.35	Amendment No. 1 to Health Net, Inc. 2005 Long-Term Incentive Plan dated December 4, 2008, a copy of which is filed herewith.
†*10.36	Amendment No. 2 to Health Net, Inc. 2005 Long-Term Incentive Plan dated January 14, 2009, a copy of which is filed herewith.

Exhibit Number	Description
*10.37	Health Net, Inc. 2006 Long-Term Incentive Plan (as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 15, 2006 and incorporated herein by reference).
†*10.38	Amendment No. 1 to Health Net, Inc. 2006 Long-Term Incentive Plan dated January 14, 2009, a copy of which is filed herewith.
*10.39	Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718) and incorporated herein by reference).
*10.40	Amendment One to the Health Net, Inc. 2006 Executive Officer Incentive Plan (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Commission on May 13, 2005 (File No. 1-12718 and incorporated herein by reference).
†*10.41	Amendment No. 2 to the Health Net, Inc. 2006 Executive Officer Incentive Plan dated November 12, 2008, a copy of which is filed herewith.
*10.42	Health Systems International, Inc. Second Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.31 to Registration Statement on Form S-4 (File No. 33-86524) on November 18, 1994 and incorporated herein by reference).
*10.43	Foundation Health Systems, Inc. Third Amended and Restated Non-Employee Director Stock Option Plan (filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-12718) and incorporated herein by reference).
*10.44	Health Net, Inc. Management Incentive Plan adopted December 2004 (filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
†*10.45	Amendment No. 1 to Health Net, Inc. Management Incentive Plan dated November 12, 2008, a copy of which is filed herewith.
†*10.46	Health Net, Inc. 401(k) Savings Plan as amended and restated effective January 1, 2008, a copy of which is filed herewith.
*10.47	Amended and Restated Health Net, Inc. Supplemental Executive Retirement Plan effective as of January 1, 2008 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
*10.48	Amended and Restated Deferred Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.99 to Foundation Health Corporation’s Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
*10.49	Amendment Number One Through Three to the Amended and Restated Deferred Compensation Plan of Foundation Health Corporation (filed as Exhibit 10.49 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 1-12718) and incorporated herein by reference).
*10.50	Foundation Health Corporation Executive Retiree Medical Plan (as amended and restated effective April 25, 1995) (filed as Exhibit 10.101 to Foundation Health Corporation’s Annual Report on Form 10-K for the year ended June 30, 1995 (File No. 1-10540) and incorporated herein by reference).
10.51	Participation Agreement dated as of December 19, 2007, by and among Health Net Funding, Inc., Health Net, Inc., Lodgemore Holdings, Inc. ING Bank, N.V. and Health Net Financing, L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 20, 2007 (File No. 1-12718) and incorporated herein by reference).

Exhibit Number	Description
10.52	First Amendment to Participation Agreement, dated as of April 29, 2008, by and among Health Net, Inc., Health Net Funding, Inc., Lodgemore Holdings, Inc., ING Bank, N.V. and Health Net Financing, LP (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-12718) and incorporated herein by reference).
†10.53	Omnibus Amendment to Participation Agreement and Put Option Agreement dated as of November 10, 2008 by and among Health Net Funding, Inc., Health Net, Inc., Lodgemore Holdings Inc., ING Bank N.V. and Health Net Financing, L.P., a copy of which is filed herewith.
10.54	Credit Agreement, dated as of June 25, 2007, by and among Health Net, Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank, N.A., as Syndication Agent, Citicorp USA, Inc., as Documentation Agent, the other lenders party thereto and Banc of America Securities LLC and J.P. Morgan Securities Inc., as Joint Lead Arrangers and as Co-Book Managers (filed as Exhibit 10 to the Company’s Current Report on Form 8-K filed with the SEC on June 27, 2007 (File No. 1-12718) and incorporated herein by reference).
10.55	First Amendment to Credit Agreement, dated as of April 29, 2008, by and among Health Net, Inc., Bank of America, N.A., as Administrative Agent and the other lenders party thereto (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (File No. 1-12718) and incorporated herein by reference).
^10.56	Master Agreement, dated August 19, 2008, between Health Net, Inc. and International Business Machines Corporation (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-12718) and incorporated herein by reference).
^10.57	Master Services Agreement, dated September 30, 2008, between Health Net, Inc. and Cognizant Technology Solutions U.S. Corporation (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-12718) and incorporated herein by reference).
*10.58	Form of Amended and Restated Indemnification Agreement for directors and executive officers of Health Net, Inc. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2008 (File No. 1-12718) and incorporated herein by reference).
10.59	First Amendment to Office Lease, dated May 14, 2001, by and between Health Net (a California corporation) and LNR Warner Center, LLC (filed as Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-12718) and incorporated herein by reference).
10.60	Lease Agreements, dated as of March 5, 2001, by and between Health Net, Inc. and Landhold, Inc. (filed as Exhibit 10.44 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-12718) and incorporated herein by reference).
†10.61	Amendment No. 1 to Lease Agreement, dated as of November 22, 2002, by and between Gold Pointe C, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.62	Amendment No. 2 to Lease Agreement, dated as of April 28, 2006, by and between McMorgan Institutional Real Estate Fund I, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.63	Amendment No. 1 to Lease Agreement, dated as of November 22, 2002, by and between Gold Pointe D, LLC, as successor-in-interest to Landhold, Inc., and Health Net, Inc., a copy of which is filed herewith.
†10.64	Standard Lease Agreement, dated as of July 24, 2006, by and between Panattoni Development Company and Health Net, Inc., a copy of which is filed herewith.
†10.65	First Amendment to Lease and Acknowledgment, dated as of February 8, 2007, by and between Panattoni Development Company and Health Net of California, Inc., a copy of which is filed herewith.

Exhibit Number	Description
†10.66	Office Building Lease, dated as of July 13, 1995, by and between Aerojet-General Corporation and Foundation Health, a copy of which is filed herewith.
†10.67	Addendums 1-12 to Office Building Lease, by and between Aerojet-General Corporation and Health Net Federal Services, LLC, a copy of which is filed herewith.
10.68	Office Lease Agreement, dated as of December 22, 2003, by and between Health Net, Inc. and Douglas Emmett Realty Fund 2000 L.P. (filed as Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 1-12718) and incorporated herein by reference).
10.69	Office Lease, dated September 20, 2000, by and among Health Net of California, Inc., DCA Homes, Inc. and Lennar Rolling Ridge, Inc. (filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-12718) and incorporated herein by reference).
10.70	Office Lease Agreement, dated August 18, 2000, by and between Physicians Health Services of Connecticut, Inc. (predecessor to Health Net of Connecticut, Inc.) and Beard Sawmill, LLC (filed as Exhibit 10.68 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).
10.71	First Amendment to Office Lease Agreement, dated December 23, 2002, by and between Health Net of Connecticut, Inc. and Beard Sawmill, LLC (filed as Exhibit 10.67 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).
10.72	Second Amendment to Office Lease Agreement, dated June 14, 2004, by and between Health Net of Connecticut, Inc. and Beard Sawmill, LLC (filed as Exhibit 10.66 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-12718) and incorporated herein by reference).
10.73	Absolute Net Lease, dated as of March 29, 2007, by and between HN Property Owner LLC and Health Net of the Northeast (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (File No. 1-12718) and incorporated herein by reference).
†11	Statement relative to computation of per share earnings of the Company (included in Note 2 to the consolidated financial statements included as part of this Annual Report on Form 10-K).
†21	Subsidiaries of Health Net, Inc., a copy of which is filed herewith.
†23	Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, a copy of which is filed herewith.
†31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.
†31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.
†32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, a copy of which is filed herewith.

* Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c) of Form 10-K.

† A copy of the exhibit is being filed with this Annual Report on Form 10-K.

^ This exhibit has been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

EX-10.1

EXHIBIT 10.1

KARIN D. MAYHEW

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of October 4, 2006 (the “Effective Date”) and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Karin D. Mayhew (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Amended and Restated Employment Agreement, dated October 4, 2006 (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to conform it to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title is Senior Vice President, Organization Effectiveness, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jay Gellert, President and Chief Executive Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities are to provide executive leadership and management of the corporate organization effectiveness functions, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid an annual base salary of $412,500, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities

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and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including termination, consistent with the needs of the business of the Company.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

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C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Executive will be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to Debbie Colia, Vice President, OE Consulting Services. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

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B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s General Counsel immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan, deferred compensation plan, and Supplemental Executive Retirement Plan (“SERP”). Under the SERP Executive is entitled to vest and accrue a retirement benefit of up to 50% of Executive’s Base Salary plus incentive compensation. This SERP benefit is offset with other retirement benefits provided by the Company to Executive and with 50% of Executive’s Social Security benefits. Executive has received credit for one additional year of service under the SERP upon Executive’s completion of five years of service with the Company. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

B. Required Insurance. Executive is covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive is entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive is eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 70% of Executive’s Base Salary as additional compensation according to the terms of the actual EIP documents. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the guidelines of the EIP.

E. Car Allowance. Executive is entitled to a car allowance of $1,000 per month.

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F. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

A. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

B. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of one times (1x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $412,500 and a stock price of $39.3033, which is the average closing price per share of the Company’s Common Stock as of December 31, 2005, Executive’s current stock ownership requirement is 10,495 (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1B of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units or shares of restricted stock of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock and shares of Common Stock gifted to others do not count toward the Target Amount. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

C. Stock Plan Amendments. In accordance with the Agreement dated January 1, 2001 between Executive and the Company, Executive previously consented, pursuant to Section 14 of the Company’s Second Amended and Restated 1991 Stock Option Plan (the “1991 Plan”), Section 6.2 of the Company’s 1997 Stock Option Plan, as amended (the “1997 Plan”) and Section 6.2 of the Company’s 1998 Stock Option Plan, as amended (the “1998 Plan,” and together with the 1991 Plan and the 1997 Plan, the “Plans”), that the Plans, as amended by the amendments to the Accelerated Provisions of the Plans set forth on Exhibit A attached hereto, shall govern and apply to all of Executive’s outstanding options under the Plans, regardless of the date such options were granted. To the extent the option agreements for Executive’s outstanding options under the Plans state anything to the contrary, Executive and the Company have agreed that such option agreement(s) are amended to be consistent with the foregoing sentence.

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8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) will be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through the date of termination, (b) any compensation previously deferred by Executive (together with any interest and earnings therein), (c) accrued but unused PTO, (d) reimbursable expenses incurred by Executive prior to the termination date and (e) amounts under any other compensatory plan, arrangement or program payment to which Executive may be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is terminated by the Company without “Cause” (as defined in Section 9(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, and (ii) the continuation of Executive’s medical, dental, vision, disability, life and accident benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s termination) (the “Benefits”) for Executive and Executive’s dependents for a period of twenty-four (24) months following the effective date of Executive’s termination.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

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(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is terminated by the Company without Cause or Executive terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of termination), then Executive will be entitled to receive, within thirty (30) days following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six (36) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, and (ii) the continuation of Executive’s Benefits for thirty-six (36) months following Executive’s date of termination, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

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(ii) A material reduction by the Company in Executive’s base compensation (i.e., Executive’s Base Salary and/or annual target bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 13 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of termination. In the event that Executive voluntarily terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9).

D. Termination by the Company for Cause. The Company may terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such termination, Executive will not be eligible to receive any of the payments set forth in Section 9(A) or 9(B) above. For purposes of this Agreement, a termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the knowing unauthorized disclosure of confidential information relating to the business of the Company or any of its affiliates, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is terminated at any time due to death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or

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Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of 12 months from the date of termination and (ii) a lump sum payment equal to one times (1x) Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, to be paid within thirty (30) days following Executive’s termination of employment. For purposes of this Agreement, a termination for “Disability” shall mean a termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Potential Tax Consequences for “Parachute” Payments.

A. Tax Gross-Up. Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for Executive’s benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 9 hereof (the “Severance Payments”), being hereinafter called (“Total Payments”) would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any successor provision enacted under the Code or any interest or penalties (to the extent permitted under Treasury Regulation Section 1.409A-3(i)(1)(v)) are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”) and (ii) the amount of such Total Payments subject to such Excise Tax exceeds $50,000, then the Company shall pay to Executive an additional cash payment (the “Tax Gross-Up”) so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of any Excise Taxes, Executive shall receive such net amount of Total Payments equal to the amount that Executive would have received if no Excise Tax was due. If the amount of Total Payments subject to the Excise Tax does not exceed $50,000, then the Tax-Gross-Up shall not be paid and the Severance Payments shall be reduced (if necessary, to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax.

B. Accounting Firm Determination. All determinations required to be made under this Section 11, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company’s independent auditor (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier

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time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 11, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, then the Accounting Firm shall furnish to Executive a written opinion that failure to report the Excise Tax on Executive’s applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made (“Underpayment”),or that amount of the Tax Gross-Up will exceed the amount required under Section 11(A) (“Overpayment”). In the event that the Accounting Firm shall determine that an Underpayment or Overpayment has occurred, either Executive or the Company, as applicable, shall promptly reimburse the other for the amount of such Underpayment or Overpayment that has occurred

C. Notifications. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to Total Payments.

D. Payment Calculator. At the time that payments are made under this Section 11, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Accounting Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

12. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization, health care management company, physician group, insurance company or similar entity that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

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B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 12 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 12 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 12 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

13. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 13, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of termination.

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C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

14. Section 409A of the Internal Revenue Code.

A. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”), and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 14 in order to comply with, or be exempt from, the requirements of Section 409A. Notwithstanding anything to the contrary herein, if Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of such policy, within the meaning of Section 409A(a)(2)(B)(i) of the Code), any amounts (or benefits) otherwise payable to or in respect of Executive pursuant to this Agreement shall be delayed until the earliest date permitted by Section 409A(a)(2) of the Code. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A of the Code including, if necessary, amending this Agreement based on further guidance issued by the Internal Revenue Service from time to time, provided that the Company shall not be required to assume any increased economic burden in connection with such amendment. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

B. Notwithstanding anything herein to the contrary, Executive shall not be considered to have terminated employment unless such termination constitutes a “separation from service” with respect to Executive, as defined in Treasury Regulation Section 1.409A-1(h).

C. All incentive bonus payments described in Section 6(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2  ¹/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

D. With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Sections 6(C) and 6(E) hereof, and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

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E. The Tax Gross-Up payment, if any, provided under Section 11 shall be provided in a manner that complies with Treasury Regulation Section 1.409A-3(i)(1)(v), including that such Tax Gross-Up payment shall be paid by the end of Executive’s taxable year next following Executive’s taxable year in which Executive remits the related taxes to the relevant taxing authority. To the extent required by Section 409A, any Tax Gross-Up payment made with respect to any payment that is non-exempt non-qualified deferred compensation (within the meaning of Section 409A) which is subject to Section 409A shall be payable only upon Executive’s “separation from service” (as defined above) and subject to Section 14(A).

15. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

16. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

17. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein, including, but not limited to, the Prior Agreement. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated December 17, 2004 between Executive and the Company.

18. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

19. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel

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If to the Executive: Karin D. Mayhew

20. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

21. Survival and Enforcement. Sections 3, 8, 9, 11, 12 and 13 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 12 and 13 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

22. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Karin D. Mayhew	By:	/s/ Jay M. Gellert
Name:	Karin D. Mayhew	Name:	Jay M. Gellert
Title:	Senior Vice President, Organization Effectiveness	Title:	President and Chief Executive Officer

cc:	Linda V. Tiano
	Debbie J. Colia/Karin Mayhew Personnel File

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EXHIBIT A

Amendment to Second Amended and Restated 1991 Stock Option Plan

The Health Net, Inc. Second Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) is hereby amended to delete paragraph 8 of the 1991 Plan in its entirety and to replace it with the following new paragraph 8:

“8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES.

Notwithstanding any contrary waiting period or installment period in any Stock Option Agreement or any Restriction Period in any Restricted Shares Agreement or in the Restated 1991 Plan, each outstanding Option granted under the Restated 1991 Plan shall, except as otherwise provided in the applicable Stock Option Agreement, become exercisable in full for the aggregate number of shares covered thereby, and each Restricted Share, except as otherwise provided in the Restricted Shares Agreement, shall vest unconditionally, in the event (i) the Company shall consummate (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company, or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (A) shall purchase any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, and (B) shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities), or (iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iv) there occurs such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be an accelerating event under this paragraph 8. Any transaction referred to in the foregoing clause (i) is herein called a Consummated Transaction, any purchase pursuant to a tender offer or exchange offer or otherwise as described in the foregoing clause (ii) is herein called a Control Purchase, the cessation of individuals constituting a majority of the Board as described in the foregoing clause (iii) is herein called a Board Change and such other transactions as described in the foregoing clause (iv) is herein called an “Other Accelerating Event”. The Stock Option Agreement and Restricted Shares Agreement evidencing Options or Restricted Shares granted under the Restated 1991 Plan may contain such provisions limiting the acceleration of the exercisability of Options and the acceleration of the vesting of Restricted Shares as provided in this paragraph 8 as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the Holder from the Company.”

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The 1991 Plan is hereby further amended to delete all references to “Approved Transaction” in the 1991 Plan and to replace all such references with “Consummated Transaction.”

Amendment to 1997 Stock Option Plan

The Health Net, Inc. 1997 Stock Option Plan (the “1997 Plan”) is hereby amended to delete subsection 6.8(b) of the 1997 Plan in its entirety and to replace it with the following new subsection 6.8(b):

“(b) Definition of Change in Control. A “Change in Control” shall mean:

(i) Consummated Transaction. Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

The Agreement evidencing options or Restricted Stock granted under the Plan may contain provisions limiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to

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ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company.”

Amendment to the 1998 Stock Option Plan

The Health Net, Inc. 1998 Stock Option Plan, as amended (the “1998 Plan”), is hereby further amended to delete subsection 6.8(b) of the 1998 Plan in its entirety and to replace it with the following new subsection 6.8(b):

“(b) Definition of Change in Control. A “Change in Control” shall mean:

(i) Consummated Transaction. Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

The Agreement evidencing Options or Restricted Stock granted under the Plan may contain such provisions limiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company.”

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EXHIBIT B

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE ] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and

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conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

5. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

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6. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

7. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

8. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

9. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit,

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disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

10. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

11. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

12. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

13. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

14. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein.

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There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

15. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

16. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

17. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: General Counsel.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.2

EXHIBIT 10.2

PATRICIA T. CLAREY

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of May 23, 2008 (the “Effective Date”) and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Patricia T. Clarey (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Amended and Restated Employment Agreement, dated March 23, 2008 (the “Prior Agreement”);

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to conform it to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title will be Senior Vice President and Chief Regulatory and External Relations Officer, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jay Gellert, President and Chief Executive Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities include (i) responsibility for policy and execution of the Company’s regulatory, public, communications and legislative activities including Medicare and Medicaid to insure consistency of message, approach, execution and compliance and (ii) provision of staff support to President and Chief Executive Officer in all legislative, congressional, industry group, community activities and strategic Company initiatives, as assigned, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid a base salary at the annual rate of $397,254, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

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C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company.

For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” shall have the meaning ascribed to such term in Treasury Regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), from time to time and other publications of the Internal Revenue Service published in the Internal Revenue Bulletin from time to time.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation,

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“Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

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5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 70% of Executive’s Base Salary as additional compensation according to the terms of the EIP. The bonus payment will range

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from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EIP.

E. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

A. Initial Equity Grant. As of the Effective Date, Executive will be granted 10,000 performance shares (the “Performance Shares”) which will vest and become non-forfeitable in accordance with the terms of the performance share agreement executed in connection with such grant. The Performance Shares granted to Executive will be granted under one of the Company’s Long-Term Incentive Plans in accordance with and subject to the terms and conditions set forth in such plan and the agreement executed in connection with such grant.

B. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

C. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of one times (1x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $397,254 and a stock price of $52.69, which is the average closing price per share of the Company’s Common Stock as of December 31, 2007, Executive’s current stock ownership requirement is 7,539 (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1B of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units, shares of restricted stock or performance shares of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock, unvested performance shares and shares of Common Stock gifted to others do not count toward the Target Amount. Under the Executive Stock Ownership Policy, Executive will have until four years from the Effective Date to comply with the Stock Ownership Requirement.

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The Committee expects that Executive will make reasonable progress toward Executive’s Stock Ownership Requirement. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 10(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of six (6) months following the effective date of Executive’s Termination, and (iii) the continuation, under COBRA, of Executive’s Benefits for Executive and Executive’s dependents for a period of eighteen (18) months, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined

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voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is Terminated by the Company without Cause or Executive Terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of Termination), then Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such thirty (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six (36) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s Benefits for eighteen (18) months following Executive’s date of Termination, and (iii) and after expiration of such eighteen (18) month Benefits continuation period, the continuation, under COBRA, of Benefits for Executive and Executive’s dependents for a period of eighteen (18) months following the effective date of Executive’s Termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary Termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

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For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the Termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

(ii) A material reduction by the Company in Executive’s base compensation (i.e., Base Salary and/or target annual bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 13 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 10).

D. Termination by the Company for Cause. The Company may Terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 10(A) or 10(B) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of

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Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve (12) months from the date of Termination and (ii) a lump sum payment equal to one times (1x) Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

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B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 13 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 13 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 13 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

12. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 14, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators,

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successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

13. Section 409A of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 15 in order to comply with, or be exempt from, the requirements of Section 409A.

A. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of any policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Termination pursuant to this Agreement shall be delayed until the earliest date upon which such amounts may be paid without being subject to taxation under Section 409A. Any amount, the payment of benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

B. All incentive bonus payments described in Section 7(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2-1/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

C. With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Sections 6(C) and 6(E) hereof, and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

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14. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

15. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

16. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated as of the Effective Date between Executive and the Company.

17. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

18. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	Patricia T. Clarey

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19. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

20. Survival and Enforcement. Sections 3, 8, 9, 11 and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 11 and 12 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

21. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Patricia T. Clarey	By:	Jay M. Gellert
Name:	Patricia T. Clarey	Name:	Jay M. Gellert
Title:	SVP, Chief Regulatory & External Relations Officer	Title:	President and Chief Executive Officer
cc:	Linda V. Tiano
	Karin Mayhew
	Debbie J. Colia/P. Clarey Personnel File

EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE ] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

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5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract,

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law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s

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relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

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16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.3

EXHIBIT 10.3

Jay M. Gellert

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of February 23, 2007 (the “Effective Date”) and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Jay M. Gellert (“Executive”).

RECITALS

WHEREAS, the Company desires to continue Executive’s employment in the capacity as President and Chief Executive Officer; and

WHEREAS, the Company and Executive desire to amend and restate the Agreement to satisfy the requirements of Section 409A of the Internal Revenue Code of 1986, as amended and the Treasury Regulations and Internal Revenue Service guidance thereunder (“Section 409A”); and

WHEREAS, this Agreement is intended to amend and restate in its entirety the Letter Agreement, dated August 22, 1997, the Letter Agreement dated March 2, 2000, the Agreement dated January 1, 2001, the Letter Agreement dated October 13, 2002, and the Agreement dated February 23, 2007 by and between Executive and the Company, relating to Executive’s employment with the Company (collectively, the “Prior Employment Agreement”).

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title is President and Chief Executive Officer, but may be changed at the discretion of the Board of Directors of the Company (the “Board”) to a title that reflects a similarly situated senior executive position. Executive shall report directly to the Board, but Executive’s reporting relationship may be changed from time to time at the discretion of the Board. Executive’s duties and responsibilities are to provide executive leadership and management of the Company, but the Board reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid an annual base salary of $1,200,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked, but the Board may change Executive’s compensation from time-to-time.

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Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), Executive’s Base Salary will be reviewed annually. Any adjustment to Executive’s compensation must be made with the approval of the Committee and with the ratification of the independent directors of the Board.

C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Board may make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any salary adjustment, transfer or disciplinary action, up to and including termination, consistent with the needs of the business of the Company.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

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B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Executive will be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that

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while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Board immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive is eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off, which shall not be less than 22 days per calendar year (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company's 401(k) plan, tuition reimbursement plan, deferred compensation plan and Supplemental Executive Retirement Plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

B. Required Insurance. Executive is covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive is entitled to be reimbursed up to the amount of $5,000 (net of taxes) per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive is eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 125% of Executive’s Base Salary as additional compensation according to the terms of the actual EIP documents. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the guidelines of the EIP.

E. Housing/Relocation. The Company will provide Executive, at its expense, with housing, including the use of utilities, in Woodland Hills, California, at a reasonable monthly cost. Weekend trips to Executive’s residence in San Francisco will be at the Company’s expense. Any modification to the housing provided Executive in Woodland Hills, California,

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must be approved in advance by the Committee. In addition, the Committee may review and modify such housing arrangements in its sole discretion from time to time. Executive may, at Executive’s option, decide to relocate to Southern California. Should Executive decide to relocate, the Company will provide Executive with certain benefits to assist Executive in relocating to Woodland Hills, including: (i) payment for all packing, shipping and unloading of all Executive’s reasonable household items upon Executive’s move and up to 60 days storage of such items; and (ii) assistance with the sale of Executive’s current home to include payment of up to a 7% real estate commission, and assistance in the purchase of a new home to include payment of up to two points with respect to financing of such home and Federal and state tax gross-ups on the above items, as allowed by law.

F. Expenses. Subject to and in accordance with the Company's written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

G. Company Car. The Company will provide Executive with the use of an automobile, the type and cost of which must be approved by the Committee. All expenses associated with Executive’s personal use of such automobile will be deemed to be imputed income to Executive and will be “grossed-up” for income tax purposes at the applicable federal and state income tax level.

H. Miscellaneous. Executive is entitled to a (i) Company provided cell phone and the Company will pay for Executive’s usage of such phone (ii) fax machine to be installed in Executive’s home and (iii) reimbursement of the cost of the annual physical exam as set forth in Section 4 above.

7. Equity Grants.

A. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee and with the approval of the independent directors of the Board.

B. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of five times (5x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company's Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $1,200,000 and a stock price of $45.3450, which is the average closing price per share of the Company’s Common Stock as of December 31, 2006, Executive’s current stock ownership requirement is 132,319 (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average

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closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1B of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units or shares of restricted stock of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock and shares of Common Stock gifted to others do not count toward the Target Amount.

Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

C. Stock Plan Amendments. In accordance with the Agreement dated January 1, 2001 between Executive and the Company, Executive previously consented, pursuant to Section 14 of the Company’s Second Amended and Restated 1991 Stock Option Plan (the “1991 Plan”), Section 6.2 of the Company’s 1997 Stock Option Plan, as amended (the “1997 Plan”) and Section 6.2 of the Company’s 1998 Stock Option Plan, as amended (the “1998 Plan,” and together with the 1991 Plan and the 1997 Plan, the “Plans”), that the Plans, as amended by the amendments to the Accelerated Provisions of the Plans set forth on Exhibit A attached hereto, shall govern and apply to all of Executive’s outstanding options under the Plans, regardless of the date such options were granted. To the extent the option agreements for Executive’s outstanding options under the Plans state anything to the contrary, Executive and the Company have agreed that such option agreement(s) are amended to be consistent with the foregoing sentence.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without cause. Upon termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) will be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of termination, except as provided in Section 9 below, (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through the date of termination, (b) any compensation previously deferred by Executive (together with any interest and earnings therein), (c) accrued but unused PTO, (d) reimbursable expenses incurred by Executive prior to the termination date and (e) amounts under any other compensatory plan, arrangement or program payment to which Executive may be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is terminated by the Company without Cause at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, beginning at the end of the first month following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit B, which is incorporated into this Agreement by reference, a lump sum cash payment equal to $6,000,000.

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For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) A 51% change in beneficial ownership as a result of a single transaction of all capital stock of Health Net, Inc.;

(ii) A change in the majority of outside directors of the Health Net, Inc. Board of Directors over two years, which is unapproved by a majority of Health Net, Inc.’s current Board of Directors;

(iii) The sale of substantially all of Health Net, Inc.’s assets to an unrelated third party; or

(iv) The liquidation or dissolution of Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is terminated by the Company without cause or Executive terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of termination), then Executive will be entitled to receive, beginning at the end of the first month following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit B, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to $6,000,000, and (ii) Executive’s options that vested prior to the date of Executive’s termination will continue to remain exercisable for the shorter of, (x) a period of two years following Executive’s date of termination, or (y) the options’ general termination date as set forth in the applicable agreement evidencing the award of such options.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A material reduction in the scope of Executive’s duties, responsibilities, salary or status with the Company; or

(ii) A relocation of Executive’s office outside of California;

provided, however, that Executive must provide notice to the Company of the existence of the condition described in Section 9(B)(i) or (ii) within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the

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effective date of termination. In the event that Executive voluntarily terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9).

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Potential Tax Consequences for “Parachute” Payments.

A. Tax Gross-Up. Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for Executive’s benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 9 hereof (the “Severance Payments”), being hereinafter called (“Total Payments”) would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any successor provision enacted under the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”) and (ii) the amount of such Total Payments subject to such Excise Tax exceeds $50,000, then the Company shall pay to Executive an additional cash payment (the “Tax Gross-Up”) so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of any Excise Taxes, Executive shall receive such net amount of Total Payments equal to the amount that Executive would have received if no Excise Tax was due. If the amount of Total Payments subject to the Excise Tax does not exceed $50,000, then the Tax-Gross-Up shall not be paid and the Severance Payments shall be reduced (if necessary, to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax.

B. Accounting Firm Determination. All determinations required to be made under this Section 11, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company’s independent auditor (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 11, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, then the Accounting Firm shall furnish to Executive a written opinion that failure to report the Excise Tax on Executive’s applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the

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Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made (“Underpayment”), or that amount of the Tax Gross-Up will exceed the amount required under Section 11(A) (“Overpayment”). In the event that the Accounting Firm shall determine that an Underpayment or Overpayment has occurred, either Executive or the Company, as applicable, shall promptly reimburse the other for the amount of such Underpayment or Overpayment that has occurred.

C. Notifications. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to Total Payments.

D. Payment Calculator. At the time that payments are made under this Section 11, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Accounting Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

12. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during the twelve (12)-month period following a termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement (the “Restricted Period”), Executive shall not undertake any employment or activity with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), which employment or activity could call upon Executive to reveal, to make judgments on or otherwise use any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to Kaiser and its affiliates, and any publicly traded or mutual health maintenance organization, healthcare management company, physician group, insurance company or similar entity that provides managed health care or related services similar to those provided by the Company or any of its affiliates in the Market Area.

B. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 12 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

C. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be

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reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 12 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 12 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

13. Arbitration. Should disagreements arise with respect to this Agreement, Executive and the Company agree to submit the matter to binding arbitration. As provided in Section 12 of this Agreement, the Company shall also have the right to pursue an equitable remedy pursuant to the applicable laws of Delaware with respect to the non-compete, non-solicitation and confidentiality restrictions set forth above. The prevailing party in either the arbitration and/or the equitable remedy action shall recover all attorney’s fees and costs incurred.

14. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 14, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

15. Section 409A of the Internal Revenue Code.

A. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the regulations and guidance promulgated thereunder. All benefits and compensation payable under this Agreement shall be provided in a manner that complies with, or is exempt from, Section 409A.

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B. Executive shall be considered to have terminated employment with the Company only when Executive incurs a “separation from service” with the Company, as defined in Treasury Regulation Section 1.409A-1(h).

C. With respect to the Company’s reimbursement obligations or provision of in-kind benefits under Sections 6(C), 6(E) and 6(H) hereof, or such similar reimbursements or in-kind benefits payable under this Agreement (including the provision of Benefits to Executive): (i) in no event shall any such reimbursements or in-kind benefits be paid or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. Any Tax Gross-Up to be paid by the Company under Section 11 shall be made by the end of Executive’s taxable year next following Executive’s taxable year in which Executive remits the related taxes. The Tax Gross-Up shall be paid in a manner that complies with Treasury Regulation Section 1.409A-(3)(i)(1)(v). Interest and penalties with respect to any Tax Gross-Up shall be payable only to the extent permitted under Treasury Regulation Section 1.409A-3(i)(1)(v). To the extent required by Section 409A, any Tax Gross-Up made with respect to any payment that is non-exempt “nonqualified deferred compensation” (within the meaning of Section 409A) which is subject to Section 409A shall be payable only upon Executive’s Separation from Service and subject to Section 15(E).

E. Notwithstanding anything to the contrary herein, if Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of such policy, within the meaning of Section 409A(a)(2)(B)(i)), any non-exempt “nonqualified deferred compensation” amounts (or benefits) that are subject to Section 409A and payable to or in respect of Executive pursuant to this Agreement shall be delayed until the earliest date permitted by Section 409A(a)(2) of the Code. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A of the Code including, if necessary, amending this Agreement based on further guidance issued by the Internal Revenue Service from time to time, provided that the Company shall not be required to assume any increased economic burden in connection with such amendment. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

16. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

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17. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

18. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein, including, but not limited to, the Prior Employment Agreement. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the General Counsel of the Company and approved by the Board . The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated December 17, 2004 between Executive and the Company.

19. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

20. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	Jay M. Gellert

21. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

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22. Survival and Enforcement. Sections 3, 8, 9, 11, 12, 13 and 14 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 12 and 14 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

23. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Jay M. Gellert	By:	/s/ Karin Mayhew
Name:	Jay M. Gellert	Name:	Karin Mayhew
Title:	President and Chief Executive Officer	Title:	Senior Vice President Organization Effectiveness

cc:	Linda V. Tiano
	Karin Mayhew
	Debbie J. Colia/Jay M. Gellert Personnel File

EXHIBIT A

Amendment to Second Amended and Restated 1991 Stock Option Plan

The Health Net, Inc. Second Amended and Restated 1991 Stock Option Plan (the “1991 Plan”) is hereby amended to delete paragraph 8 of the 1991 Plan in its entirety and to replace it with the following new paragraph 8:

“8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES.

Notwithstanding any contrary waiting period or installment period in any Stock Option Agreement or any Restriction Period in any Restricted Shares Agreement or in the Restated 1991 Plan, each outstanding Option granted under the Restated 1991 Plan shall, except as otherwise provided in the applicable Stock Option Agreement, become exercisable in full for the aggregate number of shares covered thereby, and each Restricted Share, except as otherwise provided in the Restricted Shares Agreement, shall vest unconditionally, in the event (i) the Company shall consummate (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company, or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (A) shall purchase any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, and (B) shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities), or (iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iv) there occurs such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be an accelerating event under this paragraph 8. Any transaction referred to in the foregoing clause (i) is herein called a Consummated Transaction, any purchase pursuant to a tender offer or exchange offer or otherwise as described in the foregoing clause (ii) is herein called a Control Purchase, the cessation of individuals constituting a majority of the Board as described in the foregoing clause (iii) is herein called a Board Change and such other transactions as described in the foregoing clause (iv) is herein called an “Other Accelerating Event”. The Stock Option Agreement and Restricted Shares Agreement evidencing Options or Restricted Shares granted under the Restated 1991 Plan may contain such provisions limiting the acceleration of the exercisability of Options and the acceleration of the vesting of Restricted Shares as provided in this

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paragraph 8 as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the Holder from the Company.”

The 1991 Plan is hereby further amended to delete all references to “Approved Transaction” in the 1991 Plan and to replace all such references with “Consummated Transaction.”

Amendment to 1997 Stock Option Plan

The Health Net, Inc. 1997 Stock Option Plan (the “1997 Plan”) is hereby amended to delete subsection 6.8(b) of the 1997 Plan in its entirety and to replace it with the following new subsection 6.8(b):

“(b) Definition of Change in Control. A “Change in Control” shall mean:

(i) Consummated Transaction. Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

The Agreement evidencing options or Restricted Stock granted under the Plan may contain provisions limiting the acceleration of the exercisability of options and the acceleration of the

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vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company.”

Amendment to the 1998 Stock Option Plan

The Health Net, Inc. 1998 Stock Option Plan, as amended (the “1998 Plan”), is hereby further amended to delete subsection 6.8(b) of the 1998 Plan in its entirety and to replace it with the following new subsection 6.8(b):

“(b) Definition of Change in Control. A “Change in Control” shall mean:

(i) Consummated Transaction. Consummation of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in the composition of the Board that the Board determines to be a Change in Control for purposes of the Plan.

The Agreement evidencing Options or Restricted Stock granted under the Plan may contain such provisions limiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock as provided in this Section as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock, cash or other property received by the holder from the Company.”

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EXHIBIT B

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

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5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

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7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) [a period of one (1) year] [the six (6) month period] for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers,

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enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any

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representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.4

EXHIBIT 10.4

JAMES E. WOYS

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of November 30, 2007 (the “Effective Date”) and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and James E. Woys (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Amended and Restated Employment Agreement, dated January 24, 2007 (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to conform it to the requirements of Section 409A of the Code and the Treasury Regulation and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title is Executive Vice President and Chief Operating Officer, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jay Gellert, President and Chief Executive Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities include executive leadership of claims, customer service, information technology, health care analytics and pharmacy, and oversight of the Federal Services and MHN business units, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid a base salary at the annual rate of $700,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Executive will not be eligible for a merit increase in 2008. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

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C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company.

    For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” shall have the meaning ascribed to such term in Treasury Regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), from time to time and other publications of the Internal Revenue Service published in the Internal Revenue Bulletin from time to time.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation

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marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or

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entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan, deferred compensation plan and Supplemental Executive Retirement Plan (“SERP”). Executive is 100% vested in the SERP based on his current tenure with the Company. This benefit is designed to provide participants 50% of their base and cash bonus compensation calculated as an average from their last five years of employment with the Company. This SERP benefit is then reduced by Executive’s social security and 401(k) benefits. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Car Allowance. Executive will be entitled to a car allowance of $1,000 per month.

E. Corporate Housing. From January 1, 2008 through June 30, 2008, in lieu of hotel accommodations, the Company will provide Executive with a furnished corporate

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apartment in Woodland Hills, CA. All expenses associated with such corporate housing will be deemed to be imputed income to Executive and will be “grossed-up” for income tax purposes at the applicable federal and state income tax level.

F. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 100% of Executive’s Base Salary as additional compensation according to the terms of the EIP. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EIP.

G. Relocation Benefits. Executive’s relocation will be covered under the Company’s Relocation Policy currently in effect. All relocation expenses not deductible under IRS regulations, except the miscellaneous spending allowance, will be “grossed up” for income tax purposes at the supplemental federal tax rate and applicable state tax liability.

H. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

A. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

B. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of three times (3x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $700,000 and a stock price of $45.34, which is the average closing price per share of the Company’s Common Stock as of December 31, 2006, Executive’s current stock ownership requirement is 46,316 shares (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1(B) of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted

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stock units, shares of restricted stock or performance shares of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock, unvested performance shares and shares of Common Stock gifted to others do not count toward the Target Amount. Under the Executive Stock Ownership Policy, Executive will have until four years from the Effective Date to comply with the Stock Ownership Requirement.

The Committee expects that Executive will make reasonable progress toward Executive’s Stock Ownership Requirement. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 9(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of six months following the effective date of Executive’s Termination, and (iii) the continuation, under COBRA, of Executive’s Benefits for Executive and Executive’s dependents for a period of eighteen months, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

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(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is Terminated by the Company without Cause or Executive Terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of Termination), then Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such thirty (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s Benefits for eighteen months following Executive’s date of Termination, and (iii) and after expiration of such eighteen months Benefits continuation period, the continuation, under COBRA, of Benefits for Executive and

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Executive’s dependents for a period of eighteen months following the effective date of Executive’s Termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary Termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the Termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

(ii) A material reduction by the Company in Executive’s base compensation (i.e., Executive’s Base Salary and/or annual target bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 12 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9).

D. Termination by the Company for Cause. The Company may Terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 9(A) or 9(B) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of

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Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve months from the date of Termination and (ii) a lump sum payment equal to one times Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Potential Tax Consequences for “Parachute” Payments.

A. Tax Gross-Up. Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for Executive’s benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 9 hereof (the “Severance Payments”), being hereinafter called (“Total Payments”) would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Code, or any successor provision enacted under the Code or any interest or penalties (to the extent permitted under Treasury Regulation Section 1.409A-3(i)(1)(v)) are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”) and (ii) the amount of such Total Payments subject

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to such Excise Tax exceeds $50,000, then the Company shall pay to Executive an additional cash payment (the “Tax Gross-Up”) so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of any Excise Taxes, Executive shall receive such net amount of Total Payments equal to the amount that Executive would have received if no Excise Tax was due. If the amount of Total Payments subject to the Excise Tax does not exceed $50,000, then the Tax-Gross-Up shall not be paid and the Severance Payments shall be reduced (if necessary, to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax.

B. Accounting Firm Determination. All determinations required to be made under this Section 11, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company’s independent auditor (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 11, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firm’s determination, but in no event later than the end of Executive’s taxable year next following Executive’s taxable year in which Executive pays the Excise Tax. If the Accounting Firm determines that no Excise Tax is payable by Executive, then the Accounting Firm shall furnish to Executive a written opinion that failure to report the Excise Tax on Executive’s applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made (“Underpayment”), or that amount of the Tax Gross-Up will exceed the amount required under Section 11(A) (“Overpayment”). In the event that the Accounting Firm shall determine that an Underpayment or Overpayment has occurred, either Executive or the Company, as applicable, shall promptly reimburse the other for the amount of such Underpayment or Overpayment that has occurred.

C. Notifications. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to Total Payments.

D. Payment Calculator. At the time that payments are made under this Section 11, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Accounting Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

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12. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 12 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 12 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 12 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

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13. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 13, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

14. Section 409A of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 14 in order to comply with, or be exempt from, the requirements of Section 409A.

A. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Termination pursuant to this Agreement shall be delayed until the earliest date upon which such amounts may be paid without being subject to taxation under Section 409A. Any amount, the payment of benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

B. All incentive bonus payments described in Section 6(F) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2- ¹/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

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C. With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Sections 6(C), 6(D), 6(E) and 6(G) hereof, and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. The Tax Gross-Up payment, if any, provided under Section 12 and the tax gross-up, if any, provided under Section 6(E) shall be provided in a manner that complies with Treasury Regulation Section 1.409A-3(i)(1)(v), including that such gross-up payments shall be paid by the end of Executive’s taxable year next following Executive’s taxable year in which Executive remits the related taxes to the relevant taxing authority. To the extent required by Section 409A, any tax gross-up payment made with respect to any payment that is non-exempt non-qualified deferred compensation (within the meaning of Section 409A) which is subject to Section 409A shall be payable only upon Executive’s Separation from Service and subject to Section 14(E).

E. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

15. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

16. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

17. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the

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parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated December 17, 2004 between Executive and the Company.

18. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

19. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	James E. Woys

20. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

21. Survival and Enforcement. Sections 3, 8, 9, 11, 12 and 13 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 12 and 13 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

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22. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ James E. Woys	By:	/s/ Jay Gellert
Name:	James E. Woys	Name:	Jay Gellert
Title:	Executive Vice President and Chief Operating Officer	Title:	President and Chief Executive Officer
cc:	Linda V. Tiano
	Karin Mayhew
	Debbie J. Colia/James E. Woys Personnel File

EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

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5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract,

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law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s

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relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

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16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.5

EXHIBIT 10.5

JOSEPH C. CAPEZZA

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of October 9, 2007 and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Joseph C. Capezza (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Employment Agreement dated October 9, 2007 (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to conform it to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s employment with the Company shall commence on November 1, 2007 (the “Effective Date”) and Executive’s title will be Executive Vice President & Chief Financial Officer. Executive shall report directly to the President and Chief Executive Officer of the Company. Executive’s duties and responsibilities are to provide executive leadership, infrastructure, processes and management of the Company’s Finance organization, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid a base salary at the annual rate of $550,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any such adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

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C. Engagement Bonus. Executive will receive an engagement bonus in the amount of $350,000 payable within thirty (30) days of the Effective Date. Executive must be actively employed and on the Company payroll at the time the bonus is paid. If Executive voluntarily Terminates (as defined below) employment with the Company or if the Company Terminates (as defined below) Executive’s employment for Cause within the first twenty-four (24) months of employment, Executive will be required to repay a prorated portion of the engagement bonus to the Company based on the number of months Executive has been employed by the Company as of the date of such Termination.

D. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company; provided, however, that those decisions do not violate or alter any of the terms of this Agreement.

For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” shall have the meaning ascribed to such term in Treasury Regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), from time to time and other publications of the Internal Revenue Service published in the Internal Revenue Bulletin from time to time.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Except as may be required of the Executive by law, Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive

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provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment.

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4. Drug Screening; Background Check; Physical Exam.

A. Drug Screening. The Company reserves the right to terminate Executive’s employment in the event Executive does not pass the Company’s drug screening test for illegal drugs.

B. Background Check. The Company reserves the right to terminate Executive’s employment in the event the background check conducted by the Company on Executive is not satisfactory to the Company in the Company’s sole discretion. The Company shall notify Executive of the results of the background check within five (5) business days of the receipt of the same.

C. Physical Exam. Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Immigration Documentation. Executive’s employment is contingent on Executive’s ability to prove Executive’s identity and authorization to work in the United States for the Company. Executive must comply with the Immigration and Naturalization Service’s employment verification requirements.

6. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

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7. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law; provided, that any such modifications, terminations and amendments are directed at rights granted to a class of employees generally and not directed to the Executive or any specific rights granted to Executive in this Agreement.

B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 80% of Executive’s Base Salary as additional compensation according to the terms of the EIP. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EIP. For 2007, Executive’s incentive bonus will be guaranteed at $440,000 and shall be paid on or before March 15, 2008.

E. Relocation Benefits. Executive’s relocation will be covered under the Company’s Relocation Policy currently in effect. All relocation expenses not deductible under IRS regulations, except the miscellaneous spending allowance, will be “grossed up” for income tax purposes at the supplemental federal tax rate and applicable state tax rate. In the event Executive is Terminated without Cause by the Company within the first twenty-four (24) months of employment and Executive is unable to secure new employment with a relocation benefit within thirty (30) days of the date of such Termination, the Company shall provide Executive relocation services in an amount not to exceed $80,000 (the “Move-Back Benefit”). Executive acknowledges and agrees that any amounts paid to Executive as part of the Move Back Benefit shall be imputed income to the Executive and Executive shall be solely responsible for any income taxes resulting there from.

F. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

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8. Equity Grants.

A. Initial Equity Grant. As of Effective Date, Executive will be granted 40,000 restricted stock units of the Company’s Common Stock (the “RSUs”), which will vest and become non-forfeitable in accordance with the terms of the restricted stock unit agreement to be entered into between the Company and Executive on the Effective Date. The RSUs granted to Executive will be granted under one of the Company’s Long-Term Incentive Plans in accordance with and subject to the terms and conditions set forth in such plan and the restricted stock unit agreement executed in connection with such grant.

In addition, as of the Effective Date, Executive will be granted 40,000 performance shares (the “Performance Shares”) which will vest and become non-forfeitable in accordance with the terms of the performance share agreement to be entered into between the Company and Executive on the Effective Date. The Performance Shares granted to Executive will be granted under one of the Company’s Long-Term Incentive Plans in accordance with and subject to the terms and conditions set forth in such plan and the performance share agreement executed in connection with such grant.

B. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee. Executive acknowledges and agrees that Executive will not be eligible for an annual equity grant in 2008.

C. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of three times (3x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $550,000 and a stock price of $45.34, which is the average closing price per share of the Company’s Common Stock as of December 31, 2006, Executive’s current stock ownership requirement is 36,392 shares (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1B of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units, shares of restricted stock or performance shares of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock, unvested performance shares and shares of Common Stock gifted to others do not count toward the Target Amount. Under the Executive Stock Ownership Policy, Executive will have until four years from the Effective Date to comply with the Stock Ownership Requirement.

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The Committee expects that Executive will make reasonable progress toward Executive’s Stock Ownership Requirement. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

9. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. The Company acknowledges and agrees that, following the Termination of Executive’s employment for any reason, Executive shall continue to be entitled to receive any vested benefit Executive has accrued pursuant to the Company’s 401(k) Plan and shall be entitled to all post-termination rights and benefits available to Executive under applicable law relating to the 401(k) Plan and any other benefit plan in which Executive participated pre-Termination. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

10. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 10(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of six (6) months following the effective date of Executive’s Termination, and (iii) the continuation, under COBRA, of Executive’s Benefits for Executive and Executive’s dependents for an additional period of eighteen (18) months, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

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(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is Terminated by the Company without Cause or Executive Terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of Termination), then Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such thirty (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six (36) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s Benefits for eighteen (18) months following Executive’s date of Termination, and (iii) and after expiration of such eighteen (18) months Benefits continuation period, the continuation, under COBRA, of Benefits for

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Executive and Executive’s dependents for an additional period of eighteen (18) months following the effective date of Executive’s Termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary Termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the Termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

(ii) A material reduction by the Company in Executive’s base compensation (i.e., Executive’s Base Salary and/or annual target bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 14 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 10 other than compensation and benefits earned through the date of Termination).

D. Termination by the Company for Cause. The Company may Terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 10(A) or 10(B) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the

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material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve (12) months from the date of Termination and (ii) a lump sum payment equal to one times (1x) Executive’s Annual Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

11. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

12. Potential Tax Consequences for “Parachute” Payments

A. Tax Gross-Up. Notwithstanding any other provisions of this Agreement, during the period from November 1, 2007 through December 31, 2009 only, a period of twenty-six (26 months), in the event that (i) any payment or distribution by the Company to or for Executive’s benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 10 hereof (the “Severance Payments”), being hereinafter called (“Total Payments”) would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Code, or any successor provision enacted under the Code or any interest or penalties (to the extent permitted under Treasury Regulation 1.409A-3(i)(1)(v)) are incurred by Executive with

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respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”) and (ii) the amount of such Total Payments subject to such Excise Tax exceeds $50,000, then the Company shall pay to Executive an additional cash payment (the “Tax Gross-Up”) so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of any Excise Taxes, Executive shall receive such net amount of Total Payments equal to the amount that Executive would have received if no Excise Tax was due. If the amount of Total Payments subject to the Excise Tax does not exceed $50,000, then the Tax-Gross-Up shall not be paid and the Severance Payments shall be reduced (if necessary, to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax.

B. Accounting Firm Determination. All determinations required to be made under this Section 12, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company’s independent auditor (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 12, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firm’s determination, but in no event later than the end of Executive’s taxable year next following Executive’s taxable year in which Executive pays the Excise Tax. If the Accounting Firm determines that no Excise Tax is payable by Executive, then the Accounting Firm shall furnish to Executive a written opinion that failure to report the Excise Tax on Executive’s applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made (“Underpayment”), or that amount of the Tax Gross-Up will exceed the amount required under Section 12(A) (“Overpayment”). In the event that the Accounting Firm shall determine that an Underpayment or Overpayment has occurred, either Executive or the Company, as applicable, shall promptly reimburse the other for the amount of such Underpayment or Overpayment that has occurred

C. Notifications. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to Total Payments.

D. Payment Calculator. At the time that payments are made under this Section 12, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Accounting Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

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13. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates. Notwithstanding the foregoing, the restrictions contained in Section 12B(i) above shall not apply to any person solicited by Executive to work for the Company and who previously worked for or with Executive at any prior place of employment.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 13 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 13 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 13 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

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14. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 14, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

15. Section 409A of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 15 in order to comply with, or be exempt from, the requirements of Section 409A.

A. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Termination pursuant to this Agreement shall be delayed until the earliest date upon which such amounts may be paid without being subject to taxation under Section 409A. Any amount, the payment or benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

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B. All incentive bonus payments described in Section 7(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2  ¹/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

C. With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Sections 7(C) and 7(E) hereof, and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. The Tax Gross-Up payment, if any, provided under Section 12 and the tax gross-up, if any, provided under Section 7(E) shall be provided in a manner that complies with Treasury Regulation Section 1.409A-3(i)(1)(v), including that such gross-up payments shall be paid by the end of Executive’s taxable year next following Executive’s taxable year in which Executive remits the related taxes to the relevant taxing authority. To the extent required by Section 409A, any tax gross-up payment made with respect to any payment that is non-exempt non-qualified deferred compensation (within the meaning of Section 409A) which is subject to Section 409A shall be payable only upon Executive’s Separation from Service and subject to Section 15(E).

E. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

16. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies. The Company acknowledges and agrees that, to the extent any Company Policy provides a benefit to Company associates in general (including, but not limited to, PTO, severance or relocation benefits) and such benefit is less favorable to Executive than the benefits provided herein, the terms of this Agreement shall control.

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17. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

18. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter).

19. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

20. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	Joseph C. Capezza

21. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

22. Survival and Enforcement. Sections 3, 9, 10, 12, 13 and 14 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 12, 13 and 14 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach.

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Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

23. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the preamble to this Agreement.

Executive		Health Net, Inc.
By:	/s/ Joseph C. Capezza	By:	/s/ Jay M. Gellert
Name:	Joseph C. Capezza	Name:	Jay M. Gellert
Title:	Executive Vice President & Chief Financial Officer	Title:	President & Chief Executive Officer

cc:	Linda V. Tiano
	Karin Mayhew
	Debbie J. Colia/Capezza Personnel File

EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

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5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract,

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law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s

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relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

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16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.6

EXHIBIT 10.6

STEPHEN D. LYNCH

AMENDED & RESTATED EMPLOYMENT AGREEMENT

This AMENDED & RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of December 11, 2007 (the “Effective Date”), and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Stephen D. Lynch (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Amended & Restated Employment Agreement dated as of December 11, 2007 (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to satisfy the requirements of Section 409A of the Internal Revenue Code of 1986, as amended and the Treasury Regulations and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. DUTIES AND SALARY.

(a) Duties. Executive’s title is President, Health Plan Division, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jay Gellert, President and Chief Executive Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities are to provide executive leadership for the restructure of the Company’s health plans (the “Restructuring”), including identification of market leaders, infrastructure processes and procedures, establishing integration points with the Company’s new shared services organization and achievement of market plans, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

(b) Salary. Executive will be paid a base salary at the annual rate of $600,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Executive will not be eligible for an annual merit increase in 2008. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

(c) Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. ADJUSTMENTS AND CHANGES IN EMPLOYMENT STATUS. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company.

For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” shall have the meaning ascribed to such term in Treasury Regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), from time to time and other publications of the Internal Revenue Service published in the Internal Revenue Bulletin from time to time.

3. PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

(a) Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a

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disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

(b) Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

(c) All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

(d) Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

(e) Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. PHYSICAL EXAM.

Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

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5. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE.

(a) No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

(b) Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

(a) Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

(b) Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

(c) Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

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(d) Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 80% of Executive’s Base Salary as additional compensation according to the terms of the EIP. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EIP. Executive will not be eligible for an incentive bonus under the EIP for 2008 and, in lieu thereof, will be entitled to receive a special performance bonus on the terms set forth in Section 6(E) below.

(e) Special Performance Bonus. Executive will be eligible to receive a special performance bonus in the amount of $1,800,000 (the “Performance Bonus”) if the Company’s Chief Executive Officer, in consultation with the Company’s Board of Directors, determines that Executive has successfully completed the Restructuring by February 28, 2009 (the “Target Completion Date”). The determination by the Chief Executive Officer shall occur within ten (10) days of the Target Completion Date (the “Determination Date”). The Performance Bonus shall be paid to Executive within thirty (30) days of the Determination Date as set forth below:

(i) $500,000 of the Performance Bonus shall be paid to Executive if the Chief Executive Officer, in consultation with the Company’s Board of Directors determines, on the Determination Date, that the Company’s Health Plan Division has achieved the 2008 market plans for each of the Company’s commercial health plan regions;

(ii) $1,300,000 of the Performance Bonus shall be paid to Executive if the Chief Executive Officer, in consultation with the Company’s Board of Directors, determines, on the Determination Date, that Executive has met his 2008 performance goals.

In the event Executive voluntarily Terminates his employment with the Company before the Target Completion Date, Executive shall no longer be eligible to receive the Performance Bonus and shall not be entitled to participate in the EIP.

In the event the Company Terminates Executive before the Target Completion Date for any reason other than Cause (as defined below), Executive shall be paid the entire amount of the Performance Bonus within thirty (30) days of such Termination.

In the event that a Change in Control (as defined below) occurs before the Target Completion Date, Executive shall be paid the entire amount of the Performance Bonus within thirty (30) days of consummation of the Change in Control.

Upon completion of the Restructuring, regardless of whether all or any portion of the Performance Bonus was paid, Executive shall be eligible to participate in the EIP for the duration of his employment with the Company as set forth in Section 6(D) above.

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(f) Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

(a) Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

(b) Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of three times (3x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $600,000 and a stock price of $45.34, which is the average closing price per share of the Company’s Common Stock as of December 31, 2006, Executive’s current stock ownership requirement is 39,700 shares (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1(B) of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units, shares of restricted stock or performance shares of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock, unvested performance shares and shares of Common Stock gifted to others do not count toward the Target Amount. Under the Executive Stock Ownership Policy, Executive will have until four years from the Effective Date to comply with the Stock Ownership Requirement.

The Committee expects that Executive will make reasonable progress toward Executive’s Stock Ownership Requirement. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or

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Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

(a) Termination Without Cause Not Following Change in Control. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 9(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twelve (12) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of twelve (12) months following the effective date of Executive’s Termination, and (iii) the continuation, under COBRA, of Executive’s Benefits for Executive and Executive’s dependents for a period of twelve (12) months, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

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(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

(b) Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is Terminated by the Company without Cause or Executive Terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of Termination), then Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs, prior to the expiration of such thirty (30) day period, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s Benefits for six (6) months following Executive’s date of Termination, and (iii) and after expiration of such six (6) months Benefits continuation period, the continuation, under COBRA, of Benefits for Executive and Executive’s dependents for a period of eighteen (18) months following the effective date of Executive’s Termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary Termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s duties, responsibilities or status with the Company, except in connection with the Termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

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(ii) A material reduction by the Company in Executive’s base compensation (i.e., Base Salary plus annual target bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 13 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described in Section 9(B)(i) or (ii) within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

(c) Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9). However, Executive will be eligible to purchase Company health insurance coverage, either pursuant to one of the Company’s commercial private plans or to a health plan provided for Company associates, for Executive and Executive’s spouse at Executive’s expense until Executive is eligible for Medicare at age 65. For avoidance of doubt, Executive shall be responsible for paying monthly premiums on such coverage and, if Executive elects to participate in a health plan provided for Company associates, such monthly premiums will not include any Company subsidization typically provided to Company associates.

(d) Termination by the Company for Cause. The Company may Terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 9(A) or 9(B) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of

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Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

(e) Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve (12) months from the date of Termination and (ii) a lump sum payment equal to twelve (12) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Potential Tax Consequences for “Parachute” Payments. Notwithstanding any other provision of this Agreement, in the event that any payment or benefit received or to be received by Executive in connection with a Change in Control or the Termination of Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and benefits being hereinafter called “Total Payments”) would be subject (in whole or in part), to the excise tax imposed pursuant to the operation of Section 4999 of the Code (the “Excise Tax”), then the cash payments shall first be reduced, and the non-cash payments, if any, shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which Executive would be subject in respect of such unreduced Total Payments).

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12. Restrictive Covenants.

(a) Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section 12, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

(b) Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

(c) Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 12 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

(d) Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 12 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 12 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

13. Successors; Binding Agreement.

(a) Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the

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Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

(b) Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 13, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

(c) Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

14. Section 409A of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the regulations and guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 14 in order to comply with, or be exempt from, the requirements of Section 409A.

(a) If Executive is a “specified employee” (as determined under the Company’s Specified Employee policy, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation that is subject to Section 409A and payable to or in respect of Executive in connection with Executive’s Termination pursuant to this Agreement shall be delayed until the earliest date upon which such amounts may be paid without being subject to taxation under Section 409A. Any amount, the payment of benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

(b) All incentive bonus payments described in Section 6(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2 ¹/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

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(c) With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Section 6(C) hereof, and provision of Benefits to Executive, (i) in no event shall any such reimbursements or gross-up payments be made later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

(d) The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

15. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

16. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

17. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated January 19, 2005 between Executive and the Company.

18. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

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19. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	Stephen Lynch

20. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

21. Survival and Enforcement. Sections 3, 6E, 8, 9, 11, 12 and 13 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 12 and 13 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

22. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Stephen Lynch	By:	/s/ Jay M. Gellert
Name:	Stephen Lynch	Name:	Jay M. Gellert
Title:	President, Health Plan Division	Title:	President & Chief Executive Officer

cc:	Linda Tiano
	Karin Mayhew
	Debbie J. Colia/Stephen Lynch
	Personnel File

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EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE ] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which

Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any matter related to his

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employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to

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those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

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17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.7

EXHIBIT 10.7

LINDA V. TIANO

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of December 27, 2006 (the “Effective Date”) and amended and restated as of December 3, 2008, by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Linda V. Tiano (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Employment Agreement dated December 27, 2006 (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement to conform it to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and Internal Revenue Service guidance thereunder.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s employment with the Company shall commence on February 1, 2007 and Executive’s title will be Senior Vice President, General Counsel & Secretary, but may be changed at the discretion of the Company to a title that reflects a similarly senior executive position. Executive shall report directly to Jay Gellert, President and Chief Executive Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities are to provide executive leadership, infrastructure, processes and management of the Company’s legal organization, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Executive will be paid an annual base salary of $500,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

C. Engagement Bonus. In addition, you will receive an engagement bonus in the amount of $200,000 payable within thirty (30) days of your effective date of employment. You must be actively employed and on the Company payroll at the time the bonus is paid. If you voluntarily terminate your employment with the Company or the Company terminates your employment for cause within the first twenty-four (24) months of employment, you will be required to repay a prorated portion of the engagement bonus to the Company based on the number of months employed by the Company.

D. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and any stock option agreement, restricted stock agreement, restricted stock unit agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including termination, consistent with the needs of the business of the Company.

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting

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or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Drug Screening; Background Check; Physical Exam.

A. Drug Screening. The Company reserves the right to terminate Executive in the event Executive does not pass the Company’s drug screening test.

B. Background Check. The Company reserves the right to terminate Executive in the event the background check conducted by the Company on Executive is not satisfactory to the Company in the Company’s sole discretion.

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C. Physical Exam. Executive will be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Immigration Documentation. Executive’s employment is contingent on Executive’s ability to prove Executive’s identity and authorization to work in the United States for the Company. Executive must comply with the Immigration and Naturalization Service’s employment verification requirements.

6. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

7. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

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B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $5,000 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Incentive Plan (“EIP”) in accordance with the terms of the EIP, which provides Executive with a target opportunity to earn each plan year up to 70% of Executive’s Base Salary as additional compensation according to the terms of the actual EIP documents. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the guidelines of the EIP.

E. Relocation Benefits. Executive’s relocation will be covered under the Company’s Relocation Policy currently in effect. All relocation expenses not deductible under IRS regulations, except the miscellaneous spending allowance, will be “grossed up” for income tax purposes at the supplemental federal tax rate and applicable state tax liability.

F. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

8. Equity Grants.

A. Initial Equity Grant. As of Executive’s first date of employment, Executive will be granted a non-qualified stock option (the “Stock Option”) to purchase 50,000 shares of Common Stock of the Company (the “Common Stock”) which will vest and become exercisable at the rate of one-fourth of the shares on each, first through fourth, anniversary of the grant. All Stock Options granted to Executive will be granted under one of the Company’s Long-Term Incentive Plans and will be subject to the terms and conditions set forth in such plan and the agreement executed in connection with such grant.

In addition, as of Executive’s first date of employment, Executive will be granted 25,000 restricted stock units of the Company’s Common Stock (the “RSUs”) which will vest and become non-forfeitable at the rate of one-half of the shares covered on the third and fourth anniversary of the grant. The RSUs granted to Executive will be granted under one of the Company’s Long-Term Incentive Plans in accordance with and subject to the terms and conditions set forth in such plan and the agreement executed in connection with such grant.

B. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

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C. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), Executive is required to own shares of Common Stock of the Company having a value of one times (1x) Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). The number of shares of Common Stock Executive is required to own will be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

Using Executive’s current salary of $500,000 and a stock price of $39.3033, which is the average closing price per share of the Company’s Common Stock as of December 31, 2005, Executive’s current stock ownership requirement is 12,722 (“Target Amount”). The Target Amount is subject to change from time to time based on (1) changes in the average closing sales price of the Company’s Common Stock on an annual basis and (2) any changes in Executive’s Base Salary made pursuant to and in accordance with Section 1A of this Agreement. Any shares of Company Common Stock that Executive owns, and any restricted stock units or shares of restricted stock of the Company that Executive owns and have vested count toward the Target Amount. Stock options, unvested restricted stock units, unvested shares of restricted stock and shares of Common Stock gifted to others do not count toward the Target Amount. Under the Executive Stock Ownership Policy, Executive will have until four years from the Effective Date to comply with the Stock Ownership Requirement.

The Committee expects that Executive will make reasonable progress toward Executive’s Stock Ownership Requirement. Executive will be notified on an annual basis of any changes in Executive’s Target Amount.

9. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) will be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through the date of termination, (b) any compensation previously deferred by Executive (together with any interest and earnings therein), (c) accrued but unused PTO, (d) reimbursable expenses incurred by Executive prior to the termination date and (e) amounts under any other compensatory plan, arrangement or program payment to which Executive may be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

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10. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is terminated by the Company without “Cause” (as defined in Section 10(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s termination) (the “Benefits”) for Executive and Executive’s dependents for a period of six (6) months following the effective date of Executive’s termination, and (iii) the continuation, under COBRA, of Executive’s Benefits for Executive and Executive’s dependents for a period of eighteen (18) months, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

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(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is terminated by the Company without Cause or Executive terminates

Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of termination), then Executive will be entitled to receive, within thirty (30) days following the termination of Executive’s employment, provided Executive signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to thirty-six (36) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, and (ii) the continuation of Executive’s Benefits for eighteen (18) months following Executive’s date of termination, and (iii) and after expiration of such eighteen (18) months Benefits continuation period, the continuation, under COBRA, of Benefits for Executive and Executive’s dependents for a period of eighteen (18) months following the effective date of Executive’s termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, within two (2) years following the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

(ii) A material reduction by the Company in Executive’s base compensation (i.e., Executive’s Base Salary and/or annual target bonus) as in effect immediately prior to any such reduction;

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(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 14 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of termination. In the event that Executive voluntarily terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc.), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 10).

D. Termination by the Company for Cause. The Company may terminate Executive’s employment for Cause at any time with or without advance notice. In the event of such termination, Executive will not be eligible to receive any of the payments set forth in Section 10(A) or 10(B) above. For purposes of this Agreement, a termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the knowing unauthorized disclosure of confidential information relating to the business of the Company or any of its affiliates, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is terminated at any time due to death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve

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(12) months from the date of termination and (ii) a lump sum payment equal to twelve (12) Executive’s Base Salary in effect immediately prior to the date of Executive’s termination, to be paid within thirty (30) days following Executive’s termination of employment. For purposes of this Agreement, a termination for “Disability” shall mean a termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

F. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 13 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

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D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 11 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 11 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

12. Potential Tax Consequences for “Parachute” Payments.

A. Tax Gross-Up. Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for Executive’s benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) (all such payments and distributions, including the severance payments and benefits provided for in Section 10 hereof (the “Severance Payments”), being hereinafter called (“Total Payments”) would be subject (in whole or part) to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any successor provision enacted under the Code or any interest or penalties (to the extent permitted under Treasury Regulation Section 1.409A-3(i)(1)(v)) are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”) and (ii) the amount of such Total Payments subject to such Excise Tax exceeds $50,000, then the Company shall pay to Executive an additional cash payment (the “Tax Gross-Up”) so that after receipt of such Tax Gross-Up, the payment of any additional federal, state and local income taxes on such Tax Gross-Up amount and the payment of any Excise Taxes, Executive shall receive such net amount of Total Payments equal to the amount that Executive would have received if no Excise Tax was due. If the amount of Total Payments subject to the Excise Tax does not exceed $50,000, then the Tax-Gross-Up shall not be paid and the Severance Payments shall be reduced (if necessary, to zero) to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax.

B. Accounting Firm Determination. All determinations required to be made under this Section 12, including whether and when a Tax Gross-Up is required and the amount of such Tax Gross-Up and the assumptions to be utilized in arriving at such determination, shall be made by the public accounting firm that, immediately prior to the Change in Control, was the Company’s independent auditor (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that Executive has received Total Payments, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Tax Gross-Up, as determined pursuant to this Section 12, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, then the Accounting Firm shall furnish to Executive a written opinion that failure to

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report the Excise Tax on Executive’s applicable federal income tax return would not result in the imposition of any tax assessment or a negligence or similar penalty. As a result of any uncertainty in the application of Section 4999 of the Code at the time of the determination by the Accounting Firm hereunder, it is possible that Tax Gross-Up which will not have been made by the Company should have been made (“Underpayment”),or that amount of the Tax Gross-Up will exceed the amount required under Section 12(A) (“Overpayment”). In the event that the Accounting Firm shall determine that an Underpayment or Overpayment has occurred, either Executive or the Company, as applicable, shall promptly reimburse the other for the amount of such Underpayment or Overpayment that has occurred

C. Notifications. Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Tax Gross-Up. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to Total Payments.

D. Payment Calculator. At the time that payments are made under this Section 12, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from tax counsel, the Accounting Firm or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

13. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 13, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of termination.

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C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

14. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

15. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

16. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supercede, amend or otherwise modify the terms of the Indemnification Agreement dated December 27, 2006 between Executive and the Company.

17. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

18. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel

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If to the Executive: Linda V. Tiano

19. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

20. Survival and Enforcement. Sections 3, 9, 10, 11, 12 and 13 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 11, 12 and 13 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

21. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

22. Section 409A of the Internal Revenue Code.

A. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 22 in order to comply with, or be exempt from, the requirements of Section 409A.

B. Notwithstanding anything herein to the contrary, Executive shall not be considered to have terminated employment unless such termination constitutes a “separation from service” with respect to Executive, as defined in Treasury Regulation Section 1.409A-1(h).

C. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation

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subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Termination pursuant to this Agreement shall be delayed until the earliest date upon which such amounts may be paid without being subject to taxation under Section 409A. Any amount, the payment or benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

D. All incentive bonus payments described in Section 7(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2  ¹/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

E. With respect to the Company’s reimbursement obligations and provision of in-kind benefits under Sections 7(C) and 7(E) hereof, and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred or the tax payment was made, as applicable, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

F. The Tax Gross-Up payment, if any, provided under Section 12 and the tax gross-up, if any, provided under Section 7(E) shall be provided in a manner that complies with Treasury Regulation Section 1.409A-3(i)(1)(v), including that such gross-up payments shall be paid by the end of Executive’s taxable year next following Executive’s taxable year in which Executive remits the related taxes to the relevant taxing authority. To the extent required by Section 409A, any tax gross-up payment made with respect to any payment that is non-exempt non-qualified deferred compensation (within the meaning of Section 409A) which is subject to Section 409A shall be payable only upon Executive’s “separation from service” (as defined above) and subject to Section 22(C).

G. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Linda V. Tiano	By:	/s/ Jay Gellert
	Linda V. Tiano		Jay Gellert
	Senior Vice President and General Counsel		President and Chief Executive Officer

cc:	Karin Mayhew
	Debbie J. Colia/Linda Tiano Personnel File

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EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE ] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

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7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other

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information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without

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coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

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Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
	Name:		Name:
	Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.8

Exhibit 10.8

JOHN SIVORI

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of February 17, 2009 (the “Effective Date”), by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and John Sivori (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Employment Agreement dated October 9, 2001, as amended from time to time, and a letter agreement dated February 20, 2008 (the “Prior Agreements”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreements.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title is President, Regional Health Plans and Pharmacy, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jim Woys, Executive Vice President and Chief Operating Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities are to lead all regional health plans (outside of California) and Pharmacy, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Effective February 28, 2009, Executive will be paid a base salary at the annual rate of $420,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and

any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company.

For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” with respect to Executive shall mean a “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Beginning in 2010, Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $2,500 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Officer Incentive Plan (“EOIP”) in accordance with the terms of the EOIP, which provides Executive with a target opportunity to earn each plan year up to 50% of Executive’s Base Salary as additional compensation according to the terms of the EOIP. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EOIP.

E. Milestone Bonuses. Executive is eligible to receive special milestone bonuses (each, a “Milestone Bonus”), as follows:

(i) December 31, 2009 Milestone Bonus: A minimum Milestone Bonus of $250,000 will be paid to Executive upon identification and realization of $20 million in documented “non-pharmacy related” savings during the period January 1, 2009 to December 31, 2009, as determined by the Compensation Committee in its sole discretion, based on the recommendation of the Company’s Chief Executive Officer and Chief Operating Officer that such milestone goal was achieved during the applicable period.

(ii) December 31, 2010 Milestone Bonus: A minimum Milestone Bonus of $250,000 will be paid to Executive upon satisfactory to above-satisfactory completion of the identification and realization of $20 million in documented “non-pharmacy related” savings incremental from any savings related to the December 31, 2009 Milestone Bonus, during the period January 1, 2010 to December 31, 2010, as determined by the Compensation Committee in its sole discretion, based on the recommendation of the Company’s Chief Executive Officer and Chief Operating Officer that such milestone goal was achieved during the applicable period.

In the event Executive is entitled to receive a Milestone Bonus, such Milestone Bonus shall be paid to Executive in a cash lump sum no later than March 15 following the calendar year in which such Milestone Bonus vests.

Notwithstanding the foregoing, in the event of a consummation of a Change in Control of the Company, all Milestone Bonuses shall become payable upon the consummation of a Change in Control, based on the actual achievement of the milestone goals as of the date of the consummation of the Change in Control, as determined by the Compensation Committee based on the recommendation of the Company’s Chief Executive Officer and Chief Operating Officer; provided, that such Change in Control constitutes a “change in the ownership or effective control of a corporation” with respect to Health Net, Inc., as defined in Treasury Regulation Section 1.409A-3(i)(5). If it is determined that any such milestone goals have been partially achieved, the related Milestone Bonus (if any) will be prorated based upon the portion of the milestone goal achieved as of the date of the consummation of the Change in Control. In the event of a Change in Control, any Milestone Bonus (or portion thereof) that becomes payable as the result of the Change in Control shall be paid to Executive within ten (10) business days following the consummation of the Change in Control.

F. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

A. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

B. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), the Compensation Committee in the future may require Executive to own shares of Common Stock of the Company having a certain value multiplied by Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). If applicable, the number of shares of Common Stock Executive would be required to own would be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

If Executive is required to comply with the Stock Ownership Requirement in the future, the Committee expects that Executive would make reasonable progress toward Executive’s Stock Ownership Requirement. Executive would be notified on an annual basis of any changes in Executive’s target amount under the Stock Ownership Requirement.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such Termination date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause Not Following Change in Control. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 9(D) below) at any time that is not within two (2) years after a “Change in Control” (as defined below) of Health Net, Inc., Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs and delivers prior to the expiration of such (30) day period, and does not revoke or attempt to revoke, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twelve (12) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of twelve (12) months following the effective date of Executive’s Termination, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

For purposes of this Agreement, “Change in Control” is defined as any of the following which occurs subsequent to the effective date of Executive’s employment:

(i) Any person (as such term is defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), corporation or other entity (other than Health Net, Inc. or any of its subsidiaries, or any employee benefit plan sponsored by Health Net, Inc. or any of its subsidiaries) is or becomes the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) of securities of Health Net, Inc. representing twenty percent (20%) or more of the combined voting power of the outstanding securities of Health Net, Inc. which ordinarily (and apart from rights accruing under special circumstances) have the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire Health Net, Inc.’s securities) (the “Securities”);

(ii) As a result of a tender offer, merger, sale of assets or other major transaction, the persons who are directors of Health Net, Inc. immediately prior to such transaction cease to constitute a majority of the Board of Directors of Health Net, Inc. (or any successor corporations) immediately after such transaction;

(iii) Health Net, Inc. is merged or consolidated with any other person, firm, corporation or other entity and, as a result, the shareholders of Health Net, Inc., as determined immediately before such transaction, own less than eighty percent (80%) of the outstanding Securities of the surviving or resulting entity immediately after such transaction:

(iv) A tender offer or exchange offer is made and consummated for the ownership of twenty percent (20%) or more of the outstanding Securities of Health Net, Inc.;

(v) Health Net, Inc. transfers substantially all of its assets to another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc.; or

(vi) Health Net, Inc. enters into a management agreement with another person, firm, corporation or other entity that is not a wholly-owned subsidiary of Health Net, Inc. and such management agreement extends hiring and firing authority over Executive to an individual or organization other than Health Net, Inc.

B. Termination Without Cause or For Good Reason Following Change in Control. If at any time within two (2) years after a Change in Control of Health Net, Inc. Executive’s employment is Terminated by the Company without Cause or Executive Terminates Executive’s employment for “Good Reason” (as defined below) (by giving the Company at least fourteen (14) days prior written notice of the effective date of Termination), then Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs and delivers prior to the expiration of such thirty (30) day period, and does not revokes or attempt to revoke, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum payment equal to twenty-four (24) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the continuation of Executive’s Benefits for six (6) months following Executive’s date of Termination, and (iii) and after expiration of such six (6) months Benefits continuation

period, the continuation, under COBRA, of Benefits for Executive and Executive’s dependents for a period of eighteen (18) months following the effective date of Executive’s Termination with premium payments made by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA, and provided, further, that in the event the Company requests, in writing, prior to such voluntary Termination by Executive for Good Reason that Executive continue in the employ of the Company for a period of time up to 90 days following such Change in Control, then Executive shall forfeit such severance allowance if Executive voluntarily leaves the employ of the Company prior to the expiration of such period of time.

For purposes of this Agreement, the term “Good Reason” means any of the following which occurs, without Executive’s consent, subsequent to the effective date of a Change in Control as defined above:

(i) A substantial reduction in the scope of Executive’s authority, duties or responsibilities with the Company, except in connection with the Termination of Executive’s employment for Disability (as defined below), normal retirement or Cause or by Executive voluntarily other than for Good Reason;

(ii) A material reduction by the Company in Executive’s base compensation (i.e., the Executive’s Base Salary and/or target annual bonus) as in effect immediately prior to any such reduction;

(iii) A relocation of Executive to a work location more than fifty (50) miles from Executive’s work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for Executive based on Executive’s residence immediately prior to such relocation; or

(iv) The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 12 of this Agreement;

provided, however, that Executive must provide notice to the Company of the existence of the condition described above within ninety (90) days of the initial existence of the condition, upon the notice of which the Company has thirty (30) days during which it may remedy the condition, in accordance with Treasury Regulation Section 1.409A-1(n)(2)(ii).

C. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company (except for Good Reason within two (2) years after a Change in Control of Health Net, Inc., as described in Section 9(B) hereof), then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9).

D. Termination by the Company for Cause. The Company may Terminate Executive’s employment for “Cause” at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 9(A) or 9(B) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a Change in Control of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

E. Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve (12) months from the date of Termination, and (ii) a lump sum payment equal to twelve (12) Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to

reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 11 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 11 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 11 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

12. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 12, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

13. Section 409(A) of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted, construed and administered as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 13 in order to comply with, or be exempt from, the requirements of Section 409A.

A. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy as in effect from time to time, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation that is subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Separation from Service pursuant to this Agreement shall be delayed until the earlier of (i) the expiration of six (6) months measured from the date of Executive’s Separation from Service, or (ii) the date of Executive’s death. Any amount, the payment of benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

B. All incentive bonus payments described in Section 6(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2-1/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

C. With respect to the Company’s reimbursement obligations under Sections 6(C) and 6(F) hereof and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

14. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

15. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

16. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supersede, amend or otherwise modify the terms of the Indemnification Agreement dated November 15, 2008 between Executive and the Company.

17. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

18. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company: Health Net, Inc. 21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367 Attention: General Counsel

If to the Executive: John Sivori [ADDRESS]

19. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

20. Survival and Enforcement. Sections 3, 8, 9, 11, and 12 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 11 and 12 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

21. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ John Sivori	By:	/s/ Karin Mayhew
Name:	John Sivori	Name:	Karin Mayhew
Title:	President, Regional Health Plans and Pharmacy	Title:	SVP, Organization Effectiveness

cc: Linda Tiano

Karin Mayhew

Debbie J. Colia/John Sivori Personnel File

EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

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5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

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7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract, law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

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10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

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16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.9

EXHIBIT 10.9

STEVE TOUGH

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of February 17, 2009 (the “Effective Date”), by and between Health Net, Inc., a Delaware corporation (the “Company”), with its principal place of business located at 21650 Oxnard Street, Woodland Hills, California 91367, and Steve Tough (“Executive”).

RECITALS

WHEREAS, the Company and Executive are party to an Employment Agreement dated January 25, 2006, as may be amended from time (the “Prior Agreement”); and

WHEREAS, the Company and Executive desire to amend and restate the Prior Agreement.

NOW, THEREFORE, in consideration of the following covenants, conditions and promises contained herein, and other good and valuable consideration, the Company and Executive hereby agree as follows:

1. Duties and Salary.

A. Duties. Executive’s title is President, Health Plans and Government Programs, but may be changed at the discretion of the Company to a title that reflects a similarly situated senior executive position. Executive shall report directly to Jim Woys, Executive Vice President and Chief Operating Officer of the Company, but Executive’s reporting relationship may be changed from time to time at the discretion of the Company. Executive’s duties and responsibilities are to provide leadership of the Company’s California commercial health plan division, government and specialty division, including Federal Services and MHN division, as well as Medicare and Medicaid, but the Company reserves the right to assign Executive other duties as needed and to change Executive’s duties from time to time on reasonable notice, based on Executive’s skills and the needs of the Company.

B. Salary. Effective February 28, 2009, Executive will be paid a base salary at the annual rate of $500,000, which salary will be paid on a pro-rated bi-weekly basis, less applicable withholdings (“Base Salary”), covering all hours worked. Generally, Executive’s Base Salary will be reviewed annually, but the Company reserves the right to change Executive’s compensation from time-to-time. Pursuant to the charter of the Compensation Committee of the Company’s Board of Directors (the “Committee”), any adjustment to Executive’s compensation must be made with the approval of the Committee and, in the event that Executive constitutes one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company’s Board of Directors.

C. Disclosure of Personal Compensation Information. As an “executive officer” of the Company (as such term is defined in the rules and regulations of the Securities and Exchange Commission (“SEC”)), information regarding Executive’s employment arrangements with the Company, including, among other things, the terms of this Agreement and

any stock option agreement, restricted stock agreement, restricted stock unit agreement, performance share agreement and/or severance agreement Executive enters into with the Company from time to time (collectively, “Personal Compensation Information”), may be disclosed in filings with the SEC, the New York Stock Exchange (“NYSE”) and/or other regulatory organizations upon the occurrence of certain triggering events. Such triggering events include, but are not limited to, the execution of this Agreement and any amendments thereto, changes in Executive’s Base Salary, any annual incentive payment (whether in the form of cash or equity) awarded to Executive (in the past or after the date hereof), and the establishment of performance goals under the Company’s incentive plans. Executive’s execution of this Agreement will serve as Executive’s acknowledgement that Executive’s Personal Compensation Information may be publicly disclosed from time to time in filings with the SEC, NYSE or otherwise as required by applicable law.

2. Adjustments and Changes in Employment Status. Executive understands that the Company reserves the right to make personnel decisions regarding Executive’s employment, including, but not limited to, decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including Termination (as defined below), consistent with the needs of the business of the Company.

For purposes of this Agreement, the capitalized terms “Termination” and “Terminate,” shall mean Executive’s Separation from Service (as defined below) from the Company. A “Separation from Service” with respect to Executive shall mean a “separation from service,” as defined in Treasury Regulation Section 1.409A-1(h).

3. Protection of Proprietary and Confidential Information. Executive agrees that Executive’s employment creates a relationship of confidence and trust with the Company with respect to Proprietary and Confidential Information (as defined below) of the Company learned by Executive during Executive’s employment.

A. Executive agrees not to directly or indirectly use or disclose any of the Proprietary and Confidential Information of the Company or any of its affiliates at any time except in connection with the services Executive provides to such entities. “Proprietary and Confidential Information” shall mean trade secrets, confidential knowledge, data or any other proprietary or confidential information of the Company or any of its affiliates, or of any customers, members, employees or directors of any of such entities, but shall not include any information that (i) was publicly known and made generally available in the public domain prior to the time of disclosure to Executive by the Company or (ii) becomes publicly known and made generally available after disclosure to Executive by the Company other than as a result of a disclosure by Executive in violation of this Agreement. By way of illustration but not limitation, “Proprietary and Confidential Information” includes: (i) trade secrets, documents, memoranda, reports, files, correspondence, lists and other written and graphic records affecting or relating to any such entity’s business; (ii) confidential marketing information including without limitation marketing strategies, customer and client names and requirements, services, prices, margins and costs; (iii) confidential financial information; (iv) personnel information (including without limitation employee compensation); and (v) other confidential business information.

B. Executive further agrees that at all times during Executive’s employment and thereafter, Executive will keep in confidence and trust all Proprietary and Confidential

Information, and that Executive will not use or disclose any Proprietary and Confidential Information or anything related to such information without the written consent of the Company, except as may be necessary in the ordinary course of performing Executive’s duties to the Company.

C. All Company property, including, but not limited to, Proprietary and Confidential Information, documents, data, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary and Confidential Information, provided to Executive by the Company or any of its affiliates or produced by Executive or others in connection with Executive’s providing services to the Company or any of its affiliates shall be and remain the sole property of the Company or its affiliates (as the case may be) and shall be returned promptly to such appropriate entity as and when requested by such entity. Executive shall return and deliver all such property upon termination of Executive’s employment, and Executive may not take any such property or any reproduction of such property upon such termination.

D. Executive recognizes that the Company and its affiliates have received and in the future will receive information from third parties which is private, proprietary or confidential information subject to a duty on such entity’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. Executive agrees that during Executive’s employment, and thereafter, Executive owes such entities and such third parties a duty to hold all such private, proprietary or confidential information received from third parties in the strictest confidence and not to disclose it, except as necessary in carrying out Executive’s work for such entities consistent with such entities’ agreements with such third parties, and not to use it for the benefit of anyone other than for such entities or such third parties consistent with such entities’ agreements with such third parties.

E. Executive’s obligations under this Section 3 shall continue after the Termination of Executive’s employment and any breach of this Section 3 shall be a material breach of this Agreement.

4. Physical Exam. Beginning in 2010, Executive shall be required, on an annual basis, to undergo a physical examination and to send evidence that Executive has undergone such exam (but in no case the results of such exam) to the Senior Vice President of Organizational Effectiveness. The Company shall reimburse Executive for any out-of-pocket expenses relating to the physical examination that are not otherwise covered by Executive’s health insurance plan.

5. Representations and Warranties of Executive.

A. No Violation; No Conflicts. Executive represents and warrants to the Company that the entering into of this Agreement and Executive’s performance of Executive’s duties hereunder, will not violate any agreements with, or trade secrets of, any other person or entity. Executive further represents and warrants that Executive does not have any relationship or commitment to any other person or entity that might be in conflict with Executive’s obligations to the Company under this Agreement, including but not limited to outside employment, sales broker relationships, investments or business activities. Executive understands and agrees that while employed by the Company Executive is expected to refrain from engaging in any outside

activities that might be in conflict with the business interests of the Company. In addition, Executive represents and warrants to the Company that Executive has not shared with or disclosed to, and will not share with or disclose to, the Company any proprietary or confidential information of Executive’s previous employers or any other third party.

B. Legal Proceedings. Executive represents and warrants to the Company that Executive has not been arrested, indicted, convicted or otherwise involved in any criminal or civil action or legal matter that could affect Executive’s ability to perform Executive’s duties hereunder or that may have a negative impact on the Company, its reputation or its operations. Executive agrees, to the extent permitted by applicable law, to notify the Company’s Senior Vice President of Organizational Effectiveness immediately in the event that Executive becomes party to any criminal or civil action or other legal matter in the future that could have an affect on the foregoing representation.

6. Executive Benefits.

A. Employee Benefit Programs. Executive shall be eligible to participate in the Company’s various employee benefit programs and plans in place from time to time as long as Executive remains employed by the Company and Executive meets the applicable participation requirements. These benefit programs and plans include paid time off (“PTO”), holidays, group medical, dental, vision, term life, and short and long term disability insurance and participation in the Company’s 401(k) plan, tuition reimbursement plan and deferred compensation plan. The Company or its subsidiaries or affiliates may modify, terminate or amend any benefit or plan in its discretion, retroactively or prospectively, subject only to applicable law.

The Company will continue to provide you and your dependents with health (medical, dental and vision) insurance coverage for the remainder of your life, which coverage shall be no less beneficial to you and your dependents than the coverage provided Executive by Foundation Health Corporation (“FHC”) immediately prior to the 1997 merger of FHC and Health Systems International.

B. Required Insurance. Executive will be covered by workers’ compensation insurance and state disability insurance, as required by state law.

C. Financial Counseling Allowance. Executive will be entitled to be reimbursed up to the amount of $2,500 per year for documented costs incurred for personal financial counseling services provided to Executive, including tax preparation, as long as Executive remains employed by the Company.

D. Incentive Bonus. Executive will be eligible to participate in the Health Net, Inc. Executive Officer Incentive Plan (“EOIP”) in accordance with the terms of the EOIP, which provides Executive with a target opportunity to earn each plan year up to 80% of Executive’s Base Salary as additional compensation according to the terms of the EOIP. The bonus payment will range from 0% to 200% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by Executive in order for Executive to be eligible to receive bonus payments for a given plan year. It is understood that the Committee and the Company will award bonus amounts, if any, as it deems appropriate consistent with the EOIP.

E. Expenses. Subject to and in accordance with the Company’s written policies for business and travel expenses, Executive will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of Executive’s duties pursuant to this Agreement.

7. Equity Grants.

A. Future Equity Grants. Any future equity grants made to Executive will be granted under one of the Company’s Long-Term Incentive Plans, and will be subject to the terms of such plan and of the agreement executed in connection with such grant. Any future equity grants to Executive will be made at the discretion of the Committee.

B. Company Stock Ownership Requirement. In accordance with the Executive Officer Stock Ownership Policy adopted by the Board of Directors of the Company (the “Executive Stock Ownership Policy”), the Compensation Committee in the future may require Executive to own shares of Common Stock of the Company having a certain value multiplied by Executive’s Base Salary in effect from time to time pursuant to this Agreement (the “Stock Ownership Requirement”). If applicable, the number of shares of Common Stock Executive would be required to own would be calculated based on the average NYSE closing price per share of the Company’s Common Stock (as adjusted for stock splits and similar changes to the Common Stock) for the most recently completed fiscal year of the Company.

If Executive is required to comply with the Stock Ownership Requirement in the future, the Committee expects that Executive would make reasonable progress toward Executive’s Stock Ownership Requirement. Executive would be notified on an annual basis of any changes in Executive’s target amount under the Stock Ownership Requirement.

8. Term of Employment. Executive’s employment with the Company is at the mutual consent of Executive and the Company. Nothing in this Agreement is intended to guarantee Executive’s continuing employment with the Company or employment for any specific length of time. Accordingly, either Executive or the Company may terminate the employment relationship at any time, with or without advance notice and with or without “Cause” (as defined below). Upon Termination of Executive’s employment for any reason, in addition to any other payments that may be payable to Executive hereunder, Executive (or Executive’s beneficiaries or estate) shall be paid (in each case to the extent not theretofore paid) within thirty (30) days following Executive’s date of Termination (or such shorter period that may be required by applicable law): (a) Executive’s annual Base Salary through such Termination date, (b) accrued but unused PTO, (c) reimbursable expenses incurred by Executive prior to the Termination date and (d) amounts under any other compensatory plan, arrangement or program payment to which Executive may then be entitled. This Agreement constitutes a final and fully binding integrated agreement with respect to the at-will nature of the employment relationship.

9. Termination of Employment/Severance Pay.

A. Termination Without Cause. If Executive’s employment is Terminated by the Company without “Cause” (as defined in Section 9(C) below) Executive will be entitled to receive, within thirty (30) days following the Termination of Executive’s employment, provided that Executive signs and delivers prior to the expiration of such (30) day period, and does not revoke or attempt to revoke, a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) a lump sum cash payment equal to twelve (12) months of Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, and (ii) the

continuation of Executive’s medical, dental and vision benefits (as maintained for Executive’s benefit immediately prior to the date of Executive’s Termination) (the “Benefits”) for Executive and Executive’s dependents for a period of twelve (12) months following the effective date of Executive’s Termination, with premium payments paid by the Company on Executive’s behalf, provided, that Executive properly elects to continue those benefits under COBRA.

B. Voluntary Termination. Notwithstanding anything to the contrary in this Agreement, whether express or implied, Executive may at any time Terminate Executive’s employment for any reason by giving the Company fourteen (14) days prior written notice of the effective date of Termination. In the event that Executive voluntarily Terminates employment with the Company, then Executive shall not be eligible to receive any payments or continuation of Benefits set forth in this Section 9).

C. Termination by the Company for Cause. The Company may Terminate Executive’s employment for “Cause” at any time with or without advance notice. In the event of such Termination, Executive will not be eligible to receive any of the payments set forth in Section 9(A) above. For purposes of this Agreement, a Termination for “Cause” is defined as: (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the material breach of either the Company’s Code of Business Conduct and Ethics (the “Code of Conduct”) or any policy or procedure developed and published by the Company regarding compliance or ethics related to the Code of Conduct, (iii) habitual drunkenness or narcotic drug addiction, (iv) conviction of a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to Executive, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by Executive following a “Change in Control” (as defined in the Company’s 2006 Long-Term Incentive Plan, as amended from time to time) of those duties and responsibilities of Executive that do not differ in any material respect from Executive’s duties and responsibilities during the 90-day period immediately prior to such Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company or any of its affiliates and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach, or (viii) breach of Executive’s obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

D. Termination Due to Death or Disability. In the event that Executive’s employment is Terminated at any time due to Executive’s death or “Disability” (as defined below), Executive (or Executive’s beneficiaries or estate) shall be entitled to receive, provided Executive (or Executive’s beneficiaries or estate, as applicable) signs a Separation Agreement, Waiver and Release of Claims substantially in the form attached hereto as Exhibit A, which is incorporated into this Agreement by reference, (i) continuation of Executive’s Benefits for a period of twelve (12) months from the date of Termination, and (ii) a lump sum payment equal to twelve (12) Executive’s Base Salary in effect immediately prior to the date of Executive’s Termination, to be paid within thirty (30) days following Executive’s Termination of employment. For purposes of this Agreement, a Termination for “Disability” shall mean a Termination of Executive’s employment due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

10. Withholding. All payments required to be made by the Company hereunder to Executive or Executive’s estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation.

11. Restrictive Covenants.

A. Non-Competition. Executive hereby agrees that, during (i) the six (6)-month period following a Termination of Executive’s employment with the Company that entitles Executive to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve (12)-month period following a Termination of Executive’s employment with the Company that does not entitle Executive to receive such severance benefits (the period referred to in either clause (i) or (ii), the “Restricted Period”), Executive shall not undertake any employment or activity (including, but not limited to, consulting services) with a Competitor (as defined below) in any geographic area in which the Company or any of its affiliates operate (the “Market Area”), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon Executive to reveal, to make judgments on or otherwise use or disclose any confidential business information or trade secrets of the business of the Company or any of its affiliates to which Executive had access during Executive’s employment with the Company. For purposes of this Section, “Competitor” shall refer to any health maintenance organization or insurance company that provides managed health care or related services similar to those provided by the Company or any of its affiliates.

B. Non-Solicitation. In addition, Executive agrees that, during the applicable Restricted Period following Termination of Executive’s employment with the Company, Executive shall not, directly or indirectly, (i) solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person or (ii) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

C. Modification of Restrictions. It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 11 are unreasonable (including, but not limited to, the definition of Market Area or Competitor or the time period during which this provision is applicable), the parties hereto hereby agree to any restrictions that such court would find to be reasonable under the circumstances.

D. Injunction Rights. Executive also acknowledges that the services to be rendered by Executive to the Company are of a special and unique character, which gives this Agreement a peculiar value to the Company or any of its affiliates, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 11 will cause the Company or any of its affiliates irreparable injury. Executive therefore agrees that the Company may be entitled, in addition to the remedies set forth above in this Section 11 and any other right or remedy, to a temporary, preliminary and permanent injunction, without the

necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

12. Successors; Binding Agreement.

A. Survival Following Merger, Consolidation or Asset Transfer. This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company. In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

B. Survivor’s Assumption of Agreement. The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in this Section 12, it will cause any successor or transferee to unconditionally assume, by written instrument delivered to Executive (or Executive’s beneficiary or estate), all of the obligations of the Company hereunder. Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall entitle Executive to compensation and other benefits from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive’s employment were Terminated without Cause. For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the date of Termination.

C. Enforceability. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive shall die while any amounts would be payable to Executive hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

13. Section 409(A) of the Internal Revenue Code. It is the intention of the Company and Executive that this Agreement not result in unfavorable tax consequences to Executive under Section 409A of the Code, and the Treasury Regulations and Internal Revenue Service guidance promulgated thereunder (“Section 409A”) and the Agreement shall be interpreted, construed and administered as to so comply with, or be exempt from, Section 409A. Notwithstanding anything to the contrary herein, the Company and Executive agree to the provisions set forth in this Section 13 in order to comply with, or be exempt from, the requirements of Section 409A.

A. If Executive is a “specified employee” (as determined under the Company’s Specified Employee Policy as in effect from time to time, or, in the absence of such policy, within the meaning of Section 409A) with respect to the Company, any non-exempt non-qualified deferred compensation that is subject to Section 409A and otherwise payable to or in respect of Executive in connection with Executive’s Separation from Service pursuant to this Agreement shall be delayed until the earlier of (i) the expiration of six (6) months measured from the date of Executive’s Separation from Service, or (ii) the date of Executive’s death. Any amount, the payment of benefit of which is delayed by application of the preceding sentence, shall be paid as soon as possible following the expiration of such period.

B. All incentive bonus payments described in Section 6(D) shall be paid to Executive, to the extent earned, in no event later than the last day of the “applicable 2-1/2 month period”, as such term is defined in Treasury Regulation Section 1.409A-1(b)(4)(i)(A) with respect to such payment’s treatment as a “short-term deferral” for purposes of Section 409A.

C. With respect to the Company’s reimbursement obligations under Sections 6(C) and 6(E) hereof and the provision of Benefits to Executive, (i) in no event shall any such reimbursements or in-kind benefits be made or provided later than the last day of Executive’s taxable year following the taxable year in which the fee or expense was incurred, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during Executive’s taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year of Executive, and (iii) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit, in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv).

D. The Company and Executive agree to cooperate in good faith in an effort to comply with Section 409A. Under no circumstances shall the Company be responsible for any taxes, penalties, interest or other losses or expenses incurred by the Executive due to any failure to comply with Section 409A. To the extent payments and benefits under this Agreement are subject to Section 409A, and such payments and benefits do not so comply, the Company shall amend this Agreement, or take such other actions as the Company deems reasonably necessary or appropriate, to comply with Section 409A. If any provision of the Agreement would cause such payments and benefits to fail to so comply, such provision shall not be effective and shall be null and void with respect to such payments or benefits, and such provision shall otherwise remain in full force and effect.

14. Company Policies. Executive’s employment with the Company is subject to the terms and conditions contained in the Company’s Associate Policies located on HR Link, which can be accessed through the Company’s intranet site, as in effect from time to time (the “Associate Policies”), the content of which is incorporated by reference herein. Executive shall be required to read, understand and comply with the Associate Policies.

15. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected and the parties shall use their best efforts to find an alternative way to achieve the same result.

16. Integrated Agreement. This Agreement supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied between the parties hereto with respect to the subject matters herein. It constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein. This Agreement cannot be changed unless in writing, signed by Executive and the Chief Executive Officer of the Company and approved by the Board of Directors of the Company (or the Committee, if permitted by the Committee’s charter). The Company acknowledges and agrees that nothing contained herein shall be deemed to supersede, amend or otherwise modify the terms of the Indemnification Agreement dated November 15, 2008 between Executive and the Company.

17. Waiver. No waiver of any default hereunder shall operate as a waiver of any subsequent default. Failure by either party to enforce any of the terms or conditions of this Agreement, for any length of time or from time to time, shall not be deemed to waive or decrease the rights of such party to insist thereafter upon strict performance by the other party.

18. Notices. All notices and communications required or permitted hereunder shall be in writing and shall be deemed given (a) if delivered personally, (b) one (1) business day after being sent by Federal Express or a similar commercial overnight service, or (c) three (3) business days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:

If to the Company:	Health Net, Inc.
	21650 Oxnard Street, 22nd Floor
	Woodland Hills, CA 91367
	Attention: General Counsel
If to the Executive:	Steve Tough
	[ADDRESS]
	[ADDRESS]

19. Governing Law. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

20. Survival and Enforcement. Sections 3, 8, 9, 11, 12 and the second paragraph of Section 6 of this Agreement and any rights and remedies arising out of this Agreement shall survive and continue in full force and effect in accordance with the respective terms thereof, notwithstanding any termination of this Agreement or a Termination of Executive’s employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3, 11 and 12 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Therefore, the Company or its successors or assigns shall be entitled in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security).

21. Acknowledgement. Executive acknowledges that Executive has had the opportunity to discuss the content of this Agreement with and obtain advice from Executive’s attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and Executive is knowingly and voluntarily entering into this Agreement. Executive further acknowledges that Executive is obligated to become familiar with and comply at all times with all written policies of the Company.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date set forth above.

Executive		Health Net, Inc.
By:	/s/ Steve Tough	By:	/s/ Karin Mayhew
Name:	Steve Tough	Name:	Karin Mayhew
Title:	President, Health Plans and Government Programs	Title:	SVP, Organization Effectiveness

cc: Linda Tiano

Karin Mayhew

Debbie J. Colia/Steve Tough Personnel File

EXHIBIT A

[FORM OF SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS]

This SEPARATION AGREEMENT, WAIVER AND RELEASE OF CLAIMS (this “Separation Agreement and Release”) is made and entered into as of the dates set forth on the signature pages hereto by and between Health Net, Inc. and its affiliates and subsidiaries (hereinafter referred to as the “Company”) and [EXECUTIVE NAME] (hereinafter referred to as the “Executive”).

WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of [DATE] (the “Employment Agreement”) and are entering into this Separation Agreement and Release as a condition to Executive’s receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Employment Agreement).

NOW, THEREFORE, the Company and Executive agree as follows:

1. Executive’s employment with the Company will terminate on [TERM DATE] (the “Termination Date”). Upon termination of employment, Executive will not represent to anyone that he is an employee of the Company and will not say or do anything purporting to bind the Company. Upon Executive’s termination of employment, Executive shall be deemed to have resigned from all other positions with the Company, if any, held by Executive.

2. Executive’s termination of employment with the Company shall be considered a [DESCRIBE TYPE OF TERMINATION] under the Employment Agreement, and Executive is therefore eligible to receive [DESCRIBE PAYMENTS AND OTHER BENEFITS TO BE RECEIVED (SEVERANCE, BENEFIT CONTINUATION/COBRA, ETC.].

3. Executive acknowledges that all unused accrued vacation and unused personal absence time will be paid in Executive’s final regular paycheck in keeping with the Company’s policy and practice or such shorter time as may be required by applicable law. Executive further acknowledges that no further vacation/paid-time-off or other benefits will accrue after the Termination Date.

4. Executive’s participation in all Company employee benefit plans as an active employee shall cease on the Termination Date, and Executive shall not be eligible to make contributions to or to receive Company matching contributions under the Health Net, Inc. 401(k) Associate Savings Plan, or to make any deferrals pursuant to any deferred compensation plan of the Company after the Termination Date (it being understood that Executive shall be entitled to all vested benefits accrued as of the date hereof under the Company’s 401(k) Savings Plan and any deferred compensation plan). If, immediately prior to the Termination Date, Executive participates in any Company employee welfare benefit plan, Executive’s participation in such plan shall continue on the same terms and conditions, including the same co-payment terms, until 11:59 p.m. (Pacific Time) on the last day of the month in which the Termination Date occurs.

A-1

5. In partial consideration of the Company providing Executive the payments and benefits set forth above and as a condition to receive such payments and benefits, which Executive acknowledges he is not otherwise entitled to receive, Executive freely and voluntarily enters into this Separation Agreement and Release and, by signing this Separation Agreement and Release, Executive, on his own behalf and on behalf of his heirs, beneficiaries, successors, representatives, trustees, administrators and assigns, hereby waives and releases the Company, and each of its past, present and future officers, directors, shareholders, employees, consultants, accountants, attorneys, agents, managers, insurers, sureties, parent and sister corporations, divisions, subsidiary corporations and entities, partners, joint venturers, affiliates, beneficiaries, successors, representatives and assigns, from any and all claims, demands, damages, debts, liabilities, controversies, obligations, actions or causes of action of any nature whatsoever, whether based on tort, statute, contract, indemnity, rescission or any other theory of recovery, including but not limited to claims arising under federal, state or local laws prohibiting discrimination in employment, including Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1870, as amended, claims of disability discrimination under the Americans with Disabilities Act, the Age Discrimination in Employment Act, as amended (“ADEA”), the Worker Adjustment and Retraining Notification Act (“WARN”), or claims growing out of any legal restrictions on the Company’s right to terminate its employees and whether for compensatory, punitive, equitable or other relief, whether known, unknown, suspected or unsuspected, against the Company, including without limitation claims which may have arisen or may in the future arise in connection with any event which occurred on or before the date of Executive’s execution of this Separation Agreement and Release. The provisions in this paragraph do not extend to any rights Executive may have to enforce the terms of this Agreement and are not intended to prohibit Executive from filing a claim for unemployment insurance.

6. Executive expressly waives any right or claim of right to assert hereafter that any claim, demand, obligation and/or cause of action has, through ignorance, oversight or error, been omitted from the terms of this Separation Agreement and Release. Executive makes this waiver with full knowledge of his rights and with specific intent to release both his known and unknown claims, and therefore specifically waives the provisions of Section 1542 of the Civil Code of California or other similar provisions of any other applicable law, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

Executive understands and acknowledges the significance and consequence of this Separation Agreement and Release and of such specific waiver of Section 1542, and expressly agrees that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands, obligations and causes of action herein above specified.

7. Executive shall not initiate or cause to be initiated against the Company any compliance review, suit, action, investigation or proceeding of any kind, or voluntarily participate in same, individually or as a representative, witness or member of a class, under contract,

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law or regulation, federal, state or local, pertaining to any matter related to his employment with the Company, unless Executive first cooperates in making his allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. Executive represents and warrants that he has not, to date, initiated (or caused to be initiated) any such review, suit, action, investigation or proceeding; provided, however, that nothing in this Section 7 shall restrict Executive’s ability to challenge the validity of any release herein of ADEA claims nor to any suit or action brought by Executive to assert such a challenge. In addition, Executive shall, without further compensation, cooperate with and assist the Company in the investigation of, preparation for or defense of any actual or threatened third party claim, investigation or proceeding involving the Company or its predecessors or affiliates and arising from or relating to, in whole or in part, Executive’s employment with the Company or its predecessors or affiliates for which the Company requests Executive’s assistance, which cooperation and assistance shall include, but not be limited to, providing testimony and assisting in information and document gathering efforts. In this connection, it is agreed that the Company will use its reasonable best efforts to assure that any request for such cooperation will not unduly interfere with Executive’s other material business and personal obligations and commitments.

8. Executive agrees he will return to the Company immediately upon termination any building keys, security passes or other access or identification cards and any Company property that was in his possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Executive agrees to clear all expense accounts and pay all amounts owed on any corporate credit cards which the Company previously issued to Executive, subject to the Company’s obligation to reimburse Executive for any properly reimbursable business expenses in accordance with the Company’s expense policies and procedures then in effect.

9. Executive shall not, without the Company’s written consent by an authorized representative, at any time prior or subsequent to the execution of this Separation Agreement and Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he acquired during the course of his employment by the Company, including without limitation, any technical, actuarial, economic, financial, procurement, provider, customer, underwriting, contractual, managerial, marketing or other information of any type that has economic value in the business in which the Company is engaged, but not including any previously published information or other information generally in the public domain.

10. In addition to any other part or term of this Separation Agreement and Release or the Employment Agreement, Executive agrees that he will not, (a) for a period of one (1) year from the date of this Agreement, irrespective of the reason for the termination, either directly or indirectly, on his own behalf or on behalf of any other person: (1) make known to any person, firm, corporation or other entity of any type, the names and addresses of any of the Company’s customers, enrollees or providers or any other information pertaining to them; or (2) disrupt, solicit or influence or attempt to solicit, disrupt or influence any of the Company’s customers, providers, vendors, agents or independent contractors with whom the Executive became acquainted during the course of employment or service for the purpose of terminating such a person’s or entity’s

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relationship with the Company or causing such a person or entity to associate with a competitor of the Company, and (b) for [a period of one (1) year] [the six (6) month period] following the Termination Date undertake any employment or activity prohibited by the Employment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Executive’s field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition. In addition, Executive agrees that, for [a period of one (1) year] [the six (6) month period] following the Termination Date, he shall not, directly or indirectly solicit, interfere with, hire, offer to hire or induce any person, who is or was an employee of the Company or any of its affiliates at the time of such solicitation, interference, hiring, offering to hire or inducement, to discontinue his/her relationship with the Company or any of its affiliates or to accept employment by, or enter into a business relationship with, Executive or any other entity or person.

11. Executive further agrees that, in exchange for the consideration set forth in Section 2 hereof, Executive shall not make any disparaging comments and/or statements to anyone either orally or in writing about the Company and/or its employees.

12. Nothing contained herein shall be construed as an admission of any wrongful act, including but not limited to violation of any contract, express or implied, or any federal, state or local employment laws or regulations, and nothing contained herein shall be used for any purpose except in proceedings related to the enforcement of this Separation Agreement and Release.

13. If any part or term of this Separation Agreement and Release is held invalid or unenforceable by any court or arbitrator, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Separation Agreement and Release. In addition, if any court of competent jurisdiction construes the covenants contained in Section 10 hereof, or any part thereof, to be unenforceable in any respect, the court may reduce the duration or scope to the extent necessary so that the provision is enforceable, and the provision, as reduced, shall then be enforceable.

14. Executive agrees and acknowledges that this Separation Agreement and Release recites all payments and benefits Executive is entitled to receive hereunder and under the Employment Agreement, and that no other payments or benefits will be asserted or requested by Executive.

15. The Executive acknowledges that he has had an opportunity to consult and be represented by counsel of his own choosing in the review of this Separation Agreement and Release, and that he has been advised by the Company to do so, that the Executive is fully aware of this Separation Agreement and Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Separation Agreement and Release, and that Executive enters into this Separation Agreement and Release freely, without coercion, and based on the Executive’s own judgment and not in reliance upon any representation or promise made by the other party, other than those contained herein. There may be no modification of the terms of this Separation Agreement and Release except in writing signed by the parties hereto including an appropriately authorized officer of the Company.

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16. This Separation Agreement and Release constitutes the full, complete and exclusive agreement between Executive and the Company with respect to the subject matters herein and supersedes any prior agreements, representations or promises of any kind, whether written, oral, express or implied, with respect to the subject matters herein. This Separation Agreement and Release cannot be changed unless in writing, signed by Executive and an authorized officer of the Company.

17. If there is any dispute between the Company and Executive over the terms or obligations under this Separation Agreement and Release, that dispute shall be resolved by binding arbitration before a single neutral arbitrator who shall be a retired judge. The arbitration shall proceed in accordance with the then-current rules of the Commercial American Arbitration Association to the extent not inconsistent with this Separation Agreement and Release. The judgment of the arbitrator shall be final, binding and nonappealable, and may be entered in any state or federal court having jurisdiction thereafter. The arbitrator shall be bound to apply and follow the applicable state or federal laws in reaching a decision in this matter. Any disagreement regarding whether a dispute is required to be arbitrated pursuant to this Separation Agreement and Release shall be decided by the arbitrator. The Federal Arbitration Act, 9 U.S.C. Sections 1-16, shall govern the interpretation and enforcement of this Section 17. The prevailing party will be entitled to recover reasonable attorney’s fees and costs incurred in any action to enforce or defend this Separation Agreement and Release.

18. This Separation Agreement and Release shall be construed and governed by the laws of the State of Delaware.

EXECUTIVE ACKNOWLEDGES BY SIGNING BELOW that (i) Executive has not relied upon any representations, written or oral, not set forth in this Separation Agreement and Release; (ii) at the time Executive was given this Separation Agreement and Release Executive was informed in writing by the Company that (a) Executive had at least 21 days in which to consider whether Executive would sign the Separation Agreement and Release and (b) Executive should consult with an attorney before signing the Separation Agreement and Release; and (iii) Executive had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Separation Agreement and Release without consulting an attorney.

Executive further acknowledges that he may revoke acceptance of this Separation Agreement and Release by delivering a letter of revocation within seven (7) days after the later of the dates set forth below addressed to: Health Net, Inc., Organization Effectiveness Department, 21650 Oxnard Street, Woodland Hills, California 91367, Attention: Karin Mayhew.

Finally, Executive acknowledges that he understands that this Separation Agreement and Release will not become effective until the eighth (8th) day following his signing this Separation Agreement and Release and that if Executive does not revoke his acceptance of the terms of this Separation Agreement and Release within the seven (7) day period following the date on which Executive signs this Separation Agreement and Release as set forth above, this Separation Agreement and Release will be binding and enforceable.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Separation Agreement and Release as of the dates set forth below.

Executive		Health Net, Inc.
By:	[EXHIBIT COPY]	By:	[EXHIBIT COPY]
Name:		Name:
Title:		Title:
Dated:	[TO BE INSERTED]	Dated:	[TO BE INSERTED]

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EX-10.19

EXHIBIT 10.19

HEALTH NET, INC.

DEFERRED COMPENSATION PLAN

(as amended and restated effective November 12, 2007)

I. INTRODUCTION

The purpose of the Health Net, Inc. Deferred Compensation Plan (the “Plan”) is to permit certain key employees of Health Net, Inc., a Delaware corporation (the “Company”), and certain of its subsidiaries to defer receipt of compensation payable to such employees until such times as set forth herein.

II. DEFINITIONS

For purposes of the Plan, the following capitalized terms shall have the meanings set forth in this Article.

2.1 “Account” shall mean the account kept on the books and records of the Company established on behalf of a Participant in the Plan to which amounts deferred by such Participant (and deemed earnings and losses thereon), other than amounts credited to the Participant’s In-Service Withdrawal Account, are credited.

2.2 “Beneficiary” shall mean the beneficiary or beneficiaries (including any contingent beneficiary) designated pursuant to Section 4.5, except that the beneficiary or beneficiaries entitled to amounts credited to the subaccounts of an Eligible Employee’s Former Account shall be the beneficiary or beneficiaries as designated pursuant to The Health Net Executive Deferral Plan and The Health Net Supplemental Credit Plan (such plans terminated effective as of December 31, 2000), unless a change to such a beneficiary is made pursuant to Section 4.5 hereof.

2.3 “Board” shall mean the Board of Directors of the Company.

2.4 “Code” shall mean the Internal Revenue Code of 1986, as amended.

2.5 “Committee” shall mean the Compensation and Stock Option Committee of the Board.

2.6 “Common Stock” shall mean the Class A Common Stock, $.001 par value, of the Company.

2.7 “Company” shall mean Health Net, Inc. (formerly known as Foundation Health Systems, Inc.), a Delaware corporation, or any successor thereto.

2.8 “Compensation” shall mean the total earnings paid by an Employer to an Eligible Employee and properly reportable on IRS Form W-2 for a Deferral Year (including bonuses and overtime), and all amounts not includible in such Eligible Employee’s gross income for federal

income tax purposes solely on account of his or her election to have compensation reduced pursuant to the Plan, a qualified cash or deferred arrangement described in Section 401(k) of the Code or a cafeteria plan as defined in Section 125 of the Code, but excluding any reimbursements or other allowances for automobile, relocation, travel or education expenses (even if includible in the Eligible Employee’s gross income for federal income tax purposes).

2.9 “Deferral Year” shall mean the twelve-month period beginning each January 1, except that the first Deferral Year shall be the eight-month period beginning on May 1, 1998.

2.10 “Disability” shall mean a disability within the meaning of the long-term disability plan maintained by the Employer of an Eligible Employee, pursuant to which such Eligible Employee is receiving long-term disability benefits.

2.11 “Eligible Employee” shall mean an individual (i) who is treated by an Employer as its employee, (ii) whose employment position is categorized as “director-level” or above, and (iii) whose annual base rate of salary for a Deferral Year is at least $100,000 (or such other amount determined by the Company from time to time) as of the first day of such Deferral Year.

2.12 “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

2.13 “Effective Date” shall mean May 1, 1998.

2.14 “Employer” shall mean the Company or a Subsidiary, other than a Subsidiary that the Committee excludes from participation in the Plan.

2.15 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

2.16 “Former Account” shall mean an account kept on the books and records of the Company established on behalf of an Eligible Employee to which shall be credited the following: (i) amounts equal to the benefits earned by such Eligible Employee as of December 31, 2000 (the “Plan Termination Date”) under The Health Net Executive Deferral Plan (the “Deferral Plan”) and The Health Net Supplemental Credit Plan (the “Supplemental Credit Plan”) and (ii) deemed earnings and losses on such amounts after the Plan Termination Date. An Eligible Employee’s Former Account shall consist of two subaccounts, i.e., (x) a Deferral Plan Subaccount, to which shall be credited such Eligible Employee’s benefit under the Deferral Plan as of the Plan Termination Date, and deemed earnings and losses thereon after the Plan Termination Date, and (y) a Supplemental Credit Plan Subaccount, to which shall be credited such Eligible Employee’s benefit under the Supplemental Credit Plan as of the Plan Termination Date, and deemed earnings and losses thereon after the Plan Termination Date.

2.17 “In-Service Withdrawal Account” shall mean the account kept on the books and records of the Company established on behalf of a Participant to which amounts deferred by such Participant pursuant to Section 3.2(f) shall be paid in a lump sum at the time or times described in Section 4.1(b).

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2.18 “In-Service Withdrawal Year” shall mean the calendar year designated by a Participant on his or her deferral election form filed pursuant to Section 3.2(f), which year begins at least three years after the year in respect of which the Participant has filed such election form.

2.19 “Investment Fund” shall mean an “open-end,” “closed-end” or other collective investment fund selected by the Company from time to time as a measure for allocating deemed investment gains and losses to Participants’ accounts.

2.20 “Merger” shall mean any merger of the Company in which the holders of the Class A common stock, $.001 par value, of the Company immediately prior to the merger have the same proportionate ownership of common stock of the surviving or resulting parent corporation immediately after the merger.

2.21 “Participant” shall mean an Eligible Employee who has elected to defer, pursuant to the terms of the Plan, an amount that would otherwise be payable as Compensation in a Deferral Year.

2.22 “Payment Date” shall mean the date chosen by the Company, in its sole discretion, that occurs within the 90-day period beginning immediately after the last day of a calendar year.

2.23 “Regular Compensation” shall mean an Eligible Employee’s Compensation for a Deferral Year, excluding any bonuses payable to such Eligible Employee during, or with respect to, such Deferral Year.

2.24 “Subsidiary” shall mean any corporation other than the Company in an unbroken chain of corporations beginning with the Company if, at the time of reference, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

III. PARTICIPATION AND DEFERRALS

3.1 Participation.

(a) In General. Each Eligible Employee may participate in the Plan in a Deferral Year by irrevocably specifying on an election form filed with the Company prior to the beginning of such Deferral Year the percentage of Compensation for the Deferral Year to be deducted from such Compensation and deferred for payment at a later date pursuant to the Plan. The Company shall establish rules and procedures prescribing the time and manner in which election forms shall be filed with the Company.

(b) Initial Participation. An individual may participate in the Plan during the first Deferral Year in which the individual begins employment with an Employer, provided that on the individual’s date of hire he or she satisfies the conditions set forth in clauses (i) and (ii) of the definition of “Eligible Employee” and his or her annual base rate of salary for such Deferral Year is at least $100,000. To participate in the Plan, such individual must file a deferral election form with the Company within 30 days of his or her date of hire (hereinafter, such individual is

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referred to as an “Eligible Employee”) and may only elect to defer Compensation with respect to services performed for periods following the date of the election.

3.2 Deferral Elections.

(a) In General. Except as provided in Section 3.1(b), a deferral election form must be filed in accordance with rules and procedures prescribed by the Company prior to the Deferral Year for which the election is to be effective. A Participant may not revoke or change a deferral election for a Deferral Year after the beginning of such year. A Participant must file a new election form with the Company prior to each Deferral Year for which the election is to be effective. In no event shall an election under the Plan apply to Compensation earned prior to the date on which the election to participate in the Plan for a Deferral Year is received by the Company.

(b) Deferral Amount. An Eligible Employee may elect on the election form (in the time and manner designated by the Company) to defer the receipt of (i) between 5% and 90% of the amount that would otherwise be the Eligible Employee’s Regular Compensation for a Deferral Year, (ii) between 5% and 100% of any bonus payable to such Eligible Employee during, or with respect to, the Deferral Year or (iii) any combination of such percentages described in clauses (i) and (ii).

(c) Deemed Investment Election. Upon the commencement of participation in the Plan, each Participant shall specify on his or her election form any one or more of the Investment Funds in which all of the Participant’s accounts under the Plan are to be deemed invested.

(d) Change of Deemed Investment Election. A Participant may elect to change his or her deemed investment election as frequently as may be designated by the Company, and in any event at least quarterly. Any such change shall specify the whole percentages (or amounts if so permitted by the Company) to be deemed invested in one or more of the then available Investment Funds. A Participant may change his or her election (i) with respect to the balance of his or her account(s) as of the effective date of the Participant’s new investment election, (ii) with respect to future amounts credited to the Participant’s account(s) under Section 3.3(a) and (b) or (iii) both. A Participant’s change of a deemed investment election must be made in accordance with the written rules and conditions provided by the Company to the Participants.

(e) Payment Election. Except as provided in subsection (f) of this Section 3.2, an Eligible Employee must designate on each deferral election form filed with the Company (i) a manner of payment in which his or her Account shall be paid, provided that such manner of payment is permitted under Section 4.2, and (ii) whether the Account is to be paid on the Payment Date occurring immediately after (x) the calendar year in which the Eligible Employee terminates employment with the Employer, or (y) the calendar year immediately following the calendar year in which such employment terminates. The Participant’s election on a deferral election form shall in no event supersede the Participant’s election with respect to previously deferred amounts (and credits attributable thereto).

(f) In-Service Withdrawals. A Participant may elect for any Deferral Year on a deferral election form filed with the Company (i) to designate any percentage of the amount to be

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deferred to be credited to an In-Service Withdrawal Account established on behalf of the Participant and (ii) to receive payment of the balance of such In-Service Withdrawal Account in a lump-sum within 90 days after the last day of the In-Service Withdrawal Year so designated by the Participant.

3.3 Deferred Compensation Account.

(a) Crediting Deferred Compensation. Any amount otherwise payable as Compensation that is deferred by a Participant hereunder shall be credited to the applicable account of the Participant as of the date on which, absent such election, such amount would have been payable to the Participant as Compensation.

(b) Earnings. Each Participant’s account(s) under the Plan shall be credited with deemed earnings, or reduced by deemed losses, equal to the earnings or losses that would have been realized or paid if assets in an amount equal to the balance of such account(s) were actually invested among the Investment Funds selected by the Participant in accordance with Section 3.2(c) and (d). Although the Company or an Employer might actually invest assets of the Company or such Employer according to the Participant’s election, it is not required to do so nor to set aside any assets to provide for payments hereunder. The Company may promulgate separate accounting and administrative rules to facilitate the deemed investment in an Investment Fund.

(c) Notices. Each Participant shall receive written notice of the balance of his or her account(s) as soon as practicable following the last day of each calendar quarter.

IV. PAYMENTS OF DEFERRED COMPENSATION

4.1 Timing.

(a) In General. The balance of a Participant’s Account shall be paid or shall commence to be paid on the Payment Date occurring immediately after (i) the calendar year in which the Participant terminates employment with the Employer, or (ii) the calendar year immediately following the calendar year in which such employment terminates, as elected by the Participant on the applicable election form of the Participant. Notwithstanding the foregoing, in the event that the Participant is a “specified employee” (within the meaning of Section 409A of the Code (“Section 409A”)) with respect to the Company at the time of a termination of employment, the payment (or the commencement of payment) of the Participant’s Account shall be delayed until the earliest date upon which such payment may be made or commenced without such payment being subject to taxation under Section 409A (the “Required Delay”). In the event that the Participant has elected payment in annual installments, the delay described in the preceding sentence, if applicable, shall only be applied to the installments which must be delayed in order to comply with Section 409A and shall not otherwise affect the timing of payment of subsequent installments.

(b) In-Service Withdrawals. A Participant may elect to receive any percentage of an amount deferred for a Deferral Year in any In-Service Withdrawal Year that begins at least three years after such Deferral Year. Such percentage shall be credited to an In-Service Withdrawal

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Account established in the Participant’s name and the amount credited to such account shall be paid in a lump sum on the Payment Date for such In-Service Withdrawal Year. Notwithstanding the immediately preceding sentence, if a Participant terminates employment with the Employer in a calendar year prior to such In-Service Withdrawal Year, then the amount credited to the Participant’s In-Service Withdrawal Account shall be paid in a lump sum on the earlier of: (i) the Payment Date for the calendar year with respect to which the Participant’s Account shall be paid or shall commence to be paid, as elected by the Participant pursuant to Section 4.1 (but subject to the Required Delay), and (ii) the Payment Date for the In-Service Withdrawal Year as elected by the Participant.

(c) Company Deferral Discretion. Notwithstanding a Participant’s election, the Company may, in its sole discretion, defer the payment of all or any portion of any account of a Participant to the extent the Company determines that the payment on such Payment Date would cause the Participant’s Employer to be unable to deduct any portion of the Participant’s Compensation as a result of the limitations prescribed by Section 162(m) of the Code; provided, however, that any such deferral may only be made in a manner which is in compliance with the requirements of Section 409A.

4.2 Manner of Payment. Each Participant shall receive payment of the amount credited to the Participant’s Account either in a single lump sum or in annual installments at least equal to $1,000 over a period of not less than two and not more than ten years, as elected by the Participant upon his or her commencement of participation in the Plan. Notwithstanding the foregoing sentence, such Account shall be paid to such Participant or his or her Beneficiary in the form of a single lump sum if (i) the amount credited to such Account as of the relevant Payment Date is less than the applicable dollar amount under Section 402(g)(1)(B) of the Code, (ii) the Participant has not attained age 55 as of such Payment Date or (iii) the Participant’s employment with an Employer terminates by reason of death.

4.3 Emergency Payments. In the event of an Unforeseeable Financial Emergency, as hereinafter defined, the Participant may file a written request with the Company to receive all or any portion of the balance of such Participant’s account(s) in an immediate lump sum payment. A Participant’s written request for such a payment shall describe the circumstances which the Participant believes justify the payment and an estimate of the amount necessary to eliminate the Unforeseeable Financial Emergency. An “Unforeseeable Financial Emergency” shall mean unforeseeable severe financial hardship resulting from (i) the Participant’s Disability, (ii) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (iii) loss of the Participant’s property due to casualty or (iv) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Company, provided that any such Unforeseeable Financial Emergency must also constitute an “unforeseeable emergency” as defined in Treasury Regulation 1.409A-3(i)3(i). Unforeseeable Financial Emergency payments shall be made only to the extent necessary to satisfy the emergency need and shall not be made to the extent the need is or may be relieved through reimbursement or compensation, by insurance or otherwise, by the Company’s cessation of deferrals under the Plan or by liquidation of the Participant’s assets (to the extent such liquidation itself would not cause severe financial hardship). Any Unforeseeable Financial Emergency payment from a Participant’s account(s) shall be deemed to cancel any deferral election of the Participant then in effect and, unless otherwise determined by the

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Company, the Participant shall be suspended from making further deferral elections under the Plan during the remainder of the Deferral Year in which such payment is made and the Deferral Year immediately thereafter.

4.4 Distributions to Minor and Incompetent Persons. If a payment is to be made to a minor or to an individual who, in the opinion of the Company, is unable to manage his or her financial affairs by reason of illness or mental incompetency, such payment may be made to or for the benefit of any such individual in any of the following ways as the Company shall direct: (a) directly to any such minor individual if, in the opinion of the Company, he or she is able to manage his or her financial affairs, (b) to the legal representative of any such individual, (c) to a custodian under a Uniform Gifts to Minors Act for any such minor individual, or (d) to a relative of any such individual to be used for the latter’s benefit. Neither the Company nor any Employer shall be required to see to the application by any third party of any payment made to or for the benefit of a Participant or Beneficiary pursuant to this Section.

4.5 Beneficiaries. A Participant shall have the right to designate a Beneficiary, and amend or revoke such a designation at any time, in writing. Such designation, amendment or revocation shall be effective upon receipt of the Participant’s written designation by the Company. If a Participant is married at the time a Beneficiary designation is submitted to the Company, the designation of a Beneficiary other than the Participant’s spouse shall not be effective unless the Participant’s spouse consents to such designation in writing, or it is established to the satisfaction of the Company that such consent could not be obtained because the Participant’s spouse cannot be located or such other circumstances as may be considered by the Company. Subject to the preceding sentence, a Participant may from time to time, without the consent of any Beneficiary, change or cancel any such designation. Such designation and each change therein shall be made in the form prescribed by the Company and shall be filed with the Company. If no Beneficiary survives the Participant, the Company shall direct that payment of any balance to the Participant’s account(s) be made in the following order of priority:

(a) to the beneficiaries designated in the Participant’s last will, if specific reference is made therein to the payment of such account(s); or if none,

(b) to the Participant’s spouse; or if none,

(c) to the Participant’s descendants, per stirpes; or if none,

(d) to the Participant’s estate.

If a Participant has only one election form on file with the Company and terminates employment with the Employer before the expiration of twelve (12) months since the delivery of such election form, then, notwithstanding the Participant’s election with respect to the timing of the payment, or commencement of payment, of his or her Account or In-Service Withdrawal Account, as the case may be, the balance of such account shall be paid or shall commence to be paid on the Payment Date for the calendar year in which the Participant’s employment terminates.

V. ADMINISTRATION

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5.1 Administration. The Plan shall be administered by the Committee, which shall have full power and authority to interpret, construe and administer the Plan in accordance with the provisions herein set forth, except to the extent the Plan specifically provides that the Company shall carry out certain administrative duties. The Committee’s interpretation and construction hereof, and actions hereunder, or the amount or recipient of the payments to be made herefrom, shall be binding and conclusive on all persons for all purposes. The Committee and the Company may delegate to any Employer, committee, individual (regardless of whether such individual is an employee of an Employer) or entity any of their respective powers or duties hereunder.

5.2 Indemnification. No officer or employee of the Company or any Employer shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his or her own willful misconduct or lack of good faith, and the Company shall indemnify and hold harmless such officers and employees from and against all claims, losses, damages, causes of action and expenses, including reasonable attorney fees and court costs, incurred in connection with such interpretation and administration of the Plan. The expenses of administering the Plan shall be paid by the Employers and shall not be charged against any Participant’s account(s).

5.3 Claims Procedure. The Company (i) shall provide notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial and written in a manner calculated to be understood by such Participant or Beneficiary and (ii) shall afford a reasonable opportunity to any Participant or Beneficiary whose claim for benefits has been denied for a full and fair review by the Committee of the decision denying the claim.

VI. MISCELLANEOUS

6.1 Unfunded Status and Application of ERISA. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and Department of Labor Regulation § 2520.104-23. In order to meet the deferred obligations hereunder, the Company and the Employers may, but shall not be required to, establish a grantor trust and transfer thereto an amount necessary to provide payments equal to the aggregate balances of the Participants’ accounts. In the event that the Company or an Employer transfers any amounts to a grantor trust to provide payments hereunder, such amounts, and all income attributable to such amounts, shall be subject to the claims of the Company’s or the Employer’s general creditors. The Company’s and each Employer’s obligations hereunder shall constitute general, unsecured obligations, payable solely out of its general assets, and no Participant or Beneficiary shall have any right to any specific assets. The Plan constitutes a mere promise by the Company and each Employer to make benefit payments in the future.

6.2 Limitation on Rights. Neither the establishment of the Plan nor the payment of any account hereunder shall be construed as giving or granting any person any legal or equitable rights against the Company, any Employer, the Board, the Committee, or any of their officers,

8

trustees, associates, or agents, other than such as are specifically conferred by the express terms of the Plan.

6.3 Satisfaction of Claims. The payment to a Participant, Beneficiary or other person of an account balance hereunder pursuant to the terms of the Plan shall be in full satisfaction of all claims with respect to such account that such person may have against the Company or any Employer.

6.4 Nonassignability. No amount deferred under the Plan or any amount credited to an account shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment, and any attempt to transfer or encumber the same shall be void, other than pursuant to a qualified domestic relations order as defined in Title I of ERISA.

6.5 Amendment of the Plan. The Committee may, in its sole discretion and without the consent of any Participant or Beneficiary, amend the Plan at any time and in any manner by duly adopted resolutions; provided, however, that no amendment shall reduce the amount credited to any account of any Participant immediately prior to such amendment and no amendment will be permitted which would result in taxation of Participants pursuant to Section 409A.

6.6 Withdrawal by an Employer; Termination of the Plan. Each Employer may, in its sole discretion without the consent of any Participant or Beneficiary, terminate its participation in the Plan at any time by giving written notice thereof to the Committee and each Participant employed by such Employer. Termination of participation by an Employer shall not affect the time of payment of the Participant’s Account. The Company may, in its sole discretion, terminate the Plan without the consent of, or notification to, any person. Termination of the Plan shall not affect the time of payment of the Participant’s Account unless the Plan is terminated under circumstances which would permit the immediate payment to Participants of all amounts deferred under the Plan in compliance with Treasury Regulation 1.409A-3(j)(ix), in which case each Participant’s Account shall be paid out in full in a lump sum within 30 days following the date of the termination of the Plan.

6.7 Change in Control. If, following a Change in Control, as hereinafter defined, a Participant determines in good faith that the Company or an Employer has failed to comply with any of its obligations under the Plan or, if the Company or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny or diminish or to recover from any Participant the benefits intended to be provided hereunder, then the Company irrevocably authorizes such Participant to retain counsel of his or her choice at the expense of the Company to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or an Employer, or any director, officer, stockholder or other person affiliated with the Company or such Employer, or any successor thereto in any jurisdiction. Reimbursements to Participants under this Section 6.7, if any, shall be made not later than the last day of the Participant’s taxable year following the year in which the Participant incurs the reimbursable expense. For purposes of this Section, a “Change in Control” shall mean:

(i) Approved Transaction. An action of the Board (or, if approval of the Board is

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not required as a matter of law, the stockholders of the Company) approving (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in Board composition that the Board determines to be a Change in Control for purposes of the Plan.

6.8 No Contractual Rights to Employment. Nothing in the Plan shall be interpreted as conferring any right on any employee to remain employed by an Employer for any stated period of time or otherwise change the employee’s employment relationship with his or her Employer from an employment at will relationship.

6.9 Severability. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.

6.10 Tax Withholding; Other Tax Matters. Any payment required under the Plan shall be subject to all requirements of the law with regard to income and employment withholding taxes, filings, and making of reports, and each Employer and Participant shall use its or his or her best efforts to satisfy promptly all such requirements, as applicable. For purposes of this Plan, a Participant’s employment with the Company will not be treated as terminated unless and until such termination of employment constitutes a “separation from service” for purposes of Section

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409A of the Code. It is the intention of the Company that the provisions of the Plan not result taxation of Participants under Section 409A of the Code and the regulations and guidance promulgated thereunder and that the Plan shall be construed in accordance with such intention.

6.11 Applicable Law. The Plan and all rights hereunder and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to the principles of conflicts of laws.

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EX-10.21

EXHIBIT 10.21

HEALTH NET, INC.

DEFERRED COMPENSATION PLAN

FOR DIRECTORS

(as amended and restated effective November 12, 2007)

I. INTRODUCTION

The purpose of the Health Net, Inc. Deferred Compensation Plan for Directors (the “Plan”) is to permit members of the board of directors of Health Net, Inc., a Delaware corporation (the “Company”), who are not employees of the Company to defer the receipt of certain meeting fees and other cash remuneration payable by the Company, until such times as set forth herein. Prior to January 1, 2004, such directors were eligible to participate in the Health Net, Inc. Deferred Compensation Plan, on substantially the same terms and conditions that they are eligible to participate in this Plan.

II. DEFINITIONS

For purposes of the Plan, the following capitalized terms shall have the meanings set forth in this Article.

2.1 “Account” shall mean the account kept on the books and records of the Company established on behalf of a Participant in the Plan to which amounts deferred by such Participant (and deemed earnings and losses thereon), other than amounts credited to the Participant’s In-Service Withdrawal Account, are credited.

2.2 “Beneficiary” shall mean the beneficiary or beneficiaries (including any contingent beneficiary) designated pursuant to Section 4.5.

2.3 “Board” shall mean the Board of Directors of the Company.

2.4 “Code” shall mean the Internal Revenue Code of 1986, as amended.

2.5 “Committee” shall mean the Compensation and Stock Option Committee of the Board.

2.6 “Common Stock” shall mean the Class A Common Stock, $.001 par value, of the Company.

2.7 “Company” shall mean Health Net, Inc. (formerly known as Foundation Health Systems, Inc.), a Delaware corporation, or any successor thereto.

2.8 “Compensation” shall mean the fees and other cash remuneration payable to a Director during a Deferral Year.

2.9 “Deferral Year” shall mean the twelve-month period beginning each July 1, except that the first Deferral Year shall be the six-month period beginning on January 1, 2004.

2.10 “Director” shall mean a member of the Board.

2.11 “Disability” shall mean a physical or mental disability which, in the judgment of the Committee, prevents a Participant from performing substantially such Participant’s duties and responsibilities to the Company for a continuous period of at least six months.

2.12 “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

2.13 “Effective Date” shall mean January 1, 2004.

2.14 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

2.15 “In-Service Withdrawal Account” shall mean the account kept on the books and records of the Company established on behalf of a Participant to which amounts deferred by such Participant pursuant to Section 3.2(f) shall be paid in a lump sum at the time or times described in Section 4.1(b).

2.16 “In-Service Withdrawal Year” shall mean the calendar year designated by a Participant on his or her deferral election form filed pursuant to Section 3.2(f), which year begins at least three years after the year in respect of which the Participant has filed such election form.

2.17 “Investment Fund” shall mean an “open-end,” “closed-end” or other collective investment fund selected by the Company from time to time as a measure for allocating deemed investment gains and losses to Participants’ accounts.

2.18 “Merger” shall mean any merger of the Company in which the holders of the Class A common stock, $.001 par value, of the Company immediately prior to the merger have the same proportionate ownership of common stock of the surviving or resulting parent corporation immediately after the merger.

2.19 “Participant” shall mean a Director who has elected to defer, pursuant to the terms of the Plan, an amount that would otherwise be payable as Compensation in a Deferral Year.

2.20 “Payment Date” shall mean the date chosen by the Company, in its sole discretion, that occurs within the 90-day period beginning immediately after the last day of a Deferral Year.

III. PARTICIPATION AND DEFERRALS

3.1 Participation.

(a) In General. Each Director may participate in the Plan in a Deferral Year by irrevocably specifying on an election form filed with the Company prior to the beginning of such Deferral Year the percentage(s) of the Compensation otherwise payable to him or her by the

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Company during the Deferral Year to be deducted from such Compensation and deferred for payment at a later date pursuant to the Plan. The Company shall establish rules and procedures prescribing the time and manner in which election forms shall be filed with the Company.

(b) Initial Participation. An individual may participate in the Plan during the first Deferral Year in which the individual becomes a Director. To participate in the Plan for such Deferral Year, such individual must file a deferral election form with the Company within 30 days of his or her becoming a Director and may only elect to defer Compensation with respect to services performed for periods following the date of the election.

3.2 Deferral Elections.

(a) In General. Except as provided in Section 3.1(b), a deferral election form must be filed in accordance with rules and procedures prescribed by the Company prior to the Deferral Year for which the election is to be effective. A Participant may not revoke or change a deferral election for a Deferral Year after the beginning of such year. A Participant must file a new election form with the Company prior to each Deferral Year for which the election is to be effective. In no event shall an election under the Plan apply to Compensation earned prior to the date on which the election to participate in the Plan for a Deferral Year is received by the Company.

(b) Deferral Amount. A Director may elect on the election form designated by the Company to defer the receipt of any or all of the amount otherwise payable as Compensation to such Director during the Deferral Year.

(c) Deemed Investment Election. Upon the commencement of participation in the Plan, each Participant shall specify on his or her election form any one or more of the Investment Funds in which all of the Participant’s accounts under the Plan are to be deemed invested.

(d) Change of Deemed Investment Election. A Participant may elect to change his or her deemed investment election as frequently as may be designated by the Company. Any such change shall specify the whole percentages (or amounts if so permitted by the Company) to be deemed invested in one or more of the then available Investment Funds. A Participant may change his or her election (i) with respect to the balance of his or her account(s) as of the effective date of the Participant’s new investment election, (ii) with respect to future amounts credited to the Participant’s account(s) under Section 3.3(a) and (b) or (iii) both. A Participant’s change of a deemed investment election must be made in accordance with the written rules and conditions provided by the Company to the Participants.

(e) Payment Election. Except as provided in subsection (f) of this Section 3.2, a Director must designate on each deferral election form filed with the Company (i) a manner of payment in which his or her Account shall be paid, provided that such manner of payment is permitted under Section 4.2, and (ii) whether the Account is to be paid on the Payment Date occurring immediately after (x) the Deferral Year in which the Director terminates service as a Director, or (y) the Deferral Year immediately following the Deferral Year in which such service terminates. The Participant’s election on a deferral election form shall in no event supersede the Participant’s election with respect to previously deferred amounts (and credits attributable thereto).

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(f) In-Service Withdrawals. A Participant may elect for any Deferral Year on a deferral election form filed with the Company (i) to designate any percentage of the amount to be deferred to be credited to an In-Service Withdrawal Account established on behalf of the Participant and (ii) to receive payment of the balance of such In-Service Withdrawal Account in a lump-sum within 90 days after the last day of the In-Service Withdrawal Year so designated by the Participant.

3.3 Deferred Compensation Account.

(a) Crediting Deferred Compensation. Any amount otherwise payable as Compensation that is deferred by a Participant shall be credited to the applicable account of the Participant as of the date on which, absent such election, such amount would have been payable to the Participant as Compensation.

(b) Earnings. Each Participant’s account(s) under the Plan shall be credited with deemed earnings, or reduced by deemed losses, equal to the earnings or losses that would have been realized or paid if assets in an amount equal to the balance of such account(s) were actually invested among the Investment Funds selected by the Participant in accordance with Section 3.2(c) and (d). Although the Company might actually invest assets of the Company according to the Participant’s election, it is not required to do so nor to set aside any assets to provide for payments hereunder. The Company may promulgate separate accounting and administrative rules to facilitate the deemed investment in an Investment Fund.

(c) Notices. Each Participant shall receive written notice of the balance of his or her account(s) as soon as practicable following the last day of each calendar quarter.

IV. PAYMENTS OF DEFERRED COMPENSATION

4.1 Timing.

(a) In General. The balance of a Participant’s Account shall be paid or shall commence to be paid on the Payment Date occurring immediately after (i) the Deferral Year in which the Participant terminates service as Director, or (ii) the Deferral Year immediately following the Deferral Year in which such service terminates, as elected by the Participant on the applicable election form of the Participant. Notwithstanding the foregoing, in the event that the Participant is a “specified employee” (within the meaning of Section 409A of the Code (“Section 409A”)) with respect to the Company at the time of a termination of service, the payment (or the commencement of payment) of the Participant’s Account shall be delayed until the earliest date upon which such payment may be made or commenced without such payment being subject to taxation under Section 409A (the “Required Delay”). In the event that the Participant has elected payment in annual installments, the delay described in the preceding sentence, if applicable, shall only be applied to the installments which must be delayed in order to comply with Section 409A and shall not otherwise affect the timing of payment of subsequent installments.

(b) In-Service Withdrawals. A Participant may elect to receive any percentage of an amount deferred for a Deferral Year in any In-Service Withdrawal Year that begins at least three years after such Deferral Year. Such percentage shall be credited to an In-Service Withdrawal

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Account established in the Participant’s name and the amount credited to such account shall be paid in a lump sum on the Payment Date for such In-Service Withdrawal Year. Notwithstanding the immediately preceding sentence, if a Participant terminates service as a Director in a calendar year prior to such In-Service Withdrawal Year, then the amount credited to the Participant’s In-Service Withdrawal Account shall be paid in a lump sum on the earlier of: (i) the Payment Date for the Deferral Year with respect to which the Participant’s Account shall be paid or shall commence to be paid, as elected by the Participant pursuant to Section 4.1 (subject to the Required Delay), and (ii) the Payment Date for the In-Service Withdrawal Year as elected by the Participant.

4.2 Manner of Payment. Each Participant shall receive payment of the amount credited to the Participant’s Account either in a single lump sum or in annual installments at least equal to $1,000 over a period of not less than two and not more than ten years, as elected by the Participant upon his or her commencement of participation in the Plan. Notwithstanding the foregoing sentence, such Account shall be paid to such Participant or his or her Beneficiary in the form of a single lump sum if (i) the amount credited to such Account as of the relevant Payment Date is less than the applicable dollar amount under Section 402(g)(1)(B) of the Code, (ii) the Participant has not attained age 55 as of such Payment Date or (iii) the Participant’s service as a Director terminates by reason of death.

4.3 Emergency Payments. In the event of an Unforeseeable Financial Emergency, as hereinafter defined, the Participant may file a written request with the Company to receive all or any portion of the balance of such Participant’s account(s) in an immediate lump sum payment. A Participant’s written request for such a payment shall describe the circumstances which the Participant believes justify the payment and an estimate of the amount necessary to eliminate the Unforeseeable Financial Emergency. An “Unforeseeable Financial Emergency” shall mean unforeseeable severe financial hardship resulting from (i) the Participant’s Disability, (ii) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (iii) loss of the Participant’s property due to casualty or (iv) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Company, provided that any such Unforeseeable Financial Emergency must also constitute an “unforeseeable emergency” as defined in Treasury Regulation 1.409A-3(i)3(i). Unforeseeable Financial Emergency payments shall be made only to the extent necessary to satisfy the emergency need and shall not be made to the extent the need is or may be relieved through reimbursement or compensation, by insurance or otherwise, by the Company’s cessation of deferrals under the Plan or by liquidation of the Participant’s assets (to the extent such liquidation itself would not cause severe financial hardship). Any Unforeseeable Financial Emergency payment from a Participant’s account(s) shall be deemed to cancel any deferral election of the Participant then in effect and, unless otherwise determined by the Company, the Participant shall be suspended from making further deferral elections under the Plan during the remainder of the Deferral Year in which such payment is made and the Deferral Year immediately thereafter.

4.4 Distributions to Minor and Incompetent Persons. If a payment is to be made to a minor or to an individual who, in the opinion of the Company, is unable to manage his or her financial affairs by reason of illness or mental incompetency, such distribution may be made to or for the benefit of any such individual in any of the following ways as the Company shall direct:

5

(a) directly to any such minor individual if, in the opinion of the Company, he or she is able to manage his or her financial affairs, (b) to the legal representative of any such individual, (c) to a custodian under a Uniform Gifts to Minors Act for any such minor individual, or (d) to a relative of any such individual to be used for the latter’s benefit. The Company shall not be required to see to the application by any third party of any payment made to or for the benefit of a Participant or Beneficiary pursuant to this Section.

4.5 Beneficiaries. A Participant shall have the right to designate a Beneficiary, and amend or revoke such designation at any time, in writing. Such designation, amendment or revocation shall be effective upon receipt of the Participant’s written designation by the Company. If a Participant is married at the time a beneficiary designation is submitted to the Company, the designation of a Beneficiary other than the Participant’s spouse shall not be effective unless the Participant’s spouse consents to such designation in writing, or it is established to the satisfaction of the Company that such consent could not be obtained because the Participant’s spouse cannot be located or such other circumstances as may be considered by the Company. Subject to the preceding sentence, a Participant may from time to time, without the consent of any Beneficiary, change or cancel any such designation. Such designation and each change therein shall be made in the form prescribed by the Company and shall be filed with the Company. If no Beneficiary survives the Participant, the Company shall direct that payment of any balance to the Participant’s account(s) be made in the following order of priority:

(a) to the beneficiaries designated in the Participant’s last will, if specific reference is made therein to the payment of such account(s); or if none,

(b) to the Participant’s spouse; or if none,

(c) to the Participant’s descendants, per stirpes; or if none,

(d) to the Participant’s estate.

If a Participant has only one election form on file with the Company and terminates service as a Director before the expiration of twelve (12) months since the delivery of such election form, then, notwithstanding the Participant’s election with respect to the timing of the payment, or commencement of payment, of his or her Account or In-Service Withdrawal Account, as the case may be, the balance of such account shall be paid or shall commence to be paid on the Payment Date for the calendar year in which the Participant’s service terminates.

V. ADMINISTRATION

5.1 Administration. The Plan shall be administered by the Committee, which shall have full power and authority to interpret, construe and administer the Plan in accordance with the provisions herein set forth, except to the extent the Plan specifically provides that the Company shall carry out certain administrative duties. The Committee’s interpretation and construction hereof, and actions hereunder, or the amount or recipient of the payments to be made herefrom, shall be binding and conclusive on all persons for all purposes. The Committee and the Company may delegate to any committee, individual or entity any of their respective powers or duties hereunder.

6

5.2 Indemnification. No officer or employee of the Company shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his or her own willful misconduct or lack of good faith, and the Company shall indemnify and hold harmless such officers and employees from and against all claims, losses, damages, causes of action and expenses, including reasonable attorney fees and court costs, incurred in connection with such interpretation and administration of the Plan. The expenses of administering the Plan shall be paid by the Company and shall not be charged against any Participant’s account(s).

5.3 Claims Procedure. The Company (i) shall provide notice in writing to any Participant or Beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial and written in a manner calculated to be understood by such Participant or Beneficiary and (ii) shall afford a reasonable opportunity to any Participant or Beneficiary whose claim for benefits has been denied for a full and fair review by the Committee of the decision denying the claim.

VI. MISCELLANEOUS

6.1 Unfunded Status and Application of ERISA. The Plan is an unfunded plan. In order to meet the deferred obligations hereunder, the Company may, but shall not be required to, establish a grantor trust and transfer thereto an amount necessary to provide payments equal to the aggregate balances of the Participants’ accounts. In the event that the Company transfers any amounts to a grantor trust to provide payments hereunder, such amounts, and all income attributable to such amounts, shall be subject to the claims of the Company’s general creditors. The Company’s obligations hereunder shall constitute general, unsecured obligations, payable solely out of its general assets, and no Participant or Beneficiary shall have any right to any specific assets. The Plan constitutes a mere promise by the Company to make benefit payments in the future.

6.2 Limitation on Rights. Neither the establishment of the Plan nor the payment of any account hereunder shall be construed as giving or granting any person any legal or equitable rights against the Company, the Board, the Committee, or any of their officers, trustees, associates, or agents, other than such as are specifically conferred by the express terms of the Plan.

6.3 Satisfaction of Claims. The payment to a Participant, Beneficiary or other person of an account balance hereunder pursuant to the terms of the Plan shall be in full satisfaction of all claims with respect to such account that such person may have against the Company.

6.4 Nonassignability. No amount deferred under the Plan or any amount credited to an account shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment, and any attempt to transfer or encumber the same shall be void.

6.5 Amendment of the Plan. The Committee may, in its sole discretion and without the consent of any Participant or Beneficiary, amend the Plan at any time and in any manner by duly adopted resolutions; provided, however, that no amendment shall reduce the amount credited to

7

any account of any Participant immediately prior to such amendment and no amendment will be permitted which would result in taxation of Participants pursuant to Section 409A.

6.6 Termination of the Plan. The Company may, in its sole discretion, terminate the Plan without the consent of, or notification to, any person. Termination of the Plan shall not affect the time of payment of the Participant’s Account unless the Plan is terminated under circumstances which would permit the immediate payment to Participants of all amounts deferred under the Plan in compliance with Treasury Regulation 1.409A-3(j)(ix), in which case each Participant’s Account shall be paid out in full in a lump sum within 30 days following the date of the termination of the Plan.

6.7 Change in Control. If, following a Change in Control, as hereinafter defined, a Participant determines in good faith that the Company has failed to comply with any of its obligations under the Plan or, if the Company or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny or diminish or to recover from any Participant the benefits intended to be provided hereunder, then the Company irrevocably authorizes such Participant to retain counsel of his or her choice at the expense of the Company to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, or any director, officer, stockholder or other person affiliated with the Company, or any successor thereto in any jurisdiction. Reimbursements to Participants under this Section 6.7, if any, shall be made not later than the last day of the Participant’s taxable year following the year in which the Participant incurs the reimbursable expense. For purposes of this Section, a “Change in Control” shall mean:

(i) Approved Transaction. An action of the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) approving (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by an Employer) of any Common Stock of the Company (or securities convertible into the Company’s Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and, after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire the Company’s securities);

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(iii) Board Change. A change in the composition of the Board during any period of two consecutive years, such that individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or

(iv) Other Transactions. The occurrence of such other transactions involving a significant issuance of voting stock or change in Board composition that the Board determines to be a Change in Control for purposes of the Plan.

6.8 No Contractual Rights to Serve. Nothing in the Plan shall be interpreted as conferring any right on any Director to continue as a Director.

6.9 Severability. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.

6.10 Tax Withholding; Other Tax Matters. Any payment required under the Plan shall be subject to all requirements of the law with regard to income and withholding taxes, filings, and making of reports, and the Company and Participant shall use their best efforts to satisfy promptly all such requirements. For purposes of this Plan, a Participant’s employment with the Company will not be treated as terminated unless and until such termination of employment constitutes a “separation from service” for purposes of Section 409A of the Code. It is the intention of the Company that the provisions of the Plan not result taxation of Participants under Section 409A of the Code and the regulations and guidance promulgated thereunder and that the Plan shall be construed in accordance with such intention.

6.11 Applicable Law. The Plan and all rights hereunder and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to the principles of conflicts of laws.

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EX-10.32

EXHIBIT 10.32

AMENDMENT NUMBER TWO

TO THE

FOUNDATION HEALTH SYSTEMS, INC.

AMENDED AND RESTATED

1998 STOCK OPTION PLAN

WHEREAS, Health Net, Inc. (the “Company”) maintains the Foundation Health Systems, Inc. Amended and Restated 1998 Stock Option Plan (the “Plan”) for the benefit of key employees and directors of the Company;

WHEREAS, the Company desires to amend the Plan to permit the Company to withhold fractional shares of common stock of the Company, par value $0.001 (“Common Stock”); and

WHEREAS, the Board of Directors of the Company (the “Board”) has the power to amend the Plan pursuant to Section 6.2 thereof; and

WHEREAS, the Compensation Committee of the Board has recommended that the Board amend the Plan as provided below.

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

1. Section 4.2(c) of the Plan is hereby amended by deleting the second sentence thereof, which states “If payment is to be made by delivery of Mature Shares, any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee” and replacing it with the following sentence:

“In the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy the exercise price obligation in respect of the exercise price of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy the exercise price obligation, less the Fair Market Value of such fractional share of Common Stock.”

2. Section 6.5 of the Plan is hereby amended by deleting the last sentence thereof: “Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder” and replacing it with the following sentence:

“Notwithstanding the foregoing sentence, in the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy such tax obligation in respect of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy such tax obligation, less the Fair Market Value of such fractional share of Common Stock.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 14^th day of January, 2009.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization Effectiveness

EX-10.35

EXHIBIT 10.35

AMENDMENT NUMBER ONE

TO THE

HEALTH NET, INC.

2005 LONG-TERM INCENTIVE PLAN

WHEREAS, Health Net, Inc. (the “Company”) maintains the Health Net, Inc. 2005 Long-Term Incentive Plan (the “Plan”) for the benefit of key salaried employees and persons expected to become key salaried employees of the Company;

WHEREAS, the Company desires to amend the Plan to clarify that awards made under the Plan are intended to comply with, or be exempt from, the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations and Internal Revenue Service guidance issued thereunder;

WHEREAS, the Board of Directors of the Company (the “Board”) has the power to amend the Plan pursuant to Section 8.2 thereof; and

WHEREAS, the Compensation Committee of the Board has recommended that the Board amend the Plan as provided below.

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

1. By adding the following Section 8.15:

“8.15 Section 409A Compliance. Awards under the Plan are intended to comply with, or be exempt from, Section 409A of the Code and all awards shall be interpreted in accordance with Section 409A and the Treasury Regulations and other Internal Revenue Service guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the effective date of the Plan. Notwithstanding any provision of the Plan or any Agreement to the contrary, in the event that the Committee determines that any award may or does not comply with, or satisfy an exemption from, Section 409A of the Code, the Company may adopt such amendments to the Plan and the affected award or Agreement (without Participant consent) or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines are necessary or appropriate to (i) exempt any award from the application of Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to award, or (ii) comply with the requirements of Section 409A of the Code.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 4^th day of December, 2008.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization
	Effectiveness

EX-10.36

EXHIBIT 10.36

AMENDMENT NUMBER TWO

TO THE

HEALTH NET, INC.

2005 LONG-TERM INCENTIVE PLAN

WHEREAS, Health Net, Inc. (the “Company”) maintains the Health Net, Inc. 2005 Long-Term Incentive Plan, as amended (the “Plan”) for the benefit of key employees and directors of the Company;

WHEREAS, the Company desires to amend the Plan to permit the Company to withhold fractional shares of common stock of the Company, par value $0.001 (“Common Stock”); and

WHEREAS, the Board of Directors of the Company (the “Board”) has the power to amend the Plan pursuant to Section 8.2 thereof; and

WHEREAS, the Compensation Committee of the Board has recommended that the Board amend the Plan as provided below.

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

1. Section 4.2(c) of the Plan is hereby amended by deleting the third sentence thereof, which states “Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee” and replacing it with the following sentence:

“In the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy the exercise price obligation in respect of the exercise price of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy the exercise price obligation, less the Fair Market Value of such fractional share of Common Stock.”

2. Section 8.6 of the Plan is hereby amended by deleting the last sentence thereof, which states “Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder” and replacing it with the following sentence:

“Notwithstanding the foregoing sentence, in the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy such tax obligation in respect of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy such tax obligation, less the Fair Market Value of such fractional share of Common Stock.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 14th day of January, 2009.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization Effectiveness

EX-10.38

EXHIBIT 10.38

AMENDMENT NUMBER ONE

TO THE

HEALTH NET, INC.

2006 LONG-TERM INCENTIVE PLAN

WHEREAS, Health Net, Inc. (the “Company”) maintains the Health Net, Inc. 2006 Long-Term Incentive Plan (the “Plan”) for the benefit of key employees and directors of the Company;

WHEREAS, the Company desires to amend the Plan to permit the Company to withhold fractional shares of common stock of the Company, par value $0.001 (“Common Stock”); and

WHEREAS, the Board of Directors of the Company (the “Board”) has the power to amend the Plan pursuant to Section 8.2 thereof; and

WHEREAS, the Compensation Committee of the Board has recommended that the Board amend the Plan as provided below.

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

1. Section 4.2(c) of the Plan is hereby amended by deleting the third sentence thereof, which states “Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee” and replacing it with the following sentence:

“In the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy the exercise price obligation in respect of the exercise price of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy the exercise price obligation, less the Fair Market Value of such fractional share of Common Stock.”

2. Section 8.6 of the Plan is hereby amended by deleting the last sentence thereof, which states “Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder” and replacing it with the following sentence:

“Notwithstanding the foregoing sentence, in the event the Company rounds up and withholds a whole share of Common Stock in order to satisfy such tax obligation in respect of any fraction of a share of Common Stock, the Company shall refund an amount in cash to optionee, which amount shall equal the difference between the Fair Market Value of the whole share of Common Stock withheld to satisfy such tax obligation, less the Fair Market Value of such fractional share of Common Stock.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 14^th day of January, 2009.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization Effectiveness

EX-10.41

EXHIBIT 10.41

AMENDMENT NUMBER TWO

TO THE

HEALTH NET, INC.

2006 EXECUTIVE OFFICER INCENTIVE PLAN

WHEREAS, the Company maintains the Health Net, Inc. 2006 Executive Officer Incentive Plan (the “Plan”) for the benefit of eligible executive officers of the Company and its subsidiaries;

WHEREAS, the Company desires to amend the Plan to clarify that awards made under the Plan are intended satisfy the short-term deferral exemption in accordance with Treasury Regulation Section 1.409A-1(b)(4); and

WHEREAS, the Compensation Committee of the Board of Directors of the Company has the power to amend the Plan pursuant to Article VII(1) thereof.

NOW, THEREFORE, BE IT RESOLVED, that pursuant to the power of amendment contained in Article VII(1) of the Plan, the Plan is hereby amended as follows:

1. By striking the last sentence of Article VI(2) and replacing it with the following:

“Notwithstanding the foregoing sentence, all payments under the Plan shall be made no later than March 15^th following the calendar year in which an incentive payment is earned. The Committee, in its sole discretion, may permit a Participant to defer payment of an award under a deferred compensation plan or plans of the Company, as may be in effect from time to time, in accordance with the requirements of Section 409A of the Code.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 12th day of November, 2008.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization Effectiveness

EX-10.45

EXHIBIT 10.45

AMENDMENT NUMBER ONE

TO THE

HEALTH NET, INC.

MANAGEMENT INCENTIVE PLAN

WHEREAS, the Company maintains the Health Net, Inc. Management Incentive Plan (the “Plan”) for the benefit of key employees of the Company and its subsidiaries;

WHEREAS, the Company desires to amend the Plan to clarify that awards made under the Plan are intended satisfy the short-term deferral exemption in accordance with Treasury Regulation Section 1.409A-1(b)(4); and

WHEREAS, the Compensation Committee of the Board of Directors of the Company has the power to amend the Plan pursuant to Article IX thereof.

NOW, THEREFORE, BE IT RESOLVED, that pursuant to the power of amendment contained in Article IX of the Plan, the Plan is hereby amended as follows:

1. By striking the Section V(e) in its entirety and replacing it with the following:

“(e) Payment of Incentive Awards.

Incentive Awards shall be payable to Participants no later than March 15^th following the Plan Year in which an Incentive Award is earned. The Compensation Committee, in its sole discretion, may permit a Participant to defer the receipt of an Incentive Award under a deferred compensation plan or plans of the Company, as may be in effect from time to time, in accordance with rules and procedures established by the Senior Vice President Organization Effectiveness, and in a manner that satisfies the requirements of Section 409A of the Code.”

IN WITNESS WHEREOF, Health Net, Inc. has caused this instrument to be signed on this 12th day of November, 2008.

HEALTH NET, INC.
By:	/s/ Karin Mayhew
Name:	Karin Mayhew
Title:	Senior Vice President, Organization Effectiveness

EX-10.46

EXHIBIT 10.46

HEALTH NET, INC.

401(k) SAVINGS PLAN

HEALTH NET, INC.

401(k) SAVINGS PLAN

TABLE OF CONTENTS

			PAGE
ARTICLE 1	TITLE AND PURPOSE		1
ARTICLE 2	DEFINITIONS		1
ARTICLE 3	PARTICIPATION		7
	Section 3.1.	Eligibility for Participation	7
	Section 3.2.	Application for Salary Deferral Contributions	7
	Section 3.3.	Transfer to Affiliates	8
ARTICLE 4	EMPLOYER CONTRIBUTIONS		8
	Section 4.1.	Profit Sharing Contributions	8
	Section 4.2.	Salary Deferral Contributions	10
	Section 4.3.	Annual Limit on Salary Deferral Contributions	11
	Section 4.4.	Matching Contributions	12
	Section 4.5.	Limitations on Contributions for Highly Compensated Employees	14
	Section 4.6.	Limitation on Employer Contributions	19
ARTICLE 5	ROLLOVER CONTRIBUTIONS		20
	Section 5.1.	Requirements for Rollover Contributions	20
	Section 5.2.	Delivery of Rollover Contributions	21
	Section 5.3.	Special Accounting Rules for Rollover Contributions	21
ARTICLE 6	TRUST AND INVESTMENT FUNDS		22
	Section 6.1.	Trust	22
	Section 6.2.	Investment Funds	23
ARTICLE 7	PARTICIPANT ACCOUNTS		23
	Section 7.1.	Participant Accounts and Investment Elections	23
	Section 7.2.	Investments in Company Stock Fund	26
	Section 7.3.	Valuation of Funds and Plan Accounts	26
	Section 7.4.	Allocation of Contributions and Forfeitures Among Participants’ Accounts	27
	Section 7.5.	Statutory Limitations on Allocations to Accounts	28
	Section 7.6.	Correction of Error	30

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			PAGE
ARTICLE 8	WITHDRAWALS, LOANS AND DISTRIBUTIONS		30
	Section 8.1.	Vesting	30
	Section 8.2.	Withdrawals Prior to Termination of Employment	32
	Section 8.3.	Loans to Participants	36
	Section 8.4.	Distribution Upon Termination of Employment	37
	Section 8.5.	Time and Form of Distribution upon Termination of Employment	37
	Section 8.6.	Designation of Beneficiary	40
	Section 8.7.	Distributions to Minor and Disabled Distributees	42
	Section 8.8.	Missing Person	43
ARTICLE 9	SPECIAL PARTICIPATION RULES		44
	Section 9.1.	Change of Employment Status	44
	Section 9.2.	Reemployment of an Eligible Employee Whose Employment Terminated Prior to Becoming a Participant	44
	Section 9.3.	Reemployment of a Terminated Participant	44
	Section 9.4.	Employment by Related Entities	46
	Section 9.5.	Leased Employees	46
	Section 9.6.	Reemployment of Veterans	46
ARTICLE 10	SHAREHOLDER RIGHTS WITH RESPECT TO COMPANY STOCK		48
	Section 10.1.	Voting Shares of Company Stock	48
	Section 10.2.	Tender Offers	49
ARTICLE 11	ADMINISTRATION		51
	Section 11.1.	The Committee	51
	Section 11.2.	Claims Procedure	54
	Section 11.3.	Notices to Participants	55
	Section 11.4.	Notices	56
	Section 11.5.	Records	56
	Section 11.6.	Reports of Trustee and Accounting to Participants	56
ARTICLE 12	PARTICIPATION BY OTHER EMPLOYERS		57
	Section 12.1.	Adoption of Plan	57
	Section 12.2.	Withdrawal from Participation	57
	Section 12.3.	Continuance by a Successor	58
	Section 12.4.	Company as Agent for Employers	58
ARTICLE 13	MISCELLANEOUS		59
	Section 13.1.	Expenses	59

ii

			PAGE
	Section 13.2.	Non-Assignability	59
	Section 13.3.	Employment Non-Contractual	61
	Section 13.4.	Limitation of Rights	61
	Section 13.5.	Merger or Consolidation with Another Plan	61
	Section 13.6.	Gender and Plurals	61
	Section 13.7.	Applicable Law	61
	Section 13.8.	Severability	61
	Section 13.9.	No Guarantee	62
	Section 13.10.	Plan Voluntary	62
	Section 13.11.	Tax Withholding	62
ARTICLE 14	TOP-HEAVY PLAN REQUIREMENTS		62
	Section 14.1.	Top-Heavy Plan Determination	62
	Section 14.2.	Definitions and Special Rules	63
	Section 14.3.	Minimum Contribution for Top-Heavy Years	64
ARTICLE 15	AMENDMENT, ESTABLISHMENT OF SEPARATE PLAN AND TERMINATION		65
	Section 15.1.	Amendment	65
	Section 15.2.	Establishment of Separate Plan	65
	Section 15.3.	Termination	65
	Section 15.4.	Trust Fund to Be Applied Exclusively for Participants and Their Beneficiaries	66

iii

ARTICLE 1

TITLE AND PURPOSE

The title of the Plan shall be the “Health Net, Inc. 401(k) Savings Plan.” The Plan is an amendment and restatement of the Plan as in effect as of December 31, 2007, and is effective as of January 1, 2008, unless any provision specifies a different effective date.

The Plan is designated as a “profit sharing plan” within the meaning of U.S. Treasury Regulation § 1.401-1(a)(2)(ii).

ARTICLE 2

DEFINITIONS

As used herein, the following words and phrases shall have the following respective meanings when capitalized:

(1) Affiliate. (a) A corporation that is a member of the same controlled group of corporations (within the meaning of section 414(b) of the Code) as an Employer, (b) a trade or business (whether or not incorporated) under common control (within the meaning of section 414(c) of the Code) with an Employer, (c) any organization (whether or not incorporated) that is a member of an affiliated service group (within the meaning of section 414(m) of the Code) that includes an Employer, a corporation described in clause (a) of this subdivision or a trade or business described in clause (b) of this subdivision, or (d) any other entity that is required to be aggregated with an Employer pursuant to regulations promulgated under section 414(o) of the Code.

(2) After-Tax Account. The account established pursuant to Section 7.1 to which a Participant’s after-tax contributions, if any, transferred to the Plan from the FHC Plan or the QualMed Plan (or any other plan qualified under section 401(a) of the Code) and any earnings (or losses) thereon are credited.

(3) Beneficiary. A person entitled under Section 8.6 to receive benefits in the event of the death of a Participant.

(4) Board of Directors. The board of directors of the Company.

(5) Break in Service. Any period during which an Employee does not perform any Hour of Service for an Employer. For purposes of this definition, an Employee shall be credited with Hours of Service for any period of absence from an Employer during which such Employee (a) is in Qualified Military Service, provided that the Employee returns to the employ of an Employer within the period prescribed by USERRA, (b) is on an uncompensated leave of absence duly

granted by an Employer, or (c) is absent from work for a maximum of 24 consecutive months because of (i) the pregnancy of the Employee, (ii) the birth of the Employee’s child, (iii) the placement of a child with the Employee in connection with the Employee’s adoption of such child, or (iv) the need to care for any such child for a period beginning immediately following such birth or placement. Notwithstanding the foregoing, no Hours of Service shall be credited to an Employee under clause (c) of this subdivision unless the Employee timely furnishes to the Committee a certificate of birth, proof of adoption or other appropriate legal documentation setting forth parentage or adoption.

(6) Code. The Internal Revenue Code of 1986, as amended.

(7) Committee. The committee designated in Section 11.1 to administer the Plan, or any person, corporation, partnership or committee to which the Committee has delegated its responsibilities pursuant to Section 11.1.

(8) Company. Health Net, Inc., a Delaware corporation, and any successor to such corporation that adopts the Plan pursuant to Article 12.

(9) Company Stock. Class A Common Stock of Health Net, Inc.

(10) Company Stock Fund. The investment fund established and maintained by the Trustee in accordance with Section 6.2(b).

(11) Compensation. The total cash earnings paid by an Employer to an Eligible Employee and properly reportable on Form W-2 for a Plan Year (including bonuses, overtime and, effective January 1, 2009, differential wage payments (as defined in section 3401(h) of the Code)), and all amounts not includible in such Eligible Employee’s gross income for federal income tax purposes solely on account of his or her election to have compensation reduced pursuant to the Plan or any other qualified cash or deferred arrangement described in section 401(k) of the Code, a qualified transportation fringe benefit plan described in section 132(f) of the Code or a cafeteria plan as defined in section 125 of the Code, but excluding (i) any reimbursements or other allowances for automobile, relocation, travel, education expenses or other expenses (even if includible in the Eligible Employee’s gross income for federal income tax purposes), (ii) severance payments, (iii) retention payments, (iv) disability payments, and (v) extraordinary items of remuneration. An Eligible Employee’s Compensation in excess of (I) $230,000 for the Plan Year beginning January 1, 2008, and (II) for each subsequent Plan Year, the dollar amount prescribed by section 401(a)(17) of the Code (as adjusted for increases in the cost-of-living) shall not be taken into account for any purposes under the Plan. For each Plan Year, an Eligible Employee’s Compensation shall include only compensation that is actually paid or made available to such Eligible Employee (or, if earlier, includible in the gross income of an Eligible Employee) in such Plan Year and paid to such Eligible Employee prior to his or her severance from employment; provided, however, that, with respect to an Eligible Employee who experiences a severance from employment during a Plan Year, Compensation shall include amounts paid after such Eligible Employee’s severance from employment if such amounts (a) are paid by the later of (i) 2  ¹/2 months after such severance from employment and (ii) the end of the Plan Year that includes the date of severance from employment and (b) are payments of regular compensation for services performed during such Eligible Employee’s regular working

2

hours or outside of such working hours, such as overtime, commissions, bonuses, and other similar payments that would have been paid to the Eligible Employee prior to a severance from employment if the Eligible Employee had continued in employment with his or her Employer. Compensation, as defined in this subsection (11) and in Sections 4.5(c)(5), 7.5, 9.6 and 14.2(a)(4) of the Plan, shall include amounts not available to a Participant in cash because such amounts are used to purchase group health coverage under a cafeteria plan described in section 125 of the Code that requires participants in such plan to certify that they have other health coverage in order to receive cash rather than group health coverage, provided that such Participant’s Employer does not request or collect information regarding the Participant’s other health coverage as part of the enrollment process for the cafeteria plan.

(12) Compensation and Stock Option Committee. The Compensation and Stock Option Committee of the Board of Directors of the Company.

(13) Disability. A total physical or mental inability to perform work, resulting from injury or disease, which is expected to be permanent, as determined by the Committee. The existence of a “Disability” shall be determined by the Committee according to uniform principles consistently applied, and based upon such evidence as the Committee believes necessary or desirable.

(14) Effective Date. Except as provided elsewhere, the effective date of this amendment and restatement of the Plan with respect to the Company and each other entity that is an Employer on December 31, 2008 shall be January 1, 2009, and in the case of any other Employer shall be the date designated by such Employer.

(15) Eligible Employee. With respect to each Employer, unless specified otherwise by the board of directors of each Employer, any Employee thereof, excluding:

(i) an Employee who (A) is scheduled to perform fewer than 20 Hours of Service per week and (B) performs fewer than 1,000 Hours of Service during the Plan Year,

(ii) an Employee whose employment is governed by the terms of a collective bargaining agreement under which retirement benefits were the subject of good faith bargaining, but which does not provide for participation in the Plan, and

(iii) an Employee who is a nonresident alien (within the meaning of section 7701(b)(1)(B) of the Code).

An Employee who is scheduled to work less than 20 Hours of Service per week shall become an Eligible Employee on the first Entry Date coinciding with or next following either (i) the end of the 12-consecutive month period beginning on the Employee’s employment commencement date if such Employee performs at least 1,000 Hours of Service in such 12-consecutive month period or (ii) the first Plan Year beginning in such 12-consecutive month period or any Plan Year beginning thereafter in which such Employee performs at least 1,000 Hours of Service.

3

(16) Employee. An individual whose relationship with an Employer is, under common law, that of an employee. Notwithstanding the foregoing, no individual who renders services for an Employer shall be considered an Employee for purposes of the Plan if such individual renders such services pursuant to (i) an agreement providing that such services are to be rendered by the individual as an independent contractor, (ii) an agreement between an Employer and a leasing organization that is not an Employer or Affiliate on a substantially full-time basis for a period of at least one year under the “primary direction or control” (within the meaning of section 414(n)(2)(C) of the Code) of the Employer or (iii) an agreement that contains a waiver of participation in the Plan.

(17) Employer. The Company, each Affiliate listed in Exhibit A hereto (as such exhibit is revised from time to time), and each other entity that, with the consent of the Company, elects to participate in the Plan in the manner described in Section 12.1 and any successor entity that adopts the Plan pursuant to Section 12.3. If any such entity withdraws from participation in the Plan pursuant to Section 12.2, or terminates its participation in the Plan pursuant to Section 15.3, then such entity shall thereupon cease to be an Employer. An entity shall cease being an Employer as of the date it ceases to be an Affiliate, unless the Company consents to such entity’s continued participation in the Plan.

(18) Entry Date. The first day of each payroll period.

(19) ERISA. The Employee Retirement Income Security Act of 1974, as amended from time to time.

(20) FHC Plan. The former Foundation Health Corporation Profit Sharing and 401(k) Plan.

(21) 401(k) Administrator. The person or persons appointed by the Committee to perform the duties of the 401(k) Administrator as described herein.

(22) Hour of Service. Each hour for which:

(a) an Employee is paid, or entitled to payment, for the performance of duties as an Employee;

(b) an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury, military duty or leave of absence, provided that no more than 501 Hours of Service will be credited under this paragraph (b) for any single continuous period (regardless of whether such period occurs in a single Plan Year);

(c) back pay is awarded or agreed to by the Employer or an Affiliate, provided that such hours shall be credited to the Plan Years to which the award, agreement or payment pertains rather than the Plan Year in which the award, agreement or payment is made.

4

For purposes of paragraphs (b) and (c) above, an Hour of Service shall be calculated in accordance with U.S. Department of Labor Regulation § 2530.200b-2 which provides that (i) if a payment is based upon hours, days, weeks or other unit of time the number of Hours of Service credited will be the number of regularly scheduled working hours for such Employee for such unit of time, and (ii) if the payment due is not based upon units of time, the number of Hours of Service credited shall be equal to the amount of the payment divided by the Employee’s most recent hourly rate of compensation. For payments made to an Employee without a regular work schedule, the number of hours credited shall be calculated on a reasonable basis which reflects the average hours worked by the Employee, or by other employees in the same job classification, over a representative period of time and which is consistently applied with respect to all employees within the same job classification. In order to avoid double counting, the same Hours of Service shall not be credited both under paragraph (c) and either paragraph (a) or paragraph (b), as applicable.

(23) HSI Plan. The former Health Systems International, Inc. 401(k) Associate Savings Plan.

(24) Matching Contributions. Matching contributions and supplemental matching contributions made to the Plan by an Employer pursuant to Section 4.4.

(25) Matching Contributions Accounts. The Pre-2006 Matching Contributions Account and the Post-2005 Matching Contributions Account.

(26) Merger Date. The date as of which the trust holding the assets of the FHC Plan, the provisions of which are set forth herein, merged into the trust holding the assets of the HSI Plan, as set forth herein.

(27) Participant. Subject to Section 5.3, an Eligible Employee who has satisfied the requirements set forth in Article 3. An individual shall cease to be a Participant upon the complete distribution of his or her accounts under the Plan.

(28) Plan. The plan herein set forth, and as from time to time amended.

(29) Plan Year. The twelve-month period beginning on January 1 of each calendar year.

(30) Post-2005 Matching Contributions Account. The account established pursuant to Section 7.1 to which all Matching Contributions made on behalf of a Participant on or after January 1, 2006 pursuant to Section 4.4 and earnings (or losses) thereon are credited.

(31) Pre-2006 Matching Contributions Account. The account established pursuant to Section 7.1 to which all Matching Contributions made on behalf of a Participant before January 1, 2006 pursuant to Section 4.4 and earnings (or losses) thereon are credited.

(32) Profit Sharing Account. The account established pursuant to Section 7.1 to which Profit Sharing Contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

5

(33) Profit Sharing Contribution. A profit sharing contribution made to the Plan by an Employer pursuant to Section 4.1.

(34) Qualified Nonelective Contribution Account. The account established pursuant to Section 7.1 to which qualified nonelective contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

(35) Qualified Matching Contribution Account. The account established pursuant to Section 7.1 to which qualified matching contributions, if any, allocated to a Participant and earnings (or losses) thereon are credited.

(36) Qualified Military Service. Any service in the uniformed services (as defined in 38 U.S.C. § 4303) by an individual if such individual is entitled to reemployment rights under USERRA with respect to such service.

(37) Qualified Reservist. An individual who is (i) a member of a reserve component (as defined in 37 U.S.C. § 101) and (ii) ordered or called to active duty, for a period in excess of 179 days or for an indefinite period, after September 11, 2001.

(38) QualMed Plan. The former QualMed, Inc. Employee Savings Plan.

(39) Rollover Account. The account established pursuant to Section 7.1 to which a Participant’s Rollover Contributions, if any, and any earnings (or losses) thereon are credited.

(40) Rollover Contributions. Rollover contributions made by a Participant pursuant to Section 5.1.

(41) Salary Deferral Contributions. Before-tax payroll reduction contributions made to the Plan by an Employer on behalf of Participants pursuant to Section 4.2.

(42) Salary Deferral Contributions Account. The account established pursuant to Section 7.1 to which a Participant’s Salary Deferral Contributions, if any, and any earnings (or losses) thereon are credited.

(43) Service. The aggregate of the periods during which an Employee is employed by an Employer and any periods of employment required to be taken into account pursuant to Section 9.4. Notwithstanding the previous sentence, in the case of an Employee who was a Participant in the HSI Plan immediately prior to the Effective Date of the September 1, 1997 amendment and restatement of the Plan, such Employee’s Service shall be the sum of (i) the Employee’s Years of Service as of December 31, 1996, determined under, and as defined by, the terms of such plan as in effect immediately prior to such Effective Date, (ii) the aggregate of the periods commencing on and after January 1, 1998 during which the Employee is employed by an Employer and any periods of employment on and after such date that are required to be taken into account pursuant to Section 9.4 and (iii) the greater of (A) the Service that would be credited to the Employee during the Plan Year beginning January 1, 1997 under the provisions of such plan in effect immediately prior to such Effective Date and (B) the Service that would be credited to the Employee in such year under clause (ii) above.

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For purposes of the first sentence of this subdivision (41) and clause (ii) above, an Employee shall be deemed to be employed by an Employer during (i) any period of absence from employment by an Employer which is of less than twelve (12) months duration, (ii) the first twelve months of any period of absence from employment for any reason other than the Employee’s quitting, retiring or being discharged and (iii) any period of absence from such employment during which the Employee is in Qualified Military Service, provided that the Employee returns to the employ of the Employer within the period prescribed by USERRA.

(44) Spouse. Except as otherwise provided for herein, a person of the opposite sex who is a husband or a wife, within the meaning of such term as set forth in the Federal Defense of Marriage Act.

(45) Trust. A Trust created by agreement between the Company and the Trustee, as from time to time amended.

(46) Trustee. The trustee provided for in Article 6, or any successor trustee or, if there is more than one trustee acting at any time, all of such trustees collectively.

(47) Trust Fund. All money and property of every kind of the Trust held by the Trustee pursuant to the terms of the agreement governing the Trust.

(48) USERRA. The Uniformed Services Employment and Reemployment Rights Act of 1994.

(49) Valuation Date. Each business day on which the New York Stock Exchange is open for business or such other days as the Committee may determine.

ARTICLE 3

PARTICIPATION

Section 3.1. Eligibility for Participation. Each Eligible Employee who immediately before the Effective Date was a Participant shall continue to be a Participant as of the Effective Date. Each other Employee shall become a Participant as soon as administratively practicable after the later of (i) the first Entry Date coincident with or next following the date the Employee becomes an Eligible Employee and (ii) the date the Employee is hired by his or her Employer.

Section 3.2. Application for Salary Deferral Contributions. A Participant who desires to make Salary Deferral Contributions shall execute and deliver to his or her Employer, in accordance with procedures prescribed by the Committee, an application on the form, or by

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telephonic or such electronic means as may be prescribed by the Committee, specifying his or her chosen rate of Salary Deferral Contributions. Such application shall authorize the Participant’s Employer to reduce the Participant’s Compensation by the amount of any such Salary Deferral Contributions. The application shall constitute the Participant’s acceptance of and agreement to all provisions of the Plan. Any election made pursuant to this Section shall be effective on the Entry Date occurring as soon as administratively practicable after the Salary Deferral Contribution application is received by the recordkeeper.

Section 3.3. Transfer to Affiliates. If a Participant is transferred from one Employer to another Employer or from an Employer to an Affiliate that is not an Employer, then such transfer shall not terminate the Participant’s participation in the Plan, and the Participant shall continue to participate in the Plan until an event occurs that would have entitled the Participant to a complete distribution of the Participant’s vested interest in his or her accounts under the Plan had the Participant continued to be employed by an Employer until the occurrence of such event. Nevertheless, a Participant shall not be entitled to make Salary Deferral Contributions to the Plan, to borrow from the Plan pursuant to Section 8.3 (except to the extent required by law), or to receive allocations of Matching Contributions or Profit Sharing Contributions during any period of employment by any Affiliate that is not an Employer, and periods of employment with an Affiliate that is not an Employer shall be taken into account only to the extent set forth in Section 9.4.

ARTICLE 4

EMPLOYER CONTRIBUTIONS

Section 4.1. Profit Sharing Contributions. (a) Employer Profit Sharing Contributions. Subject to the limitations of Sections 4.6 and 7.5, for each Plan Year, each Employer shall contribute on behalf of each Participant a Profit Sharing Contribution in such amount as the Employer may, in its sole discretion, determine.

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(b) Company Profit Sharing Contributions. Subject to the limitations set forth in Sections 4.6 and 7.5, in addition to any Profit Sharing Contribution that an Employer may make pursuant to subsection (a) of this Section 4.1, for each Plan Year, each Employer shall contribute on behalf of each Participant a Profit Sharing Contribution in such amount as the Company may, in its sole discretion, determine.

(c) General. Profit Sharing Contributions made pursuant to subsections (a) and (b) of this Section 4.1 shall be allocated in the manner as set forth in Section 7.4(a). Any Profit Sharing Contribution made pursuant to this Section 4.1 shall be made wholly in cash, wholly in shares of Company Stock, or in a combination thereof, as determined by the Company. A Profit Sharing Contribution made pursuant to this Section 4.1 for any Plan Year shall be delivered by the Employer making the contribution to the Trustee prior to the due date, including any extensions thereof, of the Employer’s federal income tax return for the fiscal year of the Employer which ends with or within such Plan Year. If any such Profit Sharing Contribution is made by the delivery to the Trustee of shares of Company Stock, then such stock shall be valued either (i) at the closing price of the stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions List (or the consolidated tape of such other principal exchange on which such stock is traded) as of the date such shares are delivered to the Trustee or purchased by the Trustee or, if such date is not a trading day, such price on the most recent trading day prior thereto or (ii) by the average trading price of the stock, as determined by the Committee in its sole discretion, on such date.

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Section 4.2. Salary Deferral Contributions. (a) Initial Election. Subject to the limitations set forth in Sections 4.3, 4.5, 4.6, 7.5, and 8.2(c), each Employer shall contribute on behalf of each Participant who is an Employee of such Employer an amount equal to a whole percentage not less than one percent (1%) and not more than 30 percent (30%) of such Participant’s Compensation (or such higher percentage as deemed necessary to conform to the Company’s payroll practices) for each payroll period as designated by the Participant either on his or her application form or by telephone or such electronic means as may be prescribed by the Committee, as described in Section 3.2. Salary Deferral Contributions shall be delivered to the Trustee as soon as practicable after the end of each payroll period in which the amount of such contribution would otherwise have been paid to the Participant but in no case later than the 15^th business day of the month following the month in which such contribution would otherwise have been paid to the Participant.

(b) Changes in the Rate or Suspension of Salary Deferral Contributions. A Participant’s Salary Deferral Contributions shall continue in effect at the rate designated by such Participant pursuant to subsection (a) of this Section until the Participant changes such designation or such contributions are suspended. A Participant may change such designation or suspend such contributions as of such time and in such manner as may be prescribed by the Committee (but at least once during each Plan Year). Any election made pursuant to this subsection shall be effective only with respect to Compensation not yet earned as of the effective date of such election.

(c) Catch-Up Contributions. Subject to the limitations set forth in Section 4.6, each Participant who is eligible to make Salary Deferral Contributions for a payroll period pursuant to subsection (a) above and who has, or will attain age 50 before the close of the current

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Plan Year shall be eligible to have Salary Deferral Contributions made on his or her behalf in addition to those described in subsection (a) above in accordance with, and subject to the limitations of, section 414(v) of the Code (“Catch-Up Contributions”). Catch-Up Contributions shall not be taken into account for purposes of Section 4.3 or 7.5 of the Plan, and shall not be taken into account for any Plan Year for purposes of the actual deferral percentage test and the actual contribution percentage test set forth in Section 4.5(a) and (b) of the Plan. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of section 401(a)(30), 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416 of the Code, as applicable, by reason of such Catch-Up Contributions. Notwithstanding any provision of the Plan to the contrary, no Matching Contributions shall be made pursuant to Section 4.4 with respect to any such Catch-Up Contributions and any Matching Contributions made pursuant to Section 4.4 attributable to Salary Deferral Contributions considered, as of the end of the Plan Year, to be Catch-Up Contributions shall be forfeited in accordance with Section 4.5(d)(2)(B); provided, however, Matching Contributions with respect to Catch-Up Contributions shall be made to the extent necessary to meet the safe harbor matching contribution requirement set forth in U.S. Treasury Regulation § 1.401(k)-3(c).

Section 4.3. Annual Limit on Salary Deferral Contributions. (a) General Rule. A Participant’s Salary Deferral Contributions for any calendar year shall not exceed (i) $15,500 for the 2008 calendar year and (ii), for each subsequent year, the dollar amount prescribed by section 402(g) of the Code (as adjusted for increases in the cost-of-living in accordance with section 402(g)(4) of the Code).

(b) Correction of Excess Salary Deferral Contributions. If for any calendar year a Participant determines that the aggregate of the (i) Salary Deferral Contributions to the

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Plan and (ii) amounts contributed under all other plans or arrangements described in section 401(k), 408(k) or 403(b) of the Code, including those maintained by an Employer, Affiliate or other employers, will exceed the limit imposed by Section 4.3(a) for the calendar year in which such contributions were made (“Excess Salary Deferral Contributions”), such Participant shall be permitted, pursuant to such rules and at such time prior to the April 15 following such calendar year as determined by the Committee, to submit a written request for the distribution of an amount equal to or less than the amount of such Excess Salary Deferral Contributions. The request described in this Section 4.3(b) shall be made on a form designated by the Committee and shall specify the amount of such Excess Salary Deferral Contributions and the amount to be distributed from the Plan. The request shall be accompanied by the Participant’s written statement that if such amount is not distributed, the amounts contributed by the Participant under all plans and arrangements described under sections 401(k), 408(k), and 403(b) of the Code will exceed the limit for such Participant under section 402(g) of the Code. The Committee shall direct the Trustee to distribute such amount (adjusted for gains and losses as determined pursuant to applicable regulations) no later than such April 15. If amounts are distributed pursuant to this subsection, any corresponding Matching Contributions allocated to the Participant’s Matching Contributions Account (adjusted for gains and losses) shall be forfeited.

Section 4.4. Matching Contributions. (a) Employer Matching Contributions. Subject to the limitations set forth in Sections 4.5, 4.6 and 7.5, each Employer shall contribute for each payroll period on behalf of each Participant, (i) an amount equal to 100 percent (100%) of the Salary Deferral Contributions made on behalf of the Participant for such payroll period, but only to the extent that such Salary Deferral Contributions do not exceed three percent (3%) of such Participant’s Compensation for such payroll period, and (ii) 50 percent (50%) of the

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Salary Deferral Contributions made on behalf of the Participant for such payroll period, but only to the extent that such Salary Deferral Contributions exceed three percent (3%) but do not exceed five percent (5%) of such Participant’s Compensation for such payroll period. Matching Contributions made pursuant to this subsection (a) are intended to meet the safe harbor matching contribution requirement set forth in U.S. Treasury Regulation § 1.401(k)-3(c).

(b) Other Matching Contributions. (1) Supplemental Matching Contributions. Subject to the limitations set forth in Sections 4.5, 4.6 and 7.5, each Employer also shall contribute for each Plan Year on behalf of each Participant a supplemental Matching Contribution equal to the excess of (i) 100 percent (100%) of the Salary Deferral Contributions made on behalf of the Participant for the Plan Year, to the extent that such Salary Deferral Contributions do not exceed three percent (3%) of such Participant’s Compensation for such Plan Year, plus (ii) fifty percent (50%) of the Salary Deferral Contributions made on behalf of the Participant for the Plan Year, to the extent that such Salary Deferral Contributions exceed three percent (3%) but do not exceed five percent (5%) of such Participant’s Compensation for such Plan Year, over the Matching Contributions made on behalf of such Participant pursuant to Section 4.4(a) for such Plan Year.

(2) Discretionary Matching Contributions. Subject to the limitations of Sections 4.5, 4.6 and 7.5, for each Plan Year, each Employer may contribute on behalf of each Participant (i) who on the last day of such Plan Year is an Eligible Employee of such Employer, (ii) who first incurs a Disability within such Plan Year or (iii) who terminated employment during such Plan Year on account of death or after attaining age 55, a discretionary Matching Contribution in such amount or such percentage of Compensation as the Company may, in its sole discretion, determine.

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(3) General. Matching Contributions for a Plan Year made pursuant to Section 4.4 by an Employer shall be made wholly in cash, wholly in shares of Company Stock, or in a combination thereof, as determined by the Company. Matching Contributions for any Plan Year shall be delivered to the Trustee prior to the due date, including extensions thereof, of the Employer’s federal income tax return for the fiscal year of the Employer that coincides with such Plan Year. If any Matching Contributions are made by the delivery to the Trustee of shares of Company Stock, then such stock shall be valued either (i) at the closing price of the stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions List (or the consolidated tape of such other principal exchange on which such stock is traded) as of the date such shares are delivered to the Trustee or, if such date is not a trading day, such price on the most recent trading day prior thereto or (ii) by the average trading price of the stock, as determined by the Committee in its sole discretion, on such date.

Section 4.5. Limitations on Contributions for Highly Compensated Employees. (a) Actual Deferral Percentage Test - Section 401(k)(3) of the Code. Notwithstanding the provisions of Section 4.2, if the Salary Deferral Contributions made pursuant to such Section for a Plan Year fail to satisfy both of the tests set forth in paragraphs (1) and (2) of this subsection, then the adjustments prescribed in paragraph (1) of subsection (d) of this Section shall be made.

(1) The Average Deferral Percentage for the group consisting of highly compensated Eligible Employees does not exceed the product of the Average Deferral Percentage for the group consisting of all other Eligible Employees multiplied by 1.25.

(2) The Average Deferral Percentage for the group consisting of highly compensated Eligible Employees (i) does not exceed the Average Deferral Percentage for the group consisting of all other Eligible Employees by more than two percentage points, and (ii) does not exceed two times the Average Deferral Percentage of such group.

(b) Actual Contribution Percentage Test - Section 401(m) of the Code. Notwithstanding the provisions of Section 4.4, if the Matching Contributions made pursuant to

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such Section for a Plan Year fail to satisfy both of the tests set forth in paragraphs (1) and (2) of this subsection, then the adjustments prescribed in paragraph (2) of subsection (d) of this Section shall be made.

(1) The Average Contribution Percentage for the group consisting of highly compensated Eligible Employees does not exceed the product of the Average Contribution Percentage for the group consisting of all other Eligible Employees multiplied by 1.25.

(2) The Average Contribution Percentage for the group consisting of highly compensated Eligible Employees (i) does not exceed the Average Contribution Percentage for the group consisting of all other Eligible Employees by more than two percentage points, and (ii) does not exceed two times the Average Contribution Percentage of such group.

(c) Definitions and Special Rules. For purposes of this Section, the following terms shall have the meaning set forth below:

(1) The “Average Deferral Percentage” for a Plan Year for a group of Eligible Employees shall be the average of the ratios, calculated separately for each Eligible Employee in the group to the nearest one-hundredth of one percent (.01%), of the employer contributions made for the benefit of such Eligible Employee to the total compensation for such Plan Year paid to such Eligible Employee. For purposes of this paragraph, “employer contributions” shall mean (a) Salary Deferral Contributions, as adjusted pursuant to Section 4.5(d) (including Excess Salary Deferral Contributions other than Excess Salary Deferral Contributions of Eligible Employees who are not highly compensated Employees that arise solely from salary reduction contributions made under the Plan or other plans of an Employer) and (b) any qualified nonelective contributions or qualified matching contributions designated by the Employer for this purpose pursuant to Section 4.5(e).

(2) The “Average Contribution Percentage” for a Plan Year for a group of Eligible Employees shall be the average of the ratios, calculated separately for each Eligible Employee in the group to the nearest one hundredth of one percent (.01%), of the Matching Contributions (including any Matching Contributions made under Section 14.3) made for the benefit of such Eligible Employee under the Plan, plus any qualified nonelective contributions or qualified matching contributions designated by an Employer for this purpose pursuant to Section 4.5(e) for such Eligible Employee to the total compensation for such Plan Year paid to such Employee.

(3) A “highly compensated” Employee or Eligible Employee, is an Employee or Eligible Employee, as the case may be, who is (a) a 5%-owner (as determined under section 416(i)(1)(A)(iii) of the Code) at any time during the Plan Year or the preceding Plan Year or (b) was paid compensation in excess of $105,000 (as adjusted for increases

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in the cost of living in accordance with section 414(q)(1)(B) of the Code) from an Employer for the prior Plan Year. If the Committee so elects for a Plan Year, then the Employees taken into account under clause (b) of the immediately preceding sentence shall be limited to those Employees who were members of the “top-paid group” (as defined in section 414(q)(3) of the Code) for the preceding Plan Year.

(4) The term “compensation” shall have the meaning set forth in section 414(s) of the Code.

(5) If the Plan and one or more other plans of the Employer to which elective deferrals, matching contributions, qualified nonelective contributions or qualified matching contributions (as such terms are defined in Treasury Regulation § 1.401(m) - 5) are made are treated as one plan for purposes of section 410(b) of the Code, then such plans shall be treated as one plan for purposes of this Section. If a highly compensated Employee participates in the Plan and one or more other plans of an Employer to which any such contributions are made, all such contributions shall be aggregated for purposes of this Section.

(d) Adjustments to Comply with Limits. This subsection sets forth the adjustments and correction methods that shall be used to comply with the actual deferral percentage test under section 401(k)(3) of the Code, and the actual contribution percentage test under section 401(m) of the Code.

(1) Adjustments to Comply with Actual Deferral Percentage Test. (A) Adjustment to Salary Deferral Contributions of Highly Compensated Employees. The Committee shall cause to be made such periodic computations as it shall deem necessary or appropriate to determine whether either of the tests set forth in clause (1) or (2) of Section 4.5(a) is satisfied during a Plan Year, and, if in the Committee’s judgment it appears that neither of such tests will be satisfied, then the Committee shall take such steps as it deems necessary or appropriate to adjust the Salary Deferral Contributions for all or a portion of such Plan Year on behalf of Participants who are highly compensated Employees to the extent necessary in order for one of such tests to be satisfied. If, as of the end of the Plan Year, the Committee determines that, notwithstanding any adjustments made pursuant to the preceding sentence, neither of the tests set forth in Section 4.5(a) has been satisfied, the total amount by which Salary Deferral Contributions must be reduced in order to satisfy either such test shall be determined in the manner prescribed by section 401(k)(8)(B) of the Code (the “excess contributions amount”). The amount to be returned to each Participant who is required to receive a portion of the excess contribution amount shall be determined by first reducing the Salary Deferral Contributions of each Participant who is a highly compensated Employee and whose actual dollar amount of Salary Deferral Contributions for such Plan Year is the highest until such dollar amount equals the next highest actual dollar amount of Salary Deferral Contributions made for such Plan Year on behalf of any highly compensated Employee, or until the total reduction equals the excess contributions amount. If further reductions

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are necessary, then the Salary Deferral Contributions on behalf of each Participant who is a highly compensated Employee and whose actual dollar amount of Salary Deferral Contributions, after the reduction described in the preceding sentence, is the highest shall be reduced in accordance with the previous sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess contributions amount.

(B) Corrective Distributions and Forfeitures. No later than 2 ¹/2 months after the end of the Plan Year (or if correction by such date is administratively impracticable, no later than the last day of the subsequent Plan Year), the Committee shall cause to be distributed to each affected Participant (i) the amount of Salary Deferral Contributions to be returned to such Participant pursuant to subparagraph (A) above, plus any income and minus any loss allocable thereto, and any corresponding Matching Contributions, plus any income and minus any loss allocable thereto, shall be forfeited. The amount of any income or loss allocable to any such reductions to be so distributed or forfeited shall be determined by the Committee in accordance with applicable U.S. Treasury Regulations. Any amounts forfeited pursuant to this paragraph shall be treated in the same manner as forfeitures described in Section 8.3(c). The amount of Salary Deferral Contributions (and income or loss allocable thereto) to be distributed to a Participant hereunder shall be reduced by any Salary Deferral Contributions previously distributed to such Participant pursuant to Section 4.3 in order to comply with the limitations of section 402(g) of the Code. The unadjusted amount of any such reductions so distributed or forfeited shall be treated as “annual additions” for purposes of Section 7.5 relating to the limitations under section 415 of the Code.

(2) Adjustments to Comply with the Actual Contribution Percentage Test. (A) Adjustment to Matching Contributions of Highly Compensated Employees. If, as of the end of the Plan Year but after taking into account the forfeiture of Matching Contributions made on behalf of highly compensated Employees pursuant to subparagraph (1)(B) above, the Committee determines that neither of the tests set forth in clause (1) or (2) of Section 4.5(b) is satisfied for such Plan Year, then the Committee shall calculate a total amount by which Matching Contributions must be reduced in order to satisfy either such test, in the manner prescribed by section 401(m)(6)(B) of the Code (the “excess aggregate contributions amount”). The amount to be reduced with respect to each Participant who is required to receive a portion of the excess aggregate contributions amount shall be determined by first reducing the Matching Contributions for each Participant who is a highly compensated employee and whose actual dollar amount of Matching Contributions for such Plan Year is the highest until such reduced dollar amount equals the next highest dollar amount of Matching Contributions made for such Plan Year on behalf of any highly compensated Employee, or until the total reduction equals the excess aggregate contributions amount. If further reductions are necessary then such Matching Contributions on behalf of each Participant who is a highly compensated employee and whose actual dollar amount of Matching Contributions made for such Plan Year is the highest (determined after the reduction described in the preceding sentence) shall be reduced in accordance with the preceding sentence. Such reductions shall continue to be made to the extent necessary so that the total reduction equals the excess aggregate contributions amount.

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(B) Corrective Distributions and Forfeitures. With respect to the Matching Contributions to be reduced on behalf of Participants who are highly compensated Employees as described in subparagraph (2)(A) above, the Committee shall cause to be distributed within 2 ¹/2 months after the end of the Plan Year for which the adjustment is made, if possible, but no later than the last day of the subsequent Plan Year, the portion of such Matching Contributions, plus any income and minus any loss allocable thereto, in which the Participant would be vested if he or she terminated employment on the last day of such Plan Year (or earlier if such Participant actually terminated employment at any earlier date), and the portion of such Matching Contributions in which the Participant would not be vested, plus any income and minus any loss allocable thereto, shall be forfeited. The amount of any income or loss allocable to any such reductions to be so distributed or forfeited shall be determined pursuant to applicable U.S. Treasury Regulations. Any amounts forfeited pursuant to this paragraph shall be treated in the same manner as forfeitures described in Section 8.3(c). The unadjusted amount of any such reductions so distributed shall be treated as “annual additions” for purposes of Section 7.5 relating to the limitations under section 415 of the Code.

(e) Designation of Qualified Nonelective Contributions and Qualified Matching Contributions. Subject to the limitations set forth in Section 4.3 and Section 7.5, each Plan Year, the Committee may require some or all of the Employers to make, to the extent permitted by and in accordance with U.S. Treasury Regulations, a “qualified nonelective contribution,” within the meaning of section 401(m)(4)(C) of the Code, or a “qualified matching contribution,” within the meaning of U.S. Treasury Regulation § 1.401(k)-2(a)(6), to the Plan for purposes of satisfying the tests set forth in Section 4.5(a) or (b) (or both). Any qualified nonelective contribution to the Plan shall be allocated to the accounts of those Participants who are not highly compensated Employees (as defined in Section 4.5(c)) for the Plan Year with respect to which such qualified nonelective contribution is made and who are actively employed by the contributing Employer on the last day of the Plan Year with respect to which such qualified nonelective contribution is made, in the ratio which each such Participant’s Compensation for such Plan Year bears to the total Compensation of all such Participants for such Plan Year. A qualified matching contribution shall be allocated to the accounts of Participants who are not highly compensated Employees (as defined in Section 4.5(c)) for the

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Plan Year with respect to which such qualified matching contribution is made and who are actively employed on the last day of the Plan Year with respect to which such qualified matching contribution is made as a percentage of all or a portion of each such Participant’s Salary Deferral Contributions as shall be designated by the Company; provided, however, that such designation shall satisfy the provisions of Treasury Regulation § 1.401(k)-2(a)(6).

(f) Safe Harbor Election. Notwithstanding any provision of Section 4.5 to the contrary, the Plan shall be deemed to have satisfied the actual deferral percentage test of Section 4.5(a) and the actual contribution percentage test of Section 4.5(b) as a result of the Company’s election of an alternative method of satisfying the nondiscrimination requirements of sections 401(k) and 401(m) of the Code as set forth in sections 401(k)(12) and 401(m)(11) of the Code; provided, however, that the actual contribution percentage test of Section 4.5(b) shall apply to the extent that any Discretionary Matching Contributions are made pursuant to Section 4.4(b)(2).

Section 4.6. Limitation on Employer Contributions. The contributions of an Employer for any Plan Year shall not exceed the maximum amount for which a deduction is allowable to such Employer for federal income tax purposes for the fiscal year of such Employer that ends with or within such Plan Year.

Any contribution made by an Employer by reason of a good faith mistake of fact, or the portion of any contribution made by an Employer that exceeds the maximum amount for which a deduction is allowable to such Employer for federal income tax purposes by reason of a good faith mistake in determining the maximum allowable deduction, shall upon the request of such Employer be returned by the Trustee to the Employer. An Employer’s request and the return of any such contribution must be made within one year after such contribution was mistakenly made or after the deduction of such excess portion of such contribution was disallowed, as the

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case may be. The amount to be returned to an Employer pursuant to this paragraph shall be the excess of (i) the amount contributed over (ii) the amount that would have been contributed had there not been a mistake of fact or a mistake in determining the maximum allowable deduction. Earnings attributable to the mistaken contribution shall not be returned to the Employer, but losses attributable thereto shall reduce the amount to be so returned. If the return to the Employer of the amount attributable to the mistaken contribution would cause the balance of any Participant’s account as of the date such amount is to be returned (determined as if such date coincided with the close of a Plan Year) to be reduced to less than what would have been the balance of such account as of such date had the mistaken amount not been contributed, the amount to be returned to the Employer shall be limited so as to avoid such reduction.

ARTICLE 5

ROLLOVER CONTRIBUTIONS

Section 5.1. Requirements for Rollover Contributions. If an Employee receives an “eligible rollover distribution” (within the meaning of section 402(c)(4) of the Code) from an employees’ trust described in section 401(a) of the Code which is exempt from tax under section 501(a) of the Code, a qualified annuity plan described in section 403(a) of the Code, an annuity contract described in section 403(b) of the Code, an individual retirement account or annuity described in section 408(a) or 408(b) of the Code or an eligible plan under section 457(b) of the Code which is maintained by a state, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, then such Employee may contribute to this Plan an amount not in excess of the eligible rollover distribution; provided, however, that, if any portion of an eligible rollover distribution includes after-tax contributions, such after-tax contributions may be rolled over to this Plan pursuant to this Section 5.1 only to the extent that such after-tax contributions are transferred on behalf of the Employee directly from a qualified

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defined contribution plan described in section 401(a) or 403(a) of the Code. If an Employee receives a distribution or distributions from an individual retirement account (within the meaning of section 408 of the Code) and the amount received represents the entire amount in such account and no amount in such account is attributable to any source other than an eligible rollover distribution or a “qualified total distribution” (within the meaning of section 402(a)(5)(E)(i) of the Code as in effect prior to January 1, 1993) and any earnings on such a rollover contribution, then such Employee may contribute to this Plan such distribution or distributions. An Employee may make a Rollover Contribution pursuant to this Article prior to the date on which he or she satisfies the eligibility requirement described in Section 3.1.

Section 5.2. Delivery of Rollover Contributions. Any Rollover Contribution made pursuant to this Article shall be delivered by the Participant to the Committee and by the Committee to the Trustee on or before the 60th day after the day on which the Participant receives the distribution, or on or before such later date as may be prescribed by law. Any such contribution must be accompanied by (i) a statement of the Participant that, to the best of his or her knowledge, the amount so transferred meets the conditions specified in this Section and (ii) a copy of such documents as may have been received by the Participant advising him or her of the amount of and the character of such distribution. Notwithstanding the foregoing, the Committee shall not accept a Rollover Contribution if, in its judgment, accepting such contribution would cause the Plan to violate any provision of the Code or U.S. Treasury Regulations and shall not be required to accept such a contribution to the extent that it consists of property other than cash.

Section 5.3. Special Accounting Rules for Rollover Contributions. An Employee’s Rollover Contribution shall be credited to such Employee’s Rollover Account as of the date on which such contribution is received by the Trustee. If such contribution is made by

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an Employee prior to his or her becoming a Participant, then, until such time as the Employee becomes a Participant, he or she shall be deemed to be a Participant for all purposes of the Plan except for the purposes of electing Salary Deferral Contributions and sharing in allocations of Profit Sharing Contributions, Matching Contributions or any other Employer contributions pursuant to Article 4. Upon making a Rollover Contribution to the Plan as described in this Article 5, an Employee shall make an investment election in the time and manner prescribed by the Committee (in multiples established by the Committee from time to time) which shall apply to the investment of such Rollover Contribution. Notwithstanding anything contained herein to the contrary, any future changes in investment elections made pursuant to Section 7.1(c)(i) shall supersede the original investment election applicable to any Rollover Contribution made pursuant to this Section 5.3. The “annual additions” to a Participant’s accounts, as defined in Section 7.5, shall not include any Rollover Contribution made to the Plan pursuant to this Article.

ARTICLE 6

TRUST AND INVESTMENT FUNDS

Section 6.1. Trust. A Trust created by the execution of a trust agreement between the Company (acting on behalf of the Employers pursuant to Section 12.4) and the Trustee has been established to receive, hold, invest and dispose of the assets of the Trust Fund. All contributions under the Plan shall be paid to the Trustee. The Trustee shall hold all monies and other property received by it and invest and reinvest the same, together with the net income therefrom, on behalf of the Participants collectively in accordance with the provisions of the trust agreement. The Trustee shall make distributions from the Trust Fund at such time or times to such person or persons and in such amounts as the Committee directs in accordance with the Plan.

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Section 6.2. Investment Funds. (a) In General. The Committee shall cause the Trustee to establish, operate and maintain three or more separate investment funds (other than the Company Stock Fund or any fund investing primarily in securities of any Employer) exclusively for the collective investment and reinvestment of moneys directed by the Participants to be invested in such funds on their behalf. Additional investment funds may be established and existing investment funds may be removed, as determined by the Committee from time to time, in its sole discretion.

(b) Company Stock Fund. The Committee shall cause the Trustee to establish, operate and maintain a Company Stock Fund. The assets of the Company Stock Fund shall be invested primarily in shares of Company Stock and short-term liquid investments in a commingled money market fund maintained by the Trustee, to the extent determined by the Trustee to be necessary to satisfy such fund’s cash needs. In making purchases or sales of shares of Company Stock for the Company Stock Fund, the Trustee shall purchase or sell shares of Company Stock in the manner and in the proportion as prescribed by the Committee in accordance with rules adopted for such purpose.

ARTICLE 7

PARTICIPANT ACCOUNTS

Section 7.1. Participant Accounts and Investment Elections. (a) Participant Accounts. Separate accounts shall be maintained for each Participant. The accounts maintained for a Participant, to the extent applicable, shall consist of (i) a Profit Sharing Account, to which shall be credited the portion of the Participant’s account balance attributable to Profit Sharing Contributions made prior to the Merger Date and all Profit Sharing Contributions made on behalf of the Participant pursuant to Section 4.1, (ii) a Salary Deferral Contributions Account, to which shall be credited all Salary Deferral Contributions made pursuant to Section 4.2, (iii) a Post-2005

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Matching Contributions Account, (iv) a Pre-2006 Matching Contributions Account, (v) a Rollover Account, to which shall be credited all Rollover Contributions made pursuant to Article 5, (vi) an After-Tax Account, to which shall be credited all after-tax contributions transferred to the Plan from the FHC Plan and the QualMed Plan (or any other plan qualified under section 401(a) of the Code), (vii) a Qualified Nonelective Contribution Account and (viii) a Qualified Matching Contribution Account. Unless the context otherwise requires, a Participant’s “account balance” shall mean the aggregate value of all separate accounts maintained for such Participant pursuant to the Plan and Trust. A Participant shall be fully vested at all times in his or her Salary Deferral Contributions Account, Post-2005 Matching Contributions Account, Rollover Account, After-Tax Account, Qualified Nonelective Contribution Account and Qualified Matching Contribution Account under the Plan. A Participant shall be vested in his or her Profit Sharing Account and Pre-2006 Matching Contributions Account only to the extent provided in Section 8.1. Each account shall, to the extent appropriate, be composed of (i) investment subaccounts in respect of each investment fund to which amounts contributed under the Plan shall be credited pursuant to subsections (b) and (c) of this Section and (ii) administrative subaccounts in respect of accounts transferred to the Plan from other plans qualified under section 401(a) of the Code. Such accounts and subaccounts shall be solely for accounting purposes, and there shall be no segregation of assets of the Trust or of any separate investment fund among separate accounts. The books of account, forms and accounting methods used in the administration of Participants’ accounts shall be the responsibility of, and shall be subject to the supervision and control of, the Committee.

(b) Initial Investment Election. Except as set forth in Sections 5.3 and 7.2, each Participant, as part of his or her commencement of participation shall make an investment

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election, in the time and manner prescribed by the Committee, that shall apply to the investment of (i) Profit Sharing Contributions credited to such Participant’s account and any earnings thereon, (ii) Salary Deferral Contributions made on such Participant’s behalf under the Plan and any earnings thereon, (iii) Matching Contributions made on such Participant’s behalf under the Plan and any earnings thereon, (iv) Rollover Contributions made by the Participant under the Plan and any earnings thereon and (v) any qualified nonelective contributions or qualified matching contributions and any earnings thereon. A single investment election shall apply to all such contributions and earnings thereon, unless the Committee prescribes rules for separate investment elections to be made with respect to any such contributions and earnings. Such elections shall specify that such contributions, and earnings thereon, be invested either (i) wholly in one of the funds maintained or employed by the Trustee pursuant to Section 6.2(a) or (ii) divided among such funds in multiples established by the Committee from time to time. During any period in which no direction as to the investment of a Participant’s account is on file with the Committee, contributions made by such Participant or on his or her behalf to the Plan shall be invested in such manner as the Committee shall determine.

(c) Change of Investment Election. Except as set forth in Section 7.2, a Participant may elect to change his or her investment election at such intervals as may be determined by the Committee in the time and the manner prescribed by the Committee (in multiples established by the Committee from time to time); provided, however, that such intervals shall occur no less frequently than on a quarterly basis. Such change shall be limited to the investment funds then maintained or employed by the Trustee pursuant to Section 6.2(a). A Participant may change his or her investment election in the time and manner designated by the Committee among the funds maintained pursuant to Section 6.2(a), with respect to (i)

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contributions and earnings thereon made on behalf of or by the Participant under Article 4 or Article 5 prior to such change, (ii) to future contributions made pursuant to such Articles, or (iii) both.

Section 7.2. Investments in Company Stock Fund. (a) Election of Investments in Company Stock Fund. Notwithstanding the provisions of Section 7.1:

(1) The percentage of any contribution that is invested in the Company Stock Fund shall not exceed 20%, or such other percentage as may be prescribed by the Compensation and Stock Option Committee of the Board from time to time.

(2) An Employee whose compensation is determined by the Compensation and Stock Option Committee pursuant to the bylaws of the Company shall not be permitted to elect the investment of any portion of his or her account balance in the Company Stock Fund.

(b) Crediting of Company Stock Fund Subaccount. As of the Valuation Date coinciding with or next following the date an amount is credited to a Company Stock Fund subaccount, such subaccount shall be credited with the number of whole and fractional shares of Company Stock which have a fair market value as of such Valuation Date equal to the amount credited to such subaccount. For this purpose, the price of each share of Company Stock shall be the average of the prices paid by the Trustee for shares of Company Stock on such Valuation Date.

Section 7.3. Valuation of Funds and Plan Accounts. The value of an investment fund as of any Valuation Date shall be the market value of all assets (including any uninvested cash) held by the fund as determined by the Trustee, reduced by the amount of any accrued liabilities of the fund on such Valuation Date. The Trustee’s determination of market value shall be binding and conclusive upon all parties.

The value of a Participant’s Plan accounts as of any Valuation Date shall be the sum of the values of his or her investment subaccounts in each of the Participant’s Profit Sharing

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Account, Salary Deferral Contributions Account, Matching Contributions Accounts, Rollover Account, After-Tax Account, Qualified Nonelective Contributions Account and Qualified Matching Contributions Account. The Committee shall furnish to each Participant, not less frequently than annually, a statement setting forth the balances in the Plan accounts of such Participant.

Section 7.4. Allocation of Contributions and Forfeitures Among Participants’ Accounts. (a) Allocation of Profit Sharing Contributions. A portion of a Profit Sharing Contribution made by an Employer pursuant to Section 4.1 for a Plan Year shall be allocated to the Profit Sharing Account of each Participant who was an Employee of the Employer that made such Profit Sharing Contribution and who (i) was an Eligible Employee on the last day of the Plan Year, (ii) first incurred a Disability within such Plan Year or (iii) terminated employment with the Employer during the Plan Year on account of death or after attaining age 55. Such portion shall be allocated to each such Participant’s Profit Sharing Account in proportion to the Participant’s Compensation payable by such Employer for the Plan Year compared to the Compensation payable for the Plan Year to either (i) all Participants employed by such Employer or (ii) all Participants employed by the Employers, as determined by the Company. Profit Sharing Contributions shall be allocated to the Profit Sharing Account of each such Participant as of the date on which such contributions are delivered to the Trustee.

(b) Allocation of Salary Deferral Contributions. A Participant’s Salary Deferral Contributions made pursuant to Section 4.2 shall be allocated to the Participant’s Salary Deferral Contributions Account as of the date on which such contributions are delivered to the Trustee.

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(c) Allocation of Matching Contributions. Matching Contributions made pursuant to Section 4.4 shall be allocated to the applicable Matching Contributions Account of each Participant for whom such contributions are made as of the date on which such contributions are delivered to the Trustee.

(d) Allocation of Rollover Contributions. Subject to the special accounting rules contained in Section 5.3, a Rollover Contribution made pursuant to Article 5 shall be allocated to the Rollover Account of the Participant who makes such contribution as soon as practicable after the date on which such contribution is delivered to the Trustee.

(e) Allocation of Forfeitures. The excess, if any, of (i) the amounts forfeited in a Plan Year pursuant to Section 8.1(c) by all Participants employed by an Employer over (ii) the amount of such forfeitures applied to restore previous forfeitures as provided in Section 9.3(b) shall be allocated and credited to Profit Sharing Accounts in the next following Plan Year in the manner described in subsection (a) above, so as to reduce the amount which such Employer contributes to the Plan in such Plan Year pursuant to Section 4.1. If such forfeited amounts exceed the amount of such Employer’s Profit Sharing Contribution for such Plan Year, then any remaining forfeited amounts shall be allocated to the Matching Contribution Accounts of Participants employed by such Employer during such Plan Year, in the manner described in subsection (c) above, so as to reduce the amount which such Employer contributes to the Plan for such Plan Year pursuant to Section 4.4.

Section 7.5. Statutory Limitations on Allocations to Accounts. Notwithstanding any other provision of the Plan, the aggregate annual additions for each Plan Year to a Participant’s accounts under the Plan and to the Participant’s accounts in all other defined contribution plans maintained by an employer shall not exceed the lesser of (A) $46,000 (as adjusted in accordance with section 415(d) of the Code) and (B) one hundred percent (100%) of the Participant’s compensation for such Plan Year.

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If the amount to be allocated to a Participant’s accounts pursuant to Section 7.4 for a Plan Year would exceed any of the limitations set forth in this Section 7.5, such excess amounts shall be corrected in accordance with the Employee Plans Compliance Resolution System of the Internal Revenue Service.

For purposes of this Section 7.5, the “annual additions” for a Plan Year to a Participant’s accounts under the Plan and under any other defined contribution plan maintained by an employer is the sum during such Plan Year of:

(i) the value of allocations made to such Participant’s accounts pursuant to Section 7.4 including any excess contributions distributed in accordance with Section 4.5, but excluding any Excess Salary Deferral Contributions amount distributed in accordance with Section 4.3, Catch-Up Contributions made in accordance with Section 4.2 and restorative payments (within the meaning of section 1.415(c)-1(b)(2)(ii)(C) of the Treasury Regulations),

(ii) the amount of all other employer contributions (within the meaning of section 415(c) of the Code) and forfeitures, if any, allocated to such Participant’s accounts under all other defined contribution plans maintained by an employer,

(iii) the amount of contributions by the Participant to any such plan (excluding any rollover contributions as defined in sections 402(c), 403(a)(4), 403(b)(8) and 408(d)(3) of the Code), any loan repayments made pursuant to Section 8.3, any repayments made pursuant to Section 9.3(b) and any direct transfers made from another qualified plan within the meaning of section 401(a) of the Code to such plan)

(iv) contributions allocated on behalf of the Participant to any individual medical benefit account that is part of a pension or annuity plan within the meaning of section 415(l) of the Code or, if the Participant is a key employee within the meaning of section 419A(d)(3) of the Code, to any post-retirement medical benefits account established pursuant to section 419A(d)(1) of the Code,

(v) mandatory employee contributions within the meaning of section 411(c)(2)(C) of the Code by such Participant, and

(vi) any contributions or benefits provided under another plan to a leased employee (within the meaning of section 414(n)(2) of the Code) by his or her leasing organization with respect to services rendered to an Employer or an Affiliate to the extent required under Treasury Regulation § 1.415(a)-1(f)(3).

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For purposes of this Section 7.5, the terms “compensation” and “defined contribution plan” shall have the meanings set forth in section 415 of the Code (as amended from time to time) and the applicable Treasury Regulations, and the term “employer” shall include all corporations and entities determined under section 414(b) and (c) of the Code as modified by section 415(h) of the Code.

Section 7.6. Correction of Error. If it comes to the attention of the Committee that an error has been made in any of the allocations prescribed by this Article 7 or in the crediting of any amount to a Participant’s account or in any other manner, then appropriate adjustment shall be made to the accounts of all Participants and designated Beneficiaries that are affected by such error, except that no adjustment need be made with respect to any Participant or Beneficiary whose account has been distributed in full prior to the discovery of such error. Correction of such error may be made by any method deemed appropriate by the Committee applied in a nondiscriminatory manner and may include discretionary or nonelective contributions by an Employer.

ARTICLE 8

WITHDRAWALS, LOANS AND DISTRIBUTIONS

Section 8.1. Vesting. (a) In General. A Participant who terminates employment after the Effective Date shall be entitled upon his termination of employment to the entire balance of the Participant’s Salary Deferral Contributions Account, Rollover Account, After-Tax Account, Qualified Nonelective Contributions Account, Qualified Matching Contributions Account and Post-2005 Matching Contributions Account, and a percentage of his or her Profit

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Sharing Account and Pre-2006 Matching Contributions Account determined by reference to the number of the Participant’s years of Service, in accordance with the following schedule:

Years of Service	Percentage of Profit Sharing and Matching Contributions Accounts
less than 1	0%
at least 1, but less than 2	25%
at least 2, but less than 3	50%
3 or more	100%

Notwithstanding the foregoing, a Participant shall become 100% vested in his account balance upon his death, attainment of age 55 or, when the Committee makes a determination that the Participant has a Disability.

(b) Grandfathered Vesting Schedules. Each Eligible Employee who was a participant in the FHC Plan immediately prior to the effective date of the September 1, 1997 amendment and restatement of the Plan and had commenced employment with an employer in the FHC Plan prior to January 1, 1995 shall be vested in his or her Profit Sharing Account and Pre-2006 Matching Contributions Account in accordance with the following schedule:

Years of Service	Percentage of Profit Sharing and Matching Contributions Accounts
less than 1	0%
at least 1, but less than 2	34%
at least 2, but less than 3	67%
3 or more	100%

The vesting schedule set forth in this paragraph (ii) shall not apply, however, to any participant in the FHC Plan who was employed by Intergroup HealthCare Corporation of Utah, Intergroup HealthCare Corporation of Arizona, Gem Holding Company (or any of its affiliates) or CareFlorida on the date that Foundation Health Corporation first owned, directly or indirectly, at least 80% of the stock of such Employer.

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(c) Forfeitures. If, upon a Participant’s termination of employment, the Participant is not fully vested in the balance of his or her Profit Sharing Account or Pre-2006 Matching Contributions Account, then the difference between the value of each such account and the amount distributable with respect thereto under subsection (a) or (b) of this Section shall be charged to such account and forfeited. Such forfeiture shall occur as of the Valuation Date coinciding with or next following the earlier of (i) the date the Participant takes a distribution of his or her vested interest in such account as provided in Section 8.5 and (ii) the date as of which the Participant incurs a Break in Service of five consecutive years. If such Participant is reemployed prior to incurring a Break in Service of five consecutive years, then such forfeiture shall be reinstated as prescribed in Section 9.3(b). In the case of a Participant who dies while performing qualified military service (as defined in Section 414(u) of the Code), for purposes of this subsection (c) and to the extent required by the Heroes Earnings Assistance and Relief Tax Act of 2008, the value of the Participant’s Profit Sharing Account and Pre-2006 Matching Contributions Account, if any, shall be determined as if the Participant resumed employment with his or her Employer and then terminated such employment on account of such Participant’s death.

Section 8.2. Withdrawals Prior to Termination of Employment. (a) Withdrawals of After-Tax and Rollover Accounts. While a Participant is an Employee, the Participant may at any time, by instructions at the time and in the manner prescribed by the 401(k) Administrator, make a request to withdraw all or any part of the value of the balances credited to his or her After-Tax Account and Rollover Account. A Participant shall not be permitted to withdraw any portion of his or her After-Tax Account or earnings thereon more frequently than once during any calendar year.

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(b) Withdrawals After Age 59 ¹/2. Upon attaining age 59 ¹/ 2, a Participant may at any time, by instructions at the time and in the manner prescribed by the 401(k) Administrator, make a request to withdraw any portion of the Participant’s vested interest in his or her accounts under the Plan.

(c) Hardship Withdrawals. A Participant who has incurred a financial hardship while he or she is an Employee and who has not attained age 59 ¹/2 may withdraw any portion of the balance of his or her Salary Deferral Contributions Account and any portion of the Participant’s vested interest in his or her Pre-2006 Matching Contributions Account in an amount necessary to satisfy the financial hardship, provided that such portion is not held as collateral for an outstanding plan loan. The determination of whether a financial hardship exists and the amount required to be distributed to satisfy the need created by the hardship will be made by the 401(k) Administrator in a uniform and non-discriminatory manner according to the following rules:

(1) A financial hardship shall be deemed to exist if the Participant certifies to the 401(k) Administrator that the financial need is on account of:

(A) expenses for (or necessary to obtain) medical care that would be deductible under section 213(d) of the Code (determined without regard to whether the expenses exceed 7.5% of adjusted gross income) incurred by the Participant, or the Participant’s Spouse, children or dependents (as defined in section 152 of the Code, and, for taxable years beginning on or after January 1, 2005, without regard to section 152(b)(1), (b)(2) and (d)(1)(B) of the Code );

(B) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments) such as reasonable closing costs and a down payment;

(C) payment of tuition, related educational fees, and room and board expenses for a maximum period of the next 12 months of post-secondary education for the Participant, or the Participant’s Spouse, children or dependents (as defined in section 152 of the Code, and, for taxable years beginning on or after January 1, 2005, without regard to section 152(b)(1), (b)(2) and (d)(1)(B) of the Code);

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(D) payments necessary to prevent the eviction of the Participant from the Participant’s principal residence or foreclosure on the mortgage on that residence;

(E) payments for burial or funeral expenses for the Participant’s deceased parent, Spouse, children or dependents (as defined in section 152 of the Code, and, for taxable years beginning on or after January 1, 2005, without regard to section 152(d)(1)(B) of the Code);

(F) expenses for the repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under section 165 of the Code (determined without regard to whether the loss exceeds 10% of adjusted gross income); or

(G) such other immediate and heavy financial needs as determined by the Commissioner of the Internal Revenue Service and announced by publication of revenue rulings, notices or other documents of general applicability.

(2) A Participant may request a hardship distribution only to the extent the amount of the distribution is not in excess of the amount required to satisfy the financial need and the need cannot be relieved from other resources that are reasonably available to the Participant. The Participant shall be required to submit any supporting documentation as may be requested by the 401(k) Administrator.

(3) A distribution shall be deemed necessary to satisfy an immediate and heavy financial need if (i) the Participant has obtained all other currently available distributions (including distributions of ESOP dividends under Section 404(k) of the Code and withdrawals from the Participant’s After-Tax Account and Rollover Account), other than hardship distributions, and non-taxable (at the time of the loan) loans available under the Plan and all other plans maintained by an Employer or another employer, and (ii) the Participant is prohibited under the terms of the Plan or an otherwise legally enforceable agreement from making any elective contributions and employee contributions to the Plan and all other plans maintained by an Employer until the first payroll period following the first Entry Date which is at least 6 months after the date of the hardship distribution. Such a Participant may elect to re-commence making Salary Deferral Contributions in accordance with the procedures established by the 401(k) Administrator pursuant to Section 4.2.

(4) Notwithstanding anything herein to the contrary, earnings after December 31, 1988 credited to a Participant’s Salary Deferral Contributions Account shall not be available for withdrawal pursuant to this subsection. The Participant shall give the 401(k) Administrator notice of such Participant’s intent to make any such withdrawal permitted by this subsection in the time and manner prescribed by the 401(k) Administrator.

(d) Qualified Reservist Withdrawals. A Participant who is a Qualified Reservist may, subject to subsection (e) of this Section, make a request while on active duty as a

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Qualified Reservist, by instructions at the time and in the manner prescribed by the 401(k) Administrator, to withdraw any portion of his or her Salary Deferral Contributions Account not attributable to outstanding loans. Notwithstanding the foregoing or any provision of the Plan to the contrary, effective January 1, 2009, a Participant may not make Salary Deferral Contributions to the Plan for a 6-month period following the date the Participant receives a distribution of such Participant’s account balance(s) on account of such Participant’s termination of employment during any period that the Participant was performing services in the uniformed services (as described in section 3401(h)(2)(A) of the Code).

(e) Miscellaneous Rules Relating to Withdrawals. For purposes of determining the value of a Participant’s account balance under the Plan for purposes of this Section, the Participant’s account balance shall be valued as of the date the Participant’s request for a withdrawal is received by the 401(k) Administrator in acceptable form and substance, or such other date prescribed by the 401(k) Administrator in conjunction with the Plan’s recordkeeper (such date to be applied in a uniform manner), and shall be paid within a reasonable period of time after the withdrawal request is received by the recordkeeper. All withdrawals under this Section shall be paid in cash. For purposes of this paragraph, the value of a Participant’s accounts shall be determined by excluding the portion credited to the Participant’s loan fund subaccount under Section 8.3(b), if any. To the extent permitted by the 401(k) Administrator, a Participant who elects a withdrawal under this Section shall designate the extent to which any such withdrawal shall be made from the various investment funds in which his or her account balance is invested, but absent any such designation such withdrawal shall be made from such funds as the 401(k) Administrator shall, in its sole discretion, determine. The amount of any withdrawal pursuant to this Section shall not be less than $500 or, if lesser, the value of

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the Participant’s account from which the withdrawal is made. Notwithstanding the foregoing, a Participant whose compensation is determined by the Compensation and Stock Option Committee pursuant to the by-laws of the Company shall not be permitted to elect a withdrawal pursuant to this Section 8.2 from such Participant’s Profit Sharing Contributions Account to the extent such account is invested in the Company Stock Fund.

Section 8.3. Loans to Participants. (a) Making of Loans. Subject to the restrictions set forth in this Section, the 401(k) Administrator shall establish a loan program whereby any Participant who is an Employee may request pursuant to procedures established by the 401(k) Administrator, to borrow funds from the Plan. The principal balance of such loan shall be not less than $1,000 and shall not exceed the lesser of (1) 50 percent (50%) of the aggregate of the Participant’s vested account balances as of the Valuation Date coinciding with or immediately preceding the day on which the loan is made, and (2) $50,000, reduced by the excess, if any, of the highest outstanding loan balance of the Participant under all plans maintained by the Employer during the period of time beginning one year and one day prior to the date such loan is to be made and ending on the date such loan is to be made over the outstanding balance of loans from all such plans on the date on which such loan was made.

(b) Restrictions. Amounts equal to any such loan shall be debited proportionately from each of the Participant’s accounts and investment subaccounts (other than subaccounts invested in the Company Stock Fund), subject to any other ordering rules adopted by the Committee. Each loan approved by the 401(k) Administrator shall be subject to the loan program and only upon the following terms and conditions:

(1) The period for repayment of the loan shall not exceed five years from the date of the loan; provided, however, that if the purpose of the loan, as determined by the 401(k) Administrator, is to acquire any dwelling unit that within a reasonable period of time is to be used as the principal residence of the Participant, then such period for repayment may exceed five (5) years to the extent permitted by the 401(k) Administrator, but not to exceed 15 years.

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(2) Each loan shall be secured by an assignment of a portion of the Participant’s vested benefit under the Plan at least equal to the initial principal amount of such loan and such other collateral as may be required by the 401(k) Administrator.

(c) Applicability. The provisions of this Section 8.3 shall apply to any person who is a Participant but who is not an Employee and any Beneficiary of a deceased Participant if such Participant or Beneficiary is a “party in interest” as defined in section 3(14) of ERISA. The grant of a loan pursuant to this Section 8.3 and the terms and conditions thereof shall apply to any such Participant or Beneficiary in the same manner as to a Participant who is an Employee, except that the requirements of Section 8.3(b)(2) shall be met with respect to each such Participant and Beneficiary if such Participant or Beneficiary consents to have such loan repaid in substantially equal installments as determined by the 401(k) Administrator, but not less frequently than quarterly.

Section 8.4. Distribution Upon Termination of Employment. Except as provided in Section 8.1, a Participant or his or her designated Beneficiary, as the case may be, shall be entitled to receive the Participant’s entire vested account balance as soon as administratively practicable following the date of the Participant’s termination of employment.

Section 8.5. Time and Form of Distribution upon Termination of Employment. (a) Normal Form of Distribution. Any distribution upon termination of a Participant’s employment shall be made by the Trustee at the direction of the 401(k) Administrator by payment in a lump sum in cash.

(b) Small Benefits Payable in Lump Sum. Notwithstanding any provision of the Plan to the contrary, if the vested balance of a Participant’s Plan accounts does not exceed $1,000 (such amount referred to herein as the “small benefit amount”), then such balance shall be distributed in a lump sum cash payment after the Participant’s termination of employment in accordance with administrative practices and procedures.

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(c) Time of Distribution. Except as provided in Sections 8.2(d) and 8.5(b), upon a Participant’s termination of employment, the payment of a lump sum shall be made as soon as administratively feasible on the Valuation Date occurring on or immediately after the date on which such termination of employment occurs or at such later time as the Participant or his or her Beneficiary, as the case may be, shall elect, which election may be changed as of any Valuation Date by advance written notice to the Committee, provided, however, that:

(1) subject to Section 8.5(d), no payments shall be made before the Participant’s 65th birthday unless the Participant has consented in writing;

(2) in the case of a Participant who does not elect any distribution to which such Participant becomes entitled upon termination of employment, distribution shall be made to such Participant by payment in a lump sum no later than 60 days after the end of the Plan Year which contains the later of (i) the date of the Participant’s termination of employment and (ii) the Participant’s 65th birthday;

(3) distributions commencing after the Participant’s death shall be completed within five years after the death of the Participant, except that (i) if the Participant’s Beneficiary is the Participant’s Spouse, distribution may be deferred until the last day of the Plan Year in which the Participant would have attained age 70 ¹/2 had he or she survived and (ii) if the Participant’s Beneficiary is a natural person other than the Participant’s Spouse and distributions commence not later than one year after the Participant’s death, such distributions may be made over a period not longer than the life expectancy of such Beneficiary. If at the time of the Participant’s death, distribution of the Participant’s benefit has commenced, the remaining portion of the Participant’s benefit shall be paid in the manner elected by the Participant’s Beneficiary, but at least as rapidly as was the method of distribution being used prior to the Participant’s death; and

(4) with respect to a Participant who continues in employment after attaining age 70 ¹/2, distribution of the Participant’s account balance shall commence no later than the Participant’s required beginning date. For purposes of this paragraph, the term “required beginning date” shall mean (i) with respect to a Participant who is a 5%-owner (within the meaning of section 416(i) of the Code), April 1 of the calendar year following the calendar year in which the Participant attains age 70 ¹/2 and (ii) with respect to any other Participant, April 1 of the calendar year following the calendar year in which the Participant retires. Distributions made under this paragraph shall be made in the form of installment payments in the minimum amount required by section 401(a)(9) of the Code over the life expectancy of the Participant based on the Participant’s age, or if applicable, the joint life expectancies of such Participant and the Participant’s Spouse.

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This section and the distributions made hereunder shall be administered in accordance with section 401(a)(9) of the Code and the regulations promulgated thereunder, notwithstanding anything in the Plan to the contrary.

(d) Direct Rollover Option. In the case of a distribution that is an “eligible rollover distribution” within the meaning of section 402(c)(4) of the Code, a distributee may elect that all or any portion of such distribution to which he or she is entitled shall be directly transferred from the Plan to an individual retirement account described in section 408(a) of the Code, effective January 1, 2008, an individual retirement plan described in section 408A(b) of the Code, provided that, for Plan Years beginning before January 1, 2010, the distributee meets the requirements of section 408A(c)(3)(B) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, a qualified trust described in section 401(a) of the Code, an annuity contract described in section 403(b) of the Code or an eligible plan under section 457(b) of the Code 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 which agrees to separately account for amounts transferred into such plan from this Plan; provided, however, that, in the case of any eligible rollover distribution that includes the Participant’s After-Tax Account, a distributee may elect to transfer the After-Tax Account portion of such eligible rollover distribution only to an individual retirement account or annuity described in section 408(a) or (b) of the Code, or, effective January 1, 2007, to a qualified plan described in section 401(a) or 403(a) of the Code that agrees to account separately for amounts directly transferred into such plan from this Plan, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such

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distribution which is not so includible. Notwithstanding the foregoing, a distributee shall not be entitled to elect to have an eligible rollover distribution transferred pursuant to this subsection (i) if the total of all eligible rollover distributions with respect to such distributee for the Plan Year is not reasonably expected to equal at least $200, or (ii) in the case of a partial direct rollover, the portion so rolled over equals at least $500. For purposes of this subsection, the term “distributee” shall mean (i) a Participant, (ii) an alternate payee (within the meaning of section 414(p)(8) of the Code) with respect to a Participant under a qualified domestic relations order, (iii) a surviving Spouse of a Participant or (iv) a Beneficiary of a Participant; provided, however, that a Beneficiary is permitted to elect to have an eligible rollover distribution directly transferred pursuant to this subsection only to an individual retirement account or annuity described in section 408(a) or (b) of the Code or to an individual retirement account described in section 408A(b) of the Code; provided that, with respect to Plan Years beginning before January 1, 2010, the Beneficiary meets the requirements of section 408(A)(c)(3)(B) of the Code.

(e) Valuation of Accounts. For purposes of determining the value of a Participant’s account balance under the Plan for purposes of this Section, the Participant’s account balance shall be valued as of the date the Participant’s request for a distribution is received by the Committee in acceptable form and substance, or such other date prescribed by the Committee in conjunction with the Plan’s recordkeeper (such date to be applied in a uniform manner).

Section 8.6. Designation of Beneficiary. Each Participant shall have the right to designate a Beneficiary or Beneficiaries (who may be designated contingently or successively and that may be an entity other than a natural person) to receive any distribution to be made under Section 8.4 upon the death of such Participant or, in the case of a Participant who dies

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subsequent to termination of his or her employment but prior to the distribution of the entire amount to which such Participant is entitled under the Plan, any undistributed balance to which such Participant would have been entitled, provided, however, that no such designation (or change thereof) shall be effective if the Participant was married through the one year period ending on the date of the Participant’s death unless such designation (or change thereof) was consented to at the time of such designation (or change thereof) by the person who was the Participant’s Spouse during such period, in writing, acknowledging the effect of such consent and witnessed by a notary public or a Plan representative, or it is established to the satisfaction of the Committee that such consent could not be obtained because the Participant’s Spouse cannot be located or such other circumstances as may be prescribed in Regulations. Subject to the preceding sentence, a Participant may from time to time, without the consent of any Beneficiary, change or cancel any such designation. Such designation and each change therein shall be made in the form prescribed by the Committee and shall be filed with the Committee. If (i) no Beneficiary has been named by a deceased Participant, (ii) such designation is not effective pursuant to the proviso contained in the first sentence of this Section, or (iii) the designated Beneficiary has predeceased the Participant, any undistributed balance of the deceased Participant’s account shall be distributed by the Trustee at the direction of the Committee (a) to the surviving Spouse of such deceased Participant, if any, or (b) if there is no surviving Spouse, to the then living children, if any, of the Participant in equal shares, or (c) if there are no such children, to the executor or administrator of the estate of such deceased Participant. The marriage of a Participant shall be deemed to revoke any prior designation of a Beneficiary made by him or her and a divorce shall be deemed to revoke any prior designation of the Participant’s divorced Spouse if written evidence of such marriage or divorce shall be received by the

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Committee before distribution of the Participant’s account balance has been made in accordance with such designation. If, within a period of three years following the death or other termination of employment of any Participant, the Committee, in the exercise of reasonable diligence, has been unable to locate the person or persons entitled to benefits under this Article 8, the rights of such person or persons shall be forfeited, provided, however, that the Plan shall reinstate and pay to such person or persons the amount of the benefits so forfeited upon a claim for such benefits made by such person or persons. The amount to be so reinstated shall be obtained from the total amount that shall have been forfeited pursuant to this Section 8.6 during the Plan Year that the claim for such forfeited benefit is made. If the amount to be reinstated exceeds the amount of such forfeitures, the Employer in respect of whose Employee the claim for forfeited benefit is made shall make a contribution in an amount equal to the remainder of such excess. Any such contribution shall be made without regard to whether or not the limitations set forth in Section 4.6 will be exceeded by such contribution. For purposes of this Section 8.6 only, the term “Spouse” shall include an individual married to a Participant under the state laws applicable to such Participant and an individual who is designated by a Participant as such Participant’s life partner and satisfies the conditions established by the Committee to be considered the life partner of a Participant. The designation of a life partner and any changes thereto shall be made in the form and in the time and manner prescribed by the Committee and shall be filed with the Committee.

Section 8.7. Distributions to Minor and Disabled Distributees. Any distribution under this Article that is payable to a distributee who is a minor or to a distributee who, in the opinion of the Committee, is unable to manage his or her financial affairs by reason of illness or mental incompetency may be made to or for the benefit of any such distributee at such time

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consistent with the provisions of Section 8.5 and in such of the following ways as the legal representative of such distributee shall direct: (a) directly to any such minor distributee if, in the opinion of such legal representative, he or she is able to manage his or her financial affairs, (b) to such legal representative, (c) to a custodian under a Uniform Gifts to Minors Act for any such minor distributee, or (d) to some near relative of any such distributee to be used for the latter’s benefit. Neither the Committee nor the Trustee shall be required to see to the application by any third party other than the legal representative of a distributee of any distribution made to or for the benefit of such distributee pursuant to this Section.

Section 8.8. Missing Person. If, within a period of three years following the death or other termination of employment of any Participant, the Committee, in the exercise of reasonable diligence, has been unable to locate the person or persons entitled to benefits under this Article 8, then the rights of such person or persons shall be forfeited, and, subject to the following sentence, the amount so forfeited shall be used to reduce the Profit Sharing Contributions or Matching Contributions otherwise made pursuant to Sections 4.1 or 4.4 of the Plan for the Plan Year in which such forfeiture occurs; provided, however, that the Plan shall reinstate and pay to such person or persons the amount of the benefits so forfeited upon a claim for such benefits made by such person or persons. The amount to be so reinstated shall be obtained from the total amount that shall have been forfeited pursuant to this Section 8.8 during the Plan Year that the claim for current forfeited benefit is made, or if such amount is insufficient, from the amounts forfeited pursuant to Sections 4.5(d) and 8.1(c). If the amount to be reinstated exceeds the amount of such forfeitures, then the Employer in respect of whose Employee the claim for forfeited benefits is made shall make a contribution in an amount equal to the remainder of such excess. Any such contribution shall be made without regard to whether or not the limitations set forth in Section 4.6 will be exceeded by such contribution.

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ARTICLE 9

SPECIAL PARTICIPATION RULES

Section 9.1. Change of Employment Status. If an Employee who is not a Participant becomes eligible to participate because of a change in his or her employment status, then such Employee shall be entitled to become a Participant as soon as administratively practicable following the first Entry Date coincident with or next following the Employee’s satisfaction of the eligibility requirements.

Section 9.2. Reemployment of an Eligible Employee Whose Employment Terminated Prior to Becoming a Participant. (a) If an Eligible Employee whose employment terminated before the Employee had satisfied the requirements of Section 3.1 is reemployed by an Employer, such Employee’s prior service shall be disregarded and such Employee shall be eligible to become a Participant in accordance with Section 3.1.

(b) If an Eligible Employee whose employment terminated after he or she had satisfied the requirements of Section 3.1 but prior to becoming a Participant is reemployed by an Employer, then he or she shall not be required to satisfy again such requirements and shall be eligible to become a Participant as soon as administratively practicable on the Entry Date coincident with or next following the date of his or her reemployment date.

Section 9.3. Reemployment of a Terminated Participant. (a) Participation. If a terminated Participant is reemployed, then he or she shall not be required to satisfy the requirements of Section 3.1, and shall be eligible to participate as of the first Entry Date on or after the date of his or her reemployment date, provided that such rehired Participant shall be eligible to make Salary Deferral Contributions on the first day of the first payroll period occurring after such Entry Date as of which the Plan’s recordkeeper has all the documentation it deems necessary to process such contributions.

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(b) Restoration of Forfeitures. If a Participant who terminated employment with the Employers is reemployed prior to incurring a Break in Service of five consecutive years and, if upon his termination of employment, such a Participant received a distribution pursuant to Section 8.4 and a portion of his Profit Sharing Account or Pre-2006 Matching Contributions Account was forfeited pursuant to Section 8.1(c), then the Participant shall have the right to repay to the Trustee an amount equal to the amount distributed, provided that the repayment is made on or before the last day of the Plan Year in which the fifth anniversary of the Participant’s date of reemployment occurs. An amount so repaid shall be allocated to the Participant’s account as soon as administratively practicable after the repayment is received by the Trustee. Regardless of whether a Participant repays the amount equal to his or her previous distribution, an amount equal to the portion forfeited from the Participant’s Profit Sharing Account and Pre-2006 Matching Contributions Account shall be credited to such account. The source of funds for the formerly forfeited amounts which are so credited in a Plan Year shall be the forfeitures pursuant to Sections 4.5(d) and 8.1(c) for such Plan Year. If the forfeitures pursuant to Sections 4.5(d) and 8.1(c) for any Plan Year are less than the formerly forfeited amounts which are credited in such Plan Year to Participants’ accounts pursuant to this Section, then the Company shall direct the Employer of each such Participant to make an additional contribution in an amount determined by the Company so that the amount of such additional contributions and the forfeitures pursuant to Sections 4.5(d) and 8.1(c) are equal to the amounts credited to such Participants’ accounts that are attributable to the previously forfeited amounts. Any such additional contribution is not subject to the deduction limitation set forth in Section 4.6.

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Section 9.4. Employment by Related Entities. If an individual is employed by an Affiliate that is not a participating Employer, then any period of such employment shall be taken into account to the same extent it would have been had such period of employment been as an Employee of his or her Employer solely for the purposes of (i) determining whether and when such individual is eligible to participate in the Plan under Article 3, (ii) measuring such individual’s years of Service and (iii) determining when such individual has retired or otherwise terminated his or her employment for purposes of Article 8.

Section 9.5. Leased Employees. If an individual who performed services as a leased employee (within the meaning of section 414(n)(2) of the Code) of an Employer or an Affiliate becomes an Employee, or if an Employee becomes such a leased employee, then any period during which such services were so performed shall be taken into account solely for the purposes of (i) determining whether and when such individual is eligible to participate in the Plan under Article 3, (ii) measuring such individual’s years of Service and (iii) determining when such individual has retired or otherwise terminated his or her employment for purposes of Article 8 to the same extent it would have been had such service been as an Employee. This Section shall not apply to any period of service during which such a leased employee was covered by a plan described in section 414(n)(5) of the Code.

Section 9.6. Reemployment of Veterans. (a) General. The provisions of this Section shall apply in the case of the reemployment by an Employer of an Eligible Employee, within the period prescribed by USERRA, after the Employee’s completion of a period of Qualified Military Service. The provisions of this Section are intended to provide such Employees with the rights required by USERRA and section 414(u) of the Code, and shall be interpreted in accordance with such intent.

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(b) Make Up of Salary Deferral Contributions. Such Employee shall be entitled to make contributions under the Plan (“Make-Up Deferrals”), in addition to any Salary Deferral Contributions which the Employee elects to have made under the Plan pursuant to Section 4.2. From time to time while employed by an Employer, such Employee may elect to make such Make-Up Deferrals during the period beginning on the date of such Employee’s reemployment and ending on the earlier of:

(i) the end of the period equal to the product of three and such Employee’s period of Qualified Military Service, and

(ii) the fifth anniversary of the date of such reemployment.

Such Employee shall not be permitted to contribute Make-Up Deferrals to the Plan in excess of the amount which the Employee could have elected to have made under the Plan in the form of Salary Deferral Contributions if the Employee had continued in employment with his or her Employer during such period of Qualified Military Service. Such Employee shall be deemed to have earned “Compensation” from his or her Employer during such period of Qualified Military Service for this purpose in the amount prescribed by sections 414(u)(2)(B) and 414(u)(7) of the Code. The manner in which an Eligible Employee may elect to make Make-Up Deferrals pursuant to this subsection (b) shall be prescribed by the 401(k) Administrator.

(c) Make-Up of Matching Contributions. An Eligible Employee who contributes Make-Up Deferrals as described in subsection (b) shall be entitled to an allocation of Matching Contributions (“Make-Up Matching Contributions”) in an amount equal to the amount of Matching Contributions which would have been allocated to the applicable Matching Contributions Account of such Eligible Employee under the Plan if such Make-Up Deferrals had been made in the form of Salary Deferral Contributions during the period of such Employee’s Qualified Military Service. The amounts necessary to make such allocation of Make-Up

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Matching Contributions shall be derived from forfeitures not yet applied towards Matching Contributions for the Plan Year in which the Make-Up Deferrals are made, and if such forfeitures are not sufficient for this purpose, then the Eligible Employee’s Employer shall make a special contribution which shall be utilized solely for purposes of such allocation.

(d) Profit Sharing Contributions. Such Employee shall be entitled to share in any allocations of Profit Sharing Contributions with respect to such period of Qualified Military Service as an Eligible Employee. Such Employee shall be deemed to have earned “Compensation” from his or her Employer during such period of Qualified Military Service for this purpose in the amount prescribed by sections 414(u)(2)(B) and 414(u)(7) of the Code.

(e) Application of Limitations and Nondiscrimination Rules. Any contributions made by an Eligible Employee or an Employer pursuant to this Section on account of a period of Qualified Military Service in a prior Plan Year shall not be subject to the limitations prescribed by Sections 4.3, 4.6 and 7.5 of the Plan (relating to sections 402(g), 404 and 415 of the Code) for the Plan Year in which such contributions are made. Furthermore, any such contributions shall not be taken into account for purposes of the average deferral percentage test or average contribution percentage test described in Section 4.5(a) and (b).

ARTICLE 10

SHAREHOLDER RIGHTS WITH RESPECT TO COMPANY STOCK

Section 10.1. Voting Shares of Company Stock. Each Participant (or Beneficiary) shall be entitled to give voting instructions, in the time and manner prescribed by the Trustee, with respect to the number of whole shares of Company Stock allocated to his or her accounts. The Trustee shall vote, in person or by proxy, such shares according to the voting instructions of Participants (or Beneficiaries) which have been timely submitted to the Trustee. To the extent permitted by law, the Trustee shall vote the shares of Company Stock credited to Participants’

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(or Beneficiaries’) accounts with respect to which the Trustee does not timely receive voting instructions, shares of Company Stock that are not allocated to Participants’ (or Beneficiaries’) accounts (if any) and fractional shares in the same proportion by which the Trustee votes shares of Company Stock for which instructions are timely received.

Written notice of any meeting of shareholders of the Company and a request for voting instructions shall be given by the Trustee, at such time and in such manner as the Trustee shall determine, to each Participant (or Beneficiary) entitled to give instructions for voting shares of Company Stock at such meeting. The Company shall establish a means by which such voting instructions can expeditiously be delivered to the Trustee. All such instructions shall be confidential and shall not be disclosed to any person, including any Employer.

Section 10.2. Tender Offers. (a) Rights of Participants. In the event a tender offer is made generally to the shareholders of the Company to transfer all or a portion of their shares of Company Stock in return for valuable consideration, including, but not limited to, offers regulated by section 14(d) of the Securities Exchange Act of 1934, as amended, the Trustee shall respond to such tender offer in respect of shares of Company Stock held by the Trustee in the Company Stock Fund in accordance with instructions obtained from Participants (or Beneficiaries). Each Participant (or Beneficiary) shall be entitled to instruct the Trustee regarding how to respond to any such tender offer with respect to the number of shares of Company Stock then allocated to his or her accounts. Each Participant (or Beneficiary) who does not provide timely instructions to the Trustee shall be presumed to have directed the Trustee not to tender shares of Company Stock allocated to his or her accounts. A Participant (or Beneficiary) shall not be limited in the number of instructions to tender or withdraw from tender which he or she can give, but a Participant (or Beneficiary) shall not have the right to give instructions to tender or withdraw from tender after a reasonable time established by the Trustee pursuant to paragraph (c) below.

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(b) Duties of the Company. Within a reasonable time after the commencement of a tender offer, the Company shall cause the Trustee to provide to each Participant or Beneficiary, as the case may be:

(i) the offer to purchase as distributed by the offeror to the shareholders of the Company,

(ii) a statement of the number of shares of Company Stock allocated to his or her account, and

(iii) directions as to the means by which instructions with respect to the tender offer can be given.

The Company shall establish and pay for a means by which instructions with respect to a tender offer can expeditiously be delivered to the Trustee. All such instructions shall be confidential and shall not be disclosed to any person, including any Employer. The Company at its election may engage an agent to receive such instructions and transmit them to the Trustee.

For purposes of allocating the proceeds of any sale or exchange pursuant to a tender offer, the Trustee shall then treat as having been sold or exchanged from each of the individual accounts of Participants (and Beneficiaries) who provided timely directions to the Trustee under this Section that number of shares of Company Stock subject to such directions and the proceeds of such sale or exchange shall be allocated accordingly. Any proceeds from the sale or exchange of shares of Company Stock shall be invested in a commingled fund maintained by the Trustee designated to hold such amounts pending investment instructions from Participants (and Beneficiaries).

(c) Duties of the Trustee. The Trustee shall follow the instructions of the Participants (and Beneficiaries) with respect to the tender offer as transmitted to the Trustee. The Trustee may establish a reasonable time, taking into account the time restrictions of the tender offer, after which it shall not accept instructions of Participants (or Beneficiaries).

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ARTICLE 11

ADMINISTRATION

Section 11.1. The Committee. (a) Either (i) the Compensation and Stock Option Committee or (ii) the Chairman of the Board of Directors or the President of the Company, to the extent authorized by the Compensation and Stock Option Committee, shall appoint a Committee consisting of three or more members that shall be the “administrator” of the Plan within the meaning of such term as used in ERISA. The Committee shall be a “named fiduciary” within the meaning of such term as used in ERISA. The Compensation and Stock Option Committee or an authorized officer shall have the right at any time, with or without cause, to remove one or more members of the Committee. In addition, any member of the Committee may resign and such resignation shall be effective upon delivery of the written resignation to the Company. Notwithstanding anything contained in this Section 11.1, an Employee of the Company who serves on the Committee shall be deemed to resign upon the termination of such Employee’s employment with the Company. Such deemed resignation shall be effective as of the date of the termination of employment. Upon the resignation, removal or failure or inability for any reason of any member of the Committee to act hereunder, the Compensation and Stock Option Committee or an authorized officer shall appoint a successor. Any successor members of the Committee shall have all the rights, privileges and duties of the predecessor, but shall not be held accountable for the acts of the predecessor.

(b) Any member of the Committee may, but need not, be an employee, director, officer or shareholder of an Employer and such status shall not disqualify him or her from taking any action hereunder or render him or her accountable for any distribution or other

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material advantage received by him or her under the Plan, provided that no member of the Committee who is a Participant shall take part in any action of the Committee or any matter involving solely his or her rights under the Plan.

(c) Promptly after the appointment of the members of the Committee and from time to time thereafter, and promptly after the appointment of any successor member of the Committee, the Trustee shall be notified as to the names of the persons appointed as successor members of the Committee by delivery to the Trustee of a written notice of such appointment.

(d) The Committee shall have the duty and authority to interpret and construe, in its sole discretion, the terms of the Plan in regard to all questions of eligibility, the status and rights of Participants, distributees and other persons under the Plan, and the manner, time, and amount of payment of any distribution under the Plan. Benefits under the Plan shall be paid only if the Committee decides in its discretion that the Participant, distributee or other person is entitled to them. Each Employer shall, from time to time, upon request of the Committee, furnish to the Committee such data and information as the Committee shall require in the performance of its duties. All determinations and actions of the Committee shall be conclusive and binding upon all affected parties, except that the Committee may revoke or modify a determination or action that it determines to have been in error.

(e) The Committee shall supervise the collection of Salary Deferral Contributions made pursuant to Section 4.2 and the delivery of such contributions to the Trustee.

(f) The Committee or the 401(k) Administrator shall direct the Trustee to make payments of amounts to be distributed from the Trust under Article 8.

(g) The Committee may allocate its responsibilities among its members and may designate any other person, partnership, corporation or another committee to carry out any

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of its responsibilities with respect to administration of the Plan. Any such allocation or designation shall be reduced to writing and such writing shall be kept with the records of the Plan. Any reference in the Plan to the Committee shall include any person, partnership, corporation or committee to which the Committee has delegated any of its responsibilities.

(h) The Committee may act at a meeting, or by writing without a meeting, by the vote or written assent of a majority of its members. The Compensation and Stock Option Committee shall designate one member of the Committee as its chairman, and the chairman of the Committee shall appoint one member of the Committee as its secretary. The Committee shall keep the Trustee advised of the identity of the members holding such offices. The Committee, as Plan Administrator, shall be the Plan’s agent for service of legal process and shall be authorized to forward all necessary communications to the Trustee. The secretary of the Committee shall keep records of all meetings of the Committee. The Committee may adopt such rules and procedures as it deems desirable for the conduct of its affairs and the administration of the Plan, provided that any such rules and procedures shall be consistent with the provisions of the Plan and ERISA.

(i) The members of the Committee shall discharge their duties with respect to the Plan (i) solely in the interest of the Participants and Beneficiaries, (ii) for the exclusive purpose of providing benefits to Employees participating in the Plan and their Beneficiaries and of defraying reasonable expenses of administering the Plan and (iii) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Employers hereby jointly and severally indemnify the members of the Committee from the effects and consequences of their acts, omissions and conduct in their official capacity, except to the extent that such effects and consequences result from their own willful misconduct.

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(j) The members of the Committee may not receive any compensation or fee for services as members of the Committee. The Employer shall reimburse the members of the Committee for any necessary expenditures incurred in the discharge of their duties as members of the Committee.

(k) The Committee may employ such counsel (who may be counsel for an Employer) and agents and may arrange for such clerical and other services as it may require in carrying out the provisions of the Plan.

Section 11.2. Claims Procedure. Any Participant or distributee who believes he or she is entitled to benefits in an amount greater than those which he or she is receiving or has received may file a claim with the Committee. Such a claim shall be in writing and state the nature of the claim, the facts supporting the claim, the amount claimed, and the address of the claimant. The Committee shall review the claim and, unless special circumstances require an extension of time, within 90 days after receipt of the claim, give written notice by registered or certified mail to the claimant of its decision with respect to the claim. If special circumstances require an extension of time, the claimant shall be so advised in writing within the initial 90-day period and in no event shall such an extension exceed 90 days. The notice of the decision of the Committee with respect to the claim shall be written in a manner calculated to be understood by the claimant and, if the claim is wholly or partially denied, set forth the specific reasons for the denial, specific references to the pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and an explanation of

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the claim review procedure under the Plan (including a statement of the claimant’s right to bring civil action under section 502(a) of ERISA following the final denial of the claim). The Committee shall also advise the claimant that the claimant or his or her duly authorized representative may request a review by the Committee of the denial by filing with the Committee within 60 days after notice of the denial has been received by claimant, a written request for such review. The claimant shall be informed that he or she may have reasonable access to pertinent documents and submit written comments, documents records and other information relating to the claim to the Committee within the same 60-day period. Upon request and free of charge, the claimant also may have reasonable access and copies of, documents, records and other information relative to the claim. If a request is so filed, review of the denial shall be made by the Committee within, unless special circumstances require an extension of time, 60 days after receipt of such request, and the claimant shall be given written notice of the Committee’s final decision. If special circumstances require an extension of time, the claimant shall be so advised in writing within the initial 60-day period and in no event shall such an extension exceed 60 days. The notice of the final decision of the Committee shall be provided to the claimant and shall include specific reasons for the decision, specific references to the pertinent Plan provisions on which the decision is based and a statement that the claimant is entitled, upon request and free of charge, to reasonable access to, and copies of, all relevant documents, records and information. The notice shall be written in a manner calculated to be understood by the claimant and shall notify the claimant of his or her right to bring a civil action under section 502(a) of ERISA.

Section 11.3. Notices to Participants. All notices, reports and statements given, made, delivered or transmitted to a Participant or distributee or any other person entitled to or

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claiming benefits under the Plan shall be deemed to have been duly given, made or transmitted when mailed by first class mail with postage prepaid and addressed to the Participant or distributee or such other person at the address last appearing on the records of the Committee. A Participant or distributee or other person may record any change of his or her address from time to time by written notice filed with the 401(k) Administrator.

Section 11.4. Notices. Written directions, notices and other communications from Participants or distributees or any other person entitled to or claiming benefits under the Plan to the Committee or the 401(k) Administrator shall be deemed to have been duly given, made or transmitted either when delivered to such location as shall be specified upon the forms prescribed by the Committee or the 401(k) Administrator for the giving of such directions, notices and other communications or when mailed by first class mail with postage prepaid and addressed to the addressee at the address specified upon such forms.

Section 11.5. Records. The Committee shall keep a record of all of its proceedings with respect to the Plan and shall keep or cause to be kept all books of account, records and other data as may be necessary or advisable in the Committee’s judgment for the administration of the Plan.

Section 11.6. Reports of Trustee and Accounting to Participants. The Committee shall keep on file, in such form as it shall deem convenient and proper, all reports concerning the Trust Fund received by it from the Trustee, and the Committee shall advise each Participant and Beneficiary of the balance credited to any account for his or her benefit as of the close of such Plan Year pursuant to Article 7 hereof.

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ARTICLE 12

PARTICIPATION BY OTHER EMPLOYERS

Section 12.1. Adoption of Plan. With the consent of the Company, any entity may become a participating Employer under the Plan by (a) taking such action as shall be necessary to adopt the Plan and (b) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to such entity. However, the sole, exclusive right of any other amendment of whatever kind or extent to the Plan or Trust is reserved by the Company. The administrative powers and control of the Company, as provided in the Plan and Trust agreement, including the sole right of amendment, and of appointment and removal of the Trustee and its successors, shall not be diminished by reason of the participation of any such adopting entity in the Plan.

Section 12.2. Withdrawal from Participation. Any Employer may withdraw from participation in the Plan at any time by filing with the Company a duly certified copy of a written instrument duly adopted by the Employer to that effect and giving notice of its intended withdrawal to the Company, the other Employers and the Trustee prior to the effective date of withdrawal. Any Employer, by action of its board of directors or other governing authority, may withdraw from the Plan and Trust after giving 90 days’ notice to the Board of Directors, provided the Board of Directors consents to such withdrawal. Distribution may be implemented through continuation of the Trust, or transfer to another trust fund exempt from tax under section 501(a) of the Code, or to a group annuity contract qualified under section 401(a) of the Code, or distribution may be made as an immediate cash payment in accordance with the directions of the Company; provided, however, that no such action shall divert any part of such fund to any purpose other than the exclusive benefit of the Employees of such Employer.

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Section 12.3. Continuance by a Successor. In the event that an Employer is reorganized by way of merger, consolidation, transfer of assets or otherwise, so that another entity succeeds to all or substantially all of the Employer’s business, such successor entity may be substituted for the Employer under the Plan by adopting the Plan, with the written consent of the Board of Directors. Contributions by the Employer shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of such successor entity for the Employer under the Plan becomes effective. If, within 90 days following the effective date of any such reorganization, such successor entity shall not have elected to become a party to the Plan, the Board of Directors does not consent to the adoption of the Plan by such successor entity or the Employer adopts a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to employees of such Employer as of the close of business on the 90th day following the effective date of such reorganization or as of the close of business on the date of adoption of such plan of complete liquidation, as the case may be, and the Company shall direct the Trustee to distribute the portion of the Trust Fund applicable to such Employer in the manner provided in Article 15.

If such successor entity is substituted for an Employer, by electing to become a party to the Plan as described above, then, for all purposes of the Plan, employment of such Employee with such Employer, including service with and compensation paid by such Employer, shall be considered to be employment with such Employer.

Section 12.4. Company as Agent for Employers. Each entity that becomes a participating Employer pursuant to Section 12.1 or 12.3 by so doing shall be deemed to have appointed the Company its agent to exercise on its behalf all of the powers and authorities hereby conferred upon the Company by the terms of the Plan, including, but not by way of limitation,

58

the power to amend and terminate the Plan and shall be deemed to have consented to (i) any delegation by the Company of any of its powers, duties or responsibilities to another person and (ii) the designation of the 401(k) Administrator to perform the duties set forth herein. The authority of the Company to act as such agent shall continue unless and until the portion of the Trust Fund held for the benefit of Employees of the particular Employer and their Beneficiaries is set aside in a separate Trust Fund as provided in Section 15.2.

ARTICLE 13

MISCELLANEOUS

Section 13.1. Expenses. All costs and expenses incurred in administering the Plan and the Trust, including the expenses of the Company, the Committee and the 401(k) Administrator, the fees of counsel and any agents for the Company and the Committee, the fees and expenses of the Trustee, the fees of counsel for the Trustee and other administrative expenses shall be paid under the direction of the Committee from the Trust Fund to the extent such expenses are not paid by the Employers. The Committee, in its sole discretion, having regard to the nature of a particular expense, shall determine the portion of such expense that is to be borne by each Employer.

Section 13.2. Non-Assignability. (a) In General. It is a condition of the Plan, and all rights of each Participant and Beneficiary shall be subject thereto, that no right or interest of any Participant or Beneficiary in the Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but not by way of limitation, execution, levy, garnishment, attachment, pledge or bankruptcy, but excluding devolution by death or mental incompetency, and no right or interest of any Participant or Beneficiary in the Plan shall be liable for, or subject to, any obligation or liability of such Participant or Beneficiary, including claims of a life partner and claims for alimony or the support of any

59

Spouse except as provided below. For purposes of this Section 13.2 only, the term “Spouse” shall include an individual married to a Participant under the state laws applicable to such Participant.

(b) Exception for Qualified Domestic Relations Orders. Notwithstanding any provision of the Plan to the contrary, if a Participant’s account balance under the Plan, or any portion thereof, is the subject of one or more qualified domestic relations orders, as defined below, such account balance or portion thereof shall be paid to the person at the time and in the manner specified in any such order. For purposes of this subsection (b), the term “qualified domestic relations order” shall have the meaning prescribed by section 414(p) of the Code. The Committee, in its sole discretion, shall determine whether any order constitutes a “qualified domestic relations order” under this subsection. A domestic relations order shall not fail to constitute a “qualified domestic relations order” under this subsection (b) solely because such order provides for immediate payment to an alternate payee of the portion of the Participant’s accounts assigned to the alternate payee under the terms of such order.

(c) Other Exceptions. Notwithstanding any provision of the Plan to the contrary, if a Participant is ordered or required to pay an amount to the Plan pursuant to (i) a judgment of conviction for a crime involving the Plan, (ii) a civil judgment in connection with a violation (or alleged violation) of Part 4 of Subtitle B of Title I of ERISA or (iii) a settlement agreement between the Secretary of Labor and the Participant or the Pension Benefit Guaranty Corporation and the Participant in connection with a violation (or an alleged violation) of Part 4 of Subtitle B of Title I of ERISA, such amount may, to the extent permitted by law, be offset against such Participant’s benefits under the Plan.

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Section 13.3. Employment Non-Contractual. The Plan confers no right upon an Employee to continue in employment.

Section 13.4. Limitation of Rights. The Employers do not guarantee or promise to pay or to cause to be paid any of the benefits provided by the Plan. A Participant or distributee shall have no right, title or claim in or to any specific asset of the Trust Fund, but shall have the right only to distributions from the Trust Fund on the terms and conditions herein provided.

Section 13.5. Merger or Consolidation with Another Plan. A merger or consolidation with, or transfer of assets or liabilities to, any other plan shall not be effected unless the terms of such merger, consolidation or transfer are such that each Participant, distributee, Beneficiary or other person entitled to receive benefits from the Plan would, if the Plan were to terminate immediately after the merger, consolidation or transfer, receive a benefit equal to or greater than the benefit such person would be entitled to receive if the Plan were to terminate immediately before the merger, consolidation, or transfer.

Section 13.6. Gender and Plurals. Wherever used in the Plan, references exclusively to one gender are intended to include the masculine and feminine genders, and, unless the context otherwise requires, words in the singular shall include the plural, and words in the plural shall include the singular.

Section 13.7. Applicable Law. The Plan and all rights hereunder shall be governed by and construed in accordance with the laws of the State of Delaware to the extent such laws have not been preempted by applicable federal law.

Section 13.8. Severability. If a provision of the Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included in the Plan.

61

Section 13.9. No Guarantee. None of the Company, the Employers, the Committee or the Trustee in any way guarantees the Trust from loss or depreciation nor the payment of any money that may be or become due to any person from the Trust Fund. Nothing herein contained shall be deemed to give any Participant, distributee, or Beneficiary an interest in any specific part of the Trust Fund or any other interest except the right to receive benefits out of the Trust Fund in accordance with the provisions of the Plan and the Trust Fund.

Section 13.10. Plan Voluntary. Although it is intended that the Plan shall be continued and that contributions shall be made as herein provided, the Plan is entirely voluntary on the part of the Employers and the continuance of the Plan and the payment of contributions hereunder are not to be regarded as contractual obligations of the Employers.

Section 13.11. Tax Withholding. The Employer shall have the right to require, prior to any distribution, payment by the Participant of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with any distribution hereunder. The Employer shall have the right to withhold from a distribution, which would otherwise be distributable to a Participant, any amount necessary to satisfy any such obligation.

ARTICLE 14

TOP-HEAVY PLAN REQUIREMENTS

Section 14.1. Top-Heavy Plan Determination. If, as of the determination date (as hereinafter defined) for any Plan Year, (a) the sum of the account balances under the Plan and all other defined contribution plans in the aggregation group (as defined below) and (b) the present value of accrued benefits under all defined benefit plans in such aggregation group of all Participants in such plans who are key employees (as hereinafter defined) for such Plan Year

62

exceeds 60 percent (60%) of the aggregate of the account balances and present value of accrued benefits of all Participants in such plans as of the determination date (as hereinafter defined), then the Plan shall be a “top heavy plan” for such Plan Year, and the requirements of Section 14.3 shall be applicable for such Plan Year as of the first day thereof. If the Plan is a top heavy plan for any Plan Year and is not a top heavy plan for any subsequent Plan Year, the requirements of this Article 14 shall not be applicable for such subsequent Plan Year.

Section 14.2. Definitions and Special Rules. (a) Definitions. For purposes of this Article 14, the following definitions shall apply:

(1) Determination Date. The determination date for all plans in the aggregation group shall be the last day of the preceding Plan Year, and the valuation date applicable to a determination date shall be (i) in the case of a defined contribution plan, the date as of which account balances are determined that is coinciding with or immediately precedes the determination date, and (ii) in the case of a defined benefit plan, the date as of which the most recent actuarial valuation for the Plan Year that includes the determination date is prepared, except that if any such plan specifies a different determination or valuation date, such different date shall be used with respect to such plan.

(2) Aggregation Group. The aggregation group shall consist of (a) each plan of an Employer in which a key employee is a Participant, (b) each other plan that enables such a plan to be qualified under section 401(a) of the Code, and (c) any other plans of an Employer that the Company designates as part of the aggregation group.

(3) Key Employee. Key employee shall have the meaning set forth in section 416(i) of the Code.

(4) Compensation. Compensation shall have the meaning set forth in U.S. Treasury Regulation §1.415(c)-2; provided, however, that such term shall not include any compensation excludable under Treasury Regulation § 1.415(c)-2(g)(5)(ii).

(b) Special Rules. For the purposes of determining the accrued benefit or account balance of a Participant under this Article 14, the accrued benefit or account balance of any person who has not performed services for an Employer at any time during the 1-year period ending on the determination date shall not be taken into account. Furthermore, any person who received a distribution from a plan (including a plan that has terminated) in the aggregation

63

group during the 1-year period ending on the last day of the preceding Plan Year shall be treated as a Participant in such plan, and any such distribution shall be included in such Participant’s account balance or accrued benefit, as the case may be; provided, however, that in the case of a distribution made for a reason other than a Participant’s severance from employment, death or Disability, this sentence shall be applied by substituting “5-year period” for “1-year period”.

Section 14.3. Minimum Contribution for Top-Heavy Years. Notwithstanding any provision of the Plan to the contrary, the sum of the Profit Sharing and Matching Contributions made pursuant to Article 4 allocated during any Plan Year to the accounts of each Participant (other than a key employee) for which the Plan is a top heavy plan shall in no event be less than the lesser of (i) 3 percent (3%) of such Participant’s compensation during such Plan Year and (ii) the highest percentage at which contributions are made on behalf of any key employee for such Plan Year. If, during any Plan Year for which this Section 14.3 is applicable, a defined benefit plan is included in the aggregation group and such defined benefit plan is a top heavy plan for such Plan Year, the percentage set forth in clause (i) of the first sentence of this Section shall be 5 percent (5%). The percentage referred to in clause (ii) of the first sentence of this Section shall be obtained by dividing the aggregate of contributions made pursuant to Article 4 (other than Salary Deferral Contributions but including Profit Sharing and Matching Contributions) and pursuant to any other defined contribution plan that is required to be included in the aggregation group (other than a defined contribution plan that enables a defined benefit plan that is required to be included in such group to be qualified under section 401(a) of the Code) during the Plan Year on behalf of such key employee by such key employee’s compensation for the Plan Year.

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ARTICLE 15

AMENDMENT, ESTABLISHMENT OF SEPARATE

PLAN AND TERMINATION

Section 15.1. Amendment. The Company shall have the right to amend the Plan at any time, and from time to time, by resolution of the Board of Directors. Any such amendment shall become effective as of the date the Board of Directors shall determine and may apply to Participants in the Plan at the time thereof as well as to future Participants.

Section 15.2. Establishment of Separate Plan. If an Employer withdraws from the Plan under Section 12.2, then the Committee shall determine, in the manner hereinafter described, the portion of each of the funds of the Trust Fund which is allocable to the Participants (and Beneficiaries) of such Employer and direct the Trustee to segregate such portions in a separate trust. Such separate trust shall thereafter be held and administered as a part of the separate plan of such Employer.

The portion of a fund in the Trust Fund applicable to the Participants (and Beneficiaries) of a particular Employer shall be an amount which bears the same ratio to the value of such fund as the total value of the fund accounts of Participants employed or formerly employed by such Employer bears to the total value of the fund accounts of all Participants and former Participants.

Section 15.3. Termination. The Company shall have the right to terminate the Plan at any time by resolution of its Board of Directors. Any Employer may at any time terminate its participation in the Plan by resolution of its board of directors to that effect. In the event of any such termination, or in the event of a partial termination of the Plan with respect to a group of Participants, the accounts which are applicable to the Participants with respect to whom the Plan is terminated shall become fully vested and shall not thereafter be subject to forfeiture. In the event that an Employer terminates its participation in the Plan, the Committee shall

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determine, in the manner provided in Section 15.2, the portion of the Trust Fund held by the Trustee which is applicable to the Participants (and Beneficiaries) of such Employer and direct the Trustee to distribute such portion to Participants (and Beneficiaries) in proportion to the balances of their respective accounts. A permanent suspension of contributions by an Employer shall be deemed a termination of such Employer’s participation in the Plan for purposes of this Section. A complete discontinuance of contributions by an Employer shall be deemed a termination of such Employer’s participation in the Plan for purposes of this Section.

If the Internal Revenue Service shall refuse with respect to any Employer to issue an initial favorable determination letter that the Plan and Trust as adopted by such Employer meet the requirements of section 401(a) of the Code and that the Trust is exempt from tax under section 501(a) of the Code, such Employer may terminate its participation in the Plan and the Company shall direct the Trustee to pay and deliver the portion of the Trust Fund applicable to the Participants and former Participants of such Employer, determined in the manner provided in Section 15.2, to such Employer and such Employer shall pay to Participants or their Beneficiaries the part of such Employer’s portion of the Trust Fund which is attributable to contributions made by Participants.

Section 15.4. Trust Fund to Be Applied Exclusively for Participants and Their Beneficiaries. Subject only to the provisions of Sections 4.6, 7.5 and 15.3, and any other provision of the Plan to the contrary notwithstanding, it shall be impossible for any part of the Trust Fund to be used for or diverted to any purpose not for the exclusive benefit of Participants and their beneficiaries either by operation or termination of the Plan, power of amendment or other means.

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EXHIBIT A

Schedule of Participating Employers in the

Health Net, Inc. 401(k) Savings Plan

Health Net of California, Inc.

Health Net Life Insurance Company

QualMed, Inc.

QualMed Plans for Health of Colorado, Inc.

Foundation Health Systems Life and Health Insurance Company

HealthNet Health Plan of Oregon, Inc.

QualMed Plans for Health, Inc. (Pennsylvania)

QualMed Plans for Health of Ohio and West Virginia, Inc.

QualMed Plans for Health of Western Pennsylvania, Inc.

Foundation Health Corporation

Foundation Health Facilities, Inc.

Foundation Health Warehouse Company

Foundation Health Vision Services

Denticare of California, Inc.

Managed Alternative Care, Inc.

American VitalCare, Inc.

Foundation Health Federal Services, Inc.

Integrated Pharmaceutical Services

Foundation Health, A Florida Health Plan, Inc.

Intercare, Inc.

Intergroup Health Plan, Inc.

Managed Health Network, Inc.

Health Management Center, Inc. of Wisconsin

HMC PPO, Inc.

Managed Health Network

MHN Services

Foundation Health Medical Resource Management

Foundation Integrated Risk Management Solutions, Incorporated

Axis Integrated Resources, Inc.

Gem Holding Corporation

Gem Insurance Company

QualMed Plans for Health of Pennsylvania, Inc.

MedEmpower, Inc.

Health Benchmarks, Inc.

Employer & Occupational Services Group, Inc.

Intergroup Prepaid Health Services of Arizona, Inc. (d/b/a Intergroup of Arizona, Inc.)

Physicians Health Services, Inc., effective February 1, 2001

EX-10.53

Exhibit 10.53

OMNIBUS AMENDMENT TO

PARTICIPATION AGREEMENT

AND

PUT OPTION AGREEMENT

DATED AS OF NOVEMBER 10, 2008

HEALTH NET FUNDING, INC.,

HEALTH NET, INC.,

LODGEMORE HOLDINGS INC.

ING BANK N.V

and

HEALTH NET FINANCING, L.P.

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS AND INTERPRETATION	1
ARTICLE II AMENDMENTS	2
ARTICLE III COUNTERPARTS; MISCELLANEOUS	2
ARTICLE IV GOVERNING LAW	3

i

THIS OMNIBUS AMENDMENT TO PARTICIPATION AGREEMENT AND PUT OPTION AGREEMENT (this “Amendment”), dated as of November 10, 2008 is entered into among HEALTH NET FUNDING, INC., a corporation organized under the laws of the State of Delaware (together with its permitted assigns and successors, “U.S. Investor”), HEALTH NET, INC., a publicly traded U.S. Corporation (together with its permitted assigns and successors, “U.S. Parent”), LODGEMORE HOLDINGS, INC., a Canadian corporation (together with its permitted assigns and successors, “Canadian Investor”), ING BANK N.V., a public limited liability company organized under the laws of the Netherlands (together with its permitted assigns and successors, “Credit Risk Bank”) and HEALTH NET FINANCING, L.P., a Delaware limited partnership (together with its permitted assigns and successors, the “Partnership”).

WITNESSETH:

WHEREAS, U.S. Investor, U.S. Parent, Canadian Investor, Credit Risk Bank and the Partnership entered into that certain Participation Agreement, dated as of December 19, 2007 among U.S. Investor, U.S. Parent, Canadian Investor, Credit Risk Bank and the Partnership (as amended by the First Amendment thereto, dated as of April 29, 2008, the “Participation Agreement”);

WHEREAS, U.S. Investor, Canadian Investor and Credit Risk Bank are parties to the Put Option Agreement; and

WHEREAS, U.S. Investor, U.S. Parent, Canadian Investor, Credit Risk Bank and the Partnership wish to further amend certain provisions of the Participation Agreement;

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

ARTICLE I

DEFINITIONS AND INTERPRETATION

Section 1.1. All capitalized terms used herein (including in the recitals above) shall, unless otherwise defined herein, have the respective meanings set forth in Appendix A to the Participation Agreement.

Section 1.2. In this Amendment, unless the context shall otherwise require:

(a) all references to sections, exhibits, schedules or appendices are references to sections, exhibits, schedules or appendices of this Amendment unless otherwise stated:

(b) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder or any law enacted in substitution or replacement therefor;;

(c) the headings are inserted for convenience only and shall not define or limit, nor affect the interpretation of, the provisions hereof;

(d) words denoting the singular only shall include the plural and vice versa;

(e) “include” and “including” are not limiting; and;

(f) all references to documents are to those documents as amended, modified and supplemented from time to time.

ARTICLE II

AMENDMENTS

Section 2.1. Amendment of Section 7.04(a) and Section 7.04(b) of the Participation Agreement.

Section 7.04(a) and Section 7.04(b) of the Participation Agreement are hereby amended as follows:

(a) any text in Schedule 2.1 hereto that is struck through shall be deleted; and

(b) any text in Schedule 2.1 hereto that is double underscored shall be added.

Section 2.2. Amendment of Appendix A to the Participation Agreement.

The definitions of “Change of Control”, “Restricted Payment”, “Swap Termination Value” and “Synthetic Lease” are hereby amended as follows:

(a) any text in Schedule 2.2 hereto that is struck through shall be deleted; and

(b) any text in Schedule 2.2 hereto that is double underscored shall be added.

Section 2.3. Amendment to Article IV of the Put Option Agreement.

Clause (l) of Article IV of the Put Option Agreement is hereby amended as follows:

(a) any text in Schedule 2.3 hereto that is struck through shall be deleted; and

(b) any text in Schedule 2.3 hereto that is double underscored shall be added.

ARTICLE III

COUNTERPARTS; MISCELLANEOUS

Section 3.1. This Amendment may be signed in two or more counterparts which, when taken together, shall constitute one and the same instrument.

Section 3.2. Excepted as amended hereby, the Participation Agreement and the Put Option Agreement remain in full force and effect.

2

ARTICLE IV

GOVERNING LAW

Section 4.1. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

3

IN WITNESS WHEREOF, this Amendment has been executed on behalf of the parties as of the day and year first above written.

HEALTH NET FUNDING, INC.
By:	/s/    Jonathan Rollins
	Name: Jonathan Rollins Title: Treasurer
HEALTH NET, INC.
By:	/s/    Jonathan Rollins
	Name: Jonathan Rollins Title: Treasurer
LODGEMORE HOLDINGS, INC.
By:	/s/    Kieran O’Donnell
	Name: Kieran O’Donnell Title: Director
ING BANK N.V.
By:	/s/    Albert Jan Visser
	Name: Albert Jan Visser Title: Managing Director
By:	/s/    B. Petit-Yuelin
	Name: B. Petit-Yuelin Title: Director

4

HEALTH NET FINANCING, L.P.
By:	Health Net Funding, Inc., as General Partner
By:	/s/    Jonathan Rollins
	Name: Jonathan Rollins Title: Treasurer

5

Schedule 2.1

to Omnibus Amendment

Section 7.04 Financial Information

U.S. Parent will furnish to Canadian Investor and Credit Risk Bank:

(a) as soon as available and in any event within 95 days (or within fifteen days after such other time period required by the SEC) after the end of each fiscal year of U.S. Parent, its audited consolidated balance sheet and related statements of operations, shareholders’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Deloitte & Touche LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of U.S. Parent and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP (Canadian Investor and Credit Risk Bank agree that U.S. Parent’s obligations under this paragraph (a) will be satisfied in respect of any fiscal year by delivery to Canadian Investor within 95 days (or within fivefifteen days of such other time period required by the SEC) after the end of such fiscal year of its annual report for such fiscal year on Form 10-K as filed with the SEC);

(b) as soon as available and in any event within 50 days (or within fifteen days after such other time period required by the SEC) after the end of each of the first three fiscal quarters of each fiscal year of U.S. Parent (beginning with the fiscal quarter ending on March 31, 2007), its consolidated balance sheet and related statements of operations and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Responsible Officers as presenting fairly in all material respects the financial condition and results of operations of U.S. Parent and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP, subject to normal year-end audit adjustments and the absence of footnotes (Canadian Investor and Credit Risk Bank agree that U.S. Parent’s obligations under this paragraph (b) will be satisfied in respect of any fiscal quarter by delivering to the Canadian Investor within 50 days (or within fivefifteen days after such other time period required by the SEC) after the end of such fiscal quarter of its quarterly report for such fiscal quarter on Form 10-Q as filed with the SEC);

Schedule 2.2

to Omnibus Amendment

***

“Change of Control” means an event or series of events by which:

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all Capital Stock that such person or group has the right to acquire (such right, an “option right Option Right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of twenty-five percent (25%) of the Capital Stock of U.S. Parent entitled to vote for members of the board of directors or equivalent governing body of U.S. Parent on a fully diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or

(b) during any period of 24 consecutive months, a majority of the members of the board of directors or other equivalent governing body of U.S. Parent cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (ii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clauses (ii) and (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

Notwithstanding the foregoing, “Option Right” shall not include any Capital Stock which any person or group has a right to acquire as a result of a merger or acquisition agreement and U.S. Parent shall not be deemed to have any beneficial ownership of Capital Stock of U.S. Parent.

***

“Restricted Payment” means (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of U.S. Parent or any Subsidiary thereof, now or hereafter outstanding, (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of U.S. Parent or any Subsidiary thereof, now or hereafter outstanding, and (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of capital stock of U.S. Parent or any Subsidiary thereof, now or hereafter outstanding (excluding any such payments with respect to convertible Indebtedness which has not yet been converted).

***

“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include Canadian Parent or Credit Risk Bank or any Affiliate of either of Canadian Parent or Credit Risk Bank).

***

“Synthetic Lease” means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing arrangement whereby (a) the arrangement is considered borrowed money indebtedness for tax purposes but is classified as an operating lease or does not otherwise appear on the balance sheet under GAAP and (b) the capitalized amount of the remaining lease payments under the relevant lease exceeds an amount equal to 10% of Consolidated EBITDA for the period of the four quarters most recently ended for which U.S. Parent has delivered financial statements pursuant to Section 7.04(a) or (b) of the Participation Agreement.

Schedule 2.3

to Omnibus Amendment

(1) The Net Assets of the Partnership at any time equal less than (A) 95% of (B) (x) the value of such Net Assets as of the Closing Date minus (y) the excess of (i) the aggregate amount of any cash distributed to the General Partner in accordance with the last sentence of Section 5.2 of the Partnership Agreement over (ii) the aggregate amount of any cash contributed by the General Partner after the Closing Date pursuant to Section 3.3(b) of the Partnership Agreement. For purposes of the foregoing, “Net Assets” shall mean Permitted Assets less Permitted Liabilities.

EX-10.61

EXHIBIT 10.61

AMENDMENT NUMBER ONE TO THAT LEASE AGREEMENT BETWEEN GOLD POINTE C, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, AS SUCCESSOR-IN-INTEREST TO LANDHOLD, INC., A CALIFORNIA CORPORATION, AS LANDLORD, AND HEALTH NET, INC, A DELAWARE CORPORATION, AS TENANT, DATED MARCH 5th, 2001, FOR THE PREMISES LOCATED AT 11971 FOUNDATION PLACE IN RANCHO CORDOVA, CALIFORNIA.

Effective November 22, 2002, the above described Lease Agreement shall be modified as follows:

The Basic Lease Information – Premises shall be replaced in its entirety as follows:

Premises:	The Premises referred to in this Lease consist of approximately 141,151 rentable square feet on the first, second and third floors of the Building.
Tenant’s Proportionate Share:	96.77%, based on a Building rentable area of approximately 145,869 square feet.
Lease Commencement Date:	July 8, 2002
Lease Expiration Date:	January 7, 2013
Base Rent:	Months:	Monthly Base Rent
	07/08/02-01/07/03:	Free Rent and Building Operating Expenses.
	01/08/03-01/07/05:	$258,306.33
	01/08/05-01/07/07:	$265,363.88
	01/08/07-01/07/09:	$272,421.43
	01/08/09-01/07/11:	$279,478.98
	01/08/11-01/07/13:	$286,536.53

All other terms and conditions shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and year written below.

LANDLORD:
GOLD POINTE C, LLC, a California limited liability Company
By:	/s/ Michael E. Diepenbrock
	Michael E. Diepenbrock, Managing Member

TENANT:

HEALTH NET, INC. A Delaware Corporation
By:	/s/ Dennis Bell
	Dennis Bell
Its:	Vice President

EX-10.62

EXHIBIT 10.62

SECOND AMENDMENT TO LEASE

This Second Amendment to Lease (“Amendment”), dated for reference purposes only as April 28, 2006, is made and entered into by and between MCMORGAN INSTITUTIONAL REAL ESTATE FUND I, LLC, a Delaware limited liability company (as successor-in-interest to Landhold, Inc.) (“Landlord”), and HEALTH NET, INC., a Delaware corporation (“Tenant”).

RECITALS

A. Landlord’s predecessor-in-interest and Tenant entered into that certain Standard Lease Agreement (Office) dated March 5, 2001 (“Original Lease”), for certain Premises located at 11971 Foundation Place, Rancho Cordova, California, which Original Lease was amended pursuant to that certain amendment dated November 22, 2002 (“First Amendment”). For purposes of this Amendment, the term “Lease” shall mean the Original Lease, as amended by the First Amendment. The terms used and not otherwise defined herein shall have the same meanings and definitions as set forth in the Lease.

B. Tenant has previously installed, and is currently operating and using, a repeater system on a portion of the roof and other areas of the Building (“Existing Repeater Facilities”).

C. In addition to the Existing Repeater Facilities, Tenant desires to use certain portions of the roof of the Building for the installation, operation and use of four (4) security cameras (“Rooftop Security Cameras”).

D. Landlord is willing to grant to Tenant, and Tenant is willing to accept from Landlord, a non-exclusive license for the continuing use by Tenant of the roof and certain other areas of the Building for the operation and use of the Existing Repeater Facilities and for use by Tenant of portions of the roof and certain other areas of the Building for the installation, operation and use of the Rooftop Security Cameras, all on the terms and conditions set forth below.

NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. Non-Exclusive License. Subject to the terms and conditions set forth in this Amendment below, Landlord hereby grants to Tenant a non-exclusive license (“License”):

(i) for the use of certain portions of the roof of the Building, which portions are shown on Exhibit A attached hereto, for the installation, operation and use (including maintenance and repair) of the Existing Repeater Facilities and the Rooftop Security Cameras, and associated installations, all as more particularly described in Exhibit B (collectively, the “Tenant’s Rooftop Installations”), and for the installation of cabling, conduit and other electrical wiring (“Conduit”) connecting the Tenant’s Rooftop Installations to certain equipment of Tenant located in the Premises (the Tenant’s Rooftop Installations and the Conduit are individually and collectively referred to herein as the “Facilities”);

(ii) for the use of such stairwells and roof access passageways in the Building and on the roof of the Building as may be designated by Landlord for the purpose of access to and from the Tenant’s Rooftop Installations; and

(iii) for the placement of, and access to, Conduit in such risers and pathways (collectively, “Raceways”) and utility rooms in the Building as are designated by Landlord for such purposes.

The License granted to Tenant hereunder is non-exclusive. Except as otherwise specifically set forth in this Amendment, Landlord shall not charge Tenant any rent or other fees for the License (except that Landlord expressly reserves the right to charge such rent and/or fees for the License in the future, upon not less than thirty (30) days prior written notice to Tenant, and any such rent and fees so charged by Landlord shall be payable by Tenant hereunder as and when charged by Landlord). Landlord expressly reserves the right to grant to itself and other parties, including, without limitation, other occupants of the Building and third party vendors, the right to install and operate other equipment and facilities, (including, without limitation, telecommunications equipment) on the roof of and within the non-Premises portions of the Building. Tenant agrees to cooperate with Landlord in adopting (at Tenant’s sole cost and expense) commercially reasonable procedures to limit any interference to other equipment or facilities located on the roof of the Building caused by or attributable to the Facilities and to enable the full utilization of the roof of the Building by others.

The License granted to Tenant hereunder is personal to Health Net, Inc., and may not be assigned or otherwise transferred by Tenant, in whole or in part, to any other party. The License shall automatically terminate upon any assignment of the Lease by Tenant. Notwithstanding the foregoing, Tenant may, upon prior written notice to Landlord, assign the License in connection with and as part of an assignment of the Lease or subletting of the Premises or portion thereof, as applicable, permitted to be made by Tenant without Landlord’s consent pursuant to Section 15(a) of the Original Lease, so long as the proposed transferee agrees in writing to comply with and be bound by all the terms and conditions hereof and assumes in full the obligations of Tenant hereunder. No such assignment of the License shall relieve Tenant of any obligations or liabilities hereunder.

Tenant acknowledges and agrees that the License granted to it hereunder is a contract right and not an estate or interest in land or real property, and Tenant disclaims and waives any leasehold estate or other possessory interest in the non-Premises portions of the Building (including, without limitation, the roof of the Building) that are subject to the License.

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2. Term. Unless sooner terminated pursuant to this Amendment, the License granted to Tenant hereunder shall be on a month-to-month basis only, and either party shall have the right to terminate the License at any time upon thirty (30) days written notice thereof to the other party. In addition, Landlord shall have the right to immediately revoke and terminate the License upon any failure by Tenant to observe or perform the covenants, conditions or provisions of this Amendment or the Lease to be observed or performed by Tenant where such failure shall continue for a period of five (5) days following written notice thereof from Landlord. Unless sooner terminated hereunder, the License shall automatically terminate upon the expiration or sooner termination of the Lease.

3. Permitted Uses; Compliance with Laws and CC&Rs. The installation, operation and use of the Facilities shall be at Tenant’s sole risk and expense. Tenant shall only use the Existing Repeater Facilities to receive radio transmissions for Tenant’s use in the Premises, and for no other purposes. No person or entity other than Tenant (and, following a permitted assignment of the License by Tenant pursuant to the 3rd paragraph of Section 1 above, the applicable assignee) shall have the right to use or receive transmissions from the Existing Repeater Facilities. Tenant shall only use the Rooftop Security Cameras to provide security surveillance of the exterior areas surrounding the Building, and for no other purposes. Tenant shall at all times comply with all applicable laws, statutes, ordinances and governmental rules and regulations relating to the installation, operation and use of the Facilities, and Tenant shall be responsible for obtaining and maintaining all governmental permits and approvals necessary for the lawful installation, operation and use of the Facilities, all at Tenant’s sole cost and expense. Landlord makes no representation or warranty to Tenant of any kind relating to such compliance or the availability of such permits and approvals.

Tenant acknowledges that the Project is subject to that certain Declaration of Covenants, Conditions and Restrictions and Grant of Easements dated July 28, 2000 (as the same may be amended, the “CC&Rs”), which CC&Rs, among other things, require the prior written approval of the Association (as defined in the CC&Rs) to certain installations made at the Project (including, without limitation, installations on the roof of the Building). Tenant acknowledges that Landlord has not sought or obtained the approval of the Association for the Tenant’s Rooftop Installations. The installation, use and operation of the Tenant’s Rooftop Installations by Tenant shall be subject to the CC&Rs and any and all directives of the Association made in connection therewith. Tenant shall, at its sole cost and expense, immediately comply with any and all directives of the Association relating to the Tenant’s Rooftop Installations (including, without limitations, directives requiring the removal or modification of the Tenant’s Rooftop Installations), and Tenant shall indemnify, defend and hold Landlord harmless from and against any claims made, actions commenced and penalties and fines imposed by the Association relating to any alleged violations of the CC&Rs by reason of the installation, operation or use of the Tenant’s Rooftop Installations. Landlord makes no representation or warranty to Tenant of any kind relating to the compliance or non-compliance by the Tenant’s Rooftop Installations with the CC&Rs or the availability of the Association’s approval of the Tenant’s Rooftop Installations.

4. Installation of Facilities. Landlord and Tenant acknowledge that Tenant has already installed that portion of the Facilities comprising and relating to the Existing Repeater Facilities. Prior to installing that portion of the Facilities comprising and relating to the Rooftop

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Security Cameras (the “Security Camera Facilities”), Tenant shall submit to Landlord, for Landlord’s prior written approval (which approval shall not be unreasonably withheld), detailed plans and specifications for the Security Camera Facilities, including, without limitation, the locations and manner of any proposed penetrations of the roof of the Building (and, in the event that Landlord’s reasonably disapproves such plans and specifications, Tenant shall cause the same to be revised in a manner that is reasonably acceptable to Landlord). Tenant shall cause the Security Camera Facilities to be installed in accordance with the approved plans and specifications and otherwise in accordance with Section 10(a) of the Original Lease (and, for purposes of applying said Section 10(a) to such installation, the Security Camera Facilities shall constitute “Alterations” under the Lease). All contractors and subcontractors retained by Tenant to perform the installation of the Security Camera Facilities shall be subject to Landlord’s prior written approval and the requirements of Section 15 below. Tenant shall not make any changes or modifications to the Facilities without the prior written approval of Landlord, which approval may be withheld by Landlord in its reasonable discretion.

5. Maintenance and Repair. Upon installation, the Facilities shall constitute the personal property of Tenant, and Tenant shall be solely responsible for the maintenance and repair of the Facilities, all at Tenant’s sole cost and expense. All contractors and subcontractors retained by Tenant to perform such maintenance and repair shall be subject to Landlord’s prior written approval and the requirements of Section 15 below. Landlord shall have no liability whatsoever relating to any damage to or loss of the Facilities, and Tenant hereby waives all rights of recovery against Landlord on account of any such damages or loss.

6. Utilities and Taxes. Tenant shall be solely responsible for securing and furnishing all electricity and other utilities necessary for the operation and use of the Facilities, and Landlord shall have no obligation whatsoever to furnish or supply the same. All charges for such electricity and other utilities, to the extent they exceed the total electricity allocable to the Premises under the Lease, shall be borne solely by Tenant. Any interruption, curtailment or suspension in utilities necessary for the operation and/or use of the Facilities shall not impose any liability on Landlord or entitle Tenant to any abatement or reduction in Rent (and any such interruption shall not constitute a Service Interruption for purposes of the Lease). In addition to utility charges, Tenant shall pay before delinquency any and all taxes and fees levied or assessed upon the Facilities and/or the installation, operation and/or use thereof.

7. Removal of Facilities. Upon the termination of the License, Tenant shall, at its sole cost and expense, promptly remove the Facilities and repair any damage as a result thereof, and leave the portion of the roof and other areas of the Building where the Facilities were located in good condition and repair, ordinary wear and tear expected. All contractors and subcontractors retained by Tenant to perform such removal shall be subject to Landlord’s prior written approval and the requirements of Section 15 below. In the event Tenant fails to so remove the Facilities, then, in addition to all other rights and remedies, Landlord shall have the rights and remedies set forth in the 2^nd paragraph of Section 26 of the Original Lease as if the Facilities had been installed in the Premises.

8. Supervision by Landlord’s Roof Contractor. Tenant acknowledges that the roof of the Building (including, without limitation, the roof membrane) is covered by a warranty provided by Landlord’s roof contractor (“Landlord’s Roof Contractor”). Tenant shall cause all

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work to be undertaken by Tenant in, on or about the roof of the Building in connection with the installation, maintenance, operation, use and/or removal of the Facilities (including, without limitation, any roof penetrations) to be supervised by Landlord’s Roof Contractor, and all such work shall be undertaken by Tenant and its contractors in a manner that will not void or otherwise adversely affect any then-existing warranties in favor of Landlord relating to the roof of the Building (including, without limitation, the roof membrane). All fees charged by Landlord’s Roof Contractor relating to such supervision shall be the sole responsibility of Tenant, and Tenant shall reimburse Landlord for such fees within ten (10) days following Landlord’s written demand therefor (and the reimbursement limitations and estimate requirements set forth in the 2^nd to last sentence of Section 10(a) of the Original Lease shall not apply with respect to such fees).

9. Damage to Roof and Roof Leaks. Tenant shall be responsible for any damage to the roof of the Building (including, without limitation, the roof membrane) caused by Tenant or its contractors or by the Facilities, as well as any leaks in the roof attributable thereto (including due to any roof penetrations made in connection with the Facilities). In the event of any such damage or leaks, Landlord shall cause the repair work to be undertaken by its contractor at Tenant’s sole cost and expense, and Tenant shall reimburse Landlord for such costs and expenses within ten (10) days following Landlord’s written demand therefor.

10. Access to Roof and Raceways. Access to the roof of the Building and the Raceways by Tenant and its contractors shall at all times be coordinated through Landlord’s property manager, and neither Tenant nor its contractors shall be permitted to access the roof of the Building or the Raceways without having first coordinated such access with Landlord’s property manager. Tenant’s access and use of the roof of the Building and the Raceways shall be subject to such reasonable rules and regulations that Landlord or its property manager may impose in connection therewith from time to time.

11. Insurance. Tenant shall cause the insurance to be obtained and maintained by Tenant pursuant to Section 18 of the Original Lease to include, in addition to the coverages described therein, coverage insuring against any liability arising out of the installation, operation and use of the Facilities and all areas appurtenant thereto, and any damage to the Facilities. Upon the request of Landlord, Tenant shall provide Landlord with evidence of such coverages.

12. Other Charges. If Landlord’s insurance premiums and/or Real Estate Taxes increase as a result of the Facilities or any portion thereof, or if any governmental or quasi- governmental authority shall levy, assess or impose any tax, license fee, use fee or other sum against Landlord, as a result of the Facilities or any portion thereof, Tenant shall pay all such amounts to Landlord within ten (10) days following Landlord’s written demand therefor.

13. Damage or Destruction. In the event of any damage or destruction to the Building affecting the roof of the Building, either party shall have the right to terminate the License upon written notice thereof to the other party (and, upon such notice, the License shall terminate). Landlord shall have no obligation to repair any damage to the Facilities or to any portions of the Building upon which the Facilities are located.

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14. Hazardous Materials. No Hazardous Materials (as defined below) shall be used in the operation, use or maintenance of the Facilities or stored by Tenant on or about the roof of the Building. As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material, or waste, which is or becomes regulated by any local governmental authority, the State of California or the United States Government.

15. Union Labor. All contractors and subcontractors retained at the Project by Tenant to perform the installation, maintenance, repair and/or removal of the Facilities shall be a signatory to a union collective bargaining agreement.

16. Reimbursement of Attorneys’ Fees. Tenant shall reimburse Landlord for all attorneys’ fees and costs incurred by Landlord in connection with the preparation, negotiation and finalization of this Amendment, which reimbursement shall be made by Tenant to Landlord within thirty (30) days following Landlord’s written demand therefor.

17. General

17.1 Effect of Amendment. Except as otherwise modified by this Amendment, the Lease shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms and conditions of the Lease, on the one hand, and the terms and conditions of this Amendment, on the other hand, the terms and conditions of this Amendment shall prevail.

17.2 Counterparts. This Amendment may be executed in one (1) or more counterparts, each of which shall be considered an original counterpart, and all of which together shall constitute one and the same instrument.

17.3 Authority. Tenant, and each individual executing this Amendment on behalf of Tenant, represents and warrants that such individual is duly authorized to execute and deliver this Amendment on behalf of Tenant, that Tenant is duly authorized to enter into this Amendment, and that this Amendment is enforceable against Tenant in accordance with its terms. Tenant shall deliver to Landlord upon demand evidence of such authority satisfactory to Landlord.

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written.

LANDLORD:

MCMORGAN INSTITUTIONAL REAL ESTATE FUND I, LLC,

a Delaware limited liability company

By: McMorgan & Company LLC

Its: Manager

By: /s/ Frances A. Gurriere                

Name: Frances A. Gurriere

Its: Vice President

TENANT:

HEALTH NET, INC.,

a Delaware corporation

By: /s/ Dennis Bell                            

Name: Dennis Bell

Its: Vice President of Real Estate

By: /s/ Wisdom Lu                            

Name: Wisdom Lu

Its: Treasurer

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EXHIBIT A

PERMITTED ROOFTOP LOCATIONS

ATTACHED

8

Exhibit A

9

EXHIBIT B

DESCRIPTION OF TENANT’S ROOFTOP INSTALLATIONS

ATTACHED

10

Exhibit B

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EX-10.63

EXHIBIT 10.63

AMENDMENT NUMBER ONE TO THAT LEASE AGREEMENT BETWEEN GOLD POINTE D, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, AS SUCCESSOR-IN-INTEREST TO LANDHOLD, INC., A CALIFORNIA CORPORATION, AS LANDLORD, AND HEALTH NET, INC, A DELAWARE CORPORATION, AS TENANT, DATED MARCH 5th, 2001, FOR THE PREMISES LOCATED AT 11931 FOUNDATION PLACE IN RANCHO CORDOVA, CALIFORNIA.

Effective November 22, 2002, the above described Lease Agreement shall be modified as follows:

The Basic Lease Information – Premises shall be replaced in its entirety as follows:

Premises:	The Premises referred to in this Lease consist of approximately 31,200 rentable square feet on the first floor of the Building.
Tenant’s Proportionate Share:	49.32%, based on a Building rentable area of approximately 63,265 square feet.
Lease Commencement Date:	July 8, 2002
Lease Expiration Date:	January 7, 2013
Base Rent:	Months:	Monthly Base Rent for Premises
	07/08/02-01/07/03:	Free Rent and Building Operating Expenses.
	01/08/03-01/07/05:	$57,096.00
	01/08/05-01/07/07:	$58,656.00
	01/08/07-01/07/09:	$60,216.00
	01/08/09-01/07/11:	$61,776.00
	01/08/11-01/07/13:	$63,336.00

All other terms and conditions shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and year written below.

LANDLORD:
GOLD POINTE D, LLC, a California limited liability Company
By:	/s/ Michael E. Diepenbrock
	Michael E. Diepenbrock, Managing Member

TENANT:

HEALTH NET, INC. A Delaware Corporation
By:	/s/ Dennis Bell
	Dennis Bell
Its:	Vice President

EX-10.64

EXHIBIT 10.64

STANDARD LEASE AGREEMENT (OFFICE)

BETWEEN

PANATTONI DEVELOPMENT COMPANY, A CALIFORNIA LIMITED LIABILITY COMPANY,

AS “LANDLORD”

AND

HEALTH NET, INC., A DELAWARE CORPORATION,

AS “TENANT”

JULY 24, 2006

(11031 SUN CENTER DRIVE, RANCHO CORDOVA)

OFFICE GROSS LEASE AGREEMENT

Basic Lease Information

Terms and Definitions. For the purpose of this Lease, the following capitalized terms shall have the following definitions:

Lease Date:	July 24, 2006
Landlord:	Panattoni Development Company, a California Limited Liability Company 8401 Jackson Road Sacramento, California 95826
Tenant:	Health Net, Inc., a Delaware Corporation
Tenant’s Notice
Address:	Health Net, Inc. P. O. Box 2470 Rancho Cordova, CA 95741-2470 Attn: Director of Real Estate
Tenant’s Billing
Address:	Health Net, Inc. P. O. Box 2470 Rancho Cordova, CA 95741-2470 Attn: Director of Real Estate
Tenant Contact:	Director of Real Estate Phone Number: (916) 935-1317 Fax Number: (916) 935-4406
Building:	An approximately 112,142 rentable square foot two-story office building on approximately 8.98 acres of land commonly known as 11031 Sun Center Drive, Rancho Cordova, California. The location of the Building is shown on the site plan attached as Exhibit A.
Tenant’s Proportionate Share:	100%, based on a Building rentable area of approximately 112,142 square feet.
Premises:	The Premises referred to in this Lease consists of approximately 112,142 rentable square feet on the first and second floors of the Building, as shown on the floor plans attached hereto as Exhibit G. The Premises include approximately 5 parking spaces per 1,000 rentable square feet.
Term:	The term shall be thirty-six (36) months from the Commencement Date as defined in Section 4 below. This Lease shall be subject to Landlord acquiring title to the Premises no later than August 15, 2006.
Scheduled Lease Commencement Date:	January 1, 2007.
Business Hours:	The hours of 8:00 a.m. to 6:00 p. m, Monday through Friday, and 9:00 a.m. to 2:00 p.m. Saturday (excepting Federally recognized holidays).

Base Rent:	Months 01-12:	$1.85 per rentable square foot per month.
	Months 13-24:	$1.90 per rentable square foot per month.
	Months 25-36:	$1.94 per rentable square foot per month.

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Base Year:	2007 calendar year
Lease Year:	The calendar year in which the Term commences and each succeeding calendar year thereafter.
Use:	General office and any other lawful use approved in writing by Landlord, which shall not be unreasonably withheld, delayed or conditioned.
Security Deposit:	Waived
Broker for Landlord:	None
Broker for Tenant:	Madison Partners 2029 Century Park East, Suite 515 Los Angeles, California 90067

LIST OF EXHIBITS:

A	Site Plan
A-1	Base Building Work
B	Lease Improvement Agreement
C	First Amendment to Lease and Acknowledgment
D	Rules and Regulations
E	Janitorial Specifications
F	Exclusions From Operating Expenses and Real Estate Taxes
G	Floor Plans of Premises

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STANDARD LEASE AGREEMENT

(OFFICE)

This Standard Lease Agreement (“Lease”) is made and entered into by the Landlord and Tenant referred to in the Basic Lease Information. The Basic Lease Information attached to this Lease as page 1 and page 2 is hereby incorporated into this Lease by this reference.

1. PREMISES

(a) This Lease shall be effective as between Landlord and Tenant as of the full execution and delivery hereof by both Landlord and Tenant. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord upon the terms and conditions contained herein the Premises, which are more particularly described in Exhibit A attached hereto and made a part hereof (the “Premises”), including any tenant improvements (the “Tenant Improvements”) thereon presently existing or to be constructed by Tenant in accordance with the “Lease Improvement Agreement” attached as Exhibit B, which is made a part hereof by this reference. As hereinafter used in this Lease, the term “Building” shall refer to the entire structure which is synonymous with the Premises, and the term “Lot” shall refer to the Assessor’s tax parcel on which the Building is situated. This Lease confers no rights either with regard to the subsurface of the land below the ground level of the Building or with regard to airspace above the roof of the Building.

(b) Tenant acknowledges that, as of the Lease Date, the Building is vacant. Prior to the Commencement Date, Landlord and Tenant have agreed that Landlord will complete certain improvements to the Building (the “Base Building Work”) and Tenant will complete certain improvements to the Building (the “Tenant Improvements), both as more particularly described on Exhibit A-1 and Exhibit B attached hereto. The Tenant Improvements shall be funded in part by the Tenant Improvement Allowance and Additional Allowance as set forth in the Section 4.2 of the Lease Improvement Agreement. The Base Building Work shall be at Landlord’s sole cost and expense. Tenant agrees to construct the Tenant Improvements in compliance with all applicable laws, statutes and ordinances, and such construction shall be consistent with the Building Standards attached as Schedule 2 to Exhibit B, subject to events preventing such compliance beyond the reasonable control of Tenant (provided that Tenant has advised Landlord in writing of such noncompliance and the specific reasons therefor). Tenant may, not later than the Commencement Date, at Tenant’s expense, have a licensed architect measure the Premises (using the Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996, published by BOMA International (the “BOMA Standard”)) to determine the rentable area and usable area of the Premises. Based on such measurement, the Base Rent, and Tenant Improvement Allowance and Additional Allowance shall be proportionately adjusted; provided, however, that in no event (i) will such measurement result in a Rent increase to Tenant of more than two percent (2%), or (ii) will the rentable area of the Premises be more than ten percent (10%) greater than the “Office Area” (as that term is defined in the BOMA Standard) of the Premises.

2. ACCEPTANCE OF PREMISES

Except as otherwise provided in this Lease, Tenant’s taking possession of the Premises shall constitute Tenant’s acknowledgment that, to Tenant’s actual knowledge, the Premises are in good condition and that the Base Building Work (as defined in the Lease Improvement Agreement) is constructed in accordance with the Lease Improvement Agreement, and that Tenant agrees to accept the same in its condition existing as of the date of such entry and subject to all applicable municipal, county, state and federal statutes, laws, ordinances, including zoning ordinances, and regulations governing and relating to the use, occupancy or possession of the Premises. Notwithstanding the foregoing, within fifteen (15) days following the Commencement Date, Tenant shall deliver to Landlord a list of items (“Punch List Items”) that Tenant reasonably deems that Landlord complete or correct in order for the Premises to be reasonably acceptable (which shall not include any items damaged by Tenant, its agents, employees, contractors and/or subcontractors). Within thirty (30) days following Landlord’s receipt of the Punch List Items, to the extent commercially possible, Landlord shall complete and/or correct such items set forth on the Punch List Items using its good faith efforts and due diligence. No promise of Landlord to alter, remodel, repair or improve the Premises or the Building and no representation, express or implied, respecting any matter or thing related to the Premises or Building or this Lease

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(including, without limitation, the condition of the Building or Premises) have been made to Tenant by Landlord, its agents or employees, other than as set forth in the Lease Improvement Agreement and as otherwise provided in this Lease. Nothing in this Section 2 shall, however, relieve Landlord of its obligation to correct any latent defects in the Premises or Building, or to construct the Base Building Work in compliance with all applicable laws.

3. COMMON AREAS

The term “Common Areas” shall refer to all areas and facilities outside the Premises (including all appurtenant parking facilities). Landlord hereby grants to Tenant, during the term of this Lease, the exclusive right to use the Common Areas as they exist from time to time, subject to any reasonable rules, regulations, and restrictions governing the use of the Premises as from time to time made or amended by Landlord. Under no circumstances shall the right granted herein to use the Common Areas be deemed to include the right to store any property in the Common Areas. Provided that Landlord, using its commercially reasonable efforts, does not unreasonably interfere with Tenant’s use of the Premises or the parking facilities, Landlord reserves the right at any time and from time to time, to: (i) make alterations in or additions to the Premises and to the Common Areas; (ii) close the Common Areas to whatever extent required in the opinion of Landlord’s counsel to prevent a dedication of any of the Common Areas or the accrual of any rights of any person or of the public to the Common Areas; (iii) temporarily close any of the Common Areas for maintenance purposes; and (iv) promulgate reasonable rules and regulations governing the use of the Common Areas.

4. TERM AND POSSESSION

Subject to and upon the terms and conditions set forth herein, the term of this Lease shall be for the period specified in the Basic Lease Information, commencing upon the earlier of the following dates (the “Commencement Date”): (i) the date on which the Premises are Substantially Complete (as defined below); or (ii) the date upon which the Tenant takes possession of the Premises in order to conduct its business operations therein, provided, however, and notwithstanding the foregoing, in no event shall the Commencement Date be later than the Scheduled Lease Commencement Date. Landlord shall give Tenant possession of the Premises for the purposes of Tenant installing the Tenant Improvements upon the date this Lease is fully executed, provided that such possession does not unreasonably interfere with or delay completion of the Base Building Work. Such early possession shall be upon all the terms and conditions of this Lease, except that in no event shall Tenant be required to pay Base Rent, Tenant’s Proportionate Share of Excess Expenses (as defined in Section 7(a) below), or any costs for parking, hoists, freight elevators, utilities or temporary HVAC during such early possession period. Within thirty (30) days after the Commencement Date, Landlord and Tenant shall execute an amendment to this Lease (“First Amendment to Lease and Acknowledgment”) setting forth the Commencement Date and the expiration date of the term of the Lease, which shall be in the form attached hereto as Exhibit C. For purposes of the foregoing, the Premises shall be deemed to be “Substantially Complete” when (i) a certificate of occupancy (temporary or final) for the Premises has been issued by the appropriate governmental entity, and (ii) the Base Building Work has been completed, with the exception of the Punch List Items.

5. BASE RENT

(a) Tenant agrees to pay Landlord the Base Rent set forth in the Basic Lease Information, without prior notice, demand, deduction or offset (except as expressly set forth in this Lease or under applicable law) in the manner and amounts set forth in this Section 5. Landlord agrees to accept payment of Base Rent pursuant to wire transfer from Tenant. The term “Rent” as used in this Lease shall mean Base Rent, Tenant’s Proportionate Share of Excess Expenses, and any other amounts owing from Tenant to Landlord pursuant to the provisions of this Lease. The Base Rent shall be payable in advance on or before the first day of each month throughout the term of this Lease. Base Rent for any period during the term hereof which is for less than one month shall be a prorated portion of the monthly installment based upon a thirty (30)-day month.

(b) [Intentionally omitted]

(c) If the amount of Rent or any other payments due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due

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during the period of such restrictions shall be the maximum amount allowable under those restrictions.

6. SECURITY DEPOSIT

Waived.

7. OPERATING EXPENSES

(a) For the purpose of this Section 7(a) and this Lease, the following terms are defined as follows:

(1) “Base Year” shall mean the calendar year set forth in the Basic Lease Information.

(2) “Tenant’s Proportionate Share” shall equal one hundred percent (100%).

(3) “Operating Expenses” shall mean all reasonable and necessary costs and expenses paid or incurred by or on behalf of Landlord (whether directly or through independent contractors) in connection with the operation, repair, replacement and maintenance of the Building, including the following costs by way of illustration, but not limitation: (i) salaries, wages, compensation, benefits, pension or contributions and all medical, insurance and other fringe benefits paid to, for, or with respect to all persons, excluding management personnel (whether they be employees of Landlord, its managing agent or any independent contractor) for their services in the operation (including security services for the Building), maintenance, repair or cleaning of the Building, and payroll taxes, worker’s compensation, uniforms and dry cleaning costs for such persons; (ii) payments under service contracts with independent contractors for operating (including providing security services, if any), maintaining, repairing or cleaning the Building or any portion thereof or any fixtures or equipment therein; (iii) all costs for water, steam, sewer and other utility services to the Building, including any taxes on any such utilities; (iv) repairs and replacements which are appropriate to the continued operation of the Building as a first-class office building; (v) [intentionally omitted]; (vi) cost of landscaping in, on or about the Building; (vii) cost of building and cleaning supplies and equipment, cost of replacements for tools and equipment used in the operation, maintenance and repair of the Building and charges for lobby and elevator telephone service for the Building; (viii) financial expenses incurred in connection with the operation of the Building, such as insurance costs, including, but not limited to, any premiums, deductibles and other costs of insurance, as Landlord may, in its reasonable discretion, from time to time carry (including, without limitation, liability insurance, fire and casualty insurance, rental interruption insurance, flood and earthquake insurance, and any other insurance), attorneys’ fees and disbursements, auditing and other professional fees and expenses, association dues and any other ordinary and customary financial expenses incurred in the ordinary course in connection with the operation of the Building; (ix) fees payable to a property management company (which may be owned or controlled by Landlord or Landlord’s principals) for the property and asset management of a first-class office building, provided such fee shall not exceed the fee that would be charged by a first-class management company unaffiliated with Landlord that does not have a brokerage listing agreement with Landlord for the Building; (x) the cost of capital improvements made by Landlord in order (A) to conform to any changes enacted after the Commencement Date in laws, rules, regulations or requirements of any governmental authority having jurisdiction, or of the board of fire underwriters or similar insurance body, provided that such expense, if a capital expenditure as determined by generally accepted accounting procedures, shall be amortized on a straight line basis over such

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expenditure’s useful life, and only such amortized portion shall be included in Operating Expenses, not to exceed One Hundred Thousand and No/100ths Dollars ($100,000.00) in any given Lease Year (which limitation shall apply only during the initial Term of this Lease), or (B) to effect a labor saving, energy saving or other economy, which cost shall be included in Operating Expenses for the Lease Year in which such improvement was made not in excess of the savings resulting from such expenditure; (xi) costs for accounting, legal and other professional services incurred in the operation of the Building; (xii) rental payments made for equipment used in the operation and maintenance of the Building; (xiii) the cost of governmental licenses and permits, or renewals thereof, necessary for the operation of the Building; (xiv) sales, use and excise taxes on goods and services; (xv) real property taxes, assessments and bonds (collectively, “Real Estate Taxes”), which shall include, but not be limited to, any and all taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building, including the Building and the Lot, or their operation, ordinary and extraordinary, substitute and additional, unforeseen as well as foreseen, present and future, of any kind and nature whatsoever, including without limitation, (A) real property taxes or assessments levied or assessed against the Building and the Lot, (B) assessments or charges levied or assessed against the Building and the Lot by any redevelopment agency, (C) any tax measured by gross rentals received from the leasing of the Premises, excluding any documentary transfer taxes, net income, franchise, capital stock, estate or inheritance taxes imposed by the state or federal government or their agencies, branches or departments; provided that if at any time during the term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the rent received under this Lease, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part upon such rent, or (3) any transfer, transaction, succession, gift, transit, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises, then any such taxes, assessments, levies and charges shall be deemed to be included in real property taxes and assessments (real estate taxes and assessments shall also include the reasonable cost to Landlord of contesting the amount, validity, or applicability of any real estate taxes and assessments); (xvi) [intentionally omitted]; and (xvii) all other reasonable or necessary expenses paid in connection with the operation, maintenance, repair, replacement and cleaning of the Building, that pursuant to sound property management practices consistently applied would be considered an operating expense. Please see Exhibit F for Operating Expense exclusions (in the event of any inconsistency between this Section 7(a)(3) and Exhibit F, the terms of Exhibit F shall control).

Any costs or expenses of the nature described above shall be included in Operating Expenses for any Lease Year no more than once, notwithstanding that such cost or expenses may fall under more than one of the categories listed above. Operating Expenses shall not be reduced as a result of Tenant performing for itself any of the services that Landlord provides for the Building. Landlord may use related or affiliated entities to provide service or furnish materials for the Building; provided the fees and charges of such related and affiliated entities do not exceed the reasonable fees charged in the applicable industry for a building similar to the Building.

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(4) Tenant’s Proportionate Share of Excess Expenses shall be payable by Tenant to Landlord as follows:

(i) Beginning with the Lease Year following the Base Year and for each Lease Year thereafter, Tenant shall pay Landlord an amount equal to Tenant’s Proportionate Share of the Operating Expenses incurred by Landlord in the Lease Year which exceeds the total amount of Operating Expenses payable by Landlord for the Base Year. This excess is referred to as the “Excess Expenses.” Notwithstanding anything in this Lease to the contrary, in no event shall the Operating Expenses for any Lease Year exceed the Operating Expenses for the prior Lease Year by more than one hundred five percent (105%) (“Operating Expense Cap”) on a non-cumulative basis (the “Excess Expenses Cap”). The Excess Expenses Cap shall not apply to increases attributable to Real Estate Taxes, insurance or utilities.

(ii) To provide for current payments of Excess Expenses, Tenant shall, at Landlord’s request, pay as additional rent during each Lease Year, an amount equal to Tenant’s Proportionate Share of the Excess Expenses payable during such Lease Year, as estimated and modified by Landlord from time to time, but not in excess of once per Lease Year. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses for each Lease Year, including the Lease Year immediately following the Base Year, and Tenant’s Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Lease Year.

(iii) On or before April 1 of each Lease Year after the first Lease Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement (“Expense Statement”) setting forth Tenant’s Proportionate Share of the Excess Expenses and Excess Utilities Payments (as defined in Section 7(a)(5) below) for the preceding Lease Year; provided, however, that the failure of Landlord to supply such statement shall not constitute a waiver of Landlord’s rights to collect for such Excess Expenses or Excess Utilities Payments, except, however, in the event that Landlord’s failure to provide such statement exceeds two hundred seventy (270) days after the Lease Year in question, Landlord’s right to collect such Excess Expenses and Excess Utilities Payments shall terminate at such time. If Tenant’s Proportionate Share of the actual Excess Expenses or Excess Utilities Payments for the previous Lease Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within thirty (30) days of the receipt of the statement. If such total exceeds Tenant’s Proportionate Share of the actual Excess Expenses or Excess Utilities Payments for such Lease Year, then Landlord shall credit against Tenant’s next ensuing monthly installment(s) of Base Rent and Excess Expense and Excess Utilities Payments an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit within thirty (30) days following the determination of such amount. The obligations of Tenant and Landlord to make payments required under this Section 7 shall survive the Expiration Date. Tenant’s Proportionate Share of Excess Expenses and Excess Utilities Payments in any Lease Year having less than three hundred sixty-five (365) days shall be appropriately prorated.

(iv) For a period of six (6) months after receipt of the Expense Statement, Tenant, or its representatives, shall be entitled, upon ten

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(10) days prior written notice and during normal business hours, at the office of the Building’s property manager or such other place as Landlord shall reasonably designate, to inspect, copy and examine those books and records of Landlord relating to the determination of Excess Expenses and Excess Utilities Payments for the immediately preceding Lease Year. Failure of Tenant to request such inspection within such six (6) month period shall render such Expense Statement conclusive and binding on Tenant. If, after inspection and examination of such books and records, Tenant disputes the amounts of the Excess Expenses or Excess Utilities Payments charged by Landlord, Tenant may, by written notice to Landlord, request an independent audit of such books and records. The independent audit of the books and records shall be conducted by a certified public accountant, an independent property management company, or other reputable professional with the requisite experience regarding operating expenses (each, a “Qualified Auditor”) reasonably acceptable to both Landlord and Tenant. If, within thirty (30) days after Landlord’s receipt of Tenant’s notice requesting an audit, Landlord and Tenant are unable to agree on the Qualified Auditor to conduct such audit, then the presiding judge of the superior court may designate a Qualified Auditor not then employed by Landlord or Tenant to conduct such audit. The audit shall be limited to the determination of the amount of Excess Expenses and Excess Utilities Payments for the subject Lease Year. If the audit discloses that the amount of Excess Expenses or Excess Utilities Payments billed to Tenant was incorrect, the appropriate party shall pay to the other party the deficiency or overpayment, as applicable. Tenant shall pay all costs and expenses of the audit unless the audit shows that Landlord overstated Excess Expenses or Excess Utilities Payments for the subject Lease Year by more than five percent (5.00%), in which case Landlord shall pay all costs and expenses of the audit in an amount not to exceed two thousand five hundred dollars ($2,500). Tenant and the Qualified Auditor shall keep any information gained from such audit confidential and shall not disclose it to any other party (other than Tenant’s attorneys, accountants and other consultants and advisors), except as necessary to enforce the terms of this Lease. The exercise by Tenant of the audit rights hereunder shall not relieve Tenant of its obligation to timely pay all sums due hereunder, including, without limitation, the disputed Excess Expenses or Excess Utilities Payments.

(v) Payment in Installments. All assessments and premiums which are not specifically charged to Tenant because of what Tenant has done, which can be paid by Landlord in installments, shall be paid by Landlord in the maximum number of installments permitted by law and not included as Operating Expenses except in the year in which the assessment or premium installment is actually paid; provided, however, that if the prevailing practice in comparable buildings is to pay such assessments or premiums on an earlier basis, and Landlord pays on such basis, such assessments or premiums shall be included in Operating Expenses as paid by Landlord.

(vi) Line Item Detail. Each time Landlord provides Tenant with an actual and/or estimated statement of Operating Expenses or Excess Utilities Payments, such statement shall be itemized on a line item by line item basis, showing the applicable expense for the applicable year and the year prior to the applicable year; such format and detail shall be reasonably consistent from year to year in order to facilitate Tenant’s review.

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(vii) Payment of Taxes and Insurance Premiums. Tenant shall not be required to pay its Proportionate Share of Real Estate Taxes or insurance premiums on the basis of estimates or in monthly installments. Tenant shall only be required to pay such Proportionate Share of Real Estate Taxes or insurance premiums ten (10) days prior to the due date Landlord is required to pay such taxes or insurance premiums. Landlord shall bill Tenant for Tenant’s Proportionate Share of Real Estate Taxes thirty (30) days before Landlord is required to make payments of such taxes to the appropriate taxing authorities. Landlord shall bill Tenant for Tenant’s Proportionate Share of insurance premiums thirty (30) days before Landlord is required to make payment of such insurance premiums to the appropriate insurer(s).

(viii) Proposition 8. If Landlord receives a reduction in Real Estate Taxes attributable to the Base Year as a result of commonly called Proposition 8 application, then Real Estate Taxes for the Base Year and each Lease Year shall be calculated as if no Proposition 8 reduction in Real Estate Taxes were received.

(ix) Service Agreements: If any portion of the Building is covered by a service agreement at any time during the Base Year and to the extent the Building is not covered by such service agreement during a subsequent Lease Year, Operating Expenses for the Base Year shall be deemed increased by such amount as Landlord would have incurred during the Base Year with respect to the items or matters covered by the subject or service agreement, had such service agreement not been in effect at the time during the Base Year.

(x) Management Agreement. In the event that the property management agreement in effect during the Base Year changes in any subsequent year, and a service that was previously performed pursuant to, and as part of, such property management agreement is thereafter excluded from the scope of such management agreement, then such cost shall either be excluded from Operating Expenses or the Base Year shall be grossed up to reflect such cost of such performance.

8. USE

Tenant shall use the Premises for the uses set forth in the Basic Lease Information, and shall not use the Premises for any other purposes. Tenant shall be solely responsible for obtaining any necessary governmental approvals of such use that is of a non-office nature. Tenant shall not do, bring, or keep anything in or about the Premises that will cause a cancellation of any insurance covering the Premises. If the rate of any insurance carried by Landlord is increased as a result of Tenant’s use for non-office purposes, Tenant shall pay to Landlord within thirty (30) days before the date Landlord is obligated to pay a premium on the insurance, or within thirty (30) days after Landlord delivers to Tenant a certified statement from Landlord’s insurance carrier stating that the rate increase was caused solely by an activity of Tenant on the Premises as permitted in this Lease, whichever date is later, a sum equal to the difference between the original premium and the increased premium. Landlord reserves the right to prescribe the weight and position of all safes, fixtures and heavy installations that Tenant desires to place in the Premises so as to distribute properly the weight, or to require plans prepared by a qualified structural engineer for such heavy objects, which shall be prepared at Tenant’s sole cost and expense.

9. COMPLIANCE WITH THE LAW

(a) Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental law or rule, regulation, or requirement of any duly constituted public authorities now in force or which may hereafter be enacted or promulgated, or subject Landlord to any liability for injury to any person or property by reason of any business operation being conducted

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in or about the Premises. Subject to Section 9(b) below, to the extent required due to Tenant’s specific use of the Premises, alterations of the Premises, or as a result of Tenant’s application for permits or authorizations, as opposed to compliance required by office tenants in general, Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, and governmental rules, regulations, including, but not limited to, the Americans with Disabilities Act (“ADA”) of 1990 (42 U.S.C. § 12101 et seq.), any amendment thereto or regulations promulgated thereunder, or state or local ordinances or codes enacted pursuant thereto; or requirements of any board or fire insurance underwriters or other similar bodies, now or hereafter constituted, relating to or affecting the condition, use, or occupancy of the Premises by Tenant, excluding structural changes not related to or affected by Tenant’s improvements or acts. The final judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance, or governmental rule, regulation, or requirement, shall be conclusive of that fact as between Landlord and Tenant.

(b) Landlord represents and warrants that to its actual knowledge, the Building and Premises, as of the Commencement Date to the extent such were constructed by or caused to be constructed by Landlord, are in compliance with all laws, statutes, ordinances and governmental rules, regulations including, but not limited to ADA, and all laws governing hazardous materials or hazardous substances, air quality and other environmental regulations. The foregoing representation and warranty of Landlord does not (i) include any improvements constructed or caused to be constructed by Tenant, and/or (ii) affect the Tenant’s obligations pursuant to Section 9(a) above and/or (iii) apply to any non-office use to which Tenant will put the Premises. In the event Landlord’s representation or warranty in this section is finally determined to be incorrect, as Tenant’s sole remedy, Landlord shall be responsible for promptly taking actions to cause such compliance, at Landlord’s sole cost and expense.

10. ALTERATIONS AND ADDITIONS

(a) Tenant shall not make or suffer to be made any non-structural alterations, additions, or improvements (collectively, “Alterations”) to or of the Premises, or any part thereof, without first obtaining the written consent of Landlord, which shall not be unreasonably withheld or delayed; provided, however, if the Alterations would adversely affect the structure or safety of the Building or its electrical, plumbing, HVAC, mechanical or safety systems, or if such Alterations would create an obligation on Landlord’s part to make modifications to the Building, and Tenant is not willing to pay the cost necessary to remediate such problems, Landlord may withhold its consent in its sole and absolute discretion. Notwithstanding the foregoing, without the prior consent of Landlord, but with the prior notice to Landlord, Tenant shall be entitled to make Alterations within the Premises, provided that (i) the cost of construction of such Alterations does not exceed One Hundred Thousand and No/100ths Dollars ($100,000.00) per project, and (ii) does not affect the plumbing, electrical, structural or mechanical systems of the Building, and (iii) Tenant otherwise complies with the provisions of this Section. In no event shall carpeting, painting or other work of a similar decorative nature (and which does not require a building permit) require the consent of, or notice to, the Landlord. All Alterations shall comply with all applicable laws, statutes and ordinances, which include, but are not limited to ADA. Any Alterations to or of said Premises, including, but not limited to, wall covering, paneling, and built-in cabinet work, but excepting movable furniture and trade fixtures, shall on the expiration of the Term become a part of the realty and belong to Landlord, and shall be surrendered with the Premises. However, Landlord shall provide written notice to Tenant (concurrently with Landlord’s approval of such Alteration) whether Tenant will be required to remove such Alteration. If Landlord so states in such written notice, Tenant, at its own cost shall remove such Alteration upon the expiration of the Term. Upon Landlord’s approval of the requested Alterations, Tenant shall secure all necessary permits, if applicable. Before Landlord’s consent to such Alterations, Tenant shall submit detailed specifications, floor plans and necessary permits (if applicable) to Landlord for review. In no event shall any Alterations affect the structure of the Building or its facade. Landlord and Tenant acknowledge and agree that Tenant may install supplemental HVAC in the Premises in the future at Tenant’s sole cost and expense, with the prior approval by Landlord of the plans, specifications, and installation contractor for the supplemental HVAC, such approval not to be unreasonably withheld or unduly delayed. Any supplemental HVAC shall be left in the Premises upon expiration of the Lease term. Any HVAC servicing of the existing HVAC or supplemental HVAC shall be performed by contractors reasonably approved in advance by Landlord. As a condition to its consent, Landlord may request adequate assurance that all contractors who will

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perform such work have in force workman’s compensation and such other employee and public liability insurance as Landlord deems reasonably necessary. In the event Landlord consents to the making of any Alterations to the Premises by Tenant, the same shall be made by Tenant at Tenant’s sole cost and expense, completed to the reasonable satisfaction of Landlord, and the contractor or person selected by Tenant to make the same must first be approved in writing by Landlord which approval shall not be unreasonably withheld or delayed. If Tenant makes any Alterations to the Premises as provided in this Section, the Alterations shall not be commenced until ten (10) business days after Landlord has received notice from Tenant stating the date the installation of the Alterations is to commence so that Landlord can post and record an appropriate notice of non-responsibility. Tenant shall reimburse Landlord for any reasonable out-of-pocket expenses incurred by Landlord in connection with the Alterations made by Tenant, including any reasonable fees charged by Landlord’s contractors or consultants to review plans and specifications prepared by Tenant, and the cost of updating the existing as-built plans of the Building to reflect the Alterations, not to exceed One Thousand and No/100ths Dollars ($1,000.00) in total per Alteration; Landlord must, at the time that Landlord consents to the Alteration, have provided Tenant with a binding estimate of such costs. Tenant shall indemnify, defend and hold the Landlord, the Building and the Premises free and harmless from any liability, loss, damage, cost, attorneys’ fees and other expenses incurred on account of such construction, or claims by any person performing work or furnishing materials or supplies for Tenant or any persons claiming under Tenant. Notwithstanding anything in this Section 10(a) to the contrary, in no event shall Landlord require Tenant to remove any portion of the Tenant Improvements, except that any cabling installed by Tenant, pursuant to Section 11(a), and/or trade fixtures and Tenant Improvements installed by Tenant without the prior, written consent of Landlord, shall be removed at the expiration of the Lease Term.

(b) Landlord agrees that, subject to Tenant’s compliance with Section 10(a) above, Tenant shall be entitled to install a satellite/microwave dish upon the roof of the Building in a location reasonably acceptable to Landlord and Tenant; no rent or license fee shall be charged. Tenant acknowledges that view aesthetics of the Building shall be considered in the placement of such dish. Tenant shall be responsible for the maintenance and repair of such dish and shall remove, at Tenant’s cost, such dish from the roof of the Building upon the expiration or earlier termination of this Lease and shall repair any damage caused thereby and reseal any roof penetrations.

11. REPAIRS AND MAINTENANCE:

(a) By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as being in good and sanitary order, condition and repair, excepting the Punch List Items and latent defects in the construction done by Landlord, its agents, employees, contractors, and subcontractors. Except as provided in Section 11(c) (pursuant to which Landlord is to undertake various repairs and maintenance), Tenant shall, at Tenant’s sole cost and expense, maintain the Premises, in clean and good condition and repair, ordinary wear and tear and casualty excepted. Without limiting the generality of the foregoing, Tenant shall be solely responsible for maintaining and repairing all fixtures, non-building standard electrical lighting (if identified as being non-building standard at the time that Landlord approves the Plans under the Lease Improvement Agreement), ceilings and floor coverings, doors, and interior walls within the Premises to the extent the foregoing are nonstructural elements of the Building, using the same quality of materials as used in the original construction. In addition, Tenant shall be responsible for all repairs made necessary by Tenant or Tenant’s invitees. Landlord acknowledges that Tenant shall have no obligation to repair or maintain any areas outside of the Premises, unless such repair or maintenance is required due to acts of Tenant, its agents, employees, contractors and subcontractors and the cost thereof is not covered by insurance carried by Landlord or required to be carried by Landlord under this Lease. Excepting maintenance, repairs or replacements required due to the negligence or willful misconduct of Landlord, its agents, employees, contractors and subcontractors, Tenant acknowledges that Landlord shall have no obligation to maintain, repair or replace any telecommunications or computer cabling or wiring which is located in the Premises or which exclusively serves the Premises (collectively, “Cabling”), except in the event that such would be required due to Landlord’s negligent acts or omissions. Tenant shall have the right to install in the Premises such Cabling as it may require. Tenant shall, at Tenant’s expense, contract with SBC or another reputable contractor to maintain the Cabling. Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises except as specifically set forth in this Lease. Under no circumstances shall Tenant make any repairs to the Building or to the

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mechanical, electrical or heating, ventilating or air conditioning systems of the Premises or the Building, unless such repairs are previously approved in writing by Landlord. Tenant waives the provisions of Sections 1931(1), 1941 and 1942 of the California Civil Code, and any similar or successor law regarding Tenant’s right to make repairs and deduct expenses of such repairs from the Rent due under this Lease, subject, however, to the terms of Section 11(d) below. In no event shall Tenant be responsible for repairs or replacements necessitated by ordinary wear and tear, damage by third party casualty or damage caused by Landlord or others for which Tenant is not responsible, nor shall Tenant be responsible for the correction or repair of any latent defect in the Premises, or any condition, dilapidation or defect of which Landlord has actual knowledge prior to the Commencement Date.

(b) Landlord shall operate the Building (and provide maintenance, repairs and replacements pursuant to Section 11(c) below) to a standard or quality consistent with that of other first-class buildings in the immediate geographical area and shall (i) provide janitorial service to the Premises on a five (5)-day-a-week basis (excepting holidays described in the Basic Lease Information), consistent with the janitorial specification attached hereto as Exhibit E, (ii) provide nonexclusive, non-attended automatic passenger elevator service at all times, (iii) replace Building standard lamps, starters and ballasts (all nonstandard lighting within the Premises shall be the responsibility of Tenant), and (iv) provide monitoring for the fire sprinklers, exit lighting and parking lot lighting, in or outside the Building.

(c) Landlord shall be responsible for maintaining and repairing all structural portions and latent defects of the Building, at Landlord’s sole expense (and not as part of Operating Expenses), and shall maintain the roof, side walls, and foundations of the Building in good, clean and safe condition and repair. Landlord shall be entitled to approve, in its sole discretion, the sealing of any roof penetrations caused by Tenant Improvements. Landlord shall also maintain all landscaping, driveways, parking lots, fences, signs, sidewalks and the Common Areas. Landlord shall be responsible for maintenance and repair of all washrooms, mechanical, electrical and common area telephone closets, windows, plate glass, exterior doors, plumbing, heating, electrical, air conditioning and ventilation and life safety systems, and elevators. Except as otherwise provided in this Lease, Landlord shall have no liability to Tenant, nor shall Tenant’s obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord making any repairs or changes which Landlord is required or permitted by this Lease or required by law to make in or to any portion of the Building or the Premises. Landlord shall use reasonable efforts to minimize any interference with Tenant’s business at the Premises. If Tenant fails to maintain the Premises as required in Section 11(a), Landlord may give Tenant thirty (30) days’ written notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work within such time period and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the Prime Rate plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum amount then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as the result of performing any such work. For the purpose of this Lease, the “Prime Rate” shall mean the rate, or base rate, reported in the Money Rates column or section of The Wall Street Journal as being the base rate on corporate loans at large U.S. money center commercial banks (whether or not such rate has actually been charged by any such bank) on the first date on which The Wall Street Journal is published in the month preceding the month in which the subject costs are incurred.

(d) If Landlord fails to provide repairs or maintenance as required under this Lease, and such failure interferes with Tenant’s use of the Premises, and Tenant has notified Landlord of the necessity of such repairs or maintenance in writing, then Tenant may perform such repairs or maintenance at Landlord’s cost by taking whatever action is reasonably necessary to do so, provided:

(1) Tenant gives Landlord (and any mortgagee whose address has been provided to Tenant) notice of Tenant’s intent to take such action at least ten (10) business days prior to taking any such action, Landlord further fails or refuses to commence repairs within three (3) business days after a second written notice to Landlord and such mortgagee (which notice cannot be effective until the lapse of the aforementioned ten (10) business day period) (if the nature of the required repair is such that Landlord’s failure to act is reasonably likely to result

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in injury to Tenant’s employees or visitors, or damage to Tenant’s personal property, the aforementioned notice period shall be one (1) business day, and there shall be no requirement that Tenant notify Landlord’s mortgagee);

(2) If such repairs or maintenance will affect the Building’s electrical or mechanical systems, or the structural integrity of the Building, Tenant shall use only those contractors used by Landlord in the Building that work on the Building’s systems, equipment or structure (unless such contractors are unwilling or unable to perform such work, or the urgent nature of the required repair makes using those contractors impractical, in which events Tenant may utilize the services of any other qualified contractor approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed).

If Landlord does not deliver a detailed written reasonable objection to Tenant within thirty (30) days after receipt of any invoice from Tenant of the reasonable costs and expenses incurred by Tenant in so repairing or maintaining (such invoice to contain a reasonably particularized breakdown of the costs and expenses incurred by Tenant in connection therewith) then Tenant shall be entitled to deduct from Rent next due the amount set forth in such invoice (to the extent not previously paid by Landlord).

12. WASTE

Tenant shall not use the Premises in any manner that will constitute waste, nuisance, or unreasonable annoyance (which includes excessive noise and/or vibration) to owners or occupants of adjacent properties or to other tenants of the Building.

13. LIENS

Tenant shall keep the Premises and the Lot free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. Landlord may, at its election, and upon ten (10) days’ notice to Tenant, remove any liens, in which case Tenant shall pay to Landlord the cost of removing the lien, including reasonable attorneys’ fees. Landlord shall have the right at all times to post on the Premises any notices permitted or required by law for the protection of Landlord, the Premises, the Building or the Lot from mechanics’ and materialmen’s liens. To the extent a lien arises out of any work performed, materials furnished, or obligations incurred by Tenant, Tenant shall have thirty (30) days to remove such lien, or provide a bond to Landlord in an amount sufficient to satisfy the lien.

14. UTILITIES AND SERVICES

(a) Landlord agrees to furnish to the Premises during the Business Hours (and during non-Business Hours, subject to the terms of this Section 14), subject to the conditions and in accordance with the standards set forth in this Lease, adequate quantities of electric current for normal lighting and fractional horsepower office machines, water for lavatory and drinking purposes (hot and cold), heat and air conditioning required in the comfortable use and occupation of the Premises, and elevator service by non-attended automatic elevators. Tenant acknowledges and agrees that Landlord may impose a reasonable charge for the use of any additional or unusual janitorial services required by Tenant’s carelessness or the nature of Tenant’s business that is inconsistent with the Use permitted under this Lease. Landlord shall not be obligated to service, maintain, repair or replace any system or improvement in the Premises that has not been installed by Landlord at Landlord’s expense, or which is a specialized improvement requiring additional or extraordinary maintenance or repair (by way of example only, if the standard premises in the Building contain fluorescent light fixtures, Landlord’s obligation shall be limited to the replacement of fluorescent light tubes, irrespective of any incandescent fixtures that may have been installed in the Premises at Tenant’s expense). Landlord shall not be liable for, and (except as provided in Section 14(b) below) Tenant shall not be entitled to any abatement or reduction of rent by reason of Landlord’s failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character or for any other causes; provided, however, Landlord shall use its reasonable efforts to cause such services to be restored as soon as possible. Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future law, ordinance or governmental regulation permitting the termination of this Lease due to the interruption or failure of any services to be provided under this Lease.

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(b) If there shall be an interruption, curtailment or suspension of the Building’s elevator, electricity or HVAC service or water supply (and no reasonably equivalent alternative service or supply is provided by Landlord) (each, a “Service Interruption”), and if (i) such Service Interruption shall not have been caused, in whole or in part, by an act or omission or negligence of Tenant, or of Tenant’s agents, employees or contractors, (ii) such Service Interruption does not arise as a result of a matter, event or condition affecting the general area in which the Building is located, such as rolling electrical blackouts, (iii) such Service Interruption shall have been caused, in whole or in part, by an act or omission or negligence of Landlord, or of Landlord’s agents, employees or contractors, and (iv) Landlord shall have failed to cure such Service Interruption within five (5) business days after the occurrence thereof, Rent hereunder shall thereafter be abated in the same proportion as the portion of the Premises affected by the Service Interruption bears to the entire Premises from the end of such five (5) business day period until such time as such services or utilities are restored or Tenant begins using the Premises (or affected portion thereof) again, whichever shall first occur.

(c) Tenant acknowledges and agrees that Tenant’s use of the Premises during non-Business Hours imposes additional burden on the Building’s janitorial services, fluorescent light tubes, HVAC, and the Common Areas. Accordingly, non-Business Hours use of services will be made available to Tenant through an access or override switch accessible to Tenant from the Premises and will be billed as an after hours rent assessment (the “After Hours Charge”) as reasonably determined by Landlord from time to time. The current After Hours Charge is Twenty-Seven and 00/100 Dollars ($27.00) per hour per zone, which rate Landlord may increase only due to actual increases in Landlord’s maintenance or utility costs. Tenant shall be entitled to access to the Premises twenty-four (24) hours per day, three hundred sixty-five (365) days per calendar year.

(d) Except as otherwise provided in the Lease Improvement Agreement, Tenant shall not, without the prior consent of Landlord, connect to the utility systems of the Building any apparatus, machinery or other equipment except typical office machines and devices such as electric typewriters, word processors, mini and micro-computers and office-size photocopiers. Nor shall Tenant, without the prior written consent of Landlord, connect to any electrical circuit in the Premises any apparatus or equipment with power requirements that exceed the designed electrical capacity of the Premises as described in the Lease Improvement Agreement. Landlord agrees that in all events, Tenant shall have the use of all current available electricity to the Building and parking lot for Tenant’s equipment, at no additional charge. Tenant shall pay the cost of all utilities and services supplied to Tenant in connection with Tenant’s use of additional office equipment approved by Landlord hereunder. Notwithstanding Landlord’s consent to such excess loading of circuits, Tenant shall pay the cost of any additional or above-standard capacity electrical circuits necessitated by such excess loading circuits and the installation thereof.

(e) All sums payable hereunder by Tenant for additional services or for excess utility usage shall be payable within thirty (30) days after written request from Landlord, including reasonable supporting documentation, except that Landlord may require Tenant to pay monthly for the estimated cost of Tenant’s excess utility usage if such usage occurs on a regular basis, and such estimated amounts shall be payable in advance on the first day of each month.

(f) Tenant may elect to hire its own cleaning and janitorial service, upon not less than thirty (30) days notice to Landlord. If Tenant makes such an election, Tenant shall receive a reduction in Base Rent equal to the cost that Landlord actually incurred in the Base Year in providing such janitorial service.

(g) Landlord shall provide commercially reasonable levels of security service for the Building, the cost of which shall be included in Operating Expenses.

(h) Landlord shall cause the Building’s windows to be washed, inside and out, as often as commercially reasonable, but in all events no less frequently than twice per calendar year; the cost of such window washing shall be included in Operating Expenses.

15. ASSIGNMENT AND SUBLETTING

(a) Tenant shall not, without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed as provided in this Section 15: (a) assign, mortgage, pledge, encumber or otherwise transfer this Lease, the term or estate hereby granted, or any interest

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hereunder; (b) permit the Premises or any part thereof to be utilized by anyone other than Tenant (whether as concessionaire, franchisee, licensee, permittee or otherwise); or (c) except as hereinafter provided, sublet or offer or advertise for subletting the Premises or any part thereof. Any assignment, mortgage, pledge, encumbrance, transfer or sublease without Landlord’s consent shall be voidable and, at Landlord’s election, shall constitute a default.

Notwithstanding the foregoing and Subsections (b) and (c) below, Tenant may assign this Lease or sublet the Premises or a portion thereof, without Landlord’s consent, but with prior written notice, to any corporation, partnership, individual or other entity which controls, is controlled by or is under common control with Tenant; or to any corporation, partnership, individual or other entity, resulting from the merger or consolidation with Tenant; or to any person or entity which acquires all of the assets of Tenant’s business going concern, provided that (i) the assignee or subtenant assumes, in full, the obligations of Tenant under this Lease (or, in the case of a sublease, the non-monetary obligations relevant to the portion of the Premises being subleased), (ii) Tenant remains fully liable under this Lease, (iii) the use of the Lease by such transferee conforms with the requirements of this Lease, and (iv) if Tenant is no longer a viable operating business, the proposed transferee shall have a net worth which is comparable to that of Tenant as of the Lease Date. Provided that Tenant is a corporation, and (i) the stock of Tenant is traded on a national exchange, the transfer of stock in Tenant shall not be considered an assignment, sublease or transfer under the Lease, or (ii) the stock of Tenant is not traded on a national exchange, the collective transfer of fifty percent (50.00%) or less of such stock shall not be considered an assignment, sublease or transfer under this Lease.

(b) If at any time or from time to time during the Term of this Lease, Tenant desires to assign this Lease with respect to, or to sublet, all or any part of the Premises, then at least twenty (20) days prior to the date when Tenant desires the assignment or subletting to be effective (the “Transfer Date”), Tenant shall give Landlord a notice (the “Transfer Notice”) which shall set forth the name, address and business of the proposed assignee or subtenant, information (including financial statements and references) concerning the character of the proposed assignee or subtenant, in the case of a proposed sublease, a detailed description of the space proposed to be sublet, which must be a single, self-contained unit (the “Space”), any rights of the proposed assignee or subtenant to use Tenant’s improvements and the like, the Transfer Date, and the fixed rent and/or other consideration and all other material terms and conditions of the proposed assignment or subletting, all in such detail as Landlord may reasonably require, if Landlord promptly (not later than ten (10) business days after receipt of the Transfer Notice) requests additional detail, the Transfer Notice shall not be deemed to have been received until Landlord receives such additional detail. If this Lease or any interest in this Lease is sold, assigned or transferred by Tenant, or Tenant subleases any part of the Premises, without Landlord’s consent, Landlord may, cumulative of any other right or remedy available to Landlord, elect to terminate this Lease (as it affects the portion of the Premises sought to be sublet or assigned) as of the effective date of the proposed transfer. Landlord’s acceptance of any name for listing on the Building directory will not be deemed, not will it substitute for, Landlord’s consent, as required by this Lease, to any sublease, assignment or other occupancy of the Premises.

(c) Landlord shall be permitted to consider any reasonable factor in determining whether or not to withhold its consent to a proposed assignment or sublease and Landlord shall make such determination within twenty (20) days following Landlord’s receipt of the Transfer Notice. The failure of Landlord to deliver written notice of such determination within such time period shall be deemed Landlord’s disapproval thereof. Without limiting the other instances in which it may be reasonable for Landlord to withhold its consent to an assignment or sublease, it shall be reasonable for Landlord to withhold its consent if Landlord establishes that any of the following conditions are not satisfied:

(1) The proposed use by the transferee shall (i) comply with Tenant’s permitted use, (ii) not materially increase the likelihood of damage or destruction, (iii) not materially increase the density of occupancy of the Premises or increase the amount of pedestrian and other traffic through the Building beyond the limits for which the Building was designed, (iv) not be likely to cause an increase in insurance premiums for insurance policies applicable to the Building, unless paid for by Tenant or the transferee, (v) not require new tenant improvements incompatible with then-existing Building systems and components, unless paid for by Tenant or the transferee, (vi) unless paid by Tenant or the transferee, not require Landlord to make material modifications to the Building outside of the Premises (in order, for example, to

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comply with laws such as the ADA), and (viii) not otherwise have or cause a material adverse impact on the Premises, the Building, or Landlord’s interest therein.

(2) The proposed transferee shall not be a foreign government entity.

(3) Any ground lessor or mortgagee whose consent to such transfer is required fails to consent thereto, notwithstanding Landlord’s good faith and diligent efforts to obtain such consent.

(d) Provided Landlord has consented to such assignment or subletting, Tenant shall be entitled to enter into such assignment or sublease with the third party identified in the Transfer Notice subject to the following conditions:

(1) At the time of the transfer, no event of monetary default or monetary material default under this Lease (following the giving of notice and passage of the applicable cure period under Section 24) shall have occurred and be continuing;

(2) The assignment or sublease shall be on the same terms substantially set forth in the Transfer Notice given to Landlord;

(3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession until an executed counterpart of the assignment or sublease has been delivered to Landlord;

(4) No assignee or sublessee shall have a right further to assign or sublet without Landlord’s consent thereto in each instance, which consent in the case of a future assignment should not be unreasonably withheld or delayed;

(5) Any assignee shall have assumed in writing the obligations of Tenant under this Lease;

(6) Any subtenant shall have agreed in writing to comply with all applicable terms and conditions of this Lease with respect to the Space;

(7) In the event Tenant sublets the entire Premises or any part thereof, and where the Landlord’s consent is otherwise required, Tenant shall deliver to Landlord fifty percent (50.00%) of any excess rent within thirty (30) days of Tenant’s receipt thereof pursuant to such subletting. As used herein, “excess rent” shall mean any sums or economic consideration per square foot of the Premises received by Tenant pursuant to such subletting in excess of the amount of the rent per square foot of the Premises payable by Tenant under this Lease applicable to the part or parts of the Premises so sublet; provided, however, that no excess payment shall be payable until Tenant shall have recovered therefrom all of the costs incurred by Tenant for brokerage commissions, tenant improvement work approved by Landlord, reasonable rent concessions, reasonable attorneys fees, and reasonable marketing fees, in conjunction with such sublease; and

(8) In the event Tenant assigns this Lease, and where the Landlord’s consent is otherwise required, Tenant shall deliver to Landlord fifty percent (50.00%) of any excess payment within thirty (30) days of Tenant’s receipt thereof pursuant to such assignment. As used herein, “excess payment” shall mean the amount of payment received for such assignment of this Lease in excess of the rent payable by Tenant under this Lease; provided, however, that no excess payment shall be payable until Tenant shall have recovered therefrom all of the costs incurred by Tenant for brokerage commissions, tenant improvement work approved by Landlord, rent concessions, reasonable attorneys fees, and reasonable marketing fees, in conjunction with such assignment.

(e) No subletting or assignment shall release Tenant of Tenant’s obligations under this Lease or alter the liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by an assignee or subtenant of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord

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may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, after notifying Tenant, or any successor of Tenant, and after obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease.

(f) If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting, then Tenant shall, upon demand, pay Landlord an administrative fee not to exceed Five Hundred and No/100ths Dollars ($500.00).

(g) Tenant may require, as part of its Transfer Notice, that a transferee receive a recognition agreement (the “Recognition Agreement”) from Landlord which provides that in the event this Lease is terminated, Landlord shall recognize the transferee (and such transferee shall be bound to and recognize Landlord), provided that Landlord shall only execute a Recognition Agreement with such transferee, under the following conditions (which conditions must be reflected in the Recognition Agreement): (i) such transfer is made upon the same terms and conditions set forth in this Lease, subject to equitable modifications based on the number of rentable square feet contained in the Space; provided, however, the economic terms of such transfer may be more favorable to Landlord than those set forth in this Lease, (ii) the Space contains only full floors in the Building, (iii) all Space is contiguous, (iv) the transferee is, as of the date this Lease is terminated, a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the subject transfer (it being agreed that it would be reasonable for Landlord to deny a Recognition Agreement to any transferee whose net worth is less than the product of $20,000,000 times the number of floors the transferee is leasing, but such specific minimum net worth requirement shall not, however, be imposed on transferees not requesting a Recognition Agreement), (v) Landlord shall not be liable for any act or omission of Tenant, (vi) Landlord shall not be subject to any offsets or defenses which the transferee might have as to Tenant or to any claims for damages against Tenant, (vii) Landlord shall not be required or obligated to credit the transferee with any rent or additional rent paid by the transferee to Tenant, (viii) Landlord shall not be bound by any terms or conditions of the transfer which are inconsistent with the terms and conditions of this Lease, (ix) Landlord shall be responsible for performance of only those covenants and obligations of Tenant pursuant to the transfer accruing after the termination of this Lease, (x) the transferee shall make full and complete attornment to Landlord, as lessor, pursuant to a written agreement executed by Landlord and the transferee, so as to establish direct privity of contract between Landlord and the transferee with the same force and effect as though the transfer was originally made directly between Landlord and the transferee, (xi) the transferee benefiting from the Recognition Agreement must agree to sign a commercially reasonable subordination, non-disturbance and attornment agreement (“SNDA”) in favor of any Superior Lienor (as defined in Section 31(d) below), which SNDA shall require the transferee to be bound to recognize the Superior Lienor and any successor thereto, and (xii) Tenant shall remain fully liable under this Lease, as provided in Sections 15(a)(ii) and 15(e) above. Upon Landlord’s written request given any time after the termination of this Lease, the transferee shall execute a lease for the space subject to the applicable transfer upon the same terms and conditions as set forth in the Recognition Agreement. Tenant agrees that Landlord may consider, in exercising its reasonable discretion under Section 15(a) above whether or not to consent to a given transfer, the Tenant’s request for a Recognition Agreement under this Section 15(g). If it is reasonable do so, Landlord may reject the transfer on the grounds that the proposed transferee does not have sufficient creditworthiness to be entitled to a Recognition Agreement, in which event Tenant shall have the right to amend its Transfer Notice to delete the request for a Recognition Agreement.

(h) Notwithstanding anything to the contrary in this Lease, Tenant shall not be deemed to have waived any of its rights under California Civil Code Section 1995.310.

(i) Tenant may allow any person or company which is a client or customer of Tenant or which is providing service to Tenant or one of Tenant’s clients to occupy certain portions of the Premises (not to exceed, at any one time, a total of 20,000 rentable square feet), without such occupancy being deemed an assignment or subleasing as long as no new demising walls are constructed to accomplish such occupancy and as long as such relationship was not created as a subterfuge to avoid the obligations set forth in this Section 15.

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16. INDEMNITY

(a) Subject to the provisions of Section 18(e) below and to the extent not funded and paid to Landlord by any insurance maintained by Tenant, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all claims, damages, liabilities, and expenses (including reasonable attorneys’ fees) to the extent arising from Tenant’s use of the Premises for the conduct of its business or from any activity, work or other thing done, permitted or suffered by the Tenant in or about the Building, and shall further indemnify, defend and hold harmless Landlord against and from any and all claims to the extent arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under the terms of this Lease, or from any act or negligence of the Tenant, or any officer, agent, employee, guest or invitee of Tenant, and from all and against all reasonable cost, attorney’s fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, if any case, action or proceeding be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant’s expense by counsel selected by Tenant and approved in writing by Landlord such approval not to be unreasonably withheld or delayed. Notwithstanding the preceding sentence, such indemnification by Tenant and such assumption and waiver of claims shall not include damage or injury to the extent caused by the negligence or willful misconduct of Landlord, its agents, employees or contractors or which is covered by insurance carried by Landlord or required to be carried by Landlord under this Lease. Subject to Section 18(e) below and to the extent not funded and paid to Tenant by any insurance maintained by Landlord or Tenant, Landlord shall indemnify, defend and hold harmless Tenant against and from any and all claims, damages, liabilities, and expenses (including reasonable attorneys’ fees) to the extent arising from any breach or default in the performance of any obligation on Landlord’s part to be performed under the terms of this Lease, or from any act or negligence of Landlord, or any officer, agent, employee, guest or invitee of Landlord, and from and against all reasonable costs, attorneys’ fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, if any case, action or proceeding be brought against Tenant by reason of any such claim, Landlord upon notice from Tenant, shall defend same at Landlord’s expense by counsel selected by Landlord and approved in writing by Tenant, such approval not to be unreasonably withheld or delayed. Notwithstanding any other provision of this Lease to the contrary, Landlord shall not be responsible for any damages relating to Tenant’s loss of business resulting from an event requiring indemnification pursuant to this Section.

(b) Neither Landlord nor any of its Affiliates shall be liable for and there shall be no abatement of rent for (i) any damage to Tenant’s property stored with Affiliates of Landlord, (ii) loss of or damage to any property by theft or any other wrongful or illegal act, or (iii) any injury or damage to persons or property resulting from fire, explosion, wind, earthquake, falling plaster, steam, gas, electricity, flood, water or rain which may leak from any part of the Building or from the pipes, appliances, appurtenances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or from any other cause whatsoever, or (iv) any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building, whether within or outside of the Property. Tenant and Landlord agree that in no case shall the other ever be responsible or liable on any theory for any injury to such other party’s business, loss of profits, loss of income or any other form of consequential damage. Tenant shall give prompt notice to Landlord in the event of (a) the occurrence of a fire or accident in the Premises or in the Building, or (b) the discovery of any defect therein or in the fixtures or equipment thereof.

17. DAMAGE TO PREMISES OR BUILDING

All injury to the Premises or the Building caused by moving the property of Tenant or its employees, agents, guests or invitees into, in or out of the Building and all breakage done by Tenant or the agents, servants, employees, and visitors of Tenant shall be repaired as determined by the Landlord at the expense of the Tenant (except to the extent paid by insurance carried by, or required to be carried by Landlord).

18. TENANT’S INSURANCE

(a) All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies which are rated by Best Insurance Reports as A-VII or better and reasonably acceptable to Landlord and Landlord’s lender and licensed or authorized to do

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business in the State of California. Each policy shall include Landlord, and at Landlord’s request any mortgagee of Landlord, as an additional insured (but only as to the liability policy carried by Tenant), as their respective interests may appear. Each policy shall contain (i) a separation of insureds condition, (ii) a provision that such policy and the coverage evidenced thereby shall, as to any loss resulting from Tenant’s negligent acts, be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance for Landlord’s interest only, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives (but only as to the property policy). A copy of each certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder together with an additional insured endorsement shall be delivered to Landlord before the date Tenant is given possession of the Premises, and annually thereafter, within thirty (30) days after any demand by Landlord therefor. No such policy shall be cancelable, materially changed or reduced in coverage except after endeavoring to provide thirty (30) days’ written notice to Landlord (and not less than ten (10) days, in the case of nonpayment of premiums). Tenant agrees that if Tenant does not take out and maintain such insurance following a written notice from Landlord and passage of the applicable cure period under Section 24, Landlord may (but shall not be required to) procure said insurance on Tenant’s behalf and charge the Tenant the premiums, which shall be payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord’s mortgagee and Tenant as required by this Lease.

(b) Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the term of this Lease, Tenant shall procure, pay for and maintain in effect policies of property insurance covering trade fixtures, merchandise and other personal property from time to time, in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against all risks of physical loss or damage. Upon termination of this Lease following a casualty as set forth herein, the proceeds shall be paid to Tenant.

(c) Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the Term of the Lease, Tenant shall procure, pay for and maintain in effect workers’ compensation and employer’s liability insurance. In addition, Tenant shall carry commercial general liability insurance including coverage for personal injury and contractual liability with not less than Two Million and No/100ths Dollars ($2,000,000.00) per occurrence combined single limit, and a Five Million and No/100ths Dollars ($5,000,000.00) aggregate limit, for bodily injury, personal injury or property damage liability.

(d) [Intentionally omitted]

(e) Landlord and Tenant each hereby waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property or the property of others under its control, to the extent that such loss or damage is insured against and payment is made under any “all risk” or “special form” insurance policy which either may have in force at the time of the loss or damage. Tenant and Landlord shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation as contained in this Lease.

(f) During the term of this Lease, Landlord shall maintain the following policies of insurance with insurers of recognized responsibility, licensed to do business in the State of California, rated by Best Insurance Reports as A-: VII or better: (i) commercial general liability of Two Million and No/100ths Dollars ($2,000,000.00) per occurrence combined single limit, and Five Million and No/100ths Dollars ($5,000,000.00) aggregate limit, for bodily injury, personal injury and property damage liability, (ii) workers’ compensation insurance, in accordance with applicable law, and employee’s liability insurance and bodily injury by accident of One Million and No/100ths Dollars ($1,000,000.00) per accident, and bodily injury by disease One Million and No/100ths Dollars ($1,000,000.00) policy limit, and (iii) property liability insurance, on “all risk” or “special form” basis, insuring the Building for the full replacement costs thereof.

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(g) Provided that Tenant complies with the provisions of Section 18(a), Tenant shall have the right to self-insure the requirements of this Section 18, provided Tenant, along with any corporate parent, subsidiary or affiliate thereof, maintains a minimum net worth of $400 million as shown in the latest annual financial report for Tenant. Tenant shall provide Landlord with thirty (30) days prior written notice of such election to self- insure.

19. AD VALOREM TAXES

Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon all Tenant’s leasehold improvements (if not part of the improvements constructed pursuant to the Leasehold Improvement Agreement), equipment, furniture, fixtures, and personal property located in the Premises, except that which has been paid for by Landlord and is the standard of the Building. In the event any or all of the Tenant’s leasehold improvements (if not part of the improvements constructed pursuant to the Leasehold Improvement Agreement), equipment, furniture, fixtures, and personal property shall be assessed and taxed with the Building, Tenant shall pay to Landlord its share of such taxes within thirty (30) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant’s property with supporting documentation.

20. WAIVER

No delay or omission in the exercise of any right or remedy of Landlord or Tenant on any default by Tenant or Landlord shall impair such a right or remedy or be construed as a waiver. The subsequent acceptance of Rent by Landlord after breach by Tenant of any covenant or term of this Lease shall not be deemed a waiver of such breach, other than a waiver of timely payment for the particular Rent involved, and shall not prevent Landlord from maintaining an unlawful detainer or other action based on such breach. No act or conduct of Landlord, including without limitation the acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Prior to the scheduled expiration of the term of the Lease, only a notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish an early termination of this Lease. Landlord’s consent to or approval of any act by Tenant requiring Landlord’s consent or approval shall not be deemed to waive or render unnecessary Landlord’s consent to or approval of any subsequent act by Tenant. Any waiver by Landlord or Tenant of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. The review, approval, or inspection by Landlord of any item to be reviewed, approved, or inspected by Landlord under the terms of this Lease shall not constitute the assumption of any responsibility by Landlord for the accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use.

21. ENTRY BY LANDLORD

Landlord reserves, and shall at any and all reasonable times with reasonable notice have the right to enter the Premises to inspect the same, to supply any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or tenants (with regard to prospective tenants, such entrance shall not occur earlier than one hundred eighty (180) days prior to the expiration of the Term), to post notices of non-responsibility, and to maintain and repair the Premises and any portion of the Building that Landlord may deem necessary or desirable, without abatement of Rent, and may for that purpose erect scaffolding and other necessary structures, where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby and further providing that the business of the Tenant shall not be interfered with unreasonably. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant’s vaults, safes, files, and other areas designated as secure by Tenant, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in the event of an emergency (as determined by Landlord or its employees or representatives acting in good faith), in order to obtain entry to the Premises without liability to Landlord. Any entry to the Premises obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or be deemed to be a forcible or unlawful entry into, or a detainer of the Premises, or an eviction of Tenant from the Premises or any portion thereof.

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22. CASUALTY DAMAGE

(a) During the Term hereof, if the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall be required (whether or not the Premises shall have been damaged by such fire or other casualty), (i) if such damage cannot be repaired within two hundred seventy (270) days thereafter, as reasonably determined by Landlord, (ii) if any mortgagee under a mortgage or deed of trust covering the Building requires that the insurance proceeds payable as a result of said fire or other casualty be used to retire or reduce such mortgage debt, or (iii) if such damage is not covered by insurance carried by Landlord or required to be carried by Landlord under this Lease, Landlord may, at its option, terminate this Lease and the term and estate hereby granted by notifying Tenant in writing of such termination within fifty (50) days after the date of such damage, in which event the Rent shall be abated as of the date of such damage. If Landlord elects to repair the Premises and/or the Building, Landlord shall within sixty (60) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Landlord shall not be responsible for delays outside its control) to substantially the same condition in which it was immediately prior to the happening of the casualty, except that Landlord shall not be required to rebuild, repair or replace any part of Tenant’s furniture and furnishings or fixtures and equipment removable by Tenant under the provisions of this Lease. Tenant shall not be entitled to any compensation or damages from Landlord, and Landlord shall not be liable, for any loss of the use of the whole or any part of the Premises, the Building, Tenant’s personal property, or any inconvenience or annoyance occasioned by such loss of use, damage, repair, reconstruction or restoration, except that, Landlord shall allow Tenant a diminution of Rent during the time and to the extent the Premises are unfit or unavailable for occupancy. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or to the Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. Tenant hereby specifically waives any and all rights it may have under any law, statute, ordinance or regulation to terminate the Lease by reason of casualty or damage to the Premises or Building, and the parties hereto specifically agree that the Lease shall not automatically terminate by law upon destruction of the Premises. Except as otherwise provided in this Section 22, Tenant hereby waives the provisions of Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code.

(b) In the event that Landlord elects to repair any damage to the Premises and/or Building (if such damage prevents Tenant from using the Premises pursuant to this Lease), Landlord shall deliver written notice to Tenant indicating Landlord’s good faith estimate of the number of days required to repair such damage within fifty (50) days following the date of such damage. If Landlord’s estimate is in excess of two hundred seventy (270) days, for a period of thirty (30) days following receipt of such notice, Tenant shall have the right, by delivery of written notice to Landlord, to terminate this Lease, which termination shall be effective upon delivery of such notice to Tenant by Landlord. The failure of Tenant to provide such written notice within such time period, shall be deemed a waiver of Tenant’s right to terminate this Lease pursuant to the preceding sentence.

23. CONDEMNATION

(a) If the whole of the Building or Premises should be condemned, this Lease shall terminate as of the date when physical possession of the Building or the Premises is taken by the condemning authority. If less than substantially the whole of the Building or the Premises is thus taken or sold, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by written notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord (whether or not the Premises are affected thereby) may terminate this Lease by giving written notice thereof to Tenant within sixty (60) days after the date of such taking, in which event this Lease shall terminate as of the date when physical possession of such portion of the Building or Premises is taken by the condemning authority. If, upon any such condemnation of less than substantially the whole of the Building or the Premises, this Lease shall not be thus terminated, the Rent payable hereunder shall be diminished by an amount representing that part of the Rent as shall properly be allocable to the portion of the Premises which was so condemned, and Landlord shall, at Landlord’s sole expense, restore and reconstruct the remainder of the Building and the Premises to substantially their former condition to the

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extent that the same, in Landlord’s reasonable judgment, may be feasible, but such work shall not exceed the scope of the work done in originally constructing the Building, nor shall Landlord in any event be required to spend for such work an amount in excess of the amount received by Landlord as compensation awarded upon a taking of any part or all of the Building or the Premises. Subject to the rights of any mortgagee under a mortgage or deed of trust covering the Building, Landlord shall be entitled to and shall receive the total amount of any award made with respect to condemnation of the Premises or Building, regardless of whether the award is based on a single award or a separate award as between the respective parties, and to the extent that any such award or awards shall be made to Tenant or to any person claiming through or under Tenant, Tenant hereby irrevocably assigns to Landlord all of its rights, title and interest in and to any such awards. No portion of any such award or awards shall be allocated to or paid to Tenant for any so-called bonus or excess value of this Lease by reason of the relationship between the rental payable under this Lease and what may at the time be a fair market rental for the Premises, nor for Tenant’s unamortized costs of leasehold improvements. The foregoing notwithstanding, and if Tenant be not in default for any reason, Landlord shall turn over to Tenant, promptly after receipt thereof by Landlord, that portion of any such award received by Landlord hereunder which is attributable to Tenant’s fixtures and equipment which are condemned as part of the property taken but which Tenant would otherwise be entitled to remove, and the appraisal of the condemning authority with respect to the amount of any such award allocable to such items shall be conclusive. The foregoing shall not, however, be deemed to restrict Tenant’s right to pursue a separate award specifically for its relocation expenses or the taking of Tenant’s personal property or trade fixtures so long as such separate award does not diminish any award otherwise due Landlord as a result of such condemnation or taking. Tenant hereby specifically waives any and all rights it may have under any law, statute, ordinance or regulation (including, without limitation, Sections 1265.120 and 1265.130 of the California Code of Civil Procedure), to terminate or petition to terminate this Lease upon partial condemnation of the Premises or Building, and the parties hereto specifically agree that this Lease shall not automatically terminate upon condemnation.

(b) Landlord may, without any obligation or liability to Tenant and without affecting the validity and existence of this Lease other than as hereafter expressly provided, agree to sell and/or convey to the condemnor the Premises or portion thereof sought by the condemnor, without first requiring that any action or proceeding be instituted, or if such action or proceeding shall have been instituted, without first requiring any trial or hearing thereof (and Landlord is expressly empowered to stipulate to judgment therein), free from this Lease and the rights of Tenant hereunder.

(c) If all or any portion of the Premises is condemned or otherwise taken for a period (i) of less than one hundred twenty (120) days, this Lease shall remain in full force and effect and Tenant shall continue to perform all terms and covenants of this Lease; provided, however, Rent shall abate during such limited period in proportion to the portion of the Premises that is rendered unusable as a result of such condemnation or other taking, or (ii) of one hundred twenty (120) days or more, Tenant shall have the right to terminate this Lease by providing written notice of such election within thirty (30) days of such condemnation, in which case Rent shall be abated as of the date of such condemnation.

(d) The words “condemnation” or “condemned” as used herein shall mean the taking for any public or quasi-public use under any governmental law, ordinance, or regulation, or the exercise of, or the intent to exercise, the power of eminent domain, expressed in writing, as well as the filing of any action or proceeding for such purpose, by any person, entity, body, agency, or authority having the right or power of eminent domain, and shall include a voluntary sale by Landlord to any such person, entity, body agency or authority, either under threat of condemnation expressed in writing or while condemnation proceedings are pending, and shall occur in point of time upon the actual physical taking of possession pursuant to the exercise of said power of eminent domain.

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24. TENANT’S DEFAULT

The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant:

(a) The abandonment of the Premises by Tenant (failure to occupy and operate the Premises for ten (10) days or more shall be deemed an abandonment), unless Tenant continues to pay all Rent and other expenses as and when due.

(b) The failure by Tenant to make any payment of Rent or any other payment required to be made by Tenant hereunder as and when due, which such failure shall continue for a period of five business days following Tenant’s receipt of written demand from Landlord.

(c) Tenant’s failure to observe or perform any of the covenants, conditions, or provisions of this Lease to be observed or performed by Tenant, other than as described in subparagraph (b) above, where such failure shall continue for a period of fifteen (15) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant’s default is such that more than fifteen (15) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said fifteen (15) day period and thereafter diligently prosecutes such cure to completion; provided that such cure shall not be in excess of ninety (90) days.

(d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors, or the appointment of a trustee or a receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within sixty (60) days, or the attachment, execution, or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged in sixty (60) days.

(e) The filing of any voluntary petition in bankruptcy by Tenant, or the filing of any involuntary petition by Tenant’s creditors, which involuntary petition remains undischarged for a period of sixty (60) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease, and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant’s obligation under this Lease.

(f) Without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed, selling, leasing, assigning, encumbering, hypothecating, transferring, or otherwise disposing of all or substantially all of the Tenant’s assets.

(g) If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in Sections (d) or (e) above.

25. REMEDIES FOR TENANT’S DEFAULT

In the event of Tenant’s default, Landlord may:

(a) Terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant:

(1) the worth at the time of the award of any unpaid rent which had been earned at the time of such termination; plus

(2) the worth at the time of the award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss which Tenant proves could have been reasonably avoided; plus

(3) the worth at the time of the award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss which Tenant proves could be reasonably avoided; plus

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(4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom (including, without limitation, the cost of recovering possession of the Premises, expenses of reletting including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and real estate commissions actually paid and that portion of the leasing commission paid by Landlord and applicable to the unexpired portion of this Lease); plus

(5) such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law.

As used in Subsections (1) and (2) above, the “worth at the time of the award” shall be computed by allowing interest at the lesser of ten percent (10%) per annum, or the maximum rate permitted by law per annum. As used in Subsection (3) above, the “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

(b) Continue this Lease in full force and effect, and the Lease will continue in effect, as long as Landlord does not terminate Tenant’s right to possession, and Landlord shall have the right to collect Rent when due consistent with California Civil Code Section 1951.4. During the period Tenant is in default, Landlord may enter the Premises and relet them, or any part of them, to third parties for Tenant’s account. Tenant shall be liable immediately to Landlord for all costs Landlord reasonably incurs in reletting the Premises, including, without limitation, brokers’ commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the Rent due under this Lease on the dates the Rent is due, less the rent Landlord receives from any reletting. In no event shall Tenant be entitled to any excess rent received by Landlord. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. After Tenant’s default and for as long as Landlord does not terminate Tenant’s right to possession of the Premises, if Tenant obtains Landlord’s consent, Tenant shall have the right to assign or sublet its interest in this Lease, but Tenant shall not be released from liability.

(c) Cause a receiver to be appointed to collect Rent. Neither the filing of a petition for the appointment of a receiver nor the appointment itself shall constitute an election by Landlord to terminate the Lease.

(d) Cure the default at Tenant’s cost. If Landlord at any time, by reason of Tenant’s default, reasonably pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord at the time the sum is paid, and if paid at a later date shall bear interest at the lesser of ten percent (10%) per annum, or the maximum rate an individual is permitted by law to charge from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be additional Rent.

The foregoing remedies are not exclusive; they are cumulative, in addition to any remedies now or later allowed by law, to any equitable remedies Landlord may have, and to any remedies Landlord may have under bankruptcy laws or laws affecting creditors’ rights generally. The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any proceeding breach other than a failure to pay the particular Rent so accepted, regardless of Landlord’s knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver.

26. SURRENDER OF PREMISES

On expiration of this Lease or within five (5) days after the earlier termination of the Term, Tenant shall surrender to Landlord the Premises in good condition (except for ordinary wear and tear, repair and maintenance which is the obligation of Landlord, and destruction to the Premises covered by Section 22). Tenant shall remove all its personal property within the above-stated

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time. Tenant shall perform all restoration made necessary by the removal of any alterations or Tenant’s personal property within the time periods stated in this paragraph.

Landlord may elect to retain or dispose of in any manner any alterations or any of Tenant’s personal property that Tenant does not remove from the Premises on expiration or termination of the term as allowed or required by this Lease by giving at least ten (10) days’ notice to Tenant. Title to any such alterations or any of Tenant’s personal property that Landlord elects to retain or dispose of on expiration of the ten (10)-day period shall vest in Landlord. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord’s retention or disposition of any such alterations or any of Tenant’s personal property. Tenant shall be liable to Landlord for Landlord’s costs for storing, removing, and disposing of any alterations or any of Tenant’s personal property. If Tenant fails to surrender the Premises to Landlord on expiration or five (5) days after termination of the term as required by this paragraph, Tenant shall indemnify and hold Landlord harmless from all claims, liability and damages resulting from Tenant’s failure to surrender the Premises, including, without limitation, claims made by a succeeding tenant resulting from Tenant’s failure to surrender the Premises.

27. SUBSTITUTION

Intentionally Deleted.

28. PARKING

Tenant shall have the right to park in the Premises parking facilities upon terms and conditions as may from time to time be established by Landlord. In this regard, during the Term of the Lease, Tenant shall be entitled to the nonexclusive use of all parking at the Premises at no cost to Tenant or Tenant’s employees or visitors. Landlord shall ensure, at Landlord’s sole expense (but subject to reimbursement pursuant to Section 7(a) of this Lease), that the exterior light levels satisfy all current laws and prudent management practice safety standards; Landlord shall, prior to completion of the Base Building Work, provide the results of an exterior lighting survey to Tenant, which shall be reviewed and approved in writing by Tenant within ten (10) days after receipt by Landlord. Failure by Tenant to approve the lighting survey in writing shall be deemed approval by Tenant. Landlord shall not be liable for any claims, losses, damages, expenses or demands with respect to injury or damage to the vehicles of Tenant or Tenant’s customers or employees that park in the parking areas for the Building, except for such loss or damage as may be caused by Landlord’s gross negligence or willful misconduct.

29. ESTOPPEL CERTIFICATE

(a) Tenant shall at any time and from time to time upon not less than fifteen (15) days’ prior written notice from Landlord execute, acknowledge, and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as modified is in full force and effect) and the date to which the Rental and other charges are paid in advance, if any; (b) certifying that the Premises have been accepted by Tenant; (c) confirming the Commencement Date and the expiration date of this Lease; (d) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults, if any are claimed, and (e) such other matters reasonably requested by Landlord. Any such statement may be relied upon by a prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part.

(b) Landlord shall at any time and from time to time upon not less than fifteen (15) days’ prior written notice from Tenant execute, acknowledge, and deliver to Tenant a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as modified is in full force and effect) and the date to which the Rental and other charges are paid in advance, if any; (b) confirming the Commencement Date and the expiration date of this Lease; (c) acknowledging that there are not, to Landlord’s knowledge, any uncured defaults on the part of the Tenant hereunder, or specifying such defaults, if any are claimed, and (d) such other matters reasonably requested by Tenant. Any such statement may be relied upon by a prospective transferee of Tenant’s interest in this Lease.

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30. SALE OF PREMISES

In the event of any sale of the Building, Landlord shall be and hereby is entirely freed and relieved of all further liability under any and all of its covenants and obligations contained in or derived from this Lease and accruing after such sale, and the purchaser, at such sale or any subsequent sale of the Premises, shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of Landlord under this Lease. If any Security Deposit or prepaid Rent has been paid by Tenant, Landlord will transfer the Security Deposit and prepaid Rent to Landlord’s successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto.

31. SUBORDINATION, ATTORNMENT

(a) This Lease is and shall be subordinate to any encumbrance now of record or recorded after the date of this Lease affecting the Building, other improvements, and land of which the Premises are a part. Such subordination is effective without any further act of Tenant. If any mortgagee, trustee, or ground lessor shall elect to have this Lease and any options granted hereby prior to the lien of its mortgage, deed of trust, or ground lease, and shall give written notice thereof to Tenant, this Lease and such options shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease or such options are deeded prior or subsequent to the date of said mortgage, deed of trust, or ground lease, or the date of recording thereof.

(b) In the event any proceedings are brought for foreclosure, or in the event of a sale or exchange of the real property on which the Building is located, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the purchaser upon any such foreclosure and sale and recognize such purchaser as the Landlord under this Lease.

(c) Tenant agrees to execute any documents reasonably required to effectuate an attornment or to make this Lease or any options granted herein prior to the lien of any mortgage, deed of trust, or ground lease, as the case may be, provided the rights of Tenant are not diminished or adversely affected as a result thereof.

(d) Landlord agrees that Tenant’s obligations to subordinate under this Section 31 to any existing and future ground lease, mortgage, or deed of trust (each, an “Encumbrance”) shall be conditioned upon Tenant’s receipt of a non-disturbance agreement from the party requiring such subordination (which party is referred to for the purposes of this Section as the “Superior Lienor”). Such non-disturbance agreement shall be in recordable form, and shall provide, at a minimum, that (i) Tenant’s possession of the Premises shall not be interfered with following a foreclosure, or other termination of the Encumbrance, provided Tenant is not in default beyond any applicable cure periods, (ii) there shall be no diminution in Tenant’s rights under this Lease as a result of a foreclosure or other termination of the Encumbrance, and (iii) the Superior Lienor or any other party acquiring Landlord’s interest in this Lease shall perform all of Landlord’s future obligations hereunder, and (iv) Landlord’s obligation with respect to such a non-disturbance agreement shall be limited to obtaining the non-disturbance agreement in such form as the Superior Lienor generally provides in connection with its standard commercial loans, however, Tenant shall have the right to negotiate, and Landlord shall use its good faith efforts and due diligence in assisting Tenant in the negotiation of, revisions to that non-disturbance directly with the Superior Lienor. Tenant agrees to use its good faith efforts to reach agreement with the Superior Lienor upon acceptable terms and conditions of a non-disturbance agreement.

(e) Tenant’s obligation to pay Rent under this Lease to Superior Lienor is conditioned upon Tenant’s receipt of a nondisturbance agreement, satisfying the requirements of Section 31(d), from any Superior Lienor whose Encumbrance is superior to this Lease as of the Commencement Date.

32. AUTHORITY OF TENANT

If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, and that this Lease is binding upon said corporation in accordance with its terms.

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33. BROKER

(a) Landlord and Tenant each warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease except for the broker or brokers listed in the Basic Lease Information of this Lease (“Broker”), and it knows of no other real estate broker or agent who is entitled to a commission in connection with the Lease. Landlord agrees to pay any commission to which its Broker is entitled in connection with this Lease. Tenant agrees to indemnify and defend Landlord and hold Landlord harmless from any claims for brokerage commissions arising out of any discussion allegedly had by Tenant with any broker other than Broker.

(b) Landlord shall pay Tenant’s Broker a commission per a separate commission agreement.

34. HOLDING OVER

Upon termination of the Lease or expiration of the Term hereof, if Tenant retains possession of the Premises without Landlord’s written consent first had and obtained, then Tenant’s possession shall be deemed a month-to-month tenancy upon all of the terms and conditions contained in this Lease, except the Base Rent portion of the Rent which shall be increased to one hundred twenty-five percent (125%) of the amount of the Base Rent portion of the Rent at the expiration or earlier termination of the Lease, as the case may be. Rent, as adjusted pursuant to this Section, shall be payable in advance on or before the first day of each month. If either party desires to terminate such month-to-month tenancy, it shall give the other party not less than thirty (30) days’ advance written notice of the date of termination.

35. RULES AND REGULATIONS

Tenant shall faithfully observe and comply with the reasonable rules and regulations that Landlord shall from time to time promulgate. Landlord reserves the right from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy to them to Tenant (a copy of the present Rules and Regulations is attached hereto as Exhibit D). In the event of any inconsistency between such rules and regulations and this Lease, the terms of this Lease shall govern. Any consent required to be obtained by Tenant pursuant to the rules and regulations shall not be unreasonably withheld or delayed.

36. OTHER RIGHTS RESERVED BY LANDLORD

In addition to any other rights contained in this Lease, Landlord retains and shall have the rights set forth below, exercisable without notice and without liability to Tenant for damage or injury to property, person or business and without effecting an eviction, constructive or actual, or disturbance of Tenant’s use or possession of the Premises or giving rise to any claim for setoff or abatement of Rent: to install, affix and maintain any and all signs on the exterior and interior of the Building, except as limited by Section 37(p) below; to reduce, increase, enclose or otherwise change at any time and from time to time the size, number, location, layout and nature of the Common Area and facilities and to create additional rentable areas through use or enclosure of Common Area, provided that such changes do not materially affect Tenant’s business, and parking layout, location and nature of parking spaces available, and the access to the Premises and visibility of Tenant’s signage is not impaired.

37. GENERAL PROVISIONS

(a) Plats and Riders. Clauses, plats, and riders, if any, signed by the Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof.

(b) Consents. Except as provided in this Lease, whenever this Lease requires the consent or approval of Landlord, Landlord agrees that such consent or approval shall not be unreasonably withheld or delayed.

(c) Joint Obligation. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several.

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(d) Marginal Headings. The marginal headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.

(e) Time. Time is of the essence in this Lease and with respect to each and all of its provisions in which performance is a factor.

(f) Quiet Possession. Upon Tenant paying the Rent reserved hereunder, and observing and performing all of the covenants, conditions, and provisions on Tenant’s part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease.

(g) Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto.

(h) Force Majeure. Except as provided in this Lease, in the event Landlord or Tenant, is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, failure of utility service provider to provide such utility service, government regulation or restriction, governmental delay in issuing permits, approvals and inspections, weather which causes delay of construction, strike, labor dispute, unavailability of materials or any other cause outside the reasonable control of such party (excepting, however, such party’s financial inability), then the time for performance of the affected obligations of such party shall be extended for a period equivalent to the period of such delay, interruption or prevention (but in no event shall the time for performance of any obligation for payment of money be extended pursuant to this provision).

(i) Jury Trial. The parties hereto shall, and they hereby do, waive trial by jury in any action, proceeding, or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises and/or any claim of injury or damage.

(j) Limitation on Liability. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord (except for a default under the Lease Improvement Agreement prior to the Commencement Date (1) Tenant’s sole and exclusive recourse shall be against Landlord’s interest in the Building. Tenant shall not have any right to satisfy any judgment which it may have against Landlord from any other assets of Landlord; (2) no partner, stockholder, director, officer, employee, beneficiary or trustee (collectively, “Partner”) of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction over Landlord); (3) no service of process shall be made against any Partner of Landlord (except as may be necessary to secure jurisdiction over Landlord); (4) no Partner of Landlord shall be required to answer or otherwise plead to any service of process; (5) no judgment will be taken against any Partner of Landlord; (6) any judgment taken against any Partner of Landlord may be vacated and set aside at any time nunc pro tunc; (7) no writ of execution will ever be levied against the assets of any Partner of Landlord; and (8) these covenants and agreements are enforceable both by Landlord and also by any Partner of Landlord.

(k) Limitation on Liability. The obligations of Tenant under this Lease do not constitute personal obligations of the individual officers and employees of Tenant.

(l) [Intentionally omitted]

(m) No Construction Against Drafter. The provisions of this Lease shall be construed in accordance with the fair meaning of the language used and shall not be strictly construed against either party.

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(n) Separability. Any provisions of this Lease which shall prove to be invalid, void, and illegal shall in no way affect, impair, or invalidate any other provision hereof, and such other provisions shall remain in full force and effect.

(o) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located.

(p) Signage.

(i) The Premises has two monument signs (collectively, the “Monument”). Such Monument may be used for Tenant and Building identification, and Tenant shall (subject to clause (iii) below) have the exclusive right to install its identification signage. Tenant shall be responsible for all costs associated with the installation and maintenance of such signage.

(ii) Tenant shall be entitled, on an exclusive basis (subject to clause (iii) below), to Building parapet signage (“Building Signage”) to be located at a location acceptable to Landlord and Tenant. The size, style, material and attachment of such exterior signage shall be subject to the reasonable approval of Landlord and Tenant and such exterior signage shall comply with all applicable laws, statutes and ordinances, and the conditions, covenants and restrictions encumbering the Premises (collectively, the “Sign Ordinances”). The Building signage shall be as large as such Sign Ordinances allow. Tenant shall be responsible for all costs associated with the installation and maintenance of such signage. Upon the termination of this Lease, the Building Signage shall be removed by Landlord, at Tenant’ s expense.

(q) Building Name. Tenant may use the name of the Building in which the Premises are located in all Tenant’s advertising in connection with Tenant’s business at the Premises and for no other purpose, except with Landlord’s consent.

(r) Late Charges. Tenant acknowledges that late payment by Tenant to Landlord of Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing charges, accounting charges, and late charges that may be imposed on Landlord by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any delinquent installment of Rent or other sums due from Tenant is not received by Landlord on or before the fifth day of each calendar month Tenant shall pay to Landlord an additional sum equal to six percent (6.00%) of such overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the administrative and other costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant’s default with respect to the overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord.

(s) Interest. Notwithstanding any other provisions of this Lease, any installment of Rent or other amounts due under this Lease not paid to Landlord when due shall bear interest from the date due or from the date of expenditure by Landlord for the account of Tenant, until the same have been fully paid, at the lessor of ten percent (10%) per annum or the maximum rate permitted under applicable law (the “Interest Rate”). The payment of such interest shall not constitute a waiver of any default by Tenant hereunder. Any sum owing from Landlord to Tenant under this Lease shall bear interest from the date due at the Interest Rate.

(t) Attorneys’ Fees. If Tenant or Landlord shall be in breach or default under this Lease, such party (the “Defaulting Party”) shall reimburse the other party (the “Non-Defaulting Party”) upon demand for any costs or expenses that the Non-Defaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys’ fees and costs. The losing party in such action shall pay such attorneys’ fees and costs.

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(u) Modification. This Lease and all exhibits attached hereto contain the entire agreement between the parties relating to the rights herein granted and the obligations herein assumed. Any oral representations or modifications concerning this Lease shall be of no force or effect, excepting a subsequent modification in writing signed by the party to be charged.

(v) Successors and Assigns. Subject to the provisions of Section 15, this Lease and each of its covenants and conditions shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns.

(w) Waiver of California Code Sections. Notwithstanding any other provision of this Lease and in addition to any waivers which may be contained in this Lease, Tenant waives the provisions of Civil Code Section 1932(2) and 1933(4) with respect to the destruction of the Premises; Civil Code Sections 1932(1), 1941 and 1942 with respect to Landlord’s repair duties and Tenant’s right of repair; and Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises for public or quasi-public use by statute, by right of imminent domain, or by purchase in lieu of imminent domain; and any right of redemption or reinstatement of Tenant under any present of future case law or statutory provision (including Code of Civil Procedure Section 473, 1174(c) and 1179 and Civil Code Section 3275) in the event Tenant is dispossessed from the premises for any reason. This waiver applies to future statutes enacted in addition or in substitution to the statue specified herein, and this waiver shall apply even though Tenant may be the subject of a voluntary or involuntary petition in bankruptcy.

(x) Government Energy or Utility Controls. In the event of imposition of federal, state or local governmental controls, regulations or restrictions on the use or consumption of energy or other utilities during the term, both Landlord and Tenant shall be bound thereby.

(y) Accord and Satisfaction; Allocation of Payments. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant which is then due or delinquent.

(z) Furnishing Financial Statements. In order to induce Landlord to enter into this Lease, and at any time during the Term, Tenant agrees that it shall furnish to Landlord within 15 days, upon Landlord’s written request, with annual financial statements reflecting Tenant’s current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with the Lease are true, correct and complete in all respects as of the date of delivery.

(aa) Recording. Tenant shall not record this Lease or a memorandum thereof, or any other reference to this Lease, without the prior written consent of Landlord. Either party, upon the request of the other, shall execute and acknowledge a “short form” memorandum of this Lease for recording purposes.

(bb) Execution of Lease, No Options. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to Lease, or otherwise created any interest of Tenant in the Premises or any other Premises within the Building. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant.

38. NOTICES

All notices and demands required to be sent to the Landlord or Tenant under the terms of this Lease shall be personally delivered or sent by certified or registered mail, postage prepaid or by overnight courier (i.e., Federal Express), to the addresses indicated in the Basic Lease Information, or to such other addresses as the parties may from time to time designate by notice

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pursuant to this paragraph. In addition, Notices to Tenant shall also be sent to the building premises. Notices shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the person to receive such notice (ii) if mailed, two (2) days following the date of posting by the U.S. Postal Service, and (iii) if by overnight courier, on the business day following the deposit of such notice with such courier.

39. ADDENDA/ADDITIONAL PROVISIONS

(a) Telecommunications Carrier’s Access.

(1) Tenant’s right to select and utilize a telecommunications and data carrier (the “Carrier”) shall be conditioned on the execution by such Carrier of a mutually acceptable license agreement, such license agreement must be commercially reasonable, pursuant to which Landlord shall grant to the Carrier a license (which shall be coextensive with the rights and privileges granted to Tenant under this Lease) to install, operate, maintain, repair, replace, and remove cable and related equipment within the Premises and the Building’s main telephone/electrical closet and vertical and horizontal pathways within the Building but outside of the Premises that are necessary to provide telecommunications and data services to Tenant at the Premises.

(2) The license contemplated herein to be granted to the Carrier shall permit the Carrier to provide services only to Tenant and not to any other tenants or occupants of the Building and shall require all of the Carrier’s equipment (other than connecting wiring) to be located in the Tenant’s Premises. The License shall not grant an exclusive right to Tenant or to the Carrier. Landlord reserves the right, at its sole discretion, to grant, renew, or extend licenses to other telecommunications and data carriers for the purposes of locating telecommunications equipment in the Building which may serve Tenant or other tenants in the Building.

(3) Except to the extent expressly set forth herein, nothing herein shall grant to the Carrier any greater rights or privileges than Tenant is granted pursuant to the terms of this Lease or diminish Tenant’s obligations or Landlord’s rights hereunder.

(4) Tenant shall be responsible for ensuring that the Carrier complies with the terms and conditions or the license agreement relating to the use of the Premises or the making of any physical Alterations imposed upon Tenant under this Lease to the extent the Carrier operates or maintains any equipment or delivers any services in the Premises. Any failure by the Carrier to observe and comply with such terms, conditions, agreement, and covenants on behalf of Tenant, to the extent the Carrier operates or maintains any equipment or delivers any services in the Premises or the Licensed Areas, shall be a default under the Lease (following the giving of written notice and the passage of the applicable cure period under Section 24).

(b) Options to Renew.

Tenant shall, provided this Lease is in full force and effect and Tenant is not then in monetary or nonmonetary material default under any of the terms and conditions of this Lease (following the giving of written notice and passage of the applicable cure period under Section 24), have the following consecutive options to renew the term of the Lease (collectively, the “Option Terms”): (i) one (1) option to renew this Lease for a term of one (1) year (the “First Option Term”), and (ii) one (1) option to renew this Lease for a term of three (3) years (the “Second Option Term”), both for the Premises in “as is” condition and on the same terms and conditions set forth in this Lease, except as modified by the terms, covenants and conditions set forth below:

(1) If Tenant elects to exercise such option, then Tenant shall provide Landlord with written notice (“Renewal Notice”) no later than 5:00 pm (Pacific Standard Time) on the date which is three hundred sixty-five (365) days prior to the expiration of the then current term of this Lease. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of this Lease.

(2) The Base Rent during the Option Terms shall be as follows:

Option Term	Year of Option Term	Base Rent Rate
First Option Term:	Year 1	$1.99 per rentable square foot per month
Second Option Term	Year 1	See Section 39(b)(6) below
	Year 2	See Section 39(b)(6) below
	Year 3	See Section 39(b)(6) below

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(3) The “Base Year” shall be the calendar year in which the commencement of the renewal term occurs.

(4) Any exercise by Tenant of any option to renew under this Paragraph shall be irrevocable. If requested by Landlord, Tenant agrees to execute a lease amendment reflecting the foregoing terms and conditions, prior to the commencement of the Option Term. The option(s) to renew granted under this Paragraph is/are not transferable, except to an assignee of Tenant’s entire interest in this Lease in accordance with the terms of Section 15 of this Lease.

(5) If more than one renewal option is provided above, the exercise of each renewal option shall be contingent upon Tenant exercising the prior renewal option. Only one renewal option may be exercised at a time. As each renewal option provided for above is exercised, the number of renewal options remaining to be exercised is reduced by one and upon exercise of the last remaining renewal option Tenant shall have no further right to extend the term of this Lease.

(6) Base Rent for the Second Option Term shall be determined as follows: Upon service of such Renewal Notice for the Second Option Term, this Lease shall be renewed for said Period. The Second Option Term shall commence upon the expiration date of the initial Lease Term., except that the Basic Rent payable during the Second Option Term shall be at the Market Rental Rate (as defined below) for a lease that would commence on the commencement date of the Second Option Term.

Landlord shall notify Tenant of the Basic Rent (“Landlord’s Proposed Base Rent”) for such Renewal Term in writing (the “Rental Notice”) within twenty (20) days of Landlord’s receipt of the Renewal Notice. Tenant shall either (i) accept the terms set forth in Landlord’s Rental notice by delivering written notice (the “Acceptance Notice”) to Landlord, or (ii) if Tenant does not accept Landlord’s Proposed Base Rent, then Tenant may elect to negotiate with Landlord to attempt to agree upon the Market Rental Rate within thirty (30) days after Tenant’s receipt of the Rental Notice, Landlord and Tenant both agreeing to negotiate in good faith to reach such agreement. If Landlord and Tenant fail to agree upon Market Rental Rate during such period, then, regardless of any good faith or lack thereof by Landlord or Tenant, Tenant’s only remedy shall be to either (i) terminate and waive its option to renew, or (ii) give written notice to Landlord that Tenant elects to arbitrate the determination of “Market Rental Rate” (the “Arbitration Notice”), which notice must be provided within thirty (30) days after Tenant’s receipt of the Rental Notice. If Tenant fails to timely deliver its Arbitration Notice, then Tenant shall be deemed to have terminated, waived and forfeited its renewal options. If Tenant timely delivers the Arbitration Notice, the Landlord and Tenant will be bound by Paragraph D below. In the event Tenant elects to renew the Lease, Tenant shall, at Landlord’s request, execute a lease amendment or other written confirmation setting forth the Basic Rental and other terms to be applicable during the Renewal Period.

For purposes of this Section, the term “Market Rental Rate” shall mean, for the date such determination is being made, the rate a willing tenant would pay and a willing landlord would accept for a Lease of the Premises for the applicable term, neither being under any compulsion to lease and both having reasonable knowledge of the relevant facts, considering the highest and most profitable use if offered for lease in the open market with a reasonable period of time in which to consummate a transaction and taking into consideration that Landlord would not be receiving rent during such period. Specifically, factors considered shall include, but not be limited to, location and quality of the Building, term or length of lease, condition of the Premises, credit quality and stature of the Tenant, Landlord concessions such as leasehold improvements or allowances, tenant procurement costs, real estate commissions, base year, rent escalations and operating expenses and taxes, rental rates and terms of similar class office buildings in the Rancho Cordova/Sacramento office market.

If Tenant believes that Landlord’s Proposed Rental Rate is in excess of the Market Rental Rate for the Premises, then Tenant may elect, by delivering the Arbitration Notice to Landlord within thirty (30) days after delivery of the Rental Notice, to arbitrate the Market Rental Rate for the Premises as described below. The Arbitration Notice shall not be effective unless it includes a statement of Tenant’s own good faith estimate of the Market Rental Rate for the Premises (the “Tenant’s Proposed Rental Rate”). The validity of the two (2) estimates shall be determined by arbitration as provided below, each party being bound to its estimate and such estimates establishing the only two choices available to the arbitrator. The judgment or the award rendered in any such arbitration may be entered in any court having jurisdiction and shall be final and binding upon the parties. The arbitration shall be conducted and determined in the City of Sacramento, State of California, in accordance with the American Arbitration Association’s commercial arbitration rules then pertaining to such metropolitan area, as modified by the following provisions:

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1. Within ten (10) days after delivery of Tenant’s Arbitration Notice, Landlord and Tenant shall appoint a competent and impartial person, who has not acted previously for either party in any capacity (other than as an arbitrator or appraiser), to serve as the arbitrator to decide the issue between the parties. The arbitrator shall be a member of the American Institute of Real Estate Appraisers (or its successor organization) with a then current senior designation of MAI (or then comparable designation) currently certified under the continuing education program, and shall have at least five (5) years’ experience in appraising office buildings in the local area where the Project is located. If the parties are unable to agree upon appointment of such a person within such ten (10) day period, then either party, on behalf of both, may upon five (5) days’ written notice to the other request appointment of such a qualified person by the American Arbitration Association (such appointment to be made within fifteen (15) days of such request), and the other party shall not raise any objection as to such Association’s full power to entertain the application and make the appointment. After such appointment, the arbitrator shall decide the dispute by following the procedure set forth in Subsection 2 below, and shall attempt to render a decision within thirty (30) business days after appointment. In any case, the arbitrator shall render his or her decisions within forty-five (45) days after appointment. Upon rendering his or her decision, the arbitrator shall give notice of same to the parties, who shall immediately thereafter execute an amendment to this Lease stating the minimum monthly rent for the Renewal Term as determined by the arbitrator.

2. The arbitrator must select either the Landlord’s Proposed Rental Rate or the Tenant’s Proposed Rental Rate as the Market Rental Rate for the first year Renewal Term and no compromise or other rental rate shall be selected as the Market Rental Rate. The decision of the arbitrator shall be final and binding upon the parties. The Base Rent for the second and third year of the Renewal Term shall be increased, respectively, by two and one-half percent (2.5%) over the Base Rent for the last month of the preceding Lease Year.

3. The arbitrator shall have the right to consult experts and competent authorities with factual information or evidence pertaining to the matter to be determined by them. The arbitrator shall render his or her decision and award in writing with counterpart copies to each party. The arbitrator shall have no power to modify the provisions of this Lease.

4. If the arbitrator agreed to or appointed should resign, die, withdraw, or otherwise be unable to perform his or her duties, either party may declare the office vacant, in which event the vacancy shall be filled in the same manner provided herein for the initial selection of the arbitrator.

5. The party whose proposed Basic Rent was not selected by the arbitrator shall pay all costs of the arbitration, including the reasonable attorneys’ fees and expenses of the prevailing party. Costs shall be payable within ten (10) days after the prevailing party’s written demand.

(c) Generator. Landlord shall permit Tenant to install and maintain, at Tenant’s expense, a back-up generator (and an associated fuel tank) for the Building, at a location (outside of the Building) reasonably mutually acceptable to Landlord and Tenant. Any such generator shall be subject to the requirements imposed on Alterations pursuant to Section 10 of this Lease (including, but not limited to, the requirements that Landlord approve the plans and that Tenant obtain all applicable governmental permits). Tenant shall be permitted to remove any such generator at the end of the term of the Lease, provided that Tenant repairs any and all damage caused by such removal and the Building mechanical and electrical systems are fully functional and in good working order at the time of removal.

(d) Rooftop Cameras. Landlord shall permit Tenant to install and maintain, at Tenant’s expense, rooftop cameras on the Building, in locations reasonably mutually acceptable to Landlord and Tenant. Any such rooftop cameras shall be subject to the requirements imposed on Alterations pursuant to Section 10 of this Lease (including, but not limited to, the requirements that Landlord approve the plans and that Tenant obtain all applicable governmental permits). Tenant shall be permitted to remove any such rooftop cameras at the end of the term of the Lease, provided that Tenant repairs any damage caused by such removal.

IN WITNESS WHEREOF, this Lease is executed on the date and year first above written.

LANDLORD:		TENANT:
PANATTONI DEVELOPMENT COMPANY, a California limited liability company		HEALTH NET, INC., a Delaware corporation
By:	/s/ Michael Diepenbrock	By:	/s/ Dennis Bell
	Michael Diepenbrock	Name:	Dennis Bell
Title:	Partner	Title:	Vice President

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EXHIBIT A

SITE PLAN SHOWING LOCATION OF BUILDING (PER BASIC

LEASE INFORMATION ON PAGE 1 OF THE LEASE)

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EXHIBIT A-1

BASE BUILDING WORK

1. Change out sprinklers and change the grade of the landscaping near first floor windows to eliminate over-spray on windows.

2. Pressure wash Building exterior.

3. Clean all windows, replace windows that are etched and reseal all windows to prevent moisture intrusion

4. Repair parking lot curbs and repaint fire lanes, handicap markings, parking space striping and all other markings in the parking lot.

5. Make recommended fire sprinkler repairs.

6. Make ADA compliance modifications to the exterior of the Building and to the parking lot (to exclude the outside “break area”) to the extent triggered by the Tenant Improvements (all interior ADA compliance modifications shall be the responsibility of Tenant as part of the Tenant Improvements)

7. Service existing HVAC system and replace any parts that are not functioning. The maximum design spec for this Building is based on 150 usable sf per person.

8. Minor mold remediation

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EXHIBIT B

LEASE IMPROVEMENT AGREEMENT

This Lease Improvement Agreement (“Improvement Agreement”) sets forth the terms and conditions relating to construction of the initial tenant improvements described in the Plans to be prepared and approved as provided below (the “Tenant Improvements”) in the Premises. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Lease (the “Lease”) to which this Improvement Agreement is attached and forms a part.

1. Base Building Work. The building shell rehabilitation and base building work described in Exhibit A-1 (the “Base Building Work”), will be performed by Landlord at Landlord’s sole cost and expense.

2. Plans and Specifications.

2.1 Tenant shall construct the Tenant Improvements in accordance with the Space Plan attached hereto as Schedule 1 (the “Space Plan”).

2.2 Based on the Space Plan, Tenant shall cause the Space Planner to prepare detailed plans, specifications and working drawings for the construction of the Tenant Improvements (the “Plans”). Landlord and Tenant shall diligently pursue the preparation of the Plans. Landlord shall approve or disapprove the Plans and any proposed revisions thereto, in writing within five (5) business days after receipt thereof. If Landlord fails to approve or disapprove the Space Plan or Plans or any revisions thereto within the time limits specified herein, Landlord shall be deemed to have approved the same.

2.3 Notwithstanding Landlord’s review and approval of the Space Plan and the Plans and any revisions thereto, Landlord shall have no responsibility or liability whatsoever for any errors or omissions contained in the Space Plan or Plans, or to verify dimensions or conditions, or for the quality, design or compliance with applicable Regulation of any improvements described therein or constructed in accordance therewith. Tenant hereby waives all claims against Landlord relating to, or arising out of the design of the Tenant Improvements.

3. Specifications for Standard Tenant Improvements.

3.1 Specifications and quantities of standard building components which will comprise and be used in the construction of the Tenant Improvements (“Standards”) are set forth in Schedule 1 to this Exhibit B. As used herein, “Standards” or “Building Standards” shall mean the standards set forth on Schedule 1 of this Exhibit B, or such other standards of equal or better quality as may be mutually agreed between Landlord and Tenant in writing.

3.2 [Intentionally omitted]

4. Tenant Improvement Cost.

4.1 The cost of the Tenant Improvements shall be paid for by Tenant, including, without limitation, the cost of: space plans and studies; architectural and engineering fees; permits, approvals and other governmental fees; labor, material, equipment and supplies; construction fees and other amounts payable to contractors or subcontractors; taxes; sales taxes on materials used; filing and recording fees; premiums for insurance and bonds, and all other costs expended or to be expended in the construction of the Tenant Improvements to the extent approved by Tenant pursuant to Section 4.4 below.

4.2 Provided Tenant is not in default (following notice and passage of the applicable cure period) under the Lease, including this Lease Improvement Agreement, Landlord shall contribute a one-time tenant improvement allowance not to exceed $25.00 per rentable square foot, (“Tenant Improvement Allowance”) to be credited by Landlord toward the cost of the initial Tenant Improvements, and up to $5.00 per rentable square foot of the Tenant Improvement Allowance may be used for Tenant’s communication/data conduit, cabling, and equipment. In addition, Tenant has the right to receive up to an additional $10.00 per rentable square foot, (“Additional Allowance”) which will be amortized over the term of the lease at an annual interest rate of nine percent (9%). The Additional Allowance may be used for

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overstandard tenant improvement construction costs. At Tenant’s election Tenant may use any unexpended portion of the Tenant Improvement Allowance for Base Rent abatement or Base Rent reduction. Landlord acknowledges that up to $5.00 per rentable square foot of the Tenant Improvement Allowance may be spent on cabling, wiring, security systems and other non-permanent improvements.

4.3 Landlord shall reimburse Tenant on a monthly basis for the portion of the Tenant Improvement work or additional work constructed by Tenant, upon presentation to Landlord from Tenant of paid invoices for the Tenant Improvements and other work set forth in Section 4.2 above, together with the corresponding conditional mechanic’s and material releases pertaining to the portion of the work for which Tenant is seeking reimbursement under the conditions set forth in Section 4.2 above. Tenant shall be reimbursed for all such authorized work within thirty (30) days of receipt of all required information. Draw requests, with all required information, for the Tenant Improvement Allowance and Additional Allowance must be submitted to Landlord by the first of the month in order for Tenant to receive payment by the first of the following month. Tenant must provide Landlord copies of final unconditional releases immediately upon receipt from Tenant.

4.4

(a) In no event shall any of the following costs or expenses be deducted from the Tenant Improvement Allowance, it being acknowledged that the following costs shall be borne by Landlord:

(i) the Base Building Work; as set forth in Exhibit A-1;

(ii) attorneys’ fees; and

(iii) any Landlord “supervision” fee.

5. Construction of Tenant Improvements.

5.1 Upon Landlord’s approval of the Plans including the binding estimate of the cost of the Tenant Improvements, Tenant shall cause its contractor to proceed to secure a building permit and commence construction of the Tenant Improvements provided that Landlord shall cooperate with Tenant in executing permit applications and performing other actions reasonably necessary to enable Tenant to obtain any required permits or certificates of occupancy.

5.2 Landlord shall not be liable for any direct or indirect damages suffered by Tenant as a result of delays in construction beyond Landlord’s reasonable control as set forth in Section 37(h), or delays caused by Tenant (including delays by the Space Planner, the contractor or anyone else performing services on behalf of Landlord or Tenant).

5.3 For any work is to be performed on the Premises by Tenant or Tenant’s contractor or agents:

(a) Such work shall proceed upon Landlord’s written approval of Tenant’s contractor, public liability and property damage insurance carried by Tenant’s contractor, and detailed plans and specifications for such work, shall be at Tenant’s sole cost and expense and shall further be subject to the provisions of Paragraphs 10 and 13 of the Lease.

(b) All work shall be done in conformity with a valid building permit when required, a copy of which shall be furnished to Landlord before such work is commenced, and in any case, all such work shall be performed in accordance with all applicable Regulations. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant’s failure to comply with all applicable Regulations.

(c) Intentionally left blank.

(d) Tenant’s entry to the Premises for any purpose, including, without limitation, inspection or performance of Tenant construction by Tenant’s agents, prior to the date Tenant’s obligation to pay rent commences shall be subject to all the terms and conditions of the Lease except the payment of Rent. Tenant’s entry shall mean entry by Tenant, its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors.

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(e) Tenant shall advise Landlord in writing prior to commencing any work at the Premises so that Landlord may file and post a notice of non-responsibility.

6. Completion and Rental Commencement Date.

6.1 Tenant’s obligation to pay Rent under the Lease shall commence on the applicable date described in Section 5(a) of the Lease.

6.2 A default under this Lease Improvement Agreement shall constitute a default under the Lease, and the parties shall be entitled to all rights and remedies under the Lease in the event of a default hereunder by the other party (notwithstanding that the Term thereof has not commenced).

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SCHEDULE 1 TO EXHIBIT B

SPACE PLAN

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SCHEDULE 2 TO EXHIBIT B

BUILDING STANDARDS

A. General Conditions of Construction.

1. All work shall conform to all applicable building codes, ordinances and regulations as adopted by local authorities having jurisdiction. Landlord shall be responsible for all construction documents, permits and fees associated with this tenant improvement work.

2. Landlord/Contractor shall review all plans and drawings prepared by Tenant. In the event of conflicting statements, insufficient information or errors, the Landlord/Contractor shall notify Tenant designated representative and obtain clarification before any work is begun. Work installed or completed where conflicting conditions exist shall be corrected at Landlord/Contractor’s expense.

3. The Landlord/Property manager shall notify Tenant in writing of any known issues of non-compliance with ADA regulations that the building or grounds may contain.

B. General Construction.

1. Partitions.

a. Demising.

3 5/8" steel studs at 24" O.C. w/ 5/8" type ‘x’ gypsum board both sides, or as required per code(s). Include sound batt insulation in all framing cavities and acoustical caulking at staggered receptacles.

b. Interior.

3 5/8" steel studs w/ 5/8" gypsum board both sides, to terminate at underside of suspended ceiling grid, U.N.O. Office and conference room walls to have sound batt insulation within cavities and extending perpendicularly 4' to each side above susp. ceiling, typ. Allowance of one (1) lin. ft. of wall per four (4) s.f. or per tenant supplied plan.

2. Paint/Stain.

a. Walls.

Two (2) coats of eggshell or satin finish acrylic latex, properly applied to ensure full coverage.

b. Door Frames.

Two (2) coats of oil-based semi-gloss. If reused and have factory anodized finish, shall be in new condition.

c. Doors.

All doors to be new or refinished as required for new and finished appearance. To be stained or painted with a minimum of two (2) coats of oil based semi-gloss.

d. Colors.

All colors to be selected/approved by Architect for Tenant Facilities Management.

3. Doors/Frames/Hardware.

a. Doors.

Finish and height per established building standard. All doors to be solid core and, where applicable, fire rated with UL labels visible. Allowance of one (1) door per 250 s.f. of floor area or per tenant supplied floor plan. All existing doors and frames to be reused or carefully removed and stored on-site.

b. Door Frames.

Pre finished or hollow metal frame, finish per building standard. Fire rated as

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required by applicable codes. All non-rated frames to have ‘silencer pads’ at strike side stop.

c. Sidelights.

Sidelights to be full height of adjacent door and 24" wide, tempered glass in anodized frame, located 12" from strike side of door. Allowance of one (1) sidelight per 500 s.f. of floor area or as shown on Tenant Improvement Plan.

d. Hardware.

All hardware to comply with A.D.A. requirements and building standard manufacturers, styles and finishes. Include 1 ¹/2 pairs of butts, minimum, and 2 pairs of butts for doors over 8' in height.

e. Entry Doors.

Building standard lockset. Include building standard butts, closer(s) and floor-mounted doorstop.

f. Interior Doors.

Building stnd. lock sets for all offices and storage rooms. Include building standard butts and floor mtd. Doorstop.

g. Keying.

Keying to be coordinated with Tenant Security. Contact Roy Johnson, Security, at (916) 631-6017. Keys to be provided by Landlord.

h. Security Doors.

Install Simplex Unican 5 button mechanical cypher lock, model #L1041, finish to match bldg. stnd. hardware. Specify bldg. stnd. lockset manufacturer for key override coordination. Typical install: (1) at Data Room, U.N.O.

4. Suspended Ceiling÷.

Acoustical tile and metal grid system to be white and per building standard grid size and style. All discolored or damaged tiles to be replaced prior to tenant occupancy. Provide fire rated ceiling assemblies as required.

5. Floor Coverings÷.

a. Carpet.

All carpet to be furnished by Tenant to Landlord’s contractor for installation. Contractor to provide all vinyl base and misc. materials for carpet installation. Contractor shall provide “take-offs” to establish required quantities based upon the approved plans provided by the Landlord’s architect. These quantities may be relayed directly to Bentley Mills, Inc. attention Cheryl Peale at (800) 423-4709; copy to Tenant’s designated rep.

Landlord will reimburse, to Tenant, the budgeted carpet allowance after receiving a copy of Bentley’s invoice to Tenant. Install per TI plan Finish Schedule, and as outlined below.

• Open Areas.

Bentley Danburn Dense Level Loop

26 oz. wt. 12' Broadloom, direct glue down.

Install with Bentley B-55 Healthguard VOC-free adhesive.

Color: Per Tenant Finish Schedule.

• Offices.

Bentley Covington Dense Cut Pile

Reception Area

30 oz. wt. 12' Broadloom, direct glue down

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Conf. Rm(s)

Install with Bentley B-55 Healthguard VOC-free adhesive.

Color:    Per Tenant Finish Schedule

b. V.C.T.

Armstrong 12" x 12" x 1/8" ga. Companion Square

Vinyl Composition Tile, allowance of V.C.T. for 15% of floor area. Install per T.I. plan Finish Schedule. Install black rubber reducer strips at carpet to VCT transitions.

Color: Per Tenant Finish Schedule.

c. Base All Areas÷.

Burke, or equal, 4" top-set vinyl base. Use cove style base at carpet and V.C.T. applications. Base to be installed at all interior and exterior walls and columns. Install per T.I. plan Finish Schedule. Colors: Per Tenant Finish Schedule.

6. Window Coverings÷.

Building standard horizontal or vertical adjustable blinds. Existing blinds to be in clean and operable condition. Allowance for all exterior windows and Conference Room interior glazing, as applicable.

7. Millwork÷.

Break Room(s) to have a min. 8 lin. feet of wall and base cabinets with plastic laminate at all exposed vertical and horizontal surfaces and white melamine all interior surfaces, U.N.O. on T.I. plan. All sinks and fixtures to be ADA accessible. Additional millwork per T.I. plan. Colors: Per Tenant Finish Schedule.

8. Miscellaneous÷.

a. Plywood Facing.

Install 3/4" ply, smooth face out, from floor (above 4" base molding) to 8' ht. on all walls of Data Room, per plan. Plywood to be sealed, painted white and screwed to studs.

b. Projection Screen.

Supply and install 84" x 84" projection screen mounted above T-bar ceiling in main Conference Room, where applicable, per plan. Screen to be Luma II, by Draper, or equal. Non-electric, manual extension, U.N.O.

C. Mechanical.

1. HVAC.

a. Building Standard HVAC system including, but not limited to, VAV boxes, distribution, diffusers, return air grilles, dampers and thermostats. Modify/install to accommodate room layout, building orientation and/or functions as indicated on tenant space plan. Maximum of 1,200 s.f. per zone, with allowance of one (1) wall mounted thermostat or sensor located appropriately within each zone. Minimum of (1) supply and (1) return per room. System(s) to be air balanced with copies of certified balance reports to be submitted to Tenant’s designated rep.

b. Exhaust fan(s) properly sized and ducted to exterior for Conference Room(s), Break and Training Room(s), where applicable.

c. Data/Comm. Room(s) to be supplied with 24-hour air conditioning, where applicable, separate from building system, sufficiently sized (typically 1 ¹/2 to 2

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ton) and controlled for equipment loads and operations. Include building A/C supply to Data Room for supplemental cooling during working hours.

d. All life safety equipment as required by local building and fire codes.

2. Plumbing:

Break Room to have ADA accessible s.s. sink/faucet with hot and cold water. Add one (1) 1/4" copper line for refrigerator ice maker.

3. Sprinklers:

Building Standard sprinkler system to accommodate room layouts and occupancy requirements. Layout of heads to be in uniform pattern. All heads to have escutcheon plates to match building standard.

D. Electrical, Data, Lighting.

1. Circuiting of all power shall be sized for code compliance. Power panels/service shall be sized for the following minimum design criteria in addition to building mechanical systems as follows: two (2) watts/s.f. for business equipment, two (2) watts/s.f. for duplex outlets, and one (1) watt/s.f. for misc. equipment.

2. Provide electrical feeds to tenant furniture systems per plan; Allowance for one (1) feed per 6 workstations; each feed to accommodate three (3) 120v/20AMP/single phase circuits one (1) of which to be iso. ground. Allowance for a fourth 20 AMP circuit - one (1) for every five (5) feeds.

3. Allowance for two (2) duplex outlets per private office. Allowance for one (1) 20 AMP ded. 120 volt duplex at copy room(s), per plan. Allowance for one (1) 20 AMP ded. 4-plex for two vending machines. Allowance for one (1) 20 AMP ded. GFCI duplex for coffee maker. Allowance for one (1) 12 AMP min. capacity GFCI duplex for microwave.

4. Data/Comm. outlets (string and ring) - Allowance of one (1) per 110 sf of floor area, or per plan. Telephone, voice and data cabling and associated equipment N.I.C.

5. Data Room to have 208 volt, 30 AMP single-phase power to extend to Tenant’s U.P.S. system, N.I.C., and two (2) stnd. bldg. power duplex outlets.

6. 2' x 4' recessed fluorescent light fixtures with Building Standard lenses; number of tubes and code required switching. Layout and quantity of fixtures shall provide IES recommended light levels for intended occupancy.

7. Exit signs to be installed at all exits, doors and other locations appropriate and/or required by applicable life-safety codes.

8. Emergency Lighting may be battery packs or battery back-up ballasts within fixtures. To be maintained and inspected as required by code(s).

9. Fire and smoke detection system(s) to be installed as required by local building/fire department jurisdictions and codes.

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EXHIBIT C

FIRST AMENDMENT TO LEASE AND ACKNOWLEDGMENT

This First Amendment to Lease and Acknowledgment (“First Amendment”) is made as of                     , 20__, with reference to that certain Lease Agreement (“Lease”) by and between                     , a                      corporation, as “Landlord” therein, and                     , as “Tenant” therein, regarding that certain premises (“Premises”) located at                     , and which is more particularly described in the Lease.

The undersigned hereby confirms the following and the provisions of the Lease are hereby amended by the following:

1. That Tenant accepted possession of the Premises from Landlord on                     , 200    , and acknowledges that the Premises are as represented by Landlord, in good condition and repair; and that the improvements, if any, required to be constructed for Tenant by Landlord pursuant to the Lease, have been so constructed and are satisfactory completed in all respects, excepting                                         .

2. That all conditions which are to be satisfied prior to the full effectiveness of the Lease have been satisfied and that Landlord has fulfilled all of its duties of an inducement nature.

3. That in accordance with Section 4 of the Lease, the Commencement Date is                     , 200    , and that, unless sooner terminated, the Expiration Date is                     .

4. That the Lease is in full force and effect and that the same represents the entire agreement between Landlord and Tenant concerning Tenant’s lease of the Premises.

5. That there are no existing defenses which Tenant has against the enforcement of the Lease by Landlord, and no offsets or credits against any amounts owed by Tenant pursuant to the Lease.

6. That Tenant’s obligations to pay the Rent is presently in effect and that all rentals, charges and other obligations on the part of Tenant under the Lease commences to accrue on                     , 20    .

7. That Tenant has not made any prior assignment, hypothecation or pledge of the Lease or of the rents thereunder.

8. Except as modified herein, the Lease remains in full force and effect.

IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date set forth below.

LANDLORD:		TENANT:
PANATTONI DEVELOPMENT COMPANY, a California limited liability company		HEALTH NET, INC., a Delaware corporation
By:		By:	/s/ Dennis Bell
	Michael Diepenbrock	Name:	Dennis Bell
Title:	Partner	Title:	Vice President

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EXHIBIT D

RULES AND REGULATIONS

1. Tenant shall not bring into or keep within the Building any animal or vehicle.

2. Freight, furniture, business equipment, merchandise and bulky matter of any description ordinarily shall be delivered to and removed from the demised Premises only in the designated freight elevator and through the service entrances and corridors.

3. All entrance doors in the demised Premises shall be left locked when the demised Premises are not in use.

4. Tenant shall not attach or permit to be attached additional locks or similar devices to any door, transom or window of the demised Premises; change existing locks or the mechanism thereof; or make or permit to be made any keys for any door thereof other than those provided by Landlord. (If more than two keys for one lock are desired, Landlord will provide them upon payment therefore by Tenant).

5. Tenant shall not advertise the business, profession or activities of Tenant in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining thereto or use the name of the Building for any purpose other than the business address of the Tenant.

6. The drinking fountains, lavatories, water closets and urinals shall not be used for any purpose other than those for which they were installed.

7. No awnings or other projections over or around the windows or entrances of the demised Premises shall be installed by Tenant. Tenant shall not change the draperies or the color of induction unit enclosures in any manner which will alter the Building’s appearance from the outside of the Building.

8. Landlord reserves the right by written notice to Tenant, to rescind, alter to waive any rule or regulation at any time prescribed for the Building when, in Landlord’s reasonable judgment, it is necessary, desirable or proper for the best interest of the Building.

9. The Tenant shall not exhibit, sell or offer for sale on the demised Premises or in the Building any article or thing except those articles and things essentially connected with the stated use of the demised Premises by the Tenant without the advance consent of the Landlord.

10. The Tenant shall never use any picture or likeness of the Building in any circulars, notices, advertisements or correspondence without the Landlord’s consent.

11. The Tenant shall cooperate fully with the Landlord to assure the effective operation of the Building’s air conditioning system. If Tenant shall so use the demised Premises that noxious or objectionable fumes, vapors and odors exist beyond the extent to which they are discharged or eliminated by means of the flues and other devices contemplated by the various plans, specifications and leases, then Tenant shall provide proper ventilating equipment for the discharge of such excess fumes, vapors and odors so that they shall not enter into the air conditioning system or be discharged into other vents or flues of the Building or annoy any of the tenants of adjacent properties. The design, location and installation of such equipment shall be subject to Landlord’s approval.

12. All loading and unloading of merchandise, supplies, materials, garbage and refuse shall be made only through such entryways and elevators. In its use of the loading areas in the basement, the Tenant shall not obstruct or permit the obstruction of said loading area and at no time shall park or allow its officers, agents or employees to park vehicles therein except for loading or unloading.

13. There shall not be used or kept anywhere in the Building by any tenant or persons or firms visiting or transacting business with a tenant any hand trucks, except those equipped with rubber tires and side guards, or other vehicles of any kind.

14. The Tenant shall not contract for any work or service which might involve the employment of labor incompatible with the Building employees or employees of contractors doing work or performing services by or on behalf of the Landlord.

15. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with any window or door of the demised Premises without the prior written consent of the Landlord.

16. No sign, advertisement notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside of the demised Premises or of the Building, without the prior written consent of Landlord. In the event of any violation of the foregoing

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by Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for Tenant by Landlord at the expense of Tenant, and shall be of a quality, quantity, type, design, color, size, style, composition, material, location and general appearance acceptable to Landlord.

17. The sashes, sash doors, skylights, windows and doors that reflect or admit light or air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels, or other articles be placed on the window sills.

18. Except as provided in Section 10 of the Lease, Tenant shall not mark, paint, drill into or in any way deface any part of the demised Premises or the Building. Except as provided in Section 10 of the Lease, no boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct.

19. No animal or bird of any kind shall be brought into or kept in or about the Premises or the Building except for service animals.

20. Neither Tenant nor any of Tenant’s agents, servants, employees, contractors, visitors or licensees shall at any time bring or keep upon the demised Premises any inflammable, combustible or explosive fluid, chemical or substance.

21. No additional locks, bolts or mail slots of any kind shall be placed upon any of the doors or windows by Tenant, nor shall any change be made in existing locks or the mechanism thereof. Tenant must, upon the termination of the tenancy, restore to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by Tenant, and in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.

22. Landlord shall have the right to prohibit any advertising referring to the Building which, in Landlord’s reasonable opinion, tends to impair the reputation of the Building or its desirability as a first-class building for offices, and upon notice from Landlord, Tenant shall refrain from or discontinue such advertising.

23. Tenant’s contractors shall, while in the Building or elsewhere in the complex of which the Building forms a part, be subject to and under the control and direction of the Superintendent of the Building (but not as agent or servant of said Superintendent or of Landlord).

24. If the demised Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the demised Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith at Tenant’s expense cause the same to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord.

25. The requirements of Tenant will be attended to only upon application at the office of the Building. Building personnel shall not perform any work or do anything outside of their regular duties, unless under special instructions from the office of Landlord.

26. Excepting bottled water utilized by Tenant, no water cooler, air conditioning unit or system or other apparatus shall be installed or used by Tenant without the written consent of Landlord.

27. Tenant shall install and maintain, at Tenant’s sole cost and expense, an adequate visibly marked (at all times properly operational) fire extinguisher next to any duplicating or photocopying machine or similar heat producing equipment, which may or may not contain combustible material, in the demised Premises.

28. Tenant shall not use the name of the Building for any purpose other than as the address of the business to be conducted by Tenant in the demised Premises, nor shall Tenant use any picture of the Building in its advertising, stationery or in any other manner without the prior written permission of Landlord. Landlord expressly reserves the right at any time to change said name without in any manner being liable to Tenant therefor.

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EXHIBIT E

JANITORIAL SPECIFICATIONS

RESTROOMS

DAILY:

1. Clean and sanitize commodes, urinals, sinks and countertops.

2. Clean and refill dispensers.

3. Clean mirrors and polish chrome.

4. Empty all trash receptacles and women’s sanitary receptacles.

5. Spot wash walls, partitions and doors.

6. Sweep and damp mop floors with disinfectants.

WEEKLY:

1. Pour disinfectant down floor drains.

2. Dust horizontal surfaces (mirrors, partitions, walls, etc.).

MONTHLY:

1. Seal and wax floors; strip if necessary.

2. Dust air vents.

COMMON AREAS

DAILY:

1. Vacuum all carpets (including edges and stairwells) and spot clean as required.

2. Damp mop all tile floors, where applicable.

3. Spot clean all glass entrances.

4. Clean complete interior and exterior cab including vacuuming, wiping elevator thresholds/tracks, mirrors (if required), etc.

5. Spot clean walls wherever needed.

6. Maintain janitorial storage areas in a neat and orderly manner.

7. Dust all horizontal surfaces to include picture frames, woodwork, doorjambs, window mullions, etc.

8. Clean directory glass, drinking fountains and firehouse glass, as needed.

9. Spot clean walls, door surfaces, glass, woodwork, etc.

10. Spot clean carpet as needed.

11. Empty building entrance ash urns and trash receptacles (interior & exterior).

WEEKLY:

1. Clean and polish railing in lobby where applicable.

2. Sweep and clean all walkways and verandas.

3. Clean all air vents and signs.

4. Clean kick plates and thresholds.

MONTHLY:

1. Clean lobby tile floors.

2. Sweep and dust stairwells.

3. Shampoo elevator cabs and common area carpet.

4. Dust return air vents.

AS REQUIRED:

1. Remove cobwebs from high areas.

2. Clean smudges, marks, etc. on all doors (i.e. restrooms, tenant suites, janitorial closets, SMUD/Electrical rooms, etc.)

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TENANT SUITES

DAILY:

1. Vacuum all open carpet and spot clean as required.

2. Empty all wastebaskets and remove trash to designated areas.

3. If applicable to the building, empty any large recycle bins to designated areas.

4. Thoroughly dust and clean all office furnishings including telephone sets, wall switches, kitchen countertops, shelving, credenzas, thermostats, etc. (Desk tops to be worked out with property management, if required).

5. Spot clean all walls, door surfaces, glass, woodwork, etc.

6. Restock kitchen, break room, & restroom supplies, as required.

WEEKLY:

1. Dust all table legs, chairs and windowsills.

2. Clean and dust all high surfaces including ceiling vents, partition ledges, doorjambs, etc.

MONTHLY:

1. Clean and dust all low surfaces including baseboards.

2. Vacuum all non-reached areas including corners, behind desks, edges, etc.

3. Wash all interior partition glass.

4. Seal and wax any VCT (vinyl) and hard surface flooring; strip if necessary.

QUARTERLY:

1. Dust blinds where applicable.

DAY CUSTODIAN ASSIGNMENTS

1. The entrance lobby and plaza areas are to be kept neat and clean at all times.

2. Unlock doors of building at specified time.

3. Clean and maintain all lobbies and hallways, doors, drinking fountains, exit signs, etc.

4. Clean entry and exit doors on both sides of building daily.

5. Clean window and side glass in all hallways weekly.

6. Wipe down metal and marble surfaces daily.

7. Dust and polish all brass daily.

8. Clean cigarette urns and screen sand daily as necessary.

9. Empty trash receptacles as necessary.

10. Clean lobby elevator saddles, doors and frames daily.

11. Clean sides of elevator cars daily.

12. Check all rest rooms daily and restock.

13. Sweep off walkways removing dirt and debris.

14. Change lights and ceiling tiles as necessary.

15. Wash lower lobby windows as necessary.

16. Perform miscellaneous project for property manager.

17. Report arrival and departure to property manager.

18. Insure outside parking lot drains are free of debris.

GENERALLY

1. English-speaking supervisors shall at all times be available.

2. All personnel must be bonded and carry reasonable levels of insurance.

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EXHIBIT F

EXCLUSIONS FROM OPERATING EXPENSES

AND REAL ESTATE TAXES

Landlord and Tenant agree that the “Operating Expenses and Real Estate Taxes” shall not include any of the following:

1. Any ground lease rental;

2. Costs incurred by Landlord for the repair of damage to the Building by fire or other event which is paid by insurance or required to be insured;

3. Salaries and bonuses of officers and executives of Landlord above the level of Building Manager;

4. Depreciation and amortization, except as provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, all as determined in accordance with generally accepted accounting practices, consistently applied, and when depreciation or amortization is permitted or required, the item shall be amortized over its useful life;

5. Attorneys’ fees and other costs and expenses incurred in connection with negotiations or disputes with past or prospective tenants or other occupants of the Building (including costs incurred due to violations by tenants of the terms and conditions of their leases);

6. Costs of a capital nature, including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools, all as determined in accordance with generally accepted accounting practices, consistently applied;

7. Costs incurred by Landlord due to the violation by Landlord of the terms and conditions of any former lease of space in the Building;

8. Any cost representing an amount paid to any person, firm, corporation or other entity related to or affiliated with Landlord, which amount is in excess of the amount which would have reasonably been paid in the absence of such relationship for comparable work or services involving the Building or comparable buildings in the area in which the Building is located;

9. Interest, points, and fees on debt or amortization on any mortgage or mortgages encumbering the Building;

10. Landlord’s general corporate overhead, except as it relates to the specific management of the Building;

11. Rental payments incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment not affixed to the Building which is used in providing janitorial, parking lot maintenance, window washing or similar services;

12. Advertising and promotional expenditures and costs of signs in or on the Building identifying the owner or any tenant of the Building;

13. All items and services for which Tenant reimburses Landlord (other than through operating expense pass-through provisions);

14. Costs relating to compliance with any environmental regulations;

15. Tax penalties and interest incurred as a result of Landlord’s negligence or inability or unwillingness to make tax payments when due, so long as such penalties or interest do not result from Tenant’s breach of the Lease or Tenant’s failure to make timely payment of any sum due under the Lease;

16. Any management or administrative fee in excess of those included in the base year;

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17. Any charge or expense to the extent that it is in excess of that charged by landlords for similar buildings in the area in which the Building is located;

18. Costs due to violation of law;

19. Any new item or category of expense not included in the Operating Expenses and Real Estate Taxes in the base year.

20. Costs to cure construction defects.

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EXHIBIT G

FLOOR PLANS OF PREMISES

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EX-10.65

EXHIBIT 10.65

FIRST AMENDMENT TO LEASE AND ACKNOWLEDGMENT

This First Amendment to Lease and Acknowledgment (“First Amendment”), dated for reference purposes only as of February 8, 2007, is made with reference to that certain Lease Agreement dated as of July 24, 2006 (“Lease”) by and between Panattoni Development Company, LLC, a California Limited Liability Company, as “Landlord” therein, and Health Net of California, Inc., a California corporation (as successor-in-interest to Health Net Inc., a Delaware Corporation), as “Tenant” therein, regarding that certain premises (“Premises”) located at 11031 Sun Center Drive Rancho Cordova, CA and which is more particularly described in the Lease.

The undersigned hereby confirms the following and the provisions of the Lease are hereby amended by the following:

1. That all conditions which are to be satisfied prior to the full effectiveness of the Lease have been satisfied, except for the items set forth on the attached Exhibit “A” (“Landlord’s Outstanding Obligations Under the Lease”).

2. That in accordance with Section 4 of the Lease, the Commencement Date is January 1, 2007, and that, the Expiration Date is December 31, 2009.

3. That to Tenant’s actual knowledge, the Lease is in full force and effect and that the same represents the entire agreement between Landlord and Tenant concerning Tenant’s lease of the Premises.

4. That to Tenant’s actual knowledge, there are no existing defenses which Tenant has against the enforcement of the Lease by Landlord, and no offsets or credits against any amounts owned by Tenant pursuant to the Lease.

5. That Tenant’s obligations to pay the Rent are presently in effect and that all rentals, charges and other obligations on the part of Tenant under the Lease commence to accrue on January 1, 2007.

6. Tenant has not made any prior assignment, with the exception of the assignment from Health Net Inc., a Delaware Corporation, to Health Net of California, Inc., a California corporation.

7. Section 37(r), Late Charges, is hereby amended to change “fifth day” to “tenth day” in the 7 ^th line thereof.

8. Section 39(b)(1) is hereby deleted and replaced with the following:

“If Tenant elects to exercise its option to renew the term of the Lease for the First Option Term, then Tenant shall provide Landlord with written notice (the “First Renewal Notice”) no later than 5:00 pm on December 31, 2007. If Tenant elects to exercise its option to renew the term of the Lease for the Second Option Term, then Tenant shall provide Landlord with written notice (the “Second Renewal

Notice”, and generically with the First Renewal Notice, a “Renewal Notice”) no later than 5:00 pm on December 31, 2008. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of this Lease.”

The third sentence of Section 39(b)(5) is hereby deleted.

9. Section 39(c) is hereby amended to provide an additional fourth (4th) sentence, reading as follows:

“Tenant will also return the area under and around the generator and generator enclosure to its prior condition and use as vehicle parking. The removal and repair of this area will be completed no later than 30 days following lease termination and will be done at Tenant’s sole cost and expense.”

10. Tenant hereby waives it right, pursuant to Section 4.2 of Exhibit B, to receive up to additional $10.00 per rentable square foot and to have such Additional Allowance amortized over the term of the Lease.

11. Section 4.2 of Exhibit B is hereby amended to provide that Landlord shall, upon execution of this First Amendment, pay to Tenant the sum of $67,825 as Landlord’s contribution towards corrective work for removal and replacement of three (3) stairwells in the Building which were in noncompliance with current building codes, plus the sum of $3,784 for the installation of insulation in the first floor overhangs, both as required by the City of Rancho Cordova.

12. This First Amendment may be executed in any number of counterparts, but all such counterparts together shall constitute a single binding instrument.

13. Except as modified herein, the Lease remains in full force and effect.

2

IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date(s) set forth below.

LANDLORD:		TENANT:
PANATTONI DEVELOPMENT COMPANY, LLC, a California limited liability company		HEALTH NET OF CALIFORNIA, INC., a California corporation
		By:	/s/ Dennis Bell
By:	/s/ Michael Diepenbrock
	Michael Diepenbrock	Name:	Dennis Bell
Title:	Partner	Title:	Chief Real Estate and Procurement Officer
Date:	02/07/07	Date:	February 8, 2007

EXHIBIT “A”

LANDLORD’S OUTSTANDING OBLIGATIONS UNDER THE LEASE

1. Payment of $25.00 per rental square foot for Tenant Improvements as set forth in Exhibit B to the Lease (Lease Improvement Agreement) Section 4.2.

2. Completion of all ADA modifications required on the Lot other than those required for the interior of the Building.

3. Completion of parking lot curb repairs, curb painting and restriping throughout the Lot.

EX-10.66

EXHIBIT 10.66

OFFICE BUILDING LEASE

1. PARTIES. This Lease, dated, for reference purposes only, July 13 , 1995 , is made by and between Aerojet–General Corporation, an Ohio corporation (herein called “Landlord”) and Foundation Health, a California Health Plan, a California corporation (herein called “Tenant”).

See Addendum, Paragraph 35

Said Lease is subject to the terms, covenants, and conditions herein set forth and the Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of said performance.

2. TERM. The term of this Lease shall be for two (2) years and one (1) month commencing on the 1st day of September, 1995, and ending on the 30th day of September, 1997. See Addendum, Paragraph 37

3. POSSESSION. See Addendum, Paragraph 37

3.a. If the Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to the Tenant at the commencement of the term hereof, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom.

3.b. In the event that Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the termination date hereinabove provided.

4. RENT. Tenant agrees to pay to Landlord as rental, without prior notice or demand, for the Premises the sum of: one dollar ($1.00) per rentable square foot of the premises, as determined in accordance with BOMA standards, per month , on or before the first day of the first full calendar month of the term hereof and a like sum on or before the first day of each and every successive calendar month thereafter during the term hereof, except that the first month’s rent shall be paid upon the execution hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment herein based upon a thirty (30) day month. Said rental shall be paid to Landlord, without deduction or offset in lawful money of the United States of America, which shall be legal tender at the time of payment at the Office of the Building, or to such other person or at such other place as Landlord may from time to time designate in writing.

See Addendum, Paragraph 38.

5. USE. Tenant shall use the Premises for general office purposes and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord.

Tenant shall not do, or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause cancellation of any insurance policy covering said Building or any part thereof or any of its contents. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises.

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6. COMPLIANCE WITH LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition use or occupancy of the Premises excluding structural changes not related to or affected by Tenant’s improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto, or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between the Landlord and Tenant.

7. ALTERATIONS AND ADDITIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the Premises or any part thereof without the written consent of Landlord first had and obtained and any alterations, additions or improvements to or of said Premises, including, but not limited to, wall covering, paneling and built-in cabinet work, but excepting movable furniture and trade fixtures, shall on the expiration of the term become a part of the realty and belong to the Landlord and shall be surrendered with the Premises. In the event Landlord consents to the making of any alterations, additions or improvements to the Premises by Tenant, the same shall be made by Tenant at Tenant’s sole cost and expense and any contractor or person selected by Tenant to make the same must first be approved of in writing by the Landlord. Upon the expiration or sooner termination of the term hereof, Tenant shall, upon written demand by Landlord, given at least thirty (30) days prior to the end of the term, at Tenant’s sole cost and expense, forthwith and with all due diligence remove any alterations, additions or improvements made by Tenant, designated by Landlord to be removed, and Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair any damage to the Premises caused by such removal.

8. REPAIRS.

8.a. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as being in good, sanitary order, condition and repair. Tenant shall, at Tenant’s sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear excepted. Tenant shall upon the expiration or sooner termination of this Lease surrender the Premises to the Landlord in good condition, ordinary wear and tear and damage from causes beyond the reasonable control of Tenant excepted. Except as specifically provided in an addendum, if any, to this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically herein set forth.

8.b. Notwithstanding the provisions of Article 8.a. hereinabove, Landlord shall repair and maintain the structural portions of the Building, including the roof, foundation and walls, and basic plumbing, air conditioning, heating, and electrical systems, installed or furnished by Landlord, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Article 18 hereof, there shall be no abatement of rent and no liability of Landlord by reason or any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord’s expense under any law, statute or ordinance now or hereafter in effect.

9. LIENS. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Landlord may require, at Landlord’s sole option, that Tenant shall provide to Landlord, at Tenant’s sole cost and expense, a lien

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and completion bond in an amount equal to one and one-half (1 ¹/2) times, any and all estimated cost of any improvements, additions, or alterations in the Premises, to insure Landlord against any liability for mechanics’ and materialmen’s liens and to insure completion of the work.

10. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily or by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the said Premises or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person (the employees, agents, servants and invitees of Tenant excepted) to occupy or use the said Premises, or any portion thereof.

11. SUBROGATION. As long as both their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver.

12. LIABILITY INSURANCE. Tenant shall, at Tenant’s expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. The limit of said insurance shall not, however, limit the liability of the Tenant hereunder. Tenant may carry said insurance under a blanket policy, providing, however, said insurance by Tenant shall have a Landlord’s protective liability endorsement attached thereto. If Tenant shall fail to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, but at the expense of Tenant. Insurance required hereunder, shall be in companies rated A+ AAA or better in “Best’s Insurance Guide”. Tenant shall deliver to Landlord prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancellable or subject to reduction of coverage except after ten (10) days’ prior written notice to Landlord.

13. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder Landlord agrees to furnish to the Premises from 6:00 a.m. to 6:00 p.m. Monday through Friday and 8:00 a.m. to 1:00 p.m. on Saturday and at such other times as Tenant may request subject to the rules and regulations of the Building of which the Premises are a part, electricity for normal lighting and fractional horsepower office machines, heat and air conditioning required in Landlord’s judgment for the comfortable use and occupation of the Premises, and janitorial service. Landlord shall also maintain and keep lighted the common stairs, common entries and toilet rooms in the Building of which the Premises are a part and that portion of the parking lot containing spaces allocated to Tenant. Landlord shall not be liable for, and Tenant shall not be entitled to, any reduction of rental by reason of Landlord’s failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable under any circumstances for a loss of or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, and the cost of operation and maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord.

Tenant will not, without written consent of Landlord, use any apparatus or device in the Premises, including, but without limitation thereto, electronic data processing machines, punch card machines, and machines using in excess of 120 volts, which will in any way increase the amount of electricity usually furnished or supplied for the use of the Premises as general office space; nor connect with electric current except through existing electrical outlets in the Premises, any apparatus or device, for the purpose of using electric currant. If Tenant shall require water or electric current in excess of that usually furnished or supplied for the use of the Premises as general office space, Tenant shall first procure the written consent of Landlord, which Landlord may refuse, to the use thereof and Landlord may cause a water meter or electrical current meter to be installed in the Premises, so as to measure the amount of water and electric current consumed for any such use. The cost of any such meters and of installation, maintenance and repair thereof shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand therefor by Landlord for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, such excess cost for such water and electric current will be established by an estimate made by a utility company or electrical engineer.

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14. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon all Tenant’s leasehold improvements, equipment, furniture, fixtures and personal property located in the Premises; except that which has been paid for by Landlord, and is the standard of the Building. In the event any or all of the Tenant’s leasehold improvements, equipment, furniture, fixtures and personal property shall be assessed and taxed with the Building, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant’s property.

15. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations that Landlord shall from time to time promulgate and which are attached hereto. Landlord reserves the right from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any said rules by any other tenants or occupants.

16. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof, with the consent of Landlord, such occupancy shall be a tenancy from month to month at a rental in the amount of the last monthly rental, plus all other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy.

17. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the right to enter the Premises, inspect the same, supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part that Landlord may deem necessary or desirable, without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and further providing that the business of the Tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages or for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant’s vaults, safes and files, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Tenant except for any failure to exercise due care for Tenant’s property. Any entry to the Premises obtained by Landlord by any of said means, or otherwise shall not under any circumstances be construed or deemed to be a forceable or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof.

18. RECONSTRUCTION. In the event the Premises or the Building of which the Premises are a part are damaged by fire or other perils covered by fire and extended coverage insurance, Landlord agrees to forthwith repair the same; and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall materially interfere with the business carried on by the Tenant in the Premises. If the damage is due to the fault or neglect of Tenant or its employees, there shall be no abatement of rent.

In the event the Premises or the Building of which the Premises are a part are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance, then Landlord shall forthwith repair the same, provided the extent of the destruction be less than ten (10%) per cent of the then full replacement cost of the Premises or the Building of which the Premises are a part. In the event the destruction of the Premises or the Building is to an extent greater then ten (10%) per cent of the full replacement cost, then Landlord shall have the option: (1) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately reduced as hereinabove in this Article provided; or (2) give notice to Tenant at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate on the date so specified in

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such notice and the Rent, reduced by a proportionate amount, based upon the extent, if any, to which such damage materiality interfered with the business carried on by the Tenant in the Premises, shall be paid up to date of said such termination.

Notwithstanding anything to the contrary contained in this Article, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article occurs during the last twelve (12) months of the term of this Lease or any extension thereof.

Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor covering, partitions, or any other property installed in the Premises by Tenant.

The Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the premises, Tenant’s personal property or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. Notwithstanding the foregoing, Tenant has the option to terminate the Lease if more than 20% of the premises are rendered unuseable by destruction for more than 30 days after the date on which the damage occurred.

19. DEFAULT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant.

19.a. The vacating or abandonment of the Premises by Tenant.

19.b. The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Landlord to Tenant.

19.c. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Tenant, other than described in Article 19.b. above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant’s default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.

19.d. The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged in thirty (30) days.

20. REMEDIES IN DEFAULT. In the event of any such material Default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach:

20.a. Terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant’s default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney’s fees, any real estate commission actually paid; the worth at the time of award by the Court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; that portion of the leasing commission held by Landlord and

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applicable to the unexpired term of this Lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of ten (10%) per cent per annum. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (a) taking possession of the Premises and recovering from Tenant the amount specified in this paragraph, or (b) proceeding under the provisions of the following Article 20.b.

20.b. Maintain Tenant’s right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord’s rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder.

20.c. Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decision of the State in which the Premises are located.

21. EMINENT DOMAIN. If more than twenty-five (25%) per cent of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, either party hereto shall have the right, at its option, to terminate this Lease, and Landlord shall be entitled to any and all income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such public or quasi-public use or purpose, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. If either less than or more than twenty-five (25%) per cent of the Premises is taken, and neither party elects to terminate as herein provided, the rental thereafter to be paid shall be equitably reduced. If any part of the Building other than the Premises may be so taken or appropriated, Landlord shall have the right at its option to terminate this Lease and shall be entitled to the entire award as above provided.

22. OFFSET STATEMENT. Tenant shall at any time and from time to time upon not more than twenty (20) days’ prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part.

23. PARKING. See Addendum, paragraph 42.

24. AUTHORITY OF PARTIES.

24.a. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms.

24.b. Limited Partnerships. If the Landlord herein is a limited partnership, it is understood and agreed that any claims by Tenant on Landlord shall be limited to the assets of the limited partnership, and furthermore, Tenant expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership.

25. GENERAL PROVISIONS.

(i) Plats and Riders. Clauses, plats and riders, if any, signed by the Landlord and the Tenant and endorsed on or affixed to this Lease are a part hereof.

(ii) Waiver. The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rental so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of the acceptance of such rent.

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(iii) Notices. All notices and demands which may or are to be required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by the Landlord to the Tenant shall be sent by United States Mail, postage prepaid, addressed to the Tenant at the Premises, or to such other place as Tenant may from time to time designate in a notice to the Landlord. All notices and demands by the Tenant to the Landlord shall be sent by United States Mail, postage prepaid, addressed to Terrance Griffin, Building 2001, Department 0170, P.O. Box 1322, Sacramento, CA 95813-6000, or to such other person or place as the Landlord may from time to time designate in a notice to the Tenant.

(iv) Joint Obligation. If there be more than one Tenant the obligations hereunder imposed upon Tenants shall be joint and several.

(v) Marginal Headings. The marginal headings and Article titles to the Articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof.

(vi) Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor.

(vii) Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto, subject to the absolute prohibition against sublease and assignment.

(viii) Recordation. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the prior written consent of the other party.

(ix) Quiet Possession. Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant’s part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease.

(x) Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Tenant shall not be received by Landlord or Landlord’s designee within ten (10) days after written notice that said amount is past due, then Tenant shall pay to Landlord a late charge equal to ten (10%) per cent of such overdue amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of the late payment by Tenant. Acceptance of such late charges by the Landlord shall in no event constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.

(xi) Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto.

(xii) Inability to Perform. This Lease and the obligations of the Tenant hereunder shall not be affected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Landlord.

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(xiii) Attorneys’ Fees. In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable in attorneys’ fees.

(xiv) Sale of Premises by Landlord. In the event of any sale of the Building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease.

(xv) Subordination, Attornment. Upon request of the Landlord, Tenant will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the land and Building of which the Premises are a part, and upon any buildings hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof.

In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord covering the Premises, the Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease.

The provisions of this Article to the contrary notwithstanding, and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof.

(xvi) Name. Tenant shall not use the name of the Building or of the development in which the Building is situated for any purpose other than as an address of the business to be conducted by the Tenant in the Premises.

(xvii) Separability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect.

(xviii) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

(xix) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located.

(xx) Signs and Auctions. Tenant shall not place any sign upon the Premises or Building or conduct any auction thereon without Landlord’s prior written consent.

26. BROKERS. Tenant warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease excepting only Frank Pipgras Real Estate and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease.

27. BROKER’S FEE.

(a) Upon execution of this Lease by both parties, Landlord shall pay to Frank Pipgras Real Estate and McCuen Properties Licensed real estate broker(s), a fee as set forth in Addendum, Paragraph 46 for brokerage services rendered by said broker(s) to Landlord in this transaction.

(b) Landlord further agrees that if Tenant exercises any Option which is granted to Tenant under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Tenant under this Lease, or if Tenant acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Tenant would have acquired had an Option herein granted to Tenant been exercised, or if Tenant remains in possession of the Premises after the expiration of the term of this Lease after having failed to

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exercise an Option, or if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Landlord has an interest, then as to any of said transactions, Landlord shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease.

(c) Landlord agrees to pay said fee not only on behalf of Landlord, but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Landlord’s interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Landlord’s obligation under this paragraph. Said broker shall be a third party beneficiary of the provisions of this paragraph.

**CONTINUED ON NEXT PAGE**

The parties hereto have executed this Lease at the place and on the dates specified immediately adjacent to their respective signatures.

If this Lease has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Lease or the transactions relating thereto.

	AEROJET-GENERAL CORPORATION, an Ohio Corporation
	By	/s/ Terry P. Griffin
	Its:	Director, Real Estate
Address	By
	“LANDLORD”
	FOUNDATION HEALTH, A CALIFORNIA HEALTH PLAN, a California Corporation
	By	/s/ Joe E. Erway
	Its:	Vice President
Address	By
	“TENANT”

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RULES AND REGULATIONS

1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the Building without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant.

All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord.

Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises; provided, however, that Landlord may furnish and install a Building standard window covering at all exterior windows. Tenant shall not without prior written consent of Landlord cause or otherwise sunscreen any window.

2. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress and egress from their respective Premises.

3. Tenant shall not alter any lock or install any new or additional locks or any bolts on any doors or windows of the Premises.

4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant.

5. Tenant shall not overload the floor of the Premises or in any way deface the Premises or any part thereof.

6. No furniture, freight or equipment of any kind shall be brought into the Building without the prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property from any cause and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expanse of Tenant.

7. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building.

8. No cooking shall be done or permitted by any Tenant on the Premises, nor shall the Premises be used for the storage of merchandise, for washing clothes, for lodging, or for any improper, objectionable or immoral purposes.

9. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Landlord.

10. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the consent of the Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord.

11. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. the following day, access to the Building, or to the halls, corridors, elevators or stairways in the Building, or to

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the Premises may be refused unless the person seeking access is known to the person or employee of the Building in charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person, in case of invasion, mob, riot, public excitement, or other commotion, the Landlord reserves the right to prevent access to the Building during the continuance of the same by closing of the doors or otherwise, for the safety of the tenants and protection of property in the Building and the Building.

12. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building.

13. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of the Landlord.

14. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Premises are a part.

15. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate to prevent same.

16. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant’s address.

17. Landlord shall have the right to control and operate the public portions of the Building, and the public facilities, and heating and air conditioning, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally.

18. All entrance doors in the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed except for normal ingress and egress from the Premises.

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EX-10.67

EXHIBIT 10.67

ADDENDUM TO LEASE

This is an Addendum to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995.

35. Premises. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord approximately fifty thousand (50,000) rentable square feet of office space (herein called “Premises”) comprising the entire first (1st) floor of Building number 2025 (the “Building”) located at the Aerojet headquarters in the City of Rancho Cordova, in the State of California. The rentable square feet contained in the Building and the Premises shall be field measured according to BOMA Standards (ANSI 265.1-1980/reaffirmed 1989) by a reputable space planner or architect reasonably satisfactory to Landlord.

36. Condition of Premises and Building Improvements.

A. Landlord’s Obligations. Prior to delivery of the Premises to Tenant, Landlord shall conduct, at Landlord’s sole cost and expense, the following cleaning and repair of the Premises (collectively, “Landlord’s Work”):

1. Repair T-Bar grid and replace damaged ceiling tiles.

2. Perform minor repairs to drywall prior to painting.

3. Paint all interior walls, door frames, and columns.

4. Repair existing carpeting and, to the extent needed, install new direct glue down carpeting. Landlord and Tenant estimate that ten percent (10%) to fifteen percent (15%) of the carpeting in the Premises will require replacement.

Existing doors and hardware will remain. No work will be done to the lobby area. No demolition work will be conducted. Other than Landlord’s Work, Tenant shall take the Premises “as is.” Upon execution of the Lease, Landlord and Tenant shall conduct a walk-through of the Premises and agree upon the maximum cost that Landlord shall be required to incur in conducting Landlord’s Work.

B. Tenant’s Obligations. Any other preparation of, or improvements to, the Building that Tenant desires shall, subject to approvals from Landlord under paragraph 10 of this Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense, except that Landlord agrees to provide to Tenant an allowance up to eighty thousand dollars ($80,000,00) to reimburse Tenant for costs and expenses incurred by Tenant in refurbishing the southern entrance to the Building and the exterior of the Building near said southern entrance.

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C. Communications Improvements. Tenant shall have the right to install and distribute data communications wiring, telephone lines and other communications and information processing relating wiring and equipment as reasonably required for Tenant’s business,

37. Possession. Landlord shall deliver the Premises to Tenant upon completion of Landlord’s Work. Landlord shall use its best efforts to complete said work on or before September 1, 1995. If Landlord fails to deliver the Premises to Tenant on or before September 1, 1995, then the term of the Lease shall commence on the date of delivery and end two (2) years and one (1) month after that date.

38. Use by Subsidiaries. Tenant may allow any one hundred percent (100%) owned subsidiary of Foundation Health Corporation, a Delaware corporation, to use the Premises at any time, and for any duration, during the term of the Lease, provided there shall be no assignments of, or subletting under, this Lease. If Tenant does request Landlord’s consent to any assignment, subletting, or use by any other person or entity, Landlord may withhold such consent arbitrarily, capriciously, and without reason.

39. Option to Extend. Tenant shall have the right and option to extend the term of this Lease for two (2) consecutive six (6) month periods commencing immediately upon the ending date of this Lease and the first six (6) month extension, respectively, upon the following conditions:

A. That Tenant is not, at the time of option exercise, in default under this Lease.

B. That Tenant shall, not later than one hundred fifty (150) calendar days prior to the ending date of this Lease or the first six (6) month extension, as appropriate, provide, and Landlord receives, a duly mailed written notice setting forth Tenant’s exercise of the option to extend the term of this Lease. Failure by Tenant to provide timely written notice as set forth herein shall, unless, and in the sole discretion of Landlord, a later notice is acceptable to the Landlord, cause the option to lapse and its exercise by Tenant shall not be effective.

40. Option to Expand.

a. Thirty Thousand (30,000) Rentable Square Feet. During the first year of the term of the Lease, Tenant shall have the right and option to expand the Premises to include thirty thousand (30,000) rentable square feet situated on the second (2^nd) floor of the Building (“First Expansion Space”) upon thirty days’ written notice to Landlord (“First Option to Expand”). If Tenant fails to exercise such option to expand, then, on the first anniversary of the commencement of the term, the Premises shall be expanded automatically to include the First Expansion Space.

The exact location and configuration of the First Expansion Space are to be determined by Tenant upon the earlier of (i) Tenant’s exercise of its First Option to Expand or (ii) thirty (30) days prior to the first anniversary of the term of the Lease.

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b. Twenty Thousand (20,000) Rentable Square Feet. Tenant shall have the right and option to expand the Premises to include all, and not less than all, of the remaining rentable square feet contained in the Building (which the parties anticipate to be approximately twenty thousand (20,000) rentable square feet) (“Second Expansion Space”). Tenant shall have the right to effect such expansion option upon written notice to Landlord simultaneously with its First Option to Expand or at anytime after Tenant takes possession of the First Expansion Space.

The rentable square feet contained in the First Expansion Space and the Second Expansion Space shall be field measured according to BOMA Standards (ANSI 265.1-1980/reaffirmed 1989) by a reputable space planner or architect reasonably satisfactory to Landlord. The First Expansion Space and the Second Expansion Space, as appropriate, shall be deemed to be included as a part of the “Premises” and shall be subject to the same terms and conditions as the original office space. The rental rate for the additional office space shall be the same as the rental rate for the original office space.

Landlord shall improve both the First Expansion Space and the Second Expansion Space to the same extent that Landlord improves the original office space. Such improvements shall be completed by the earlier of (i) thirty (30) days after Tenant exercises its First Option to Expand or (ii) the first anniversary of the term of the Lease. Tenant shall have the right to install and distribute data communications wiring, telephone line and other communications and information processing wiring and equipments as reasonably required for Tenant’s business.

41. Signage. With Landlord’s prior approval as to the design of the signage, Tenant may install a sign on the Building. Landlord shall provide a one-time five thousand dollar ($5,000) allowance for the cost of designing and installing the signage. Tenant may not erect any other signs without the written permission of Landlord.

42. Parking. Tenant shall be entitled, at no cost, to seven and one-half (7 & 1/2) spaces per one thousand (1,000) rentable square feet of the Premises,

43. Security. The Building is located in a complex of office buildings, for which Landlord provides a package of security features, including without limitation, a security fence, twenty-four (24) hour security guard, and security identification cards. Tenant shall benefit from and cooperate in the security features that Landlord provides to the office complex, including the Premises.

44. Access to Premises. Tenant shall have access to the Premises and the parking twenty-four (24) hours per day, seven (7) days per week, fifty-two (52) weeks per year.

45. Utility Services. Tenant shall be responsible for and timely pay all electrical and gas utility costs associated with the occupancy and use of the Premises. At Landlord’s expense, the Building will be separately metered for electrical and gas service.

Landlord will use its best efforts to ensure continuous availability of telecommunications, telephone, electrical, gas, and other utility services to the Building, but Landlord cannot and does not guaranty that such continuous service will occur. Tenant agrees that Landlord shall have no liability for any loss or damage caused by discontinuation or interruption of utility services.

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46. Brokers’ Fee. Landlord shall pay a brokers’ fee equal to six percent (6%) of the total rent for the Premises leased at the commencement of the term. One-half (1/2) of the brokers’ fee shall be due and payable promptly following the determination of the exact square footage of the Premises, upon which the rent is based, provided that Landlord is then assured that no rescission under Section 47 can occur. The balance of the brokers’ fee shall be due and payable upon commencement of the term of this Lease.

If Tenant exercises its option to extend the Lease or its option to expand the Premises or the Premises are automatically expanded, then Landlord shall pay a brokers’ fee equal to six percent (60) of the total increase in rent for the Premises. Such additional brokers’ fee shall be due and payable upon effective exercise of the Tenant’s option or the automatic expansion, as appropriate.

47. Compliance with Governmental Requirements. Landlord shall be responsible for bringing the Building into compliance with the Americans with Disabilities Act (“ADA”). Landlord shall bear the cost of bringing the Building into compliance with the ADA and shall not pass such cost through to Tenant by any means, including, without limitation, deducting the cost of ADA compliance from any of Tenant’s tenant improvement allowances.

If in the process of obtaining government permits or approvals necessary to make the Building available to Tenant in accordance with the terms of this Lease, unusual or burdensome requirements are imposed, then either Landlord or Tenant may rescind this Lease. Completion of Landlord’s Work and issuance of a building permit to Tenant for its initial work shall be conclusively deemed to mean that no such unusual or burdensome requirements were imposed.

48. Environmental Site Conditions Certification and Indemnification. Landlord represents and certifies to Tenant the following relative to the Building:

A. Landlord has no information indicating that the Building ever had any industrial activity conducted on it. Landlord is not aware of any soil contamination on the Building.

B. Groundwater contamination, at depth, may exist below the Building. Such contamination is being addressed pursuant to a consent decree entered into by Landlord and state and federal environmental protection agencies. Such decree requires Landlord to investigate and remediate any such groundwater contamination with the review and approval of the state and federal governments.

C. The consent decree also requires Landlord to notify the governments before any possessory interest in any land on the Sacramento facility is granted. On August 2, 1995 Landlord provided such notice regarding the potential lease of Building number 2023.

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Landlord will defend and indemnify Tenant in respect of any liability and claim of liability (“Liability Claim”) which any third person asserts against Tenant and is based solely on and arises solely out of any environmental contamination which is associated with the Premises and its immediate surrounding area and is caused by Landlord, subject to each of the following conditions:

A. Tenant promptly gives Landlord written notice of any Liability Claim and delivers to Landlord a copy of each document or other writing which Tenant receives in connection therewith;

B. Tenant, at its own expense, cooperates with Landlord in every reasonable way in connection with the defense of each Liability Claim;

C. Landlord, at its option, may control the defense of each Liability Claim, select lawyers to defend each Liability Claim, and compromise and settle each Liability Claim; and

D. Tenant gives Landlord notice of the Liability Claim within one year after the expiration or termination of this Lease, whichever first occurs.

Tenant will defend and indemnify Landlord in respect of any liability and claim of liability (“Liability Claim”) which any third person asserts against Landlord and is based solely on and arises solely out of any environmental contamination which is associated with the premises and its immediate surrounding area and is caused by Tenant during this Lease.

49. Insurance. Landlord and Tenant agree that the amount of coverage that Tenant shall procure and maintain pursuant to Section 16 shall be no less than Five Million Dollars ($5,000,000.00). Tenant may have a deductible up to, and no greater than, One Million Dollars ($1,000,000.00). The insurer or insurers shall be subject to Landlord’s approval, which approval shall not be unreasonably withheld or delayed, and any substitute insurer or insurers shall have equal or better performance and financial ratings under “Best’s Key Rating Guide.”

Tenant shall also procure and maintain, at Tenant’s sole cost and expense, insurance adequate to protect Tenant and Landlord under the workers’ compensation laws of the State of California (Part A) plus standard employer’s liability insurance in an amount not less than One Million Dollars ($1,000,000.00) (Part B), including waiver of subrogation rights with respect to Landlord. Tenant shall provide Landlord with appropriate certification or other proof of such coverage.

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		Landlord
		Aerojet-General Corporation, an Ohio corporation
Dated:		By:	/s/ Terry P. Griffin
		Its:	Director, Real Estate
		Tenant
		Foundation Health, a California Health Plan, a California corporation
Dated:	August 2, 1995	By:	/s/ Joe E. Erway
		Its:	Vice President

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SECOND ADDENDUM (“Second Addendum”) TO OFFICE BUILDING LEASE

DATED JULY 13, 1995, BETWEEN

AEROJET - - GENERAL CORPORATION,

an Ohio corporation (“Landlord”), and

FOUNDATION HEALTH, A CALIFORNIA HEALTH PLAN,

a California corporation (“Tenant”)

Aerojet 2025 Building, Rancho Cordova, California

THIS SECOND ADDENDUM is attached to and made part of the above-referenced lease, which lease includes an Addendum to Lease that contains Sections 35 through 49 (collectively, the “Lease”). Unless otherwise defined in this Second Addendum, all capitalized terms used in this Second Addendum shall have the same meaning as such capitalized terms have in the Lease. All references within this Second Addendum to a “Section” are to a specific section within the Lease unless otherwise indicated,

1. Sections 4 and 37, Possession. If Landlord, for any reason other than a Tenant-caused delay, shall fail to substantially complete Landlord’s Work and deliver the Premises to Tenant by September 1, 1995 (the “Scheduled Commencement Date”), the parties agree that Tenant shall have the following remedies:

(a) If such delivery occurs later than thirty (30) days after the Scheduled Commencement Date, then Tenant shall be entitled to one (1) day of free rent for each day after said thirty (30) days that Landlord is late in so delivering the Premises.

(b) If such delivery occurs later than ninety (90) days after the Scheduled Commencement Date, then Tenant may terminate the Lease by written notice to Landlord prior to Tenant’s occupancy of the Premises.

2. Section 5, Rent. The parties acknowledge that Tenant shall have no obligation to pay “operating expenses,” other than the cost of electrical and gas service pursuant to Section 45.

3. Section 9, Compliance with Law. Tenant’s obligation under Section 9 of the Lease and elsewhere in the Lease with respect to the compliance with laws, statutes, ordinances, and governmental rules and regulations (including, but not limited to, the Americans with Disabilities Act of 1990), as all of the same may be amended and supplemented from time to time (collectively, “Laws”) shall be limited to (i) Laws pertaining to Tenant’s personal property; (ii) Laws pertaining to modifications made to the Premises by Tenant; and (iii) Laws pertaining to Tenant’s specific use of the Premises. Landlord, at Landlord’s sole cost and expense, shall comply with all other Laws pertaining to the Building and parking area; provided, however, that if the aggregate cost of the Landlord’s complying with any Laws exceeds Two Hundred Fifty Thousand Dollars ($250,000.00), and Landlord did not have actual or constructive notice prior to commencement of the term of the general cost of the compliance now being required, and Tenant is unwilling to pay the cost of such compliance in excess of $250,000.00 (it being agreed that Tenant has no obligation to pay such cost), Landlord shall have the right to terminate the Lease upon one hundred twenty (120) days’ written notice to Tenant. If Landlord

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exercises such termination right, Landlord shall pay reasonable costs and expenses incurred by Tenant in relocating to new premises, not to exceed Seventy-Five Thousand Dollars ($75,000.00).

4. Section 10, Alterations and Additions.

(a) Landlord’s consent to alterations, additions or improvements (collectively, “Alterations”) shall in no event be unreasonably withheld or delayed.

(b) In no event shall Tenant be obligated to remove any Alterations on the Premises (including, but not limited to, the leasehold improvements constructed by Landlord), unless such Alterations were made by Tenant during the term of the Lease. If Tenant desires to have the right to surrender the Alterations at the expiration of the Lease term and not remove them from the Premises, Tenant shall, at the time that it requests Landlord’s consent to the making of those Alterations, notify Landlord of such desire, and Landlord shall have the option to either (i) require such surrender of the Alterations, or (ii) expressly condition Landlord’s approval of such Alterations on Tenant’s agreement to remove such Alterations at the expiration of the Lease term,

5. Sections 11, Repairs. Tenant shall not be responsible for the correction or repair of any latent defect in the Premises, or any existing defect or code violation in existence prior to the commencement of the term. The repairs or maintenance that are Landlord’s responsibility shall be done diligently and on a timely basis.

6. Section 17, Services and Utilities. If any utility or other service to the Premises is interrupted, Tenant shall be entitled to an abatement of rent (proportionate to the degree to which Tenant’s use of the Premises for office purposes is interfered with) until ouch interruption is cured by Landlord. Landlord shall use diligent and good faith efforts to promptly restore utility service.

7. Section 21, Entry by Landlord. Landlord shall provide to Tenant advance notice of Landlord’s entry onto Premises (except in the case of an emergency, or in such cases as Landlord’s security procedures do not reasonably permit advance notice). Landlord’s right to enter the Premises to show them to prospective tenants pursuant to Section 21 shall be limited to the last six (6) months of the Lease term. In no event shall Landlord’s access onto the Premises unreasonably interfere with Tenant’s use of the Premises.

8. Section 22, Reconstruction. Tenant shall be entitled to a rent abatement pursuant to Section 22, from the date of the casualty until the repairs are completed, whether or not such casualty is covered by Landlord’s insurance.

9. Section 23, Default. In Section 2.3.a, the words “vacating or” are hereby deleted. In Section 23.b, the words “three (3) days” are hereby replaced with “ten (10) days.”

10. Section 29(ii), Waiver. This waiver by Tenant of any term, covenant or condition in the Lease or this Second Addendum shall not be deemed a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition contained in the Lease or this Second Addendum.

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11. Section 29(iii), Notices. All notices to Tenant shall be sent to the Premises and:

Foundation Health Corporation

Attention: Director of Real Estate

Post Office Box 2470

Rancho Cordova, California 95741-2470

12. New Provision, Hazardous Materials. Nothing in the Lease is intended to prevent Tenant from using hazardous materials or hazardous substances normally associated with office activities, provided the same are used in compliance with all applicable laws. Tenant’s responsibility respecting hazardous materials or hazardous substances shall be limited to those materials actually introduced by Tenant in the Premises; the responsibility for compliance with laws respecting all other hazardous materials or hazardous substances shall be Landlord’s.

13. Section 36A, Landlord’s Obligations. Landlord and Tenant shall, as soon as possible after the execution of the Lease, and from time to time during the course of construction, confer respecting the Landlord’s Work, such that Tenant will be kept apprised of the progress of that work, and so the Tenant has the right to approve (which approval shall not be unreasonably withheld or delayed) all construction drawings, finishes and materials. In addition to the work described in Section 36A, the Landlord’s Work shall include all work necessary to bring the Building into compliance with applicable building codes and other applicable laws, such that Tenant can lawfully occupy the Premises.

14. Section 36B, Tenant’s Obligations. The allowance referenced in Section 36B shall be paid not later than thirty (30) days after Landlord’s receipt of a reasonably detailed invoice from Tenant.

15. Section 39, Option to Extend. The rent during the option terms shall be One and 04/100ths Dollars ($1.04) per square foot of rentable area per month.

IN WITNESS WHEREOF, the parties have executed this Second Addendum as of the date first set forth above.

LANDLORD		TENANT
AEROJET – GENERAL CORPORATION, an Ohio corporation		FOUNDATION HEALTH, A CALIFORNIA HEALTH PLAN, a California corporation
By:	/s/ T. P. Griffin	By:	/s/ Joe E. Erway
Name:	T. P. Griffin	Name:	Joe E. Erway
Its:	Director, Real Estate	Its:	Vice President
Date of Execution: August 2, 1995		Date of Execution: August 2, 1995

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THIRD ADDENDUM TO LEASE

This is the Third Addendum attached to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health, a California Health Plan, a California corporation, as Tenant, dated duly 13, 1995, including that certain Addendum and that certain Second Addendum attached thereto (collectively, the “Lease”).

1. Temporary Storage Area. Landlord does hereby permit and allow Tenant temporary use (the “License”) of a portion of the space contained in building number 2006 located at said Aerojet property in Rancho Cordova, California (the “Temporary Storage Area”). The exact location and configuration of the Temporary Storage Area shall be determined by Landlord and Tenant through mutual consultations immediately after execution of the Lease and this Third Addendum and shall contain approximately three thousand (3,000) to four thousand (4,000) rentable square feet. The Temporary Storage Area will not be separated from the balance of the space in said building number 2006 by any demising wall or walls. Landlord and Tenant agree to cooperate reasonably and fairly with each other in connection with uses of their respective portions of said building.

2. Use of Temporary storage Area. Tenant may use the Temporary Storage Area for the storage, light assembly, and staging of computers and related equipment to be used in Tenant’s business, including, but not limited to, preparation for Tenant’s taking of possession of the Premises in said building 2025, and for no other use without Landlord’s advance written consent. Tenant expects to have no more than approximately six (6) employees working in the Temporary Storage Area at any time. The Temporary Storage Area is not intended, nor will it be prepared, for long-term occupancy or use as business offices.

3. Term of License. The term of the License shall commence upon full execution of the Lease and this Third Addendum 8/2/95 and shall continue on a month-to-month basis thereafter. The License may be terminated by thirty (30) days’ written notice of termination given by either Landlord or Tenant to the other, except that Landlord cannot terminate the License effective earlier than thirty (30) days after Landlord delivers possession of the Premises to Tenant.

4. License Fee. Tenant agrees to pay to Landlord, without prior notice or demand, and without deduction or offset, in advance, as consideration for the License, the sum of (a) One Dollar ($1.00) per rental square foot (as measured by said BOMA standards) of the Temporary Storage Area per month; plus (b) fourteen cents ($0.14) per rental square foot of the Temporary Storage Area per month as a fixed reimbursement to Landlord for the estimated cost of providing electrical and gas service to the Temporary Storage Area. Said payments shall be made on or before the first (1st) day of each calendar month of the term of the License. Payment for any period during the term of the License that is less than one (1) month shall be a prorated portion of the monthly payment, based upon a thirty (30) day month. Tenant shall have no obligation to pay for utility services provided by Landlord to the Temporary Storage Area except as set forth above in this section.

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5. Preparation of Temporary Storage Area. Landlord shall be responsible for coordinating the preparation of the Temporary Storage Area for use by Tenant. Tenant shall bear all reasonable costs and expenses incurred in carrying out such preparation and shall, at the request of Landlord, provide labor to assist Landlord in carrying out such preparation. In this connection, Landlord and Tenant shall work together to utilize, to the extent possible, various interior partitions that Landlord has available and stored in said building 2006. Other than such preparation, Lessee accepts the Temporary Storage Area “as is,” and Lessor shall have no duty to improve or change the Temporary Storage Area in any way.

6. Parking. Tenant shall have access to the parking area near said building number 2006 to the extent reasonably necessary for Tenant’s use of the Temporary Storage Area.

7. Janitorial Service. Landlord shall have no obligation to provide janitorial service with respect to the Temporary Storage Area.

8. Terms of Lease. The License shall be subject to all terms and conditions of the Lease that are consistent with the terms specifically applicable to the License and consistent with the temporary nature of the License. Specifically, the License shall not be subject to the following provisions: Sections 3, 5, 27, 30, 31, 35, 36, 37, 39, 40, 41, 42, 46, 47, and 48 of the Lease; the first sentence of section 8 of the Lease; all references to janitorial services in Section 17 of the Lease; the second sentence of Section 45 of the Lease; and Sections 1, 3, 14, and 15 of the Second Addendum.

9. Hold Harmless and Waiver. Tenant agrees to indemnify Landlord and to hold Landlord free and harmless from and against any and all liabilities and losses arising from or related to Tenant’s use of the Temporary Storage Area. Tenant hereby assumes all risk of damage to property or injury to persons in, upon, or about the Temporary Storage Area, including, but not limited to, injury to or death of employees of Tenant and damage to, or loss of use of, property of Tenant or of any of Tenant’s employees, and Tenant hereby waives all claims, and agrees not to sue Landlord, in respect thereof.

		Landlord
		Aerojet-General Corporation, an Ohio corporation
Dated:		By:	/s/ Terry P. Griffin
		Its:
		Tenant
		Foundation Health, a California Health Plan, a California corporation
Dated:	August 2, 1995	By:	/s/ Joe E. Erway
		Its:	Vice President

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FOURTH ADDENDUM TO LEASE

This is the Fourth Addendum attached to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, and that certain Second Addendum and that certain Third Addendum attached thereto (collectively, the “Lease”).

1. Third Expansion Space. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord approximately thirty-three thousand five hundred (33,500) rentable square feet of office space (“Third Expansion Space”) comprising part of building number 2015B (“Building 2015B”), a single story building, located at the Aerojet headquarters in the City of Rancho Cordova, in the State of California. The location and configuration of the Third Expansion Space is shown on the floor plan thereof, a copy of which is attached as Exhibit “A” to this Addendum and incorporated herein by this reference.

2. Condition of Third Expansion Space and Building 2015B Improvements.

A. Landlord’s Obligations. Prior to delivery of the Third Expansion Space to Tenant, Landlord conducted, at Landlord’s sole cost and expense, the following cleaning and repair of Building 2015B (collectively, the “Building 2015B Work”):

1. Repaired T-Bar grid and replace damaged ceiling tiles.

2. Performed minor repairs to drywall prior to painting.

3. Painted all interior walls, door frames, and columns.

4. Repaired existing carpeting and, to the extent needed, installed new direct glue down carpeting.

Existing doors and hardware were left in place. No work was done to the lobby area. No demolition work was conducted. The Building 2015B Work included all work necessary to bring Building 2015B into compliance with applicable building codes and other applicable laws, such that Tenant could lawfully occupy Building 2015B. Other than the Building 2015B Work, Tenant accepted Building 2015B “as is.”

B. Tenant’s Obligations. Any other preparation of, or improvements to, Building 2015B that Tenant may desire shall, subject to approvals from Landlord under paragraph 10 of this Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

C. Communications Improvements. Tenant shall have the right to install and distribute in Building 2015B data communications wiring, telephone lines and other communications and information processing related wiring and equipment as reasonably required for Tenant’s business.

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3. Possession. Landlord delivered the Third Expansion Space to Tenant upon completion of the Building 2015B Work, which completion and delivery occurred on November 22, 1995.

4. Option to Expand. Tenant shall have the right and option to expand the Premises to include all of the remaining rentable square feet of office space contained in Building 2015B (which is approximately sixteen thousand five hundred (16,500) rentable square feet) (“Fourth Expansion Space”). Tenant shall have the right to effect such expansion option upon written notice to Landlord. Alternatively, Landlord and Tenant shall work together and coordinate delivery of portions of the Fourth Expansion Space as and when needed by Tenant; provided that, in all events, as of November 17, 1996, the Premises shall be expanded automatically to include the Fourth Expansion Space, with said option then being deemed to have been exercised with respect to all of said Fourth Expansion Space. Landlord shall have no obligation to improve the Fourth Expansion Space above and beyond the Building 2015B Work.

5. Parking. Tenant shall be entitled, at no cost, to the minimum number of parking spaces with respect Tenant’s use of the Third Expansion Space and the Fourth Expansion Space, if appropriate, as required from time to time by applicable law, which requirement is currently four and one-half (4- ¹/2) parking spaces per one thousand (1,000) rentable square feet of office space, as set forth in Sacramento Zoning Code, Chapter 3, Article 2, section 330-22.

6. Brokers’ Fee.

A. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Fourth Addendum excepting only Aguer Pipgras Real Estate and they know of no other real estate broker or agent who is entitled to a commission in connection with this Fourth Addendum.

B. Landlord shall pay to Aguer Pipgras Real Estate a brokers’ fee equal to three percent (3%) of the total rent for the Third Expansion Space. One-half ( ¹/2) of the brokers’ fee shall be due and payable upon execution of this Fourth Addendum, provided that Landlord is then assured that no rescission under Section 47 can occur. The balance of the brokers’ fee shall be due and payable upon delivery of the Third Expansion Space to Tenant.

C. If Tenant exercises, or is deemed to have exercised, its option with respect to the Fourth Expansion Space, then Landlord shall pay to Aguer Pipgras Real Estate a brokers’ fee equal to three percent (3%) of the total rent for the Fourth Expansion Space. Such additional brokers’ fee shall be due and payable upon effective exercise, or deemed exercise, of the Tenant’s option.

7. The Premises and Other Terms and Conditions of the Lease. The Third Expansion Space and the Fourth Expansion Space, if appropriate, shall be deemed to be included as a part of the “Premises” and the “Building” and shall be subject to the same terms and

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conditions as the original office space as set forth in the Lease, except to the extent that any provision of this Fourth Addendum is inconsistent or in conflict with such terms and conditions, and except that Sections 35, 36, 37, 40, 41, 42 and 46 set forth in the Addendum to Lease, Sections 1 and 14 of the Second Addendum to Office Building Lease, and Sections 1 through 9 of the Third Addendum to Lease shall not apply to the Third Expansion Space or the Fourth Expansion Space, if appropriate. Specifically, the Third Expansion Space and the Fourth Expansion Space, if appropriate, shall be subject to the terms and conditions of this Fourth Addendum and, to the extent compatible and consistent with the provisions of this Fourth Addendum, subject to Sections 1 through 31 of the Lease, Sections 38, 39, 43, 44, 45, 47, 48, and 49 of the Addendum to Lease, and Sections 2 through 13, and 15 of the Second Addendum to Office Building Lease; and the Rules and Regulations attached to the Lease. The rental rate for the Third Expansion Space and for the Fourth Expansion Space shall be the same as the rental rate for the Premises as first demised by the Lease. The termination date for all of the Premises, including the Third Expansion Space, the Fourth Expansion Space, and all areas previously included within the Premises under the Lease, shall be same date, which date is set forth in the Lease.

8. Applicable Rental Amount. As a memorandum of record, the rent for the Third Expansion Space added by this Fourth Addendum is Thirty-three Thousand Five Hundred Dollars ($33,500.00) per month, computed at One Dollar ($1.00) per square foot.

		Landlord
		Aerojet-General Corporation, an Ohio corporation
Dated:	March 12, 1996	By:	/s/ Terry P. Griffin
		Its:	Director, Real Estate
		Tenant
		Foundation Health, a California Health Plan, a California corporation
Dated:	March 4, 1996	By:	/s/ Joe E. Erway
		Its:	Vice President

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FIFTH ADDENDUM TO LEASE

This is the Fifth Addendum attached to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, and that certain Fourth Addendum thereto (collectively, the “Lease”).

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B and the entire Building number 2025 (collectively, the “Existing Premises”) and no other space. The term of the Lease ends on September 14, 1997, and Tenant has the option to extend the term for two (2) consecutive six (6) month periods. The rent for the Existing Premises is One Dollar ($1.00) per square foot per month.

B. In accordance with the provisions herein, Landlord and Tenant desire to expand the Premises to include an additional building, to extend the term of the lease, to provide for increases in the rent payable by Tenant, and to supersede the existing extension options.

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals and the covenants contained in this Fifth Addendum, agree as follows:

1. Expansion of the Premises. Landlord does hereby lease to Tenant, and Tenant hereby leases from Landlord, approximately thirty thousand (30,000) rentable square feet of office space comprising the entire Building number 2006 (“Building 2006”) located at the Aerojet headquarters in the City of Rancho Cordova, in the State of California. Measurement of the rentable square feet contained in Building 2006 shall be conducted in accordance with a method acceptable to both parties. The “Premises” under the Lease shall thus henceforth include both the Existing Premises and Building 2006.

2. Extension of Term. The term of the Lease for the Premises is hereby extended thirty and one-half (30.5) months and shall end on March 31, 2000.

3. Rent.

A. Initial Rent. Subject to increases in rent as set forth below, the rent for the Existing Premises shall continue at One Dollar and No Cents ($1.00) per square foot per month. Subject to increases in rent as set forth below, the rent for Building 2006 shall be One Dollar and Fourteen Cents ($1.14) per square foot per month.

B. Rental Increases. The rent for the Existing Premises and the rent for Building 2006 shall increase on October 1, 1998 and again on October 1, 1999 as follows: (1) on October 1, 1998, the rent for the Existing premises and the rent for Building 2006 shall each increase by the same percentage as the Consumer Price

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Index, unadjusted, for All Urban Consumers (all items), as published by the United States Department of Labor, Bureau of Labor Statistics, for the San Francisco-Oakland-San Jose Area (1982-84 = 100 Base) (the “CPI”), has increased from the CPI as published for September, 1997 to the CPI as published for September, 1998; and (2) on October 1, 1999, the rent for the Existing Premises and the rent for Building 2006 shall each increase by the same percentage as the CPI has increased from the CPI as published for September, 1998 to the CPI as published for September, 1999; provided that under no circumstances shall either of said increases in rent, the one occurring October 1, 1998 and the other occurring on October 1, 1999, exceed three and one-quarter percent (3.25%). Landlord shall calculate and notify Tenant of all applicable rental increases. If the CPI for calculating any such increase is not available at the time a rental increase begins, then Tenant shall temporarily continue paying rent at the existing rate. Once the applicable CPI becomes available and Landlord notifies Tenant of the amount of the applicable rental increase, then Tenant shall pay the difference between any rent paid and the rent as adjusted under the applicable CPI.

C. Another Index. If the CPI is not in existence at the time any increase is to be computed, Landlord and Tenant shall utilize such other index published by that governmental authority as shall be most similar thereto and consistent with the intent to adjust the rent in accordance with changes, if any, in the “cost-of-living” that occurs during the applicable period.

4. Extension of Term.

A. Option. Tenant shall have the right and option (the “Extension Option”) to extend the term of the Lease for thirty (30) months (the “Extension Period”) commencing immediately upon the expiration of the term of this Lease (commencing, therefore, on April 1, 2000). Tenant shall no longer have the extension periods of six (6) months each set forth in Section 39 of the Addendum (the “Superseded Extension Periods”), nor shall Landlord have any duty to pay the broker’s fee that would have been payable in connection with the Superseded Extension Periods under Section 46 of the Addendum to Lease.

B. Extension Premises. Tenant may exercise the Extension Option with respect to any or all of the buildings that comprise the Premises, provided that Tenant may not exercise the Extension Option with respect to only a portion of a building.

C. Rent During Extension.

1. Initial Rent. During the first (1st) twelve (12) months of the Extension Period, the rent shall be as follows: (a) the rent for Building 2015B and the rent for Building 2025 shall continue at the same rate as the rent for those buildings during the month immediately preceding the commencement of the Extension Period, and (b) the rent for Building 2006 shall be One Dollar and Twenty-Three Cents ($1.23) per square foot per month or, if greater, the rent for that building during the month immediately preceding the commencement of the Extension Period.

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2. Rental Increases. During the Extension Period, the rent for Building 2006, the rent for Building 2015B, and the rent for Building 2025 shall all increase as follows: (a) on April 1, 2001, said rent shall increase by the same percentage as the CPI has increased from March, 2000 to March, 2001; and (b) on April 1, 2002, said rent shall increase by the same percentage as the CPI has increased from March, 2001 to March, 2002; provided that under no circumstances shall either of said increases in rent, the one occurring April 1, 2001 and the other occurring on April 1, 2002, exceed three and one-quarter percent^.(3.25%). Landlord shall calculate and notify Tenant of all applicable rental increases. If the CPI for calculating any such increase is not available at the time a rental increase begins, then Tenant shall temporarily continue paying rent at the existing rate. Once the applicable CPI becomes available and Landlord notifies Tenant of the amount of the applicable rental increase, then Tenant shall pay the difference between any rent paid and the rent as adjusted under the applicable CPI.

D. Exercise of Extension Option. To exercise the Extension Option, Tenant shall, not later than one hundred fifty (150) calendar days prior to the expiration of the term of the Lease, provide, and Landlord shall receive, a duly mailed or personally delivered written notice setting forth (i) Tenant’s exercise of the Extension Option, and (ii) a statement clearly designating to which of the buildings comprising the Premises the Extension Period shall apply. Failure by Tenant to provide timely or adequate written notice as set forth herein shall, unless, and in the sole discretion of Landlord, an untimely or inadequate notice is acceptable to Landlord, cause the Extension Option to lapse and its exercise by Tenant shall not be effective.

E. Condition. Tenant’s right to exercise the Extension Option set forth in this Fifth Addendum is conditioned upon the requirement that, after the applicable cure period, if any, Tenant shall not be in default under the Lease at the time of exercise of the Extension Option.

5. Building 2006.

A. Condition of Building 2006 Improvements.

1. Landlord’s Obligations. Prior to delivery of Building 2006 to Tenant, Landlord shall conduct, at Landlord’s sole cost and expense, the following cleaning and repair of the Premises (collectively, the “Building 2006 Work”):

a. Replace all ceiling tiles.

b. Paint all interior walls, door frames, and columns.

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c. Install new carpeting.

Materials used for the Building 2006 Work shall be of the same or similar quality as those materials previously used by Landlord in the repair of the Existing Premises pursuant to the Lease. Existing doors and hardware will remain. No demolition work will be conducted. Other than the Building 2006 Work, Tenant shall take Building 2006 “as is.”

2. Tenant’s Obligations. Any other preparation of, or improvements to, Building 2006 that Tenant may desire shall, subject to approvals from Landlord under Section 10 of the Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

3. Communications Improvements. Landlord shall provide a telecommunications conduit between Building 2006 and the Existing Premises. Tenant shall have the right to install and distribute in Building 2006 data communications wiring, telephone lines and other communications and information processing related wiring and equipment as reasonably required for Tenant’s business.

B. Possession. Landlord shall use reasonable efforts to deliver possession of the Building 2006 to Tenant on or before September 1, 1997. Notwithstanding the foregoing, Landlord shall complete the Building 2006 Work on or before October 1, 1997 and shall deliver possession of Building 2006 to Tenant on October 1, 1997.

C. Parking. In addition to Tenant’s right to parking spaces with respect to the Existing Premises, Tenant shall also be entitled, at no cost, to five (5) parking spaces per one thousand (1,000) rentable square feet of office space contained in Building 2006.

D. The Premises and Other Terms and Conditions of the Lease. Building 2006 shall be deemed to be included as a part of the “Premises” and the “Building” and shall be subject to the same terms and conditions as the original office space as set forth in the Lease, except to the extent that any provision of this Fifth Addendum is inconsistent or in conflict with such terms and conditions, and except that Sections 35, 36, 37, 39, 40, 41, 42 and 46 set forth in the Addendum to Lease, Sections 1 and 14 of the Second Addendum to Office Building Lease, Sections 1 through 9 of the Third Addendum to Lease, and Sections 1 through 8 of the Fourth Addendum to Lease shall not apply to Building 2006. Specifically, Building 2006 shall be subject to the terms and conditions of this Fifth Addendum and, to the extent compatible and consistent with the provisions of this Fifth Addendum, subject to Sections 1 through 31 of the Lease, Sections 38, 43, 44, 45, 47, 48, and 49 of the Addendum to Lease, and Sections 2 through 13, and 15 of the Second Addendum to Office Building Lease; and the Rules and Regulations attached to the Lease. Section 39 of the Addendum to Lease shall no longer apply

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to any portion of the Premises. The termination date for all of the Premises shall be same date, which date is set forth in this Fifth Addendum at Section 2 above, subject to extension under Section 4 above and subject to earlier termination as is possible under other provisions of the Lease, such as Section 24 of the Lease.

6. Brokers’ Fee.

A. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Fifth Addendum excepting only Aguer Pipgras Real Estate, and they know of no other real estate broker or agent who is entitled to a commission in connection with this Fifth Addendum.

B. Landlord shall pay to Aguer Pipgras Real Estate a broker’s fee equal to three percent (3%) of the total rent for the thirty-and-one-half-months extension of the term of the Lease for the Existing Premises and three percent (3%) of the total rent for Building 2006 for the period prior to the Extension Period. One-half ( ¹ /2) of said broker’s fee hereunder shall be due and payable upon execution of this Fifth Addendum, provided that Landlord is then assured that no rescission under Section 48 of the Addendum to Lease can occur. The balance of said broker’s fee shall be due and payable upon October 1, 1997. If the Extension Option is effectively exercised by Tenant, then Landlord shall pay to Aguer Pipgras Real Estate, at the beginning of the Extension Period, three percent (3%) of the total rent payable during the Extension Period for that portion of the Premises as to which the Extension Option is exercised as set forth in Section 4.B above.

		Landlord
		Aerojet-General Corporation, an Ohio corporation
Dated:	July 8, 1997	By:	/s/ Terry P. Griffin
		Its:	Director, Real Estate
		Tenant
		Foundation Health, a California Health Plan, a California corporation
Dated:	July 7, 1997	By:	/s/ Joe E. Erway
		Its:	Joe E. Erway, Vice President of Tenant’s parent company, duly authorized to bind Tenant under this document.

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SIXTH ADDENDUM TO LEASE

This is the Sixth Addendum attached to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, and that certain Fifth Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Sixth Addendum, all capitalized terms used in this Sixth Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Sixth Addendum to a “Section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, and approximately thirty thousand (30,000) square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006) (collectively, the “Existing Premises”) and no other space.

B. In accordance with the provisions herein, Landlord and Tenant desire to expand the Premises to include additional space located in Building 2015A.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals and the covenants contained in this Sixth Addendum, agree as follows:

1. Expansion of the Premises. Landlord does hereby lease to Tenant, and Tenant hereby leases from Landlord, approximately twenty thousand (20,000) to twenty-five (25,000) rentable square feet of office space (“Building 2015A Expansion Space”) comprising part of building number 2015A (“Building 2015A”), a single-story building, located at the Aerojet headquarters in the City of Rancho Cordova, in the State of California. The precise number of rentable square feet, the location, and the configuration of the Building 2015A Expansion Space shall be conclusively determined by mutual agreement of Landlord and Tenant and will be shown on the floor plan therefor, a copy of which shall be attached as Exhibit “A” to this Sixth Addendum and incorporated herein by this reference. Measurement of the rentable square feet contained in the Building 2015A Expansion Space shall be conducted in accordance with a method acceptable to both parties. The “Premises” under the Lease shall thus henceforth include both the Existing Premises and the Building 2015A Expansion Space.

2. Rent.

A. Initial Rent. Subject to increases in rent as set forth below, the rent for the Building 2015A Expansion Space shall be One Dollar ($1.00) per square foot per month commencing as of the date possession of the Building 2015A Expansion Space is delivered to Tenant.

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B. Rental Increases. The rent for the Building 2015A Expansion Space shall increase on October 1, 1998 and again on October 1, 1999 as follows: (1) on October 1, 1998, the rent for the 2015A Expansion Space shall increase by the same percentage as the Consumer Price Index, unadjusted, for All Urban Consumers (all items), as published by the United States Department of Labor, Bureau of Labor Statistics, for the San Francisco-Oakland-San Jose Area (1982-84 = 100 Base) (the “CPI”), has increased from the CPI as published for September, 1997 to the CPI as published for September, 1998; and (2) on October 1, 1999, the rent for the Building 2015 Expansion Space shall each increase by the same percentage as the CPI has increased from the CPI as published for September, 1998 to the CPI as published for September, 1999; provided that under no circumstances shall either of said increases in rent, the one occurring October 1, 1998 and the other occurring on October 1, 1999, exceed three and one-quarter percent (3.25%), Landlord shall calculate and notify Tenant of all applicable rental increases. If the CPI for calculating any such increase is not available at the time a rental increase begins, then Tenant shall temporarily continue paying rent at the existing rate. Once the applicable CH becomes available and Landlord notifies Tenant of the amount of the applicable rental increase, then Tenant shall pay the difference between any rent paid and the rent as adjusted under the applicable CPI.

3. Term. The term of the Lease for the Building 2015A Expansion Space shall end on March 31, 2000.

4. Extension of Term.

A. Option. With respect to the Building 2015A Expansion Space, Tenant shall have the Extension Option described in the Fifth Addendum, which Extension Option shall be exercisable subject to the conditions and in accordance with the procedures set forth in Section 4 of the Fifth Addendum; provided, however, that the initial rent and rental increases applicable to the Building 2015A Expansion Space during the Extension Period shall be as set forth in subsection C below.

B. Buy-Out. In the event that Tenant fails to exercise the Extension Option with respect to the Building 2015A Expansion Space, Tenant shall pay to Landlord the sum of Three Hundred and Forty-Thousand Dollars ($340,000.00), being the amount of money that the parties stipulate to be the unamortized balance of Landlord’s expenditures for the Building 2015A Work (as defined below). Payment of said amount shall be owed in addition to payment and performance by Tenant of all obligations accruing under the Lease up to the date of the expiration of the Lease.

C. Rent During Extension.

i. Initial Rent. During the first (1st) twelve (12) months of the Extension Period, the rent for the Building 2015A Expansion Space shall continue at the same rate as the rent for the Building 2015A Expansion Space during the month immediately preceding the commencement of the Extension Period.

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ii. Rental Increases. During the Extension Period, the rent for the Building 2015A Expansion Space shall all increase as follows: (a) on April 1, 2001, said rent shall increase by the same percentage as the CPI has increased from March, 2000 to March, 2001; and (b) on April 1, 2002, said rent shall increase by the same percentage as the CPI has increased from March, 2001 to March, 2002; provided that under no circumstances shall either of said increases in rent, the one occurring April 1, 2001 and the other occurring on April 1, 2002, exceed three and one-quarter percent (3.25%). Landlord shall calculate and notify Tenant of all applicable rental increases. If the CPI for calculating any such increase is not available at the time a rental increase begins, then Tenant shall temporarily continue paying rent at the existing rate. Once the applicable CH becomes available and Landlord notifies Tenant of the amount of the applicable rental increase, then Tenant shall pay the difference between any rent paid and the rent as adjusted under the applicable CPI.

5. Building 915A.

A. Conditions Building 2015A and Improvements.

i. Lease of Remaining Building Space. Tenant understands that the Building 2015A Expansion Space constitutes approximately one-half of Building 2015A, and that Landlord has agreed, or may agree, to lease the remaining portion of Building 2015A to another tenant, and that Tenant shall, therefore, have no right to lease any additional space in Building 2015A.

ii. Space Plan. Tenant and Landlord acknowledge and agree that the precise number of rentable square feet and the specific location of the Building 2015A Expansion Space within Building 2015A shall be shown on the floor plan to be prepared by Forar Williams & Associates, with consultations with REF and Sons, Inc., and in accordance with instructions from Landlord and Tenant, and attached hereto as Exhibit “A.”

iii. Landlord’s Obligations. Prior to delivery of the Building 2015A Expansion Space to Tenant, Landlord shall construct, at Landlord’s sole cost and expense, the tenant improvements described in Exhibit “B” attached hereto and incorporated herein by this reference (the “Building 2015A Work”). Materials used for the Building 2015A Work shall be of the same or similar quality as those materials previously used by Landlord in the repair of the Existing Premises pursuant to the Lease. Existing doors and hardware will remain. No demolition work will be conducted. Other than the Building 2015A Work, Tenant shall take the Building 2015A Expansion Space “as is.”

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iv. Tenant’s Obligations. Any other preparation of, or improvements to, the Building 2015A Expansion Premises that Tenant may desire shall, subject to approvals from Landlord under Section 10 of the Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

v. Communications Improvements. Landlord shall provide a telecommunications conduit between Building 2015A and the Existing Premises. Tenant shall have the right to install and distribute in Building 2015A data communications wiring, telephone lines and other communications and information processing related wiring and equipment as reasonably required for Tenant’s business.

B. Possession. Landlord shall use reasonable efforts to deliver possession of the Building 2015A Expansion Premises to Tenant on or before December 10, 1997. Notwithstanding the foregoing, Landlord shall complete the Building 2015A Work no later than December 31, 1997 and shall deliver possession of the Building 2015A Expansion Space to Tenant on January 5, 1998.

C. Parking. In addition to Tenant’s right to parking spaces with respect to the Existing Premises, Tenant shall also be entitled, at no cost, to five (5) parking spaces per one thousand (1,000) rentable square feet of office space contained in the Building 2015A Expansion Space.

D. The Premises and Other Terms and Conditions the Lease. The Building 2015A Expansion Space shall be deemed to be included as a part of the “Premises” and the “Building” and shall be subject to the same terms and conditions as the original office space as set forth in the Lease, except to the extent that any provision of this Sixth Addendum is inconsistent or in conflict with such terms and conditions, and except that Sections 35, 36, 37, 39, 40, 41, 42 and 46 set forth in the Addendum to Lease, Sections 1, 14, and 15 of the Second Addendum to Office Building Lease, Sections 1 through 9 of the Third Addendum to Lease, Sections 1 through 8 of the Fourth Addendum to Lease, and Sections 1, 2, 3A, 3B, 4C, 5, and 6 of the Fifth Addendum to Lease shall not apply to the Building 2015A Expansion Space. Specifically, the Building 2015A Expansion Space shall be subject to the terms and conditions of this Sixth Addendum and, to the extent compatible and consistent with the provisions of this Sixth Addendum, subject to Sections 1 through 31 of the Lease, Sections 38, 43, 44, 45, 47, 48, and 49 of the Addendum to Lease, Sections 2 through 13 of the Second Addendum to Office Building Lease, Sections 3C, 4A, 4B, 4D, and 4E of the Fifth Addendum, and the Rules and Regulations attached to the Lease, With respect to the notice described in Section 48, Landlord provided such notice regarding the potential lease of the Building 2015A Expansion Space on August 2, 1995. Section 39 of the Addendum to Lease shall no longer apply to any portion of the Premises. The termination date for the Building 2015A Expansion Space shall be the same as the Lease termination date for the Existing Premises, which date is set forth in the Fifth Addendum at Section 2, subject to extension under Section 4 of this Sixth Addendum and subject to earlier termination as is possible under other provisions of the Lease, such as Section 24 of the Lease.

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E. Brokers’ Fee.

i. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Sixth Addendum excepting only Aguer Pipgras Associates, and they know of no other real estate broker or agent who is entitled to a commission in connection with this Sixth Addendum.

ii. Landlord shall pay to Aguer Pipgras Associates a broker’s fee equal to three percent (3%) of the total rent for the Building 2015A Expansion Space for the period prior to the Extension Period. One-half ( ¹/2) of said broker’s fee hereunder shall be due and payable upon execution of this Sixth Addendum, provided that Landlord is then assured that no rescission under Section 47 of the Addendum to Lease can occur. The balance of said broker’s fee shall be due and payable upon January 15, 1998. If the Extension Option is effectively exercised by Tenant, then Landlord shall pay to Aguer Pipgras Associates, at the beginning of the Extension Period, three percent (3%) of the total rent payable during the Extension Period for that portion of the Premises as to which the Extension Option is exercised as set forth in Section 4.B of the Fifth Addendum.

		Landlord
		Aerojet-General Corporation, an Ohio corporation
Dated:		By:
		Its:
		Tenant Foundation Health, a California Health Plan, a California corporation
Dated:	December 10, 1997	By:	/s/ Joe E. Erway
		Its:	Joe E. Erway, Vice President of Tenant’s parent company, duly authorized to bind Tenant under this document.

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SEVENTH ADDENDUM TO LEASE

This is the Seventh Addendum, which, upon approval, will be attached to that certain Lease by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Foundation Health Federal Services, Inc., a Delaware corporation, successor in interest to Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, and that certain Sixth Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Seventh Addendum, all capitalized terms used in this Seventh Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Seventh Addendum to a “Section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately thirty thousand (30,000) square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006) and approximately twenty thousand (20,000) to twenty-five thousand (25,000) square feet in Building number 2015A (collectively, the “Premises”) and no other space.

B. In accordance with the provisions herein, Landlord and Tenant desire, among other things, to extend the term of the Lease, to grant to Tenant a New Extension Option (defined below), to require Landlord to install a new card access and additional security measures, and to provide for other improvements to the Premises.

C. Tenant has advised Landlord that (i) the original Tenant under the Lease, Foundation Health, a California Health Plan (“FH”), has been merged into Health Net, a California corporation (“Health Net”), and (iii) Health Net is a subsidiary of Foundation Health Systems, Inc., a Delaware corporation (“FHS”). Pursuant to a separate Assignment of Lease, Health Net has, with Landlord’s consent, assigned all of its interest under the Lease to Foundation Health Federal Services, Inc., a Delaware corporation, which is also a subsidiary of FHS.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals and the covenants contained in this Seventh Addendum, agree as follows:

1. Exercise of Extension Option. Tenant hereby exercises, and Landlord hereby confirms Tenant’s exercise of the Extension Option described in the Fifth Addendum, as modified by this Seventh Addendum, with respect to all of the Premises.

2. Term. By reason of said exercise by Tenant of said Extension Option, the term of the Lease for all of the Premises expires at midnight on September 30, 2002.

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3. Rent. The rent for the period of April 1, 2000 through September 30, 2002 shall be the rent as calculated under Section 4.C. of the Fifth Addendum and under Section 4.C. of the Sixth Addendum.

4. Further Extension of Term.

A. New Extension Option. Tenant shall have the right and option (the “New Extension Option”) to extend the term of this Lease for thirty (30) months (the “New Extension Period”) commencing immediately upon the expiration of the term of this Lease (commencing, therefore, on October 1, 2002).

B. Extension Premises. Tenant may exercise the New Extension Option with respect to any or all of the buildings that comprise the Premises, provided that Tenant may not exercise the New Extension Option with respect to only a portion of a building.

C. Rent During New Extension Period.

i. Initial Rent. During the first (1st) twelve (12) months of the New Extension Period, the rent shall be as follows: (a) the rent for Building 2015B, the rent for Building 2025, and the rent for Building 2015A shall be One Dollar and Ten Cents ($1.10) per rentable square foot per month, and (b) the rent for Building 2006 shall be One Dollar and Thirty Cents ($1.30) per rentable square foot per month.

ii. Rental Increases. During the New Extension Period, the rent for Building 2015B, the rent for Building 2025, the rent for Building 2006, and the rent for Building 2015A shall all increase as follows: (a) on October 1, 2003, said rent shall increase by the same percentage as the Consumer Price Index, unadjusted, for All Urban Consumers (all items), as published by the United States Department of Labor, Bureau of Labor Statistics, for the San Francisco-Oakland-San Jose Area (1982-84 =100 Base) (the “CPI”) has increased from the CPI as published for September, 2002, to the CPI as published for September, 2003; and (b) on October 1, 2004, said rent shall increase by the same percentage as the CPI has increased from the CPI as published for September, 2003_: to the CPI as published for September 2004; provided that under no circumstances shall either of said increases in rent, the one occurring October 1, 2003 and the other occurring on October 1, 2004, exceed three and one-quarter percent (3.25%). Landlord shall calculate and notify Tenant of all applicable rental increases. If the CPX for calculating any such increase is not available at the time a rental increase begins, then Tenant shall temporarily continue paying rent at the existing rate. Once the applicable CPI becomes available and Landlord notifies Tenant of the amount of the applicable rental increase, then Tenant shall pay the difference between any rent paid and the rent as adjusted under the applicable CPI.

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D. Exercise of New Extension Option. To exercise the New Extension Option, Tenant shall, not later than May 4, 2002, give, and Landlord shall receive, a duly mailed or personally delivered written notice setting forth (i) Tenant’s exercise of the New Extension Option, and (ii) a statement clearly designating to which of the buildings comprising the Premises the New Extension Period shall apply. Failure by Tenant to provide timely or adequate written notice as set forth herein shall, unless, and in the sole discretion of Landlord, an untimely or inadequate notice is acceptable to Landlord, cause the New Extension Option to lapse and its exercise by Tenant shall not be effective.

E. Condition. Tenant’s right to exercise the New Extension Option set forth in this Seventh Addendum is conditioned upon the requirement that, after the giving of written notice and the passage of the applicable cure period, if any, Tenant shall not be in default under the Lease at the time of exercise of the New Extension Option.

5. Prior Rental Increases. Landlord agrees to review its notices of rental increases effective October 1, 1998, and October 1, 1999, under Section 3.B. of the Fifth Addendum as previously delivered to Tenant and to review the CPI as published for the months designated therein. Promptly after the execution and delivery of this Seventh Addendum, Landlord shall report its findings to Tenant. If rental increases previously paid by Tenant were in excess of the increases that should have been paid, Landlord shall provide Tenant with credit for the excess against the rent next becoming due under the Lease.

6. Improvements and Energy Casts.

A. Security. Promptly following the execution and delivery of this Seventh Addendum, Landlord shall, at a total cost to Landlord not exceeding Fifty-Three Thousand Dollars ($53,000.00), install a new card access and additional security measures, all in accordance with plans and specifications that Landlord and Tenant have been discussing and shall mutually approve after the execution and delivery of this Seventh Addendum.

B. Other Improvements. In addition to the new card access and additional security measures to be installed under Section 6.A., above, Landlord agrees to expend no more than Three Dollars ($3.00) per rentable square foot to pay for permanent improvements to the Premises (the “New Improvements”), to be done in accordance with plans and specifications to be prepared and mutually approved by Landlord and Tenant following the execution and delivery of this Seventh Addendum. Landlord agrees to commence installation of the New Improvements as promptly as may be reasonably possible after said plans and specifications are mutually approved and all necessary permits are obtained, and to prosecute such installation to completion with commercially reasonable diligence. Materials used for said new permanent improvements shall be of the same or similar quality as those materials previously used by Landlord in the repair and Improvement of the Premises pursuant to the Lease. The New Improvements are generally as follows:

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i. To build out a few perimeter offices, but not to exceed twenty (20) such offices;

ii. To replace two (2) additional entrance doors (10S and 11S) with glass;

iii. To plumb water coolers;

iv. To install additional landscaping;

v. To reduce noise in HVAC unit, second floor, enrollment area;

vi. To upgrade breakrooms;

vii. To spot paint as needed;

viii. To replace carpeting as needed;

ix. To install lockers in restrooms;

x. To add bulletin boards; and

xi. To continue parking lot improvements.

C. Tenant’s Obligations. Any other improvements to the Premises that Tenant may desire shall, subject to approvals from Landlord under Section 10 of the Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

D. Energy Costs. At the request of Tennant, Landlord agrees to work with Tenant in the development of an energy cost reduction program with respect to electrical usage, including, but not limited to, HVAC, at the Premises and to implement any such program if and to the extent, the cost thereof is reasonable from Landlord’s perspective under the circumstances.

7. Brokers’ Fee.

A. Only One Broker. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Seventh Addendum excepting only Aguer Pipgras Associates (the “Broker”), and they know of no other real estate broker or agent who is entitled to a commission in connection with this Seventh Addendum.

B. Fee for First Extension. By reason of Tenant’s exercise herein of the Extension Option granted in the Fifth Addendum, Landlord shall, immediately after execution and delivery of this Addendum, pay to the Broker its fee calculated as set forth in Section 6.B. of the Fifth Addendum.

C. Fee for New Extension. If the New Extension Option is effectively exercised by Tenant, then Landlord shall pay to the Broker, at the beginning of the New Extension Period, a brokerage fee of three percent (3%) of the total rent payable during the New Extension Period for that portion of the Premises as to which the New Extension Option is exercised.

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8. Effect. Landlord and Tenant agree that the Least is in full force and effect without modification except as expressly set forth in this Seventh Addendum.

		Aerojet-General Corporation,
		an Ohio corporation
Dated:	December 1, 1999	By:	/s/ Terry P. Griffin
		Its:	President Aerojet Investments Ltd.
		Foundation Health Federal Services, Inc.,
		a Delaware corporation
Dated:	July 7, 1997	By:	/s/ Michael Radford
		Its:	Vice President

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EIGHTH ADDENDUM TO LEASE

This is the Eighth Addendum, which, upon approval, will be attached to that certain Lease (the “Original Lease”) by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Health Net, Inc., a Delaware corporation, as successor in interest by merger to Foundation Health Federal Services, Inc., a Delaware corporation (“FHFS”), as successor in interest to Foundation Health, a California Health Plan, a California corporation (“FH”), as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, that certain Sixth Addendum, and that certain Seventh Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Eighth Addendum, all capitalize terms used in this Eighth Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Eighth Addendum to a “section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately twenty-eight thousand (28,000) square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006), and approximately twenty-eight thousand (28,000) square feet in Building number 2015A (collectively, the “Premises”) and no other space.

B. The Premises consist of approximately two hundred one thousand six hundred eighty-four (201,684) rentable square feet of office space.

C. In accordance with the provisions herein, Landlord and Tenant desire, among other things, (1) to extend the term of the Lease, (2) to grant to Tenant a right to further extend the term, (3) to give Tenant expansion and contraction rights respecting the Premises and a right to first negotiate for additional space, and (4) to provide a rental schedule for the extended term and an allowance from Landlord for renovation and improvement work at the Premises.

D. Tenant has advised Landlord and hereby represents and warrants to Landlord: (1) that FH, being the original Tenant under the Lease, disappeared upon its merger into Health Net, Inc., a California corporation (“Health Net-Cal”), as the surviving corporation; (2) that Health Net-Cal was at the time of execution and delivery of the Seventh Addendum a subsidiary of Foundation Health Systems, Inc., a Delaware corporation (“FHS”); (3) that, pursuant to a separate Assignment of Lease dated November 30, 1999, Health Net-Cal, with Landlord’s consent, assigned all of its interest under the Lease to FHS, which was then a subsidiary of FHS and (4) that as of the date this Eighth Addendum is executed, Health Net-Cal, FHS, and FHFS have all merged into one (1) surviving company, which surviving company is Health Net Inc., a Delaware corporation, which is the current Tenant under the Lease.

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AGREEMENT

NOW, THEREFORE Landlord and Tenant, in consideration of the foregoing recitals, all of which are incorporated herein by this reference, and the covenants contained in this Eighth Addendum, agree as follows:

1. Term. Landlord and Tenant agree that, subject to further extension as provided below, the term of the Lease is extended by five(5) years (the “Additional Term”) which Additional Term commences on October 1, 2002 and expires on September 30, 2007, subject to earlier termination as provided elsewhere in the Lease. The Additional Term supersedes and replaces entirely any and all extension options Tenant may have had under the Lease as it existed prior to this Eighth Addendum, including, but not limited to, the New Extension Option (as defined in the Seventh Addendum). Except as may be expressly provided to the contrary in this Eighth Addendum, all of the terms and conditions of the Lease including, but not limited to, the rental amounts payable thereunder, as it existed prior to this Eighth Addendum shall continue to apply for the period prior to commencement of the Additional Term.

2. Rent. The monthly rent for the Additional Term shall be as follows:

A. For the first (1^st) through the twelfth (12^th) months, One Dollar and Twenty-Four Cents ($1.24 per rentable square foot, which is, assuming no interim Contraction Date (defined below), and assuming no interim addendum to the Lease demising the Expansion Area (defined below , a total of Two Hundred Fifty Thousand Eighty-Eight Dollars and Sixteen Cents ($250,088.16) per month.

B. For the thirteenth (13^th) through the forty-eighth (48^th) months, One Dollar and Twenty-Seven Cents ($1.27) per rentable square foot, which is, assuming no interim Contraction Date (defined below) and assuming no interim addendum to the Lease demising the Expansion Area (defined below), a total of Two Hundred Fifty-Six Thousand One Hundred Thirty-Eight Dollars and Sixty-Eight Cents ($256,138.68) per month.

C. For the forty-ninth (49^th) through the sixtieth (60) months, One Dollar and Twenty-Nine Cents ($1.29 per rentable square foot, which is, assuming no interim Contraction Date (defined below) and assuming no interim addendum to the Lease demising the Expansion Area (defined below) welted below , a total of Two Hundred Sixty Thousand One Hundred Seventy-Two Dollars and Thirty-Six Cents ($260,172.36) per month.

3. Extension of Term.

A. Extension Option. Tenant shall have the right and option (the “Extension Option” to extend the term of the Lease for five (5) years beyond the Additional Term (the “Extension Period”) commencing immediately upon expiration of the Additional Term (commencing, therefore, on October 1, 2007); provided that:

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i. Tenant must give to Landlord, and Landlord must have received, by mail or by personal delivery, written notice of Tenant’s election to exercise the Extension Option no later than two hundred seventy (270) days prior to the date the Additional Term expires;

ii. At the time Tenant gives said written notice to Landlord, and at the time the Extension Period commences, Tenant must not, after the giving of written notice and the passage of the applicable cure period, if any, be in default under the Lease;

iii. Subject to Tenant’s Contraction Option (defined below) Tenant may exercise the Extension Option with respect to all of the premises only, and may not exercise the Extension Option with respect to only part of the Premises; and

iv. Failure by Tenant to provide timely or adequate written notice as set forth herein shall, unless, and in the sole discretion of Landlord, an untimely or inadequate notice is acceptable to Landlord, cause the Extension Option to lapse and its exercise by Tenant shall not be effective.

B. Rent during the Extension Period. The monthly rental payable during the Extension Period shall be in the fair market rental for the Premises, as of the beginning of the Extension Period, taking into account the specific provisions of the Lease that will remain constant, including, but not limited to, the term thereof as hereby modified, the improvements installed by Landlord, services provided to Tenant, the fact that said fair market rental shall not be subject to increase during the Extension Period, and other pertinent items and the amenities, location, identity, quality, age, and conditions of the buildings in which the Premises are located; provided that, in no event, shall the monthly rental payable for the Premises during the Extension. Period be less than the monthly rental payable for the last month of the Additional Term, regardless what the fair market rental may be. The fair market rental for the Premises shall be determined by applying the following procedures and subject to the following terms and conditions:

i. At least one hundred fifty (150) days prior to the expiration of the Additional Term, Landlord and Tenant may meet and confer but are not obligated to meet and confer, respecting the establishment of the fair market rental;

ii. In the event that Landlord and Tenant fail to meet and confer or cannot agree upon the fair market rental at least one hundred twenty (120) days prior to the expiration of the Additional Term, then at least one hundred (100) days prior to the expiration of the Additional Term, Landlord and Tenant shall each give to the other a written notice setting forth its final determination of the fair market rental (collectively, the “Fair Rental Notices”);

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iii. If only one (1) Fair Rental Notice is timely given, then that Fair Rental Notice shall conclusively establish the fair market rental;

iv. If both Landlord and Tenant give Fair Rental Notices, and the Fair Rental Notices are different in any respect, then the fair market rental shall be conclusively established by, a third-party appraiser mutually chosen by Landlord and Tenant; provided that, if Landlord and Tenant have not agreed upon, and engaged, such appraiser at least ninety (90) days prior to expiration of the Additional Term, then Landlord and Tenant shall each engage a duly licensed California attorney with commercial leasing experience of at least five (5) years, which attorneys shall, by their agreement, select the appraiser; provided that, if said attorneys have not agreed upon an appraiser at least sixty (60) days prior to the expiration of the Additional Term, then the appraiser shall be selected by the Presiding Judge of the Superior Court of Sacramento County acting in his or her individual capacity if said Judge is willing to do so;

v. Landlord and Tenant shall share equally the fees and expenses of the selected appraiser and shall each pay its own attorneys’ fees;

vi. Within thirty (30) days after the appraiser’s engagement, the appraiser shall deliver to Landlord and to Tenant the appraiser’s determination of which of the two (2) Fair Rental Notices is, in the appraiser’s best judgment, the closest to the fair market rental for the Premises (the “Chosen Fair Rental Notice”), and the amount set forth in the Chosen Fair Rental Notice shall be deemed to be the fait market rental; and

vii. The appraiser shall be required to give to Landlord and to Tenant a written statement of the appraiser’s reasoning, and justification for selection of the Chosen Fair Rental Notice; the appraiser shall not be permitted to decide on a middle ground, or to suggest any compromise; the appraiser’s sole function shall be to determine the Chosen Fair Rental Notice, and provide his or her reasons therefor.

4. Tenant Improvements.

A. Renovation Allowance. As of the commencement of the Additional Term, and in consideration for the Additional Rent (defined below), Landlord shall make available for paying costs of renovating and improving the Premises an allowance of Five Dollars ($5.00) per rentable square foot of the premises not including the Expansion Area (defined below), which is assuming no interim Contraction date (defined below a total amount of One Million Eight Thousand Four Hundred Twenty-Nine Dollars ($l,008,429.00) (the “Renovation Allowance”).

B. Construction of Improvements. Subject to the Reimbursement Option (defined below), Landlord agrees to expend an amount up to the Renovation Allowance (the portion of the Renovation Allowance actually expended is hereinafter

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referred to as the “Expended Allowance”) as and when Landlord incurs costs for the construction of permanent improvements (collectively the “Permanent Improvements”) to the premises, including, but not limited to, costs associated with architectural designs engineering, preparation of plans and specifications, permits and fees, labor and materials, equipment purchase or rental amounts paid to contractors, including contractor profit and overhead, provided that all such Permanent Improvements shall be constructed in accordance with plans and specifications that are mutually approved by Landlord and Tenant. Landlord agrees to commence installation of the Permanent Improvements as promptly as may be reasonably possible after said plans and specifications are mutually approved and all necessary permits are obtained, to make reasonable efforts to minimize any disruption to Tenant’s business operations as a result of such installation, and to prosecute such installation to completion with commercially reasonable diligence. Materials used for said Permanent Improvements shall be of the same or similar quality as those materials previously used by Landlord in the repair and improvement of the Premises pursuant to the Lease. The contract between Landlord and its general contractor construction of the Permanent Improvements shall be a fixed-price contract for all of the work contemplated, and Landlord shall give Tenant a copy thereof at least five (5) business days before it is fully executed and delivered by Landlord and its general contractor. Tenant acknowledges that the amount of such contract will not include the cost of any change orders or corrections issued by the architect or Tenant. If the cost of any such change orders or corrections causes the total cost for the Permanent Improvements to exceed the amount of the Renovation Allowance, then Tenant shall, upon presentation of invoices or other reasonable proof of the cost thereof, pay, or reimburse Landlord for, such excess.

C. Consultants and Contractor. Although Landlord will pay, out of the Renovation Allowance, the costs of design work for the Permanent Improvements, Tenant shall have the right to select an interior space planning firm and other consultants to prepare said plans and specifications for Landlord and Tenant mutually to approve, except that Landlord, and not Tenant, shall select the engineer or engineering company to be used. Landlord and Tenant agree to engage REF & Sons as the general contractor to construct the Permanent Improvements (Tenant acknowledges that Landlord has advised Tenant that Landlord will not accept an alternative contractor) in accordance with the mutually approved plans and specifications. Landlord and Tenant agree to engage Forrar Williams & Associates as the architectural firm to do the interior space planning and design work and to prepare the plans and specifications for the Permanent Improvements (Landlord acknowledges that Tenant has advised Landlord that Tenant will not accept an alternative design, planning, and architectural firm).

D. Organized Labor. Landlord and its general contractor shall provide organized labor (construction trades) the opportunity to participate in the construction of the Permanent Improvements via the^-bidding process. When applicable, Landlord shall award any job or jobs to companies using organized labor if they are the most responsive and their pricing is competitive.

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E. Budgeting. Landlord’s fiscal year ends November 30 of each year. Landlord has budgeted expenditure of the Renovation Allowance one-half (1/2) during the fourth (4^th) quarter of Landlord’s 2002 fiscal year (i.e., between October 1, 2002, when the Additional Term commences, and November 30, 2002) and one-half (1/2) during Landlord’s 2003 fiscal year (i.e., between December 1, 2002 and November 30, 2003). Landlord and^-Tenant agree to cooperate reasonably with each other to cause design, mutual approval, and construction of the Permanent Improvements to be consistent with Landlord’s said budgeting, including, but not limited to, planning to complete construction of the Permanent Improvements by November 30, 2003. Landlord shall no obligation to pay from the Renovation Allowance any cost incurred after November 30, 2003 unless that cost is incurred after November 30, 2003 by reason of Landlord’s purposeful delay or other fault.

F. The Reimbursement Option. Notwithstanding that subparts B through D of this paragraph 4 contemplate that Landlord shall arrange for, and supervise, the renovation and improvement work for which the Renovation Allowance or some portion thereof is to be spent after the Additional Term has commenced, Landlord agrees that, at any time prior at any time or to commencement of the Additional Term Tenant may give Landlord written notice of Tenant’s desire to have that work done before commencement of the Additional Term (an “Early Work Notice”). If and when an Early Work Notice is given, then Tenant may itself arrange for, and supervise, all of the renovation and improvement work, in which case all costs and expenses incurred therefor shall be paid by Tenant as and when they become due, and Tenant shall be entitled to receive from the Renovation Allowance reimbursement for said costs and expenses (the “Reimbursement Option”); provided that:

i. All other provisions of subparts B through D of this paragraph 4 that are not inconsistent with the Reimbursement Option, including, but not limited to, Landlord’s right to review and approve in advance all plans and specifications for the work and to select the engineer or engineering company and Landlord and Tenant’s agreement to use REF Sons as the general contractor and to use Forrar Williams & Associates as the architectural firm, shall apply under the Reimbursement Option;

ii. As and when costs and expenses are incurred and the work is done, Tenant shall keep Landlord regularly informed of the amounts involved and progress toward completion and shall provide to Landlord all appropriate backup documentation, including, but not limited to, copies of contracts, change order, invoices, billing statements, and other such documentation;

iii. When the work is completed and Tenant has paid all costs and expenses incurred, and there are no other costs or expenses to be incurred for which Tenant will seek reimbursement under the Reimbursement Option, then Tenant shall deliver to Landlord a complete and final breakdown, in reasonable detail, and a statement of the total amount owed by Landlord to reimburse Tenant therefor (the “Reimbursement Amount”), which Reimbursement Amount shall not exceed the amount of the Renovation Allowance; and

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iv. Landlord shall pay to Tenant one-half (1/2) of the Reimbursement Amount no later than during the month of October, 2002, and the remaining one-half (1/2) of the Reimbursement Amount no later than during the month of December, 2002.

G. Tenant’s Obligations. Any other improvements to the Premises that Tenant may wire shall, subject to approvals from Landlord under Section 10 of the Original Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

H. Additional Rent. In consideration for Landlord’s making the Renovation Allowance available, and in addition to the monthly rent payable under paragraph 2 of this Addendum Tenant agrees to pay, commencing at the beginning of the Additional Term, additional monthly rent (the “Additional Rent”) in the amount that is necessary to fully amortize, during the five (5) years of the Additional Term, in equal monthly installments, the Expended Allowance or the Reimbursement Amount, as the case may be, plus interest accruing on the unpaid balance thereof at ten percent (10%) per annum provided that, if no part of the Renovation Allowance is actually expended by Landlord, then such Additional Rent shall not become due. For example, if Landlord expends all of the Renovation Allowance then the Additional Rent will be Twenty-One Thousand Four Hundred Twenty Five Dollars and Ninety-Four Cents ($21 425.94) payable in advance on the first (1^st) day of each month, commencing on the first (1^st) day of the Additional Tern, notwithstanding that the Renovation Allowance is expended after commencement of the Additional Term.

5. Contraction Option. Tenant shall have the right and option to contract the area of the premises as much as, but by no more than, one hundred thousand (100 000) square feet (the “Contraction Option”), subject to the following terms and conditions:

A. The Contraction Option may be exercised only by written notice of exercise given by Tenant either by certified U.S. Mail or by personal delivery to Landlord (a “Contraction Notice”);

B. A Contraction Notice may be given only if the Department of Defense (the “DOD”) fails to extend or renew one (1) or more of the following three (3) CHAMPUS contracts currently held by Tenant, each of which has two (2) possible two (2) year extensions or renewals, as of dates set forth below: (i) the Region 11 CHAMPUS contract; (ii) the Region 6 CHAMPUS contract; and (iii) the Regions 9/10/12 CHAMPUS contract;

C. If the Region 11 CHAMPUS contract is not extended or renewed as of February 28, 2002 or as of February 28, 2004 (collectively, the “Region 11 Extension Dates”), that will permit exercise of the Contraction Option for up to, but no more than, twenty thousand (20,000) square feet;

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D. If the Region 6 CHAMPUS contract is not extended or renewed as of October 31, 2002 or as of October 31, 2004 (collectively the “Region 6 Extension Dates”), that will permit exercise of the Contraction Option for up to, but no more than, thirty thousand (30,000) square feet;

E. If the Regions 9/10/12 CHAMPUS contract is not extended or renewed as of March 31, 2003 or as of March 31, 2005 (collectively, the “Regions 9/10/12 Extension Dates”), that will permit exercise of the Contraction Option for up to, but no more than, fifty thousand (50,000) square feet;

F. A Contraction Notice must specify which DOD CHAMPUS contract was not extended or renewed and the exact date as of which the area of the Premises shall be reduced (a “Contraction Date”) which date cannot be earlier than but may be later than, one (1) of the Region 11 Extension Dates one (1) of the First Region 6 Extension Dates, or one (1) of the Regions 9/10/12 Extension Dates (collectively, the “Extension Dates”), respectively, depending upon which of the three (3) CHAMPUS contracts is not extended or renewed and is the subject of the Contraction Notice;

G. A Contraction Notice must also describe the area of the Premises affected (the “Deleted Area”), set forth Tenant’s best estimate of the number of rentable square feet contained within the Deleted Area (although the exact number of rentable square feet shall be determined by Landlord by application of the method for determining “rentable area” under the ANSI/BOMA Z65.1-1996 standard) and a commitment by Tenant to surrender to Landlord, on the Contraction Date, possession of the Deleted Area;

H. A Contraction Notice shall be effective only if it is given by Tenant and received by Landlord at least six (6) months prior to the Contraction Date set forth therein and no later than thirty (30) days after an Extension Date for the CHAMPUS contract referenced therein;

I. Concurrently with Tenant’s giving a Contraction Notice to Landlord Tenant shall pay to Landlord the total amount of the unamortized portion of the Expended Allowance or the Reimbursement Amount, as the case may be, and of the broker’s commission payable to the Broker (defined below) under paragraph 12 below, both as proportionally attributable to the number of rentable square feet of the Deleted Area compared to the number of rentable square feet contained in the entire Premises for the period from the Contraction Date to the end of the five (5) years of the Additional Term. For purposes of this subpart I of this paragraph 5, said brokerage commission shall be deemed amortized on a straight-line basis over a period of five (5) years, commencing upon commencement of the Additional Term, and the Expended Allowance or the Reimbursement Amount shall be deemed amortized as provided in subpart H of paragraph 4 of this Addendum;

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J. If Tenant actually surrenders possession of a Deleted Area to Landlord, on or before the Contraction Date applicable thereto then rent under the Lease shall be proportionately abated, as of the Contraction Date, using the rent per rentable square foot then in effect and if the Contraction Date precedes the commencement of the Additional Term, the Renovation Allowance shall be proportionately reduced so that it shall not exceed the amount per rentable square foot specified in subpart A of paragraph 4 of this Addendum;

K. Tenant agrees to pay all out-of-pocket costs and expenses reasonably incurred by Landlord to cause each Delete Area to become separate premises that can be demised to a separate tenant, including, but not limited to, compliance with legal requirements for ingress and egress and safety. Said payment by Tenant shall be made in one (1) or several installments as, and within ten (10) days after, Landlord presents to Tenant appropriate evidence of such costs or expenses either when incurred by Landlord or after they are owed or paid by Landlord, with copies of invoices from contractors and others who are doing the work and/or supplying the materials being deemed to be such appropriate evidence. Said costs and expenses reasonably incurred by Landlord shall include, but shall not be limited to, costs and expenses for construction of demising walls and corridors, which may include fire walls as required by law, causing electricity to be separately metered to the Deleted Area, and installing standard numbers of electrical outlets and wiring in such demising and corridor walls, but shall in no event include improvement work commonly called “tenant improvements” designed specially for the use and enjoyment of a particular tenant; and

L. At the request of either Landlord or Tenant, they shall, after any Contraction Date, enter into an amendment to the Lease as hereby amended documenting the facts arising from Tenant’s exercise of the Contraction Option, including, but not limited to, that the Deleted Area is no longer part of the premises and what the current rent has become.

6. Expansion Option. Tenant shall have one (l) right and option to expand the area of the Premises by as much as, and by no more than, sixty thousand (60,000) square feet of rentable area (the “Expansion Option”), subject to the following terms and conditions:

A. The Expansion Option may be exercised by Tenant only by written notice given to Landlord during, and neither before nor after, the first (1^st) twelve (12) months of the Additional Term (the “Expansion Notice”);

B. The Expansion Notice must specify the area or areas within a building or buildings owned by Landlord and located within Landlord’s administrative area on Aerojet Road that Tenant desires to add to the Premises (the “Expansion Area”);

C. If, at the time the Expansion Notice is given, the Expansion Area is available for leasing to Tenant, then Landlord and Tenant shall immediately enter into another written addendum to the Lease to effect a demise thereof to Tenant, at the same

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terms and conditions as the Premises are then being leased to Tenant under the Lease (with the exception that the rent shall be the fair market rental for such Expansion Area determined as set forth in subpart E of this paragraph 6); provided that, if through no fault of Landlord, Tenant and Landlord have not, within ninety (90) days after the Expansion Notice is given, entered into a fully executed addendum to the Lease, then Landlord may, by written notice to Tenant, terminate Tenant’s Expansion Option, and upon the giving of such written notice, Tenant shall have no further interest in, or rights to, the Expansion Area;

D. Whether or not the Expansion Area is “available for leasing to Tenant” shall be determined by Landlord in the exercise of its reasonable discretion. Without limiting the generality of the foregoing, Landlord may determine that the Expansion Area is not available for leasing to Tenant if it is then occupied by another tenant, is already subject to a leasing arrangement for any period that would overlap with any portion of the then remaining Additional Term or any part of the Extension Period, or is used or expected to be used by Landlord for its own business operations. Landlord shall respond in writing to any Expansion Notice within fifteen (15) business days of the receipt thereof, and advise Tenant as to whether the Expansion Area is “available for leasing to Tenant” (if available, a “Notice of Availability”); and

E. Determining Fair Market Rental. The monthly rental payable for the Expansion Area shall be the fair market rental for the Expansion Area, taking into account the specific provisions of the Lease that will remain constant, including, but not limited to, the term thereof as hereby modified, the improvements installed by Landlord, services provided to Tenant, the fact that said fair market rental for the Expansion Area shall not be subject to increase during the Additional Term, and other pertinent items and the amenities, location, identity, quality, age, and conditions of the buildings in which the Premises are located; provided that, in no event shall the monthly rental per rentable square foot for the Expansion Area be less than the monthly rental per rentable square foot payable for the Premises under paragraph 2 hereof, as of the date the Expansion Notice is given, regardless what the fair market rental for the Expansion Area may be. The fair market rental for the Expansion Area shall be determined by applying the following procedures and subject to the following terms and conditions:

i. Within ten (10) days after Landlord gives the Notice of Availability, Landlord and Tenant may meet and confer, but are not obligated to meet and confer, respecting the establishment of the fair market rental for the Expansion Area;

ii. In the event that Landlord and Tenant fail to meet and confer or cannot agree upon the fair market rental within thirty (30) days after the Expansion Notice was given, then within forty-five (45) days after the Expansion Notice was given, Landlord and Tenant shall each give to the other a written notice setting forth its final determination of the fair market rental for the Expansion Area (collectively, the “Expansion Area Fair Rental Notices”);

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iii. If only one (1) Expansion Area Fair Rental Notice is timely given, then that Expansion Area Fair Rental Notice shall conclusively establish the fair market rental for the Expansion Area;

iv. If both Landlord and Tenant give Expansion Area Fair Rental Notices, and the Expansion Fair Rental Notices are different in any respect, then the fair market rental for the Expansion Area shall be conclusively established by a third-party appraiser mutually chosen by Landlord and Tenant; provided that, if Landlord and Tenant have not agreed upon, and engaged, such appraiser within sixty (60) days after the Expansion Notice was given, then Landlord and Tenant shall each engage a duly licensed California attorney with commercial leasing experience of at least five (5) years, which attorneys shall, by their agreement, select the appraiser; provided that, if said attorneys have not agreed upon an appraiser within seventy-five (75) days after the Expansion Notice was given, then the appraiser shall be selected by the Presiding Judge of the Superior Court of Sacramento County acting in his or her individual capacity if said Judge is willing to do so;

v. Landlord and Tenant shall share equally the fees and expenses of the selected appraiser and shall each pay its own attorneys’ fees;

vi. Within fifteen (15) days after the appraiser’s engagement, the appraiser shall deliver to Landlord and to Tenant the appraiser’s determination of which of the two (2) Expansion Area Fair Rental Notices is, in the appraiser’s best judgment, the closest to the fair market rental for the Expansion Area (the “Chosen Expansion Area Fair Rental Notice”), and the amount set forth in the Chosen Expansion Area Fair Rental Notice shall be deemed to be the fair market rental for the Expansion Area; and

vii. The appraiser shall be required to give to landlord and to Tenant a written statement of the appraiser s reasoning and justification for selection of the Chosen Expansion Area Fair Rental Notice; the appraiser shall not be permitted to decide on a middle ground, or to suggest any compromise; the appraiser’s sole function shall be to determine the Chosen Expansion Area Fair Rental Notice, and provide his or her reasons therefor.

7. Right to First Negotiate. Tenant shall have the right and option to first negotiate for leasing of additional space within any building owned by Landlord and located in Landlord’s administrative area on Aerojet Road (the “First Right”), subject to the following terms and conditions;

A. If, at any time during the Additional Term or the Extension Period, Landlord decides to seek a tenant or tenants for any space within any building owned by

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and located in Landlord’s administrative area on Aerojet Road, Landlord shall first give written notice to Tenant (a “Landlord’s Notice” ) setting forth a description of the available space (the “Available Space”) the monthly rental rate, and all other material terms and conditions upon which Landlord intends to offer the Available Space. A Landlord’s Notice shall be deemed to be an offer to lease to Tenant the Available Space on the terms stated therein;

B. Upon Tenant’s receipt of a Landlord’s Notice, Tenant shall have five (5) business days to respond by giving Landlord a written acceptance setting for Tenant’s commitment to lease the Available Space on the terms stated in the Landlord’s Notice (a “Tenant’s Acceptance”);

C. If Tenant fails to give to Landlord a Tenant’s Acceptance within said five (5) business days, that failure shall be deemed to be a rejection of Landlord’s offer to lease the Available Space (a “Tenant’s Rejection”) and, except as provided in subpart E of this paragraph 7 shall be deemed a termination of Tenant’s First Right, so that Landlord shall have no further duty to give any Landlord’s Notice respecting the Available Space or any other space it may own from time to time, just as if this paragraph 7 were not a part of this Eighth Addendum;

D. After any Tenant’s Rejection, Landlord shall, for a period of one (1) year, be free to lease the Available Space to any other person or entity for rent and upon the terms and conditions at least as favorable to Landlord as those set forth in the Landlord’s Notice;

E. If (a) during said one (1) year Landlord desires to lease the Available Space upon terms and conditions that are less favorable to Landlord than those set forth in the Landlord’s Notice, or (b) the Available Space is not leased by Landlord to another person or entity within said one (1) year, and if Landlord desires to continue to seek a tenant therefor, then, and in either of those events, Landlord must give Tenant another Landlord’s Notice respecting that Available Space, and the provisions of this paragraph 7 shall again apply;

F. If and when Landlord has without breach of this paragraph 7, leased any space that is subject to the First Right to another person or entity, the First Right shall terminate and be of no further force or effect, this paragraph 7 being then deemed not to be a part of this Eighth Addendum; and

G. If a Tenant’s Rejection ever occurs, Tenant agrees to provide to Landlord such written proof, including, but not limited to, an estoppel certificate, as Landlord may request to prove when Landlord leases or is negotiating to lease, or seeking a tenant for, the Available Space, that the First Right no longer applies thereto, which written proof shall be provided within five (5) business days after Landlord’s written request therefor is received by Tenant.

8. Parking. Tenant shall be entitled to its current parking ratio and, in any event, not less than five (5) vehicle parking spaces for every one thousand (l,000) rentable square feet of

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the Premises, as and if the size of the Premises changes from time to time as provided elsewhere in this Eighth Addendum, which parking spaces shall be provided by Landlord at no charge.

9. Roof Rights. Provided that Tenant complies with all rules and regulations adopted by Landlord respecting access to, and activities and installations on, the roof of any of the buildings in which the Premises are located and provide Tenant gives to Landlord, at least ten (10) days in advance, written notice of Tenant’s plans and expected activities, Tenant may, at Tenant’s sole cost and expense, install a satellite dish, microwave antenna, or any other electrical devise, communications equipment, or mechanical equipment on the rooftop area of any such building, subject to Tenants compliance with all governmental requirements, including, but not limited to, issuance of appropriate permits and conduct of appropriate inspections, and subject to Landlord’s review and approval of all plans and specifications therefor.

10. Mortgages. Landlord hereby represents and warrants to Tenant that the Premises are not currently encumbered by any mortgage or deed of trust, and therefore, no lender’s non-disturbance and attornment agreement is necessary or appropriate.

11. Signage Rights. Tenant may maintain its existing building identification and may, in its reasonable determination, expand its identification signage, subject to Tenant’s compliance with all governmental requirements, including, but not limited to, issuance of appropriate permits and conduct of appropriate inspections, and subject to first obtaining written approval of Landlord, which approval shall not be unreasonably withheld, conditioned, or delayed.

12. Brokers’ Fee.

A. Only One Broker. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Eighth Addendum excepting only Aguer Pipgras Associates (the “Broker”), and they know of no other real estate broker or agent who is entitled to a commission in connection with this Eighth Addendum.

B. Fee for the Additional Term. Landlord agrees to pay to the Broker, payable one-half (1/2) upon the fill execution of this Eighth Addendum, and one-half (1/2) at the commencement of Additional Term, a brokerage fee equal to five percent (5%) of the total rent payable during the five (5) years of the Additional Term.

C. Fee for Extension Option. If the Extension Option is effectively exercised by Tenant, then Landlord shall pay to the Broker, at the beginning of the Extension Period, a brokerage fee equal to two and one-half percent (2-1/2%) of the total rent payable during the Extension Period.

D. Fee for Expansion Option. If the Expansion Option is effectively exercised by Tenant then Landlord shall pay to the Broker, at the time Tenant takes occupancy of the Expansion Area, a brokerage fee equal to five percent (5%) of the total rent payable for the Expansion Area from the date rent commences to accrue thereon to expiration of the five (5) years of the Additional Term.

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E. Fee for the First Right. If the First Right is effectively exercised by Tenant, then Landlord shall pay to the Broker, at the time Tenant takes occupancy of the Available Space, a brokerage fee equal to five percent (5%) of the total rent payable for the Available Space within five (5) years of such occupancy. If exercise of the First Right produces a lease of the Available Space the term of which is, or, through exercise of an option or options, becomes longer than five (5) years, then, at the beginning of the sixth (6^th ) year, Landlords shall pay to the Broker a brokerage fee equal to two and one-half percent (2-1/2%) of the total rent payable from the commencement of said sixth (6^th) year and before the expiration of ten (10) years from the date Tenant takes occupancy of the Available Space. Notwithstanding the foregoing provisions of this subpart E of this paragraph 12, if any such period or periods are not a part of the initial term for which Tenant is committed to pay rent for the Available Space, but are payable, for example, only if an option is exercised or a right to terminate is not exercised by Tenant, then said portion or portions of the commission attributable thereto shall be due to Broker only if and when Tenant becomes committed to pay rent of such period or periods.

F. Landlord acknowledges that the Broker and Tenant have notified Landlord that the Broker will pay part of said brokerage fees to Tenant although the amount of such payments has not been shared with Landlord.

13. Effect. Landlord and Tenant agree that the Lease is in full force and effect without modification except as expressly set forth in this Eighth Addendum.

		Aerojet-General Corporation,
		an Ohio corporation
Dated:	June 28, 2001	By:	/s/ Terry P. Griffin
		Its:	President, Aerojet Investments Ltd.
		Health Net, Inc.,
		a Delaware corporation
Dated:	June 12, 2001	By:	/s/ Michael Radford
		Its:	Vice President

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NINTH ADDENDUM TO LEASE

This is the Ninth Addendum, which, upon approval, will be attached to that certain Lease (the “Original Lease”) by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Health Net, Inc., a Delaware corporation, as successor in interest by merger to Foundation Health Federal Services, Inc., a Delaware corporation (“FHFS”), as successor in interest to Foundation Health, a California Health Plan, a California corporation (“FH”), as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, that certain Sixth Addendum, that certain Seventh Addendum, and that certain Eighth Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Ninth Addendum, all capitalized terms used in this Ninth Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Ninth Addendum to a “section” are to a specific section within the Lease unless otherwise indicated in this Ninth Addendum.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately twenty-eight thousand (28,000) square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006), and approximately twenty-eight thousand (28,000) square feet in Building number 2015A (collectively, the “Premises”) and no other space.

B. The Premises consist of approximately two hundred one thousand six hundred eighty-four (201,684) rentable square feet of office space.

C. In accordance with the provisions herein, Landlord and Tenant desire, among other things, to memorialize their agreements regarding (i) Tenant’s prepayment of rent, and (ii) Tenant’s obligation regarding Additional Rent.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals, all of which are incorporated herein by this reference, and the covenants contained in this Ninth Addendum, agree as follows:

1. Payment of Rent.

A. Landlord acknowledges receipt from Tenant of the sum of Two Million Five Hundred Eleven Thousand Three Hundred Fifteen and no/100ths Dollars ($2,511,315.00) (the “Rent Payment”), and agrees that such Rent Payment shall constitute payment in full of all of Tenant’s rent obligations under the Lease for the period of time commencing on September 1, 2001 and ending at 11:59 p.m. on September 30, 2002 (such period of time is hereinafter referred to as the “Payment Period”), notwithstanding any contrary provision of the Lease. Nothing in this Section 1.A is intended, however, to relieve Tenant of its obligation to pay the Additional Rent pursuant to Section 2 of this Ninth Addendum.

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B. If the Lease is terminated prior to the end of the Payment Period by reason of fire or other casualty, condemnation or any other event beyond the reasonable control of Tenant (and in all events excluding a termination resulting from Tenant’s default or breach of the Lease), Landlord agrees, within thirty (30) business days after such termination, to pay Tenant the unearned balance of the Monthly Rent, calculated at the rate of Six Thousand Four Hundred Thirty Nine and 27/100ths Dollars ($6,439.27) per day (the “Per Diem Amount”).

C. If, during the Payment Period, an event occurs that would entitle Tenant to an abatement or reduction of monthly rent payable under the Lease (including, but not limited to Sections 22 and 25 of the Original Lease, and Sections 6 and 8 of the Second Addendum, such abatement or reduction (on a daily rate equal to the Per Diem Amount) shall be credited to Tenant’s monthly rent obligations that accrue following the Payment Period until such credit is exhausted.

2. Additional Monthly Rent Increases. Tenant shall pay Landlord the sum of Four Hundred Nine Three Thousand Six Hundred Fifty-Three and no/100ths Dollars ($493,653.00) the “Additional Rent”), not later than October 31, 2001 (the parties acknowledge that the “Additional Rent” owing under this Section 2 is a separate and distinct obligation from the “Additional Rent” that may be payable under Section 4.H of the Eighth Addendum, and nothing in this Ninth Addendum is intended to modify Tenant’s obligation to pay Additional Rent pursuant to Section 4.H of the Eighth Addendum). The parties agree that the payment of the Additional Rent shall satisfy in full any obligation Tenant has under the Lease to pay (i) previous CPI increases in monthly rent (including, but not limited to any increases referenced in Sections 3 and 4 of the Fifth Addendum, and Sections 2 and 4 of the Sixth Addendum), and (ii) any CPI increase in monthly rent scheduled to occur on April 1, 2002 pursuant to clause (b) of Section 4.C of the Fifth Addendum, notwithstanding any contrary provision of the Lease. The parties acknowledge and agree that the Additional Rent amount represents a negotiated amount, and it is intended that the payment of such Additional Rent shall fully and finally settle any dispute or potential dispute arising from previous CPI increases in monthly rent.

3. Mortgages. Landlord hereby represents and warrants to Tenant that the Premises are not currently encumbered by any mortgage or deed of trust, and therefore, no lender’s non-disturbance and attornment agreement is necessary or appropriate.

4. Effect. Landlord and Tenant agree that the Lease is in full force and effect without modification except as expressly set forth in this Ninth Addendum. In the event of any discrepancy between the terms of this Ninth Addendum and any other term of the Lease, the terms of this Ninth Addendum shall govern.

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		Aerojet-General Corporation,
		an Ohio corporation
Dated:	November 7, 2001	By:	/s/ Thomas Brown
		Its:	Vice President, Aerojet Investments Ltd.
		Health Net, Inc.,
		a Delaware corporation
Dated:	November 9, 2001	By:	/s/ Michael Radford
		Its:	Vice President

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TENTH ADDENDUM TO LEASE

This is the Tenth Addendum, which, upon approval, will be attached to that certain Lease (the “Original Lease”) by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Health Net, Inc., a Delaware corporation, as successor in interest by merger to Foundation Health Federal Services, Inc., a Delaware corporation, as successor in interest to Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, that certain Sixth Addendum, that certain Seventh Addendum, that certain Eighth Addendum, and that certain Ninth Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Tenth Addendum, all capitalized terms used in this Tenth Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Tenth Addendum to a “section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately twenty-eight thousand (28,000) rentable square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006), and approximately twenty-eight thousand (28,000) rentable square feet in Building number 2015A (collectively, the “Existing Premises”) and no other space.

B. The Existing Premises consist of approximately two hundred one thousand six hundred eighty-four (201,684) rentable square feet of office space.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals, all of which are incorporated herein by this reference, and the covenants contained in this Tenth Addendum, agree as follows:

1. Premises. Subject to the terms and conditions of this Tenth Addendum, Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, approximately fifty-three thousand nine hundred ninety (53,990) rentable square feet of space, being a portion of the first (1^st) floor and approximately one-half (1/2) of the second (2^nd) floor of Building number 2019 located within the same complex of buildings as the Existing Premises on Aerojet Road in Sacramento County, California (the “Building 2019 Expansion Space”) (collectively, the Existing Premises and the Building 2019 Expansion Space, the “Premises”), the location of which Building 2019 Expansion Space is shown on Exhibits “A-1” and “A-2” attached hereto and incorporated herein by this reference, in addition to continuing Tenant’s leasehold interest in the Existing Premises under the Lease as modified by this Tenth Addendum; provided that, Landlord hereby reserves, and Tenant acknowledges that Landlord shall have, at all times during the term of the Lease, (a) access through the Building 2019 Expansion Space to and from the area known as the

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Platelet Design room, which access shall be limited by the requirement that persons using the Platelet Design room must first check in with Tenant’s reception and security; (b) for fire safety purposes for all of said Building number 2019, access through fire corridors and exits, including exits in the lobby area, and (c) for both fire safety purposes and for compliance with the Americans with Disabilities Act for all of said Building number 2019, access to and from, and use of, the elevator within the Building 2019 Expansion Space. See Exhibits “B-1” and “B-2” attached hereto and incorporated herein by this reference for information about said access rights reserved by Landlord.

2. Term. Landlord and Tenant agree that the term of the Lease for the Building 2019 Expansion Space shall commence, subject to any Phased TI Completion (defined below), on the date as of which Landlord has substantially completed the TI Work (defined below) (the “Completion Date”), and shall expire on July 31, 2009 (the “New Expiration Date”). Landlord hereby grants to Tenant an option to extend the term of the Lease for the Existing Premises (the “Existing Premises Option”) from its current expiration date of September 30, 2007 (the “Old Expiration Date”), to the New Expiration Date (the “New Additional Term”); provided that, unless, prior to March 31, 2007, Tenant gives to Landlord a written notice that Tenant does not exercise the Existing Premises Option, Tenant shall be deemed to have exercised the Existing Premises Option as of Old Expiration Date. Thus, unless such a notice of non-exercise of the Existing Premises Option is timely given, the term of the Lease for both the Building 2019 Expansion Space and the Existing Premises shall expire on the same day. Notwithstanding the foregoing provisions of this paragraph 2, (a) Landlord and Tenant agree to work together and cooperate in connection with the TI Work such that substantial completion of the TI Work, and delivery by Landlord to Tenant of the completed Building 2019 Expansion Space, may be accomplished in phases (collectively, “Phased TI Completion”); and (b) if Phased TI Completion does occur, the term of the Lease for the Building 2019 Expansion Space, and the payment of monthly rent, as set forth in paragraph 3 of this Tenth Addendum, shall both commence as of the delivery or deliveries of possession for each such phase or phases of the Phased TI Completion (each, a “Phased Completion Date”); provided that no such Phased Completion Date shall accelerate the New Expiration Date for that phase, but shall increase the length of the term of the Lease applicable thereto by the number of days said Phased Completion Date precedes the Completion Date. The provisions of this paragraph 2 and the provisions of paragraph 6 of this Tenth Addendum supersede and replace entirely any and all extension, contraction, and expansion options Tenant may have had under the Lease as it existed prior to this Tenth Addendum, including, but not limited to, paragraphs 3, 5, and 6 of the Eighth Addendum. When the Completion Date or any Phased Completion Date occurs, Landlord and Tenant shall then promptly execute and deliver to each other, based upon the form attached hereto as Exhibit “C” and incorporated herein by this reference, a written certification (an “Building 2019 Expansion Space Completion Date Certification”) of the Completion Date or Phased Completion Date, as the case may be, and, if requested by Landlord or Tenant, a further addendum to the Lease setting forth the Completion Date or Phased Completion Date and the monthly rental amount applicable thereto. As of the execution of this Tenth Addendum, Landlord estimates that a Phased TI Completion may be accomplished on the schedule set forth in Exhibits “D-1” and “D-2” attached hereto and incorporated herein by this reference.

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3. Rent. The monthly rent for the Existing Premises for the period prior to, and including, the Old Expiration Date is not modified by this Tenth Addendum, but continues on the same schedule as set forth in paragraphs 2 and 4H of the Eighth Addendum. If the Existing Premises Option is deemed exercised as set forth in paragraph 2 of this Tenth Addendum, then the monthly rent for the Existing Premises for the New Additional Term, being the period commencing immediately after the Old Expiration Date and ending on the New Expiration Date, shall be at the same rates per rentable square foot as apply, from time to time, to the Building 2019 Expansion Space as set forth in the next sentence of this paragraph 3. The monthly rent for the term of this Lease applicable to the Building 2019 Expansion Space, commencing on the Completion Date (subject to earlier commencement of monthly rent if and when any Phased Completion Date occurs) and expiring on the New Expiration Date, shall be calculated by multiplying the number of rentable square feet thereof by the following amounts: (a) One Dollar and Thirty-Eight Cents ($1.38) for the period commencing on the Completion Date and ending July 31, 2005; (b) One Dollar and Forty Cents ($1.40) for the period commencing August 1, 2005, and ending July 31, 2006; (c) One Dollar and Forty-Two Cents ($1.42) for the period commencing August 1, 2006, and ending July 31, 2007; (d) One Dollar and Forty-Four Cents ($1.44) for the period commencing August 1, 2007, and ending July 31, 2008; and (e) One Dollar and Forty-Six Cents ($1.46) for the period commencing August 1, 2008, and ending July 31, 2009. If a Phased TI Completion occurs, then the monthly rent for the period or periods, commencing upon each Phased Completion Date, and expiring on the Completion Date, shall be calculated by multiplying the number of rentable square feet in the completed phase by One Dollar and Thirty-Eight Cents ($1.38). Such rent shall be set forth in the Building 2019 Expansion Space Completion Date Certification applicable to that phase. Notwithstanding the foregoing provisions of this paragraph 3, Tenant agrees to pay to Landlord, in advance, in two (2) equal installments as set forth below, to be credited to the monthly rent for the Building 2019 Expansion Space for the thirteen (13) month period commencing on December 1, 2004, and expiring on December 31, 2005, Nine Hundred Seventy-Two Thousand Nine Hundred Dollars ($972,900.00) (the “Prepaid Rent”), and upon Tenant’s timely payment of the Prepaid Rent, the rental rate per rentable square foot for the Building 2019 Expansion Space and for the Existing Premises, for the period commencing on December 1, 2005, and expiring on New Expiration Date, shall be reduced by Two Cents ($.02) from the scheduled amounts set forth above in this paragraph 3; provided that, if the Existing Premises Option is not deemed exercised as set forth in paragraph 2 of this Tenth Addendum, then said reduction in the rental rate for the Existing Premises will expire on the Old Expiration Date. One-half (1/2) of the Prepaid Rent, being the amount of Four Hundred Eighty-six Thousand Four Hundred Fifty Dollars ($486,450.00), shall be paid within fifteen (15) days after the execution of this Tenth Addendum; the other one-half (1/2) of the Prepaid rent, being the amount of Four Hundred Eighty-six Thousand Four Hundred Fifty Dollars ($486,450.00), shall be paid upon the Completion Date.

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4. Extension of Term.

A. New Extension Option. Tenant shall have the right and option (the “New Extension Option”) to extend the term of the Lease for the Premise for five (5) years beyond the New Expiration Date (the “New Extension Period”) commencing immediately after the New Expiration Date; provided that:

i. Tenant must give to Landlord, and Landlord must have received, by mail or by personal delivery, written notice of Tenant’s election to exercise the New Extension Option no later than two hundred seventy (270) days prior to the New Expiration Date;

ii. At the time Tenant gives said written notice to Landlord, and at the time the New Extension Period commences, Tenant must not, after the giving of written notice and the passage of the applicable cure period, if any, be in default under the Lease;

iii. Tenant may exercise the New Extension Option with respect to all of the Premises only, and may not exercise the New Extension Option with respect to only part of the Premises; and

iv. Failure by Tenant to provide timely or adequate written notice as set forth herein shall, unless, and in the sole discretion of Landlord, an untimely or inadequate notice is acceptable to Landlord, cause the New Extension Option to lapse and its exercise by Tenant shall not be effective.

B. Rent during the New Extension Period. The monthly rental payable during the New Extension Period shall be the fair market rental for the Premises, as of the beginning of the New Extension Period, taking into account the specific provisions of the Lease that will remain constant, including, but not limited to, the term thereof as hereby modified, the improvements installed by Landlord, services provided to Tenant, the fact that said monthly rental based upon the fair market rental shall not be subject to increase during the New Extension Period, the cost to Landlord of paying to the Broker (defined below) any commission required under paragraph 12B of this Tenth Addendum in connection with Tenant’s exercise of the New Extension Option, and other pertinent items, and the amenities, location, identity, quality, age, and conditions of the buildings in which the Premises are located; provided that, in no event, shall the monthly rental payable for the Premises during the New Extension Period be less than the monthly rental payable for the month immediately preceding the New Expiration Date, regardless what the fair market rental may be. The fair market rental for the Premises shall be determined by applying the following procedures and subject to the following terms and conditions:

i. At least one hundred twenty (120) days prior to the New Expiration Date, Landlord and Tenant may meet and confer, but are not obligated to meet and confer, respecting the establishment of the fair market rental;

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ii. In the event that Landlord and Tenant fail to meet and confer or cannot agree upon the fair market rental at least one hundred (100) days prior to the New Expiration Date, then, at least ninety (90) days prior to the New Expiration Date (the “Notice Deadline”), Landlord and Tenant shall each give to the other a written notice setting forth its final determination of the fair market rental (collectively, the “Fair Rental Notices”); provided that, in order to help prevent inadvertent loss of any party’s right to give a Fair Rental Notice, the Notice Deadline shall extend, for both Landlord and Tenant, until one (1) of them gives a Fair Rental Notice plus, for the other, a period expiring five (5) business days thereafter.

iii. If only one (1) Fair Rental Notice is timely given, then that Fair Rental Notice shall conclusively establish the fair market rental;

iv. If both Landlord and Tenant give Fair Rental Notices, and the Fair Rental Notices are different in any respect, then the fair market rental shall be conclusively established by a third-party appraiser or broker mutually chosen by Landlord and Tenant; provided that, if Landlord and Tenant have not agreed upon, and engaged, such appraiser or broker at least sixty (60) days prior to the New Expiration Date, then Landlord and Tenant shall each engage a duly licensed California attorney with commercial leasing experience of at least five (5) years, which attorneys shall, by their agreement, select the appraiser or broker; provided that, if said attorneys have not agreed upon an appraiser or broker at least thirty (30) days prior to the New Expiration Date, then either Landlord or Tenant may commence an action for declaratory relief or other appropriate remedy to have the court appoint the appraiser or broker;

v. Landlord and Tenant shall share equally the fees and expenses of the selected appraiser or broker and shall each pay its own attorneys’ fees;

vi. Within thirty (30) days after the appraiser or broker’s engagement, the appraiser or broker shall deliver to Landlord and to Tenant the appraiser or broker’s determination of which of the two (2) Fair Rental Notices is, in the appraiser or broker’s best judgment, the closest to the fair market rental for the Premises (the “Chosen Fair Rental Notice”), and the amount set forth in the Chosen Fair Rental Notice shall be deemed to be the fair market rental; and

vii. The appraiser or broker shall be required to give to Landlord and to Tenant a written statement of the appraiser or broker’s reasoning and justification for selection of the Chosen Fair Rental Notice; the appraiser or broker shall not be permitted to decide on a middle ground, or to suggest any compromise; the appraiser or broker’s sole function shall be to determine the Chosen Fair Rental Notice, and provide his or her reasons therefor.

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5. Tenant Improvements.

A. Improvement Allowance. Landlord shall make available for paying costs of improving the Building 2019 Expansion Space an allowance of Twenty-Five Dollars ($25.00) per rentable square foot of the Building 2019 Expansion Space (the “TI Allowance”). Landlord shall, at Landlord’s sole cost and expense, and without charge against the TI Allowance, cause the Building 2019 Expansion Space to be a “standard building shell” (as more specifically described in Exhibit “E” attached hereto and incorporated herein by this reference) that complies with all applicable building codes and regulations (the “Standard Building Shell”) and to which Landlord may lawfully add the TI Work (defined below). Within thirty (30) days following the Completion Date, Landlord shall send to Tenant a written notice setting forth the amount of the Expended Allowance (defined below). If the Expended Allowance is less then the amount of the TI Allowance, then Landlord shall apply the difference solely to the reasonable cost of such additional permanent improvements to the Building 2019 Expansion Space as are reasonably requested by Tenant and approved by Landlord. For construction of such additional permanent improvements, Tenant shall, or, at Landlord’s option, Landlord shall, engage REF & Sons, being the contractor authorized by Landlord to work in the Building 2019 Expansion Space.

B. Construction of Improvements. Following completion of the Standard Building Shell, Landlord agrees to expend the TI Allowance or such lesser amount as may be sufficient (the “Expended Allowance”) as and when Landlord incurs costs for the construction of permanent improvements (collectively, the “TI Work”) to the Building 2019 Expansion Space, including, but not limited to, costs associated with architectural design, engineering, preparation of plans and specifications, permits and fees, labor and materials, equipment purchase or rental, amounts paid to contractors, including contractor profit and overhead, provided that all such TI Work shall be done in accordance with plans and specifications that are mutually approved by Landlord and Tenant. Landlord agrees to commence installation of the TI Work as promptly as may be reasonably possible after said plans and specifications are mutually approved and all necessary permits are obtained, to make reasonable efforts to minimize any disruption to Tenant’s business operations as a result of such installation, and to prosecute such installation to completion with commercially reasonable diligence. Materials used for said TI Work shall be of the same or similar quality as those materials previously used by Landlord in the repair and improvement of the Premises pursuant to the Lease; provided that Tenant may elect to use better quality materials as part of the plans approval process. The work order or contract between Landlord and its general contractor for construction of the TI Work shall be a fixed-price work order or contract for all of the work contemplated and shall be reasonably priced, and Landlord shall give Tenant a copy thereof at least five (5) business days before it is fully executed and delivered by Landlord and its general contractor. Tenant acknowledges that the amount of such contract will not include the cost of any change orders or corrections issued by the architect or Tenant. If the cost of any such change orders or corrections causes the total cost for the TI Work to exceed

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the amount of the TI Allowance, then Tenant shall, upon presentation of invoices or other reasonable proof of the cost thereof, pay, or reimburse Landlord for, such excess: provided that, if a change order is issued by Tenant, then, before Landlord implements said change order, Landlord shall obtain Tenant’s approval of the estimated cost of implementing that change order; provided further that, if a correction is required due to a defect in the original construction of the building or to complete the Standard Building Shell, then such correction shall be made at Landlord’s sole cost and expense, and the cost thereof shall not be charged against the TI Allowance.

C. Consultants and Contractor. Although Landlord will pay, out of the TI Allowance, the costs of design work for the TI Work, Tenant shall have the right to select an interior space planning firm and other consultants to prepare said plans and specifications for Landlord and Tenant mutually to approve (Tenant’s selection of an architectural firm is set forth below in this paragraph), except that Landlord, and not Tenant, shall select the engineer or engineering company to be used; provided such engineer or engineering company provides services at commercially reasonable rates. Landlord and Tenant agree to engage REF & Sons as the general contractor to do the TI Work (Tenant acknowledges that Landlord has advised Tenant that Landlord will not accept an alternative contractor) in accordance with the mutually approved plans and specifications. Landlord and Tenant agree to engage Architectural Arts as the architectural firm to do the interior space planning and design work and to prepare the plans and specifications for the TI Work (Landlord acknowledges that Tenant has advised Landlord that Tenant will not accept an alternative design, planning, and architectural firm).

D. Organized Labor. Landlord and its general contractor shall provide organized labor (construction trades) the opportunity to participate in the construction of the TI Work via the bidding process. When applicable, Landlord shall award any job or jobs to companies using organized labor if they are the most responsive and their pricing is competitive.

E. Tenant’s Obligations. Any other improvements to the Premises that Tenant may desire shall, subject to approvals from Landlord under Section 10 of the Original Lease, be the responsibility of Tenant and done at Tenant’s sole cost and expense.

6. Expansion and Contraction Options.

A. Expansion Option. All options to expand the Premises set forth in the Lease prior to execution of this Tenth Addendum, including, but not limited to, the options to expand the Premises set forth in paragraph 6 of the Eighth Addendum, are hereby superseded and deleted from the Lease. Landlord and Tenant agree that Tenant shall have the right and option to expand the area of the Premises subject to the Lease (“Tenant’s Expansion Option”) subject to the following terms and conditions:

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i. Tenant’s Expansion Option applies only to space within the second (2^nd) floor of said Building number 2019;

ii. Tenant must give to Landlord written notice of its election to exercise Tenant’s Expansion Option (an “Expansion Notice”) no later than six (6) months prior to the date as of which the expansion shall be effective;

iii. The Expansion Notice must describe the area within said second (2^nd) floor of said Building 2019 desired by Tenant;

iv. Landlord shall have no obligation to deliver the expansion space earlier than October 1, 2006;

v. The monthly rental for the expansion space shall be the fair market rental for the expansion space determined in the same manner as the fair market rental for the New Extension Period shall be determined under the provisions of paragraph 4B of this Tenth Addendum;

vi. Tenant shall accept the expansion space “as is” with Landlord having no obligation to construct, or pay any part of the cost of, any improvement work required to make the expansion space suitable for Tenant’s use unless, and to the extent, that Landlord and Tenant then reach a contrary agreement; and

vii. Within thirty (30) days after Tenant gives the Expansion Notice to Landlord, or, if later, within ten (10) days after the fair market rental for the expansion space is determine, Landlord and Tenant shall enter into and amendment to the Lease setting forth that fair market rental amount and other details about the effect of Tenant’s exercise of Tenant’s Expansion Option.

B. Contraction Option. All options to contract or delete space from the Premises set forth in the Lease prior to execution of this Tenth Addendum, including, but not limited to, the option to contract set forth in paragraph 5 of the Eighth Addendum, are hereby superseded and deleted from the Lease. Landlord and Tenant agree that Tenant shall have the right and option to reduce or contract the area of the Premises subject the Lease (“Tenant’s Contraction Option”) subject to the following terms and conditions:

i. Tenant’s Contraction Option applies only to space within said Building number 2006;

ii. Tenant must give to Landlord written notice (a “Contraction Notice”) of its election to exercise Tenant’s Contraction Option;

iii. The Contraction Notice must specify the date as of which the contraction shall be effective (a “Contraction Date”), provided that the Contraction Date shall not be earlier than December 31, 2006;

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iv. The Contraction Notice must be given no later than three (3) months prior to the Contraction Date;

v. The Contraction Notice must describe the area within said Building 2006, which may be all or any portion of said Building 2006, that Tenant wants to surrender to Landlord (the “Deleted Area”) and a commitment by Tenant to surrender the Deleted Area to Landlord on the Contraction Date;

vi. Concurrently with Tenant’s giving a Contraction Notice to Landlord, Tenant shall pay to Landlord the total amount of the unamortized portion of the brokerage commission, if any, payable to the Broker (defined below) under paragraph 12 of this Tenth Addendum and proportionately attributable to the Deleted Area;

vii. If Tenant actually surrenders possession of a Deleted Area to Landlord, on or before the Contraction Date, then rent under the Lease shall be proportionately abated, as of the Contraction Date, using the rent per rentable square foot then in effect;

viii. Tenant agrees to pay all out-of-pocket costs and expenses reasonably incurred by Landlord to cause each Deleted Area to become separate premises that can be demised to a separate tenant, including, but not limited to, compliance with legal requirements for ingress and egress and safety. Said payment by Tenant shall be made in one (1) or several installments as, and within ten (10) days after, Landlord presents to Tenant appropriate evidence of such costs or expenses either when incurred by Landlord or after they are owed or paid by Landlord, with copies of invoices from contractors and others who are doing the work and/or supplying the materials being deemed to be such appropriate evidence. Said costs and expenses reasonably incurred by Landlord shall include, but shall not be limited to, costs and expenses for construction of demising walls and corridors, which may include fire walls as required by law, causing electricity to be separately metered to the Deleted Area, and installing standard numbers of electrical outlets and wiring in such demising and corridor walls, but shall in no event include improvement work commonly called “tenant improvements” designed specially for the use and enjoyment of a particular tenant; and

ix. At the request of either Landlord or Tenant, they shall, after any Contraction Date, enter into an amendment to the Lease documenting the facts arising from Tenant’s exercise of the Contraction Option, including, but not limited to, that the Deleted Area is no longer part of the Premises and what the current rent has become.

7. Right to First Negotiate. All rights of first refusal or to negotiate for additional space owned by Landlord set forth in the Lease prior to execution of this Tenth Addendum, including, but not limited to, the right set forth in paragraph 7 of the Eighth Addendum,

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are hereby superseded and deleted from the Lease. Landlord and Tenant agree that Tenant shall have a first right to negotiate to lease additional office space from Landlord (“Tenant’s First Right”) subject to the following terms and conditions:

A. Tenant’s First Right shall apply only to space within the first (1^st) floor of said Building number 2019;

B. If, at any time while Tenant continues to use and occupy all of the Building 2019 Expansion Space, Landlord decides to seek a tenant or tenants for any space within the first (1^st) floor of said Building 2019, Landlord shall first give written notice to Tenant (a “Landlord’s Notice”) setting forth a description of the available space (the “Available Space”), the monthly rental rate, and all other material terms and conditions upon which Landlord intends to offer the Available Space. A Landlord’s Notice shall be deemed to be an offer to lease to Tenant the Available Space on the terms stated therein;

C. Upon Tenant’s receipt of a Landlord’s Notice, Tenant shall have five (5) business days to respond by giving Landlord a written acceptance setting for Tenant’s commitment to lease the Available Space on the terms stated in the Landlord’s Notice (a “Tenant’s Acceptance”);

D. If Tenant fails to give to Landlord a Tenant’s Acceptance within said five (5) business days, that failure shall be deemed to be a rejection of Landlord’s offer to lease the Available Space (a “Tenant’s Rejection”) and, except as provided in subpart F of this paragraph 7, shall be deemed a termination of Tenant’s First Right, so that Landlord shall have no further duty to give any Landlord’s Notice respecting the Available Space or any other space it may own from time to time, just as if this paragraph 7 were not a part of this Tenth Addendum;

E. After any Tenant’s Rejection, Landlord shall, for a period of one (1) year, be free to lease the Available Space to any other person or entity for rent and upon the terms and conditions at least as favorable to Landlord as those set forth in the Landlord’s Notice;

F. If (i) during said one (1) year, Landlord desires to lease the Available Space upon terms and conditions that are less favorable to Landlord than those set forth in the Landlord’s Notice, or (ii) the Available Space is not leased by Landlord to another person or entity within said one (1) year, and if Landlord desires to continue to seek a tenant therefor, then, and in either of those events, Landlord must give Tenant another Landlord’s Notice respecting that Available Space, and the provisions of this paragraph 7 shall again apply;

G. If and when Landlord has, without breach of this paragraph 7, leased any space that is subject to the First Right to another person or entity, the First Right shall terminate and be of no further force or effect, this paragraph 7 being then deemed not to be a part of this Tenth Addendum; and

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H. If a Tenant’s Rejection ever occurs, Tenant agrees to provide to Landlord such written proof, including, but not limited to, an estoppel certificate, as Landlord may request to prove, when Landlord leases or is negotiating to lease, or seeking a tenant for, the Available Space, that the First Right no longer applies thereto, which written proof shall be provided within five (5) business days after Landlord’s written request therefor is received by Tenant.

8. Parking. Tenant shall be entitled to its current parking ratio and, in any event, not less than five (5) vehicle parking spaces for every one thousand (1,000) rentable square feet of the Premises, as and if the size of the Premises changes from time to time as provided elsewhere in this Tenth Addendum, which parking spaces shall be provided by Landlord at no charge. For the Building 2019 Expansion Space, if Phased TI Completion occurs, then Tenant shall be entitled a proportionate share of parking spaces as of each Phased Completion Date.

9. Limitations on Access to Roof. Tenant shall not have access to, and shall not allow any of its employees, contractors, consultants, agents, or other invitees to go upon, the roof of any of the buildings in which the Premises are located; except that Landlord shall reasonably consider granting to Tenant or its contractor permission to enter upon any such roof to install on the rooftop a satellite dish, microwave antenna, or any other electrical devise, communications equipment, or mechanical equipment; provided that: (a) Tenant first requests such permission in writing delivered to Landlord no later than ten (10) business days prior to the date of desired access; (b) Landlord may, in its discretion, impose reasonable conditions upon such access for the protection of the building or people, including, but not limited to, requiring that Landlord control some or all of the rooftop activities; (c) when Tenant delivers its said request to Landlord, Tenant shall also deliver in writing details about the rooftop installation and the contractor proposed to be engaged to do the work, including, but not limited to, any plans and specifications; and (d) Tenant shall, at all times, comply with all governmental requirements, including, but not limited to, issuance of appropriate permits and conduct of appropriate inspections.

10. Mortgages. Landlord hereby represents and warrants to Tenant that no mortgage or deed of trust encumbers the Premises or any portion thereof; that Landlord has not assigned to any lender or other third party all or any part of Landlord’s interests in the Lease as modified by this Tenth Addendum, whether for collateral purposes or otherwise; and that Landlord is under no obligation to obtain the consent of any lender or other third party to enter into this Tenth Addendum.

11. Signage Rights. Tenant may maintain its existing building identification and may, in its reasonable determination, expand its identification signage to the Building 2019 Expansion Space, subject to Tenant’s compliance with all governmental requirements, including, but not limited to, issuance of appropriate permits and conduct of appropriate inspections, and subject to first obtaining written approval of Landlord, which approval shall not be unreasonably withheld, conditioned, or delayed.

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12. Broker’s Fee.

A. Only One Broker. Tenant and Landlord agree that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Tenth Addendum excepting only Cushman & Wakefield of California, Inc. (the “Broker”), and they know of no other real estate broker or agent who is entitled to a commission in connection with this Tenth Addendum.

B. Commission. By a separate Commission Agreement executed by Landlord as of March 31, 2004, Landlord has agreed to pay a commission to the Broker in connection with this Tenth Addendum as follows: (a) One Hundred Nine Thousand Three Hundred Seventy-three Dollars and Eighty-seven Cents ($109,373.87) (based upon an expectation that the Prepaid Rent will be timely paid and upon an assumption that there will be no early occupancy under a Phased TI Completion) when this Tenth Addendum is executed and delivered: (b) approximately One Hundred Nine Thousand Three Hundred Seventy-three Dollars and Eighty-seven Cents ($109,373.87) (subject to adjustments to account for early occupancy under a Phased TI Completion, if any, for the actual Completion Date, and for any failure of Tenant to timely pay the Prepaid Rent) when the Completion Date has occurred and the Building 2019 Expansion Space Completion Date Certification has been executed and delivered; (c) subject to Landlord’s timely receipt of the applicable Agency Confirmation (defined below), Three Hundred Twenty-one Thousand Eight Hundred Eighty-eight Dollars and Zero Cents ($321,888.00) on October 1, 2007, if and only if the Existing Premises Option is deemed exercised as provided in paragraph 2 of this Tenth Addendum; and (d) subject to Landlord’s timely receipt of the applicable Agency Confirmation, if and when the New Extension Option is exercised and the New Extension Period has commenced, a full commission calculated in accordance with said Commission Agreement dated March 31, 2004. Landlord shall not be required to pay said commission under subparts (c) or (d) of this paragraph 12B unless and until, in each instance, Landlord timely receives from Tenant a written designation and confirmation that the Broker is then serving as Tenant’s exclusive agent in connection with the Lease and the Premises (an “Agency Confirmation”). An applicable Agency Confirmation, to be effective, must be received by Landlord, (i) with respect to the portion of the commission payable under said subpart (c), no later than the later of October 1, 2007, or the date that is ten (10) days after Tenant receives from Landlord a written request for such Agency Confirmation; and (ii) with respect to the portion of the commission payable under said subpart (d), no later than the later of the date Tenant exercises the New Extension Option or the date that is ten (10) days after Tenant receives from Landlord a written request for such Agency Confirmation. If Landlord fails to pay to the Broker when due hereunder any portion of said commission, Tenant shall have the right, but no obligation, to pay the Broker what is owed and deduct that amount from the next monthly rent becoming due under the Lease until Tenant is fully reimbursed therefor; provided that Tenant must first give to Landlord written notice of Tenant’s intention to so pay and deduct no later than thirty (30) days prior to making such payment to the Broker.

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13. Occupant of the Premises. Tenant represents and warrants that Health Net Federal Services, Inc., a Delaware corporation (the “Occupant”), is a wholly owned subsidiary of Tenant. Landlord acknowledges that the Occupant shall have the right to occupy the Premises throughout the term of the Lease without prior notice to or consent from Landlord.

14. The Premises and Other Terms and Conditions of the Lease. The Building 2019 Expansion Space shall be deemed to be included as a part of the “Premises” and the “Building” and shall be subject to the same terms and conditions set forth in the Lease, except to the extent that any provision of this Tenth Addendum is inconsistent or in conflict with such terms and conditions.

15. Effect. Landlord and Tenant agree that the Lease is in full force and effect without modification except as expressly set forth in this Tenth Addendum.

16. Estoppels. Landlord and Tenant acknowledge and agree that, as of the execution and delivery of this Tenth Addendum, neither Landlord nor Tenant is in default under the terms of the Lease, nor has the Lease been modified or amended except as recited or set forth in this Tenth Addendum.

		Aerojet-General Corporation,
		an Ohio corporation
Dated:	March 31, 2004	By:	/s/ Terry P. Griffin
		Its:	Authorized Agent
		Health Net, Inc.,
		a Delaware corporation
Dated:		By:	/s/ Marvin P. Rich
		Its:	Executive Vice President

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Exhibit “C”

Memorandum Certifying the Completion Date

[Alternative Title: Memorandum Certifying a Phased Completion Date]

To: Health Net, Inc. (“Tenant”)

From: Aerojet-General Corporation (“Landlord”)

Date:                     , 2004

Subject: Building 2019 Expansion Space Completion Date Certification

Greetings:

Landlord and Tenant hereby certify that, as of                     , 2004 (the “Completion Date”) [alternatively, (a “Phased Completion Date”)], Landlord has substantially completed tenant improvement work (the “TI Work”) at Building 2019 located on Aerojet Road in Sacramento County, California (the “Building”). The TI Work thus completed is described a follows:

.            

The rentable square feet of the Building affected by said TI Work consists of                      (            ) rentable square feet (the “Completed Premises”). The monthly rental rate applicable, as of the Completion Date [alternatively, Phased Completion Date], to the Completed Premises is                      Dollars ($            .        ) (the “Monthly Rent”).

By execution of this Memorandum Certifying the Completion Date [alternatively, this Memorandum Certifying a Phased Completion Date], Landlord and Tenant certify to each other, and for the benefit of their respective lenders, investors, affiliates, successors, and assigns, that this Memorandum is true and accurate as of its date set forth above. Landlord and Tenant are each be estopped to deny the truth of any statement of fact set forth in this Memorandum.

Aerojet-General Corporation

By:

Its:

Health Net, Inc.

By:

Its:

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Exhibit “E”

(Definition of Standard Building Shell)

Landlord shall provide at Landlord’s sole cost and expense, a finished building shell prior to the completion of tenant improvements including existing building roof, main HVAC system with main loop installed and package units, and main building electrical backbone with panel installed. Landlord shall be responsible for bringing the building into compliance with the Americans with Disabilities Act (ADA), and all other governmental regulations, including proper exiting and life safety compliance. Landlord has removed all hazardous materials from the first (1^st) and second (2^nd) floors except for the VAT at the first (1^st) floor, which will be capsulized under the new floor covering, and shall be responsible for all remediation work in preparing the Building 2019 Expansion Space for Tenant’s occupancy.

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ELEVENTH ADDENDUM TO LEASE

This is the Eleventh Addendum, which, upon approval, will be attached to that certain Lease (the “Original Lease”) by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Health Net, Inc., a Delaware corporation, as successor in interest by merger to Foundation Health Federal Services, Inc., a Delaware corporation, as successor in interest to Foundation Health, a California Health Plan, a California corporation, as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, that certain Sixth Addendum, that certain Seventh Addendum, that certain Eighth Addendum, that certain Ninth Addendum, and that certain Tenth Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Eleventh Addendum, all capitalized terms used in this Eleventh Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Eleventh Addendum to a “section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately twenty-eight thousand (28,000) rentable square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006), approximately twenty-eight thousand (28,000) rentable square feet in Building number 2015A, and approximately fifty-three thousand nine hundred ninety (53,990) rentable square feet, being a portion of the first (1^st) floor and approximately one-half (1/2) of the second (2^nd) floor of Building number 2019 (collectively, the “Existing Premises”) and no other space.

B. The Existing Premises consist of approximately two hundred fifty-five thousand six hundred seventy-four (255,674) rentable square feet of office space.

C. On or about January 29, 2007, Tenant gave to Landlord a Contraction Notice (as defined in Section 6.B.ii. of the Tenth Addendum), by which Contraction Notice Tenant exercised Tenant’s Contraction Option with respect to a portion of Building number 2006. Attached hereto and incorporated herein by this reference is Exhibit “A,” showing the Deleted Area (labeled “Vacant”) of approximately twenty-six thousand four hundred eighty-five (26,485) rentable square feet, and showing the portion of Building number 2006 that will continue as part of the Existing Premises (labeled “Health Net”) consisting of approximately one thousand five hundred fifteen (1,515) rentable square feet.

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AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals, all of which are incorporated herein by this reference, and the covenants contained in this Eleventh Addendum, agree as follows:

1. Contraction of Premises.

(a) Effective as of June 1, 2007, the Deleted Area is deleted from the Existing Premises, thus reducing the total rentable area of the Premises demised by the Lease to approximately two hundred twenty-nine thousand one hundred eighty-nine (229,189) rentable square feet.

(b) Tenant shall vacate all of the Deleted Area and surrender possession of the Deleted Area to Landlord no later than 11:59 p.m. on May 31, 2007.

(c) Upon Tenant’s vacating and surrendering possession of the Deleted Area, all rent and other obligations of Tenant and Landlord under the Lease shall cease to accrue with respect to the Deleted Area, including, but not limited to, the monthly rental payment for Building number 2006 shall (at the current monthly rental rate of One Dollar and Twenty-Seven Cents [$1.27] per rentable square foot) be reduced from Thirty-Five Thousand Five Hundred Sixty Dollars ($35,560.00) to One Thousand Nine Hundred Twenty-Four Dollars and Five Cents ($1,924.05).

(d) Landlord hereby waives any claim against Tenant respecting, and agrees that there does not exist, any unamortized portion of the brokerage commission as otherwise payable by Tenant under Section 6.B.vi. of the Tenth Addendum.

(e) Landlord does not waive any claim under Section 6.B.viii. of the Tenth Addendum respecting, and reserves its right to collect, if incurred, any out-of-pocket costs and expenses as described therein. As of the execution of this Eleventh Addendum Landlord anticipates, but is not assuring Tenant, that no such out-of-costs and expenses will be incurred.

(f) Nothing in this Eleventh Addendum shall be construed to affect in any way obligations respecting Additional Rent under Section 4.H. of the Eighth Addendum.

2. Effect. Landlord and Tenant agree that the Lease is in full force and effect without modification except as expressly set forth in this Eleventh Addendum.

3. Estoppels. Landlord and Tenant acknowledge and agree that, as of the execution and delivery of this Eleventh Addendum, neither Landlord nor Tenant is in default under the terms of the Lease, nor has the Lease been modified or amended except as recited or set forth in this Eleventh Addendum.

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In witness whereof, Landlord and Tenant have executed this Eleventh Addendum on the dates set forth with their signatures below.

		Aerojet-General Corporation,
		an Ohio corporation
Dated:	June 1, 2007	By:	/s/ Terry P. Griffin
		Its:	Authorized Agent
		Health Net, Inc.,
		a Delaware corporation
Dated:	May 22, 2007	By:	/s/ Dennis Bell
		Its:	Chief Real Estate & Procurement Officer

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Exhibits “A”

(Floor Plan Showing the Deleted Area and

the Continuing Health Net Area of Building number 2006)

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TWELFTH ADDENDUM TO LEASE

This is the Twelfth Addendum, which, upon approval, will be attached to that certain Lease (the “Original Lease”) by and between Aerojet-General Corporation, an Ohio corporation, as Landlord, and Health Net Federal Services, LLC a Delaware limited liability company, as successor in interest (by reason of name change and conversion from a Delaware corporation to a Delaware limited liability company) to Health Net Federal Services, Inc., a Delaware corporation, as successor in interest by merger to Foundation Health Federal Services, Inc., a Delaware corporation (“FHFS”), as successor in interest to Foundation Health, a California Health Plan, a California corporation (the “Original Tenant”), as Tenant, dated July 13, 1995, including that certain Addendum, that certain Second Addendum, that certain Third Addendum, that certain Fourth Addendum, that certain Fifth Addendum, that certain Sixth Addendum, that certain Seventh Addendum, that certain Eighth Addendum, that certain Ninth Addendum, that certain Tenth Addendum, and that certain Eleventh Addendum thereto (collectively, the “Lease”). Unless otherwise defined in this Twelfth Addendum, all capitalized terms used in this Twelfth Addendum shall have the same meanings as such capitalized terms have in the Lease. All references within this Twelfth Addendum to a “section” are to a specific section within the Lease unless otherwise indicated.

RECITALS

A. Pursuant to the terms of the Lease, Landlord currently leases to Tenant, and Tenant currently leases from Landlord, the entire Building number 2015B, the entire Building number 2025, approximately one thousand five hundred fifteen (1,515) rentable square feet within Building number 2006 (incorrectly described in the Fifth Addendum as the entire Building number 2006), approximately twenty-eight thousand (28,000) rentable square feet in Building number 2015A, and approximately fifty-three thousand nine hundred ninety (53,990) rentable square feet, being a portion of the first (1^st) floor and approximately one-half ( ¹/2) of the second (2^nd) floor of Building number 2019 (collectively, the “Existing Premises”) and no other space.

B. The Existing Premises consist of approximately two hundred twenty-nine thousand one hundred eighty-nine (229,189) rentable square feet of office space.

C. By its terms, the Lease expires on July 31, 2009, which date is defined as the “New Expiration Date” in said Tenth Addendum.

D. On or about September 21, 2007, Tenant delivered to Landlord an Agency Confirmation (as defined in Section 12B of said Tenth Addendum) thereby designating Cushman & Wakefield of California, Inc. (“C&W”) as Tenant’s exclusive real estate agent with respect to “the contingent portion of the Commission described in Article 12B of the Tenth Addendum.” Said contingency portion is payable in two (2) portions under subparts (c) and (d), respectively, of said Section 12B.

E. Said Section 12B references the Commission Agreement executed as of March 31 and April 13, 2004, by and between Landlord and C&W (the “C&W Commission Agreement”). Landlord represents that Landlord has heretofore paid to C&W the commission owed under subparts (a), (b), and (c) of said Section 12B of the Tenth Addendum.

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F. Subpart (d) of Section 12B of said Tenth Addendum provides for payment of a commission to C&W upon Tenant’s exercise of the New Extension Option (as defined in said Tenth Addendum), which shall be “a full commission calculated in accordance with said Commission Agreement dated March 31, 2004. Said full commission would be five percent (5%) of the gross rent payable during the first five (5) years of the New Extension Period (as defined in Section 4A of said Tenth Addendum.

G. By correspondence dated September 19, 2007, from CB Richard Ellis (“CBRE”), addressed to Landlord, CBRE claims to be the exclusive representative of Tenant, requests that the terms of the New Extension Option be modified, as set forth below in this Twelfth Addendum, and, under the heading “Brokerage Fee,” proposes that “Landlord shall pay pursuant to a separate agreement between Landlord and Broker [meaning CBRE] upon tenant’s exercise of each Extension of the Term.” CBRE is not willing, at this time, to enter into said separate agreement between Landlord and Broker.

H. Tenant has advised Landlord and herby represents and warrants to Landlord that: (i) the Eighth Addendum incorrectly stated that FHFS merged into Health Net, Inc., a Delaware corporation; (ii) any references in the Lease to Health Net, Inc., a Delaware corporation, ever having been the Tenant under the Lease are incorrect; (iii) the correct entity under the Lease is Health Net Federal Services, LLC, a Delaware limited liability company, which entity was formerly known as Health Net Federal Services, Inc., a Delaware corporation; and (iv) Health Net Federal Services, LLC, a Delaware limited liability company, has succeeded to all rights and obligations of the Original Tenant under the Lease.

AGREEMENT

NOW, THEREFORE, Landlord and Tenant, in consideration of the foregoing recitals, all of which are incorporated herein by this reference, and the covenants contained in this Twelfth Addendum, agree as follows:

1. The New Extension Option. Section 4 of the Tenth Addendum is hereby deleted from the Lease and replaced entirely by the following new Section 4:

2. Extension of Term.

A. New Extension Option. Tenant shall have the right and option (the “New Extension Option”) to extend the term of the Lease for five (5) years beyond July 31, 2009 (the “New Expiration Date”), to expire instead on July 31, 2014 (the “New Extension Period”); provided that:

i. Tenant must give to Landlord, and Landlord must have received, by mail or by personal delivery, written notice of Tenant’s election to exercise the New Extension Option no later than one hundred twenty (120) days prior to the New Expiration Date;

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ii. At the time Tenant gives said written notice to Landlord, and at the time the New Extension Period commences, Tenant must not, after the giving of written notice and the passage of the applicable cure period, if any, be in default under the Lease;

iii. Tenant may exercise the New Extension Option with respect to all of the Premises only, and may not exercise the New Extension Option with respect to only part of the Premises; and

iv. Failure by Tenant to provide timely or adequate written notice as set forth herein shall, unless, and in the sole discretion of Landlord, an untimely or inadequate notice is acceptable to Landlord, cause the New Extension Option to lapse and its exercise by Tenant shall not be effective.

B. Tenant’s Termination Right. If and when the New Extension Period commences, Tenant shall thereafter have the right and option to terminate the Lease (“Tenant’s Termination Option”) effective as of July 31, 2011, July 31, 2012, or July 31, 2013 (each, a “Termination Date”); provided that Tenant’s Termination Option may be exercised only by giving to Landlord a written notice of termination no later than ninety (90) days before the Termination Date chosen by Tenant. Any such termination of the Lease shall apply to all of the Premises, and cannot be applied to only a portion or portions of the Premises

C. Rent during the New Extension Period. The monthly rental payable during the New Extension Period shall be the fair market rental for the Premises, as of the beginning of the New Extension Period, taking into account the specific provisions of the Lease that will remain constant, including, but not limited to, the term thereof as hereby modified, the improvements installed by Landlord, services provided to Tenant, the fact that said monthly rental based upon the fair market rental shall not be subject to increase during the New Extension Period, the cost to Landlord of paying any brokerage commission in connection with Tenant’s exercise of the New Extension Option, and other pertinent items, and the amenities, location, identity, quality, age, and conditions of the buildings in which the Premises are located; provided that, in no event, shall the monthly rental payable for the Premises during the New Extension Period be less than the monthly rental payable for the month immediately preceding the New Expiration Date, regardless what the fair market rental may be. The fair market rental for the Premises shall be determined by applying the following procedures and subject to the following terms and conditions:

i. At least one hundred (100) days prior to the New Expiration Date, Landlord and Tenant may meet and confer, but are not obligated to meet and confer, respecting the establishment of the fair market rental;

ii. In the event that Landlord and Tenant fail to meet and confer or cannot agree upon the fair market rental at least ninety (90) days prior to the New Expiration Date, then, at least eighty (80) days prior to the New Expiration

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Date (the “Notice Deadline”), Landlord and Tenant shall each give to the other a written notice setting forth its final determination of the fair market rental (collectively, the “Fair Rental Notices”); provided that, in order to help prevent inadvertent loss of any party’s right to give a Fair Rental Notice, the Notice Deadline shall extend, for both Landlord and Tenant, until one (1) of them gives a Fair Rental Notice plus, for the other, a period expiring five (5) business days thereafter.

iii. If only one (1) Fair Rental Notice is timely given, then that Fair Rental Notice shall conclusively establish the fair market rental;

iv. If both Landlord and Tenant give Fair Rental Notices, and the Fair Rental Notices are different in any respect, then the fair market rental shall be conclusively established by a third-party appraiser or broker mutually chosen by Landlord and Tenant; provided that, if Landlord and Tenant have not agreed upon, and engaged, such appraiser or broker at least sixty (60) days prior to the New Expiration Date, then Landlord and Tenant shall each engage a duly licensed California attorney with commercial leasing experience of at least five (5) years, which attorneys shall, by their agreement, select the appraiser or broker; provided that, if said attorneys have not agreed upon an appraiser or broker at least fifty (50) days prior to the New Expiration Date, then either Landlord or Tenant may commence an action for declaratory relief or other appropriate remedy to have the court appoint the appraiser or broker;

v. Landlord and Tenant shall share equally the fees and expenses of the selected appraiser or broker and shall each pay its own attorneys’ fees;

vi. Within thirty (30) days after the appraiser or broker’s engagement, the appraiser or broker shall deliver to Landlord and to Tenant the appraiser or broker’s determination of which of the two (2) Fair Rental Notices is, in the appraiser or broker’s best judgment, the closest to the fair market rental for the Premises (the “Chosen Fair Rental Notice”), and the amount set forth in the Chosen Fair Rental Notice shall be deemed to be the fair market rental; and

vii. The appraiser or broker shall be required to give to Landlord and to Tenant a written statement of the appraiser or broker’s reasoning and justification for selection of the Chosen Fair Rental Notice; the appraiser or broker shall not be permitted to decide on a middle ground, or to suggest any compromise; the appraiser or broker’s sole function shall be to determine the Chosen Fair Rental Notice, and provide his or her reasons therefor.

3. Brokerage Commissions. Landlord makes no commitment to pay a brokerage commission to CBRE in connection with this Twelfth Addendum or any exercise of the New Extension Option unless and until, and only to the extent that, Landlord and CBRE

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enter into a separate commission agreement (a “CBRE Commission Agreement”). In no event shall any brokerage commission paid by Landlord to CBRE, for the New Extension Period, exceed the brokerage commission that Landlord would owe to C&W under the terms of Section 12B(d) of said Tenth Addendum; provided further that any such brokerage commission, if paid, shall be paid only as and when Tenant exercises the New Extension Option, triggering a brokerage commission based upon two (2) years of rent, and Tenant elects not to exercise Tenant’s Termination Option as of each Termination Date, each such event triggering a brokerage commission based upon one (1) year of rent. In no event shall Landlord pay brokerage commissions to both C&W and CBRE whether or not a CBRE Commission Agreement is executed. Landlord shall have the right, in its absolute discretion, in all events, to decline to pay any brokerage commission to CBRE unless and until Tenant and CBRE provide to Landlord satisfactory assurances and indemnity, including indemnity against attorneys’ fees incurred, against any possible Landlord liability to C&W under either Section 12B(d) of the Tenth Addendum or the C&W Commission Agreement.

4. Effect. Landlord and Tenant agree that the Lease is in full force and effect without modification except as expressly set forth in this Twelfth Addendum.

5. Estoppels. Landlord and Tenant acknowledge and agree that, as of the execution and delivery of this Twelfth Addendum, neither Landlord nor Tenant is in default under the terms of the Lease, nor has the Lease been modified or amended except as recited or set forth in this Twelfth Addendum

In witness whereof, Landlord and Tenant have executed this Twelfth Addendum on the dates set forth with their signatures below.

		Aerojet-General Corporation,
		an Ohio corporation
Dated:	January 29, 2008	By:	/s/ Brian Sweeney
		Its:	Vice President, General Counsel
		Health Net Federal Services, LLC, a Delaware limited liability company
Dated:	January 16, 2008	By:	/s/ Dennis Bell
		Its:	Vice President, Real Estate

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EX-21

EXHIBIT 21

Subsidiaries of Health Net, Inc. as of January 31, 2009

Health Net, Inc. (DE)(95-4288333)

(All Subsidiaries wholly owned unless otherwise indicated)

• Health Net of California, Inc. (CA) (95-4402957)

• Health Net Life Insurance Company (CA) (73-0654885)

• Health Net Life Reinsurance Company (Cayman Islands) (98-0409907)

• Health Net Community Solutions, Inc. (CA) (54-2174068)

• Health Net of California Real Estate Holdings, Inc. (CA) (54-2174069)

• Health Net of the Northeast, Inc. (DE) (06-1116976)

• FOHP, Inc. (NJ) (22-3314813)

• Health Net of New Jersey, Inc. (NJ) (22-3241303)

• Health Net Services (Bermuda) Ltd. (Bermuda) (98-0153069)

• Health Net of Connecticut, Inc. (CT) (06-1084283)

• Health Net of New York, Inc. (NY) (06-1174953)

• Health Net Insurance of New York, Inc. (NY) (13-3584296)

• Health Net Insurance Services, Inc. (CT) (06-1254380)

• Health Net Foundation, Inc. (DE) (41-2241862)*

• QualMed, Inc. (DE) (84-1175468)

• QualMed Plans for Health of Colorado, Inc. (CO) (84-0975985)

• Health Net Health Plan of Oregon, Inc. (OR) (93-1004034)

• HSI Advantage Health Holdings, Inc. (DE) (23-2867299)

• QualMed Plans for Health of Western Pennsylvania, Inc. (PA) (23-2867300)

• Pennsylvania Health Care Plan, Inc. (PA) (25-1516632)

• Health Net of Pennsylvania, LLC (PA)

• FH Surgery Limited, Inc. (CA) (68-0390434)

• FH Surgery Centers, Inc. (CA) (68-0390435)

• Greater Sacramento Surgery Center Limited Partnership (CA) (68-0343818)**

• Foundation Health Facilities, Inc. (CA) (68-0390438)

• FH Assurance Company (Cayman Islands)(98-0150604)

• Health Net Federal Services, LLC (DE) (68-0214809)

• Health Net Federal Services of Hawaii, Inc. (HI) (99-0240224)

• Health Net Preferred Providers, LLC (DE) (61-1388903)

• Network Providers, LLC (DE) (88-0357895)

• Health Net Pharmaceutical Services (CA) (68-0295375)

• Health Net of Arizona Administrative Services, Inc. (AZ) (86-0660443)

• Health Net of Arizona, Inc. (AZ) (36-3097810)

• Managed Health Network, Inc. (DE) (95-4117722)

• Managed Health Network (CA) (95-3817988)

• MHN Services (CA) (95-4146179)

• MHN Services IPA, Inc. (NY) (13-4027559)

• MHN Government Services, Inc. (DE) (42-0680916)

• MHN Global Services, Inc. (DE) (51-0589404)

• Catalina Behavioral Health Services, Inc. (AZ) (51-0490598)

• Health Net Services, Inc. (DE) (94-3037822)

• Health Net Managing Partners, LLC (DE) (26-1406369)***

• Health Net Funding, Inc. (DE) (26-1395366)

• Health Net Investments, LLC (DE)

• Health Net Financing, L.P. (DE) (26-1395236)****

• National Pharmacy Services, Inc. (DE) (84-1301249)

• Integrated Pharmacy Systems, Inc. (PA) (23-2789453)*****

• QualMed Plans for Health of Pennsylvania, Inc. (PA) (23-2456130)

• Health Net One Payment Services, Inc. (DE) (54-2153100)

*	Health Net Foundation, Inc. is a nonprofit, nonstock corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.
**	FH Surgery Centers, Inc. owns general and limited partnership units, representing approximately 66% of the total equity of Greater Sacramento Surgery Center Limited Partnership (which specific percentage fluctuates from time to time).
***	Health Net Managing Partners, LLC - 75% common interest is owned by Health Net, Inc. and 25% common interest is held by Health Net One Payment Services, Inc.
****	Health Net Financing, L.P. - 100% general partnership interest is held by Health Net Funding, Inc., 100% of the Class A limited partnership interest is held by Lodgemore Holdings Inc., and 100% of the Class B limited partnership interest is held by Health Net Investments, LLC.
*****	National Pharmacy Services, Inc. owns approximately 90% of the outstanding common stock.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statement Nos. 333-134014, 333-132008, 333-124900, 333-118646, 333-118647, 333-99337, 333-68387, 333-48969, 333-35193, 333-24621, 33-90976, and 33-74780 on Form S-8 of our reports dated February 26, 2009, relating to the financial statements and financial statement schedules of Health Net Inc. (which report expressed an unqualified opinion, and included an explanatory paragraph relating to Health Net, Inc.’s adoption as of January 1, 2007 of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting For Uncertainty in Income Taxes, and to the Company’s change in its method of accounting for share-based compensation in 2006 upon adoption of FASB Statement No. 123(R), Share-Based Payment), and the effectiveness of Health Net, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Health Net, Inc. for the year ended December 31, 2008.

/s/ Deloitte & Touche, LLP

Los Angeles, California

February 26, 2009

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jay M. Gellert, certify that:

1. I have reviewed this annual report on Form 10-K of Health Net, 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 23, 2009	/s/    JAY M. GELLERT
	Jay M. Gellert
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Joseph C. Capezza, certify that:

1. I have reviewed this annual report on Form 10-K of Health Net, 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 23, 2009	/s/    JOSEPH C.CAPEZZA
	Joseph C. Capezza
	Chief Financial Officer

EX-32

Exhibit 32

Certification of CEO and CFO 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 Health Net, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jay M. Gellert, as Chief Executive Officer of the Company, and Joseph C. Capezza, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their respective knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Jay M. Gellert

Jay M. Gellert

Chief Executive Officer

February 23, 2009

/s/ Joseph C. Capezza

Joseph C. Capezza

Chief Financial Officer

February 23, 2009