10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2002

OR

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

For the transition period from                              to                             

Commission file number: 1-12718

HEALTH NET, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	95-4288333 (I.R.S. Employer Identification No.)
21650 Oxnard Street, Woodland Hills, CA (Address of principal executive offices)	91367 (Zip Code)

(818) 676-6000
Registrant's telephone number, including area code

        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 ý No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

        The number of shares outstanding of the registrant's Class A Common Stock as of August 9, 2002 was 125,138,711 (excluding 4,915,774 shares held as treasury stock) and no shares of Class B Common Stock were outstanding as of such date.

HEALTH NET, INC.
INDEX TO FORM 10-Q

		Page
Part I—FINANCIAL INFORMATION
Item 1—Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Operations for the Second Quarter Ended June 30, 2002 and 2001	4
	Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2002 and 2001	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3—Quantitative and Qualitative Disclosures About Market Risk		41
Part II—OTHER INFORMATION
Item 1—Legal Proceedings		44
Item 2—Changes in Securities		49
Item 3—Defaults Upon Senior Securities		49
Item 4—Submission of Matters to a Vote of Security Holders		49
Item 5—Other Information		50
Item 6—Exhibits and Reports on Form 8-K		55
Signatures		61

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEALTH NET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

			June 30, 2002			December 31, 2001
ASSETS
Current Assets:
	Cash and cash equivalents		$	672,978		$	909,594
	Investments—available for sale			953,591			856,560
	Premiums receivable, net			167,929			183,824
	Amounts receivable under government contracts			128,653			99,619
	Reinsurance and other receivables			113,504			136,854
	Deferred taxes			74,092			72,909
	Other assets			97,099			82,583
		Total current assets		2,207,846			2,341,943
Property and equipment, net				253,405			253,063
Goodwill, net				762,360			764,381
Other intangible assets, net				24,942			37,433
Deferred taxes				18,627			23,359
Other noncurrent assets				139,689			139,468
		Total Assets	$	3,406,869		$	3,559,647
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Reserves for claims and other settlements			1,163,724			1,278,036
	Unearned premiums			63,830			166,842
	Amounts payable under government contracts			2,902			2,284
	Accounts payable and other liabilities			295,763			308,364
		Total current liabilities		1,526,219			1,755,526
Revolving credit facilities and capital leases				120,000			195,182
Senior notes payable				398,750			398,678
Other noncurrent liabilities				47,447			44,749
		Total Liabilities		2,092,416			2,394,135
Commitments and contingencies
Stockholders' Equity:
	Common Stock and additional paid-in capital			720,642			662,867
	Restricted common stock			1,034			—
	Unearned compensation			(914	)		—
	Retained earnings			712,302			597,753
	Treasury Class A common stock, at cost			(124,201	)		(95,831	)
	Accumulated other comprehensive income			5,590			723
		Total Stockholders' Equity		1,314,453			1,165,512
		Total Liabilities and Stockholders' Equity	$	3,406,869		$	3,559,647

See accompanying notes to condensed consolidated financial statements.

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HEALTH NET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

			Second Quarter Ended June 30,
			2002		2001
REVENUES
	Health plan services premiums		$	2,040,519	$	2,104,501
	Government contracts/Specialty services			447,399		417,699
	Investment and other income			18,046		24,503
		Total revenues		2,505,964		2,546,703
EXPENSES
	Health plan services			1,729,393		1,816,199
	Government contracts/Specialty services			326,779		302,300
	Selling, general and administrative			321,638		332,724
	Depreciation			15,132		16,088
	Amortization			2,847		9,460
	Interest			10,338		16,408
	Loss on assets held for sale			2,600		76,072
		Total expenses		2,408,727		2,569,251
Income (loss) before income taxes				97,237		(22,548	)
Income tax provision (benefit)				32,502		(8,343	)
Net income (loss)			$	64,735	$	(14,205	)
Basic and diluted earnings (loss) per share:
	Basic		$	0.52	$	(0.12	)
	Diluted		$	0.51	$	(0.12	)
Weighted average shares outstanding:
		Basic		125,620		123,029
		Diluted		127,800		123,029

See accompanying notes to condensed consolidated financial statements.

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HEALTH NET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

				Six Months Ended June 30,
				2002			2001
REVENUES
	Health plan services premiums			$	4,064,152		$	4,179,200
	Government contracts/Specialty services				876,966			805,789
	Investment and other income				34,664			49,838
		Total revenues			4,975,782			5,034,827
EXPENSES
	Health plan services				3,438,551			3,583,593
	Government contracts/Specialty services				643,331			575,335
	Selling, general and administrative				649,452			672,302
	Depreciation				28,610			33,060
	Amortization				5,633			18,839
	Interest				20,527			30,846
	Loss on assets held for sale				2,600			76,072
		Total expenses			4,788,704			4,990,047
Income from operations before income taxes and cumulative effect of a change in accounting principle					187,078			44,780
Income tax provision					63,588			16,570
Income from operations before cumulative effect of a change in accounting principle					123,490			28,210
Cumulative effect of a change in accounting principle, net of tax					(8,941	)		—
Net income				$	114,549		$	28,210
Basic earnings per share:
	Income from operations			$	0.99		$	0.23
	Cumulative effect of a change in accounting principle				(0.07	)		—
	Net			$	0.92		$	0.23
Diluted earnings per share:
	Income from operations			$	0.97		$	0.23
	Cumulative effect of a change in accounting principle				(0.07	)		—
	Net			$	0.90		$	0.23
Weighted average shares outstanding:
			Basic		124,755			122,938
			Diluted		126,941			125,103

See accompanying notes to condensed consolidated financial statements.

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HEALTH NET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

			Six Months Ended June 30,
			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	114,549			28,210
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
	Amortization and depreciation			34,243			51,899
	Loss on assets held for sale			2,600			76,072
	Cumulative effect of a change in accounting principle			8,941			—
	Other changes			4,405			1,528
	Changes in assets and liabilities:
		Premiums receivable and unearned premiums		(87,117	)		(49,823	)
		Other assets		9,492			(5,886	)
		Amounts receivable/payable under government contracts		(28,416	)		235,862
		Reserves for claims and other settlements		(113,373	)		2,964
		Accounts payable and other liabilities		3,584			(23,928	)
Net cash (used in) provided by operating activities				(51,092	)		316,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales or maturities of investments				239,146			442,844
Purchases of investments				(334,315	)		(374,336	)
Net purchases of property and equipment				(27,974	)		(36,948	)
Other				297			(13,702	)
Net cash (used in) provided by investing activities				(122,846	)		17,858
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases				40,906			5,360
Proceeds from issuance of notes and other financing arrangements				50,000			495,102
Repayment of borrowings on credit facilities and other financing arrangements				(125,214	)		(636,516	)
Repurchases of common stock				(28,370	)		—
Net cash used in financing activities				(62,678	)		(136,054	)
Net (decrease) increase in cash and cash equivalents				(236,616	)		198,702
Cash and cash equivalents, beginning of period				909,594			1,046,735
Cash and cash equivalents, end of period			$	672,978		$	1,245,437

See accompanying notes to condensed consolidated financial statements.

6

HEALTH NET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

        Health Net, Inc. (formerly named Foundation Health Systems, Inc., together with its subsidiaries, referred to hereafter as the Company, we, us or our) prepared the condensed consolidated financial statements following the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) can be condensed or omitted if they substantially duplicate the disclosures contained in the annual audited financial statements.

        We are responsible for the accompanying unaudited condensed consolidated financial statements. These condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results in accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that affect the reported amounts. Actual results could differ from estimates. As these are condensed consolidated financial statements, one should also read our 2001 consolidated financial statements and notes included in our Form 10-K for the year ended December 31, 2001.

        Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for the full year.

        Certain amounts in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 presentation. The reclassifications have no effect on net income (loss) or stockholders' equity as previously reported.

2. COMPREHENSIVE INCOME

        Our comprehensive income for the second quarter and six months ended June 30 is as follows (amounts in thousands):

		Second Quarter Ended June 30,					Six Months Ended June 30,
		2002		2001			2002		2001
Net income (loss)		$	64,735	$	(14,205	)	$	114,549	$	28,210
Other comprehensive income (loss), net of tax:
	Net change in unrealized appreciation (depreciation) on investments available for sale		9,607		(212	)		4,867		3,531
Comprehensive income (loss)		$	74,342	$	(14,417	)	$	119,416	$	31,741

3. EARNINGS PER SHARE

        Basic earnings per share excludes dilution and reflects net income or loss 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 (all of which are comprised of stock options) outstanding during the periods presented. Common stock equivalents arising from dilutive stock options are computed using the treasury stock method. There were 2,180,000 and 2,186,000 shares of dilutive common stock equivalents for the second quarter and six months ended June 30, 2002, respectively, and 2,165,000 shares of dilutive common stock

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equivalents for the six months ended June 30, 2001. For the second quarter ended June 30, 2001, 1,886,000 shares of common stock equivalents were excluded from the computation of diluted loss per share due to their antidilutive effect.

        Options to purchase an aggregate of 1,477,000 and 2,290,000 shares of common stock during the second quarter and six months ended June 30, 2002, respectively, and an aggregate of 7,291,000 shares of common stock during the six months ended June 30, 2001, were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock for each respective period.

        On May 2, 2002, we announced that our board of directors has authorized us to repurchase up to $250 million of our Class A Common Stock. As of June 30, 2002, we had repurchased an aggregate of 1 million shares of our Class A Common Stock under this repurchase program (see Note 10).

4. SEGMENT INFORMATION

        Our segment information for the second quarter and six months ended June 30, 2002 and 2001 is as follows (amounts in millions):

	Health Plan Services		Government Contracts/ Specialty Services		Total
Second Quarter Ended June 30, 2002
Revenues from external sources	$	2,040.5	$	447.4	$	2,487.9
Intersegment revenues		—		29.8		29.8
Segment profit		80.7		17.0		97.7
Second Quarter Ended June 30, 2001
Revenues from external sources	$	2,104.5	$	417.7	$	2,522.2
Intersegment revenues		—		31.9		31.9
Segment profit		49.6		12.6		62.2
Six Months Ended June 30, 2002
Revenues from external sources	$	4,064.2	$	877.0	$	4,941.2
Intersegment revenues		—		59.8		59.8
Segment profit		158.5		27.1		185.6
Six Months Ended June 30, 2001
Revenues from external sources	$	4,179.2	$	805.8	$	4,985.0
Intersegment revenues		—		46.8		46.8
Segment profit		106.0		16.7		122.7

        Prior to January 1, 2002, our basis of measurement of segment profit or loss was pretax income or loss after allocation of budgeted costs for our corporate shared services to each of our reportable segments, Health Plan Services and Government Contracts/Specialty Services. Shared service expenses include costs for information technology, finance, operations and certain other administrative functions.

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        Beginning January 1, 2002, we implemented several initiatives to reduce our selling, general and administrative (SG&A) expenses. At that time, we changed our methodology from allocating budgeted costs to allocating actual expenses incurred for corporate shared services to more properly reflect segment costs. Management now uses the segment pretax profit or loss subsequent to the allocation of actual shared services expenses as its measurement of segment performance. We changed our methodology of determining segment pretax profit or loss to better reflect management's revised view of the relative costs incurred proportionally by our reportable segments.

        A reconciliation of the total reportable segments' measures of profit to the Company's consolidated income before income taxes and cumulative effect of a change in accounting principle for the second quarter and six months ended June 30, 2002 and 2001 is as follows (amounts in millions):

	Second Quarter Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Total segment profit	$	97.7		$	62.2		$	185.6		$	122.7
Loss from other corporate entities		(2.9	)		(14.5	)		(6.3	)		(17.5	)
Investment income		15.3			22.3			30.9			46.5
Interest expense		(10.3	)		(16.4	)		(20.5	)		(30.8	)
Loss on assets held for sale		(2.6	)		(76.1	)		(2.6	)		(76.1	)
Income (loss) before income taxes and cumulative effect of a change in accounting principle as reported	$	97.2		$	(22.5	)	$	187.1		$	44.8

        Losses from other corporate entities, which are not part of our Health Plan Services and Government Contracts/Specialty Services reportable segments, are excluded from our measurement of segment performance. Investment income and interest expense are also excluded from our measurement of segment performance, as these items are not managed within either of our reportable segments.

5. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES

        As part of our ongoing SG&A expense reduction efforts, during the third quarter of 2001, we finalized a formal plan to reduce operating and administrative expenses for all business units within the Company (the 2001 Plan). In connection with the 2001 Plan, we decided on enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions. We recorded pretax restructuring charges of $79.7 million during the third quarter ended September 30, 2001 (2001 Charge). Of the total 2001 Charge, approximately $49.5 million was expected to result in cash outlays, of which $36.2 million has been paid as of June 30, 2002. We plan to use cash flows from operations to fund the remaining payments of $13.3 million.

SEVERANCE AND BENEFIT RELATED COSTS

        During the third quarter ended September 30, 2001, we recorded severance and benefit related costs of $43.3 million related to enterprise-wide staff reductions, which costs were included in the 2001

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Charge. These reductions include the elimination of 1,517 positions throughout all functional groups, divisions and corporate offices within the Company. As of June 30, 2002, 1,264 positions have been eliminated and $34.2 million of the severance and benefit related costs have been paid out. We expect the remaining balance to be paid by September 30, 2002. We anticipate that the elimination of the remaining positions associated with the 2001 Charge will also be completed by September 30, 2002.

ASSET IMPAIRMENT COSTS

        As of September 30, 2001, pursuant to Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" (SFAS No. 121), we evaluated the carrying value of certain long-lived assets that were affected by the 2001 Plan. The affected assets were primarily comprised of information technology systems and equipment, software development projects and leasehold improvements. We determined that the carrying value of these assets exceeded their estimated fair values. The fair values of these assets were determined based on market information available for similar assets. For certain of the assets, we determined that they had no continuing value to us due to our abandoning certain plans and projects in connection with our workforce reductions.

        Accordingly, we recorded asset impairment charges of $27.9 million consisting entirely of non-cash write-downs of equipment, building improvements and software application and development costs, which charges were included in the 2001 Charge. The carrying value of these assets were $8.0 million and $9.0 million as of June 30, 2002 and December 31, 2001, respectively.

        The asset impairment charges of $27.9 million consist of $10.8 million for write-downs of assets related to the consolidation of four data centers, including all computer platforms, networks and applications into a single processing facility; $16.3 million related to abandoned software applications and development projects resulting from the workforce reductions, migration of certain systems and investments to more robust technologies; and $0.8 million for write-downs of leasehold improvements.

REAL ESTATE LEASE TERMINATION COSTS

        The 2001 Charge included charges of $5.1 million related to termination of lease obligations and non-cancelable lease costs for excess office space resulting from streamlined operations and consolidation efforts. The remainder of the termination obligations will be paid during 2002 and throughout the respective lease terms.

OTHER COSTS

        The 2001 Charge included charges of $3.4 million related to costs associated with consolidating certain data center operations and systems and other activities which were completed and paid for in the first quarter ended March 31, 2002.

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        The following tables summarize the charges we recorded in 2001 (amounts in millions):

			2001 Activity
	2001 Charges		Cash Payments			Non-cash			Balance at December 31, 2001
Severance and benefit related costs	$	43.3	$	(20.5	)	$	—		$	22.8
Asset impairment costs		27.9		—			(27.9	)		—
Real estate lease termination costs		5.1		(0.3	)		—			4.8
Other costs		3.4		(0.4	)		(2.3	)		0.7
Total	$	79.7	$	(21.2	)	$	(30.2	)	$	28.3

			2002 Activity
	Balance at December 31, 2001		Cash Payments			Non-cash		Balance at June 30, 2002		Expected Future Cash Outlays
Severance and benefit related costs	$	22.8	$	(13.7	)	$	—	$	9.1	$	9.1
Real estate lease termination costs		4.8		(0.6	)		—		4.2		4.2
Other costs		0.7		(0.7	)		—		—		—
Total	$	28.3	$	(15.0	)	$	—	$	13.3	$	13.3

6. ASSETS HELD FOR SALE AND DIVESTITURES

        Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. (EOS Claims), to Tristar Insurance Group, Inc. (Tristar). In connection with the sale, we received $500,000 in cash, and also entered into a Payor Services Agreement. Under the Payor Services Agreement, Tristar has agreed to exclusively use EOS Managed Care Services, Inc. (one of our remaining subsidiaries) for various managed care services to its customers and clients.

        We estimated and recorded a $2.6 million pretax loss on the sale of EOS Claims during the second quarter ended June 30, 2002. EOS Claims, excluding the $2.6 million pretax loss on sale, had the following financial results (amounts in millions):

	Second Quarter Ended June 30,					Six Months Ended June 30,
	2002		2001			2002		2001
Total revenues	$	3.6	$	3.8		$	7.2	$	8.2
Income (loss) before income taxes and cumulative effect of a change in accounting principle	$	0.1	$	(1.4	)	$	0.1	$	(2.3	)

        As of the date of sale, EOS Claims had no net equity after dividends to its parent company and the goodwill impairment charge taken in the first quarter ended March 31, 2002. EOS Claims was reported as part of our Government Contracts/Specialty Services reportable segment.

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        Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc. (the Plan), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consists of $23 million in cash and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001.

        Under the Stock Purchase Agreement that evidenced the sale (as amended, the SPA), we, through our subsidiary FH Assurance Company (FHAC), entered into a reinsurance agreement (the Reinsurance Agreement) with the Plan. Under the terms of the Reinsurance Agreement, FHAC will reimburse the Plan for certain medical and hospital expenses arising after the Florida health plan sale. The Reinsurance Agreement will cover claims arising from all commercial and governmental health care contracts or other agreements in force as of July 31, 2001 and any renewals thereof up to 18 months after July 31, 2001. The Reinsurance Agreement provides that the Plan will be reimbursed for medical and hospital expenses relative to covered claims in excess of certain baseline medical loss ratios, as follows:

•

88% for the six-month period commencing on August 1, 2001;



•

89% for the six-month period commencing on February 1, 2002;



•

90% for the six-month period commencing on August 1, 2002.

        The Reinsurance Agreement is limited to $28 million in aggregate payments and is subject to the following levels of coinsurance:

•

5% for the six-month period commencing on August 1, 2001;



•

10% for the six-month period commencing on February 1, 2002;



•

15% for the six-month period commencing on August 1, 2002.

        If the baseline medical loss ratio is less than 90% at the end of the six-month period commencing on August 1, 2002, Health Net is entitled to recover medical and hospital expenses below the 90% threshold up to an amount to not exceed 1% of the total premiums for those members still covered during the six-month period under the Reinsurance Agreement.

        The maximum liability under the Reinsurance Agreement of $28 million was reported as part of loss on assets held for sale as of June 30, 2001, since this was our best estimate of our probable obligation under this arrangement. As the reinsured claims are submitted to FHAC, the liability is reduced by the amount of claims paid.

        The indemnification obligation is for all pending and threatened litigation as of the closing date and certain specific provider contract interpretation or settlement disputes. At this time, we are unable to quantify an estimated liability related to the indemnified obligations due to the status and uncertainty of any pending or threatened litigation and the specific provider contract disputes.

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        The SPA provides for the following three true-up adjustments that could result in an adjustment to the loss on the sale of the Plan:

•

A retrospective post-closing settlement of statutory equity based on subsequent adjustments to the closing balance sheet for the Plan.



•

A settlement of unpaid provider claims as of the closing date based on claim payments occurring during a one-year period after the closing date.



•

A settlement of the reinsured claims in excess of certain baseline medical loss ratios. Final Settlement is not scheduled to occur until the latter part of 2003. The development of claims and claims related metrics and information provided by Florida Health Plan Holdings II, L.L.C. have not resulted in any revisions to the maximum $28 million liability we originally estimated.

        As of June 30, 2002, we did not have sufficient additional information for the true-up adjustments to estimate any adjustment to the loss on the sale of the Plan.

        The Florida health plan, excluding the $76.1 million loss on sale, had total revenues of $144.4 million and a pretax loss of $(12.0) million for the second quarter ended June 30, 2001, and total revenues of $297.0 million and a pretax loss of $(15.0) million for the six months ended June 30, 2001. The effect of the suspension of the depreciation on the corporate facility building was immaterial for the three and six months ended June 30, 2001. At the date of sale, the Florida health plan had $41.5 million in net equity. The Florida health plan was reported as part of our Health Plan Services reportable segment.

7. LEGAL PROCEEDINGS

SUPERIOR NATIONAL INSURANCE GROUP, INC.

        We and our former wholly-owned subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc. in January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. (M&R), filed on April 28, 2000, in the United States Bankruptcy Court for the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group, Inc. (BIG), a holding company of workers' compensation companies operating primarily in California, by FHC to Superior National Insurance Group, Inc. (Superior).

        On March 3, 2000, the California Department of Insurance seized BIG and Superior's other California insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two days later, Superior filed its lawsuit against us, FHC and M&R. Superior alleges in the lawsuit that:

•

the BIG transaction was a fraudulent transfer under federal and California bankruptcy laws in that Superior did not receive reasonably equivalent value for the $285 million in consideration paid for BIG;

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•

we, FHC and M&R defrauded Superior by making misstatements as to the adequacy of BIG's reserves;



•

Superior is entitled to rescind its purchase of BIG;



•

Superior is entitled to indemnification for losses it allegedly incurred in connection with the BIG transaction;



•

FHC breached the stock purchase agreement relating to the sale of BIG; and



•

we and FHC were guilty of California securities laws violations in connection with the sale of BIG.

        Superior seeks $300 million in compensatory damages, unspecified punitive damages and the costs of the action, including attorneys' fees.

        On August 1, 2000, a motion filed by us and FHC to remove the lawsuit from the jurisdiction of the Bankruptcy Court to the United States District Court for the Central District of California was granted. Pursuant to a June 12, 2002 intra-district transfer order, the lawsuit is now pending in the District Court under case number CV02-5155 PA. The parties are currently engaged in discovery.

        We intend to defend ourselves vigorously in this litigation. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

FPA MEDICAL MANAGEMENT, INC.

        Since May 1998, several complaints have been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. (FPA) at various times between February 3, 1997 and May 15, 1998. The complaints name as defendants FPA, certain of FPA's auditors, us and certain of our former officers. The complaints allege that we and such former officers violated federal and state securities laws by misrepresenting and failing to disclose certain information about a 1996 transaction between us and FPA, about FPA's business and about our 1997 sale of FPA common stock held by us. All claims against our former officers were voluntarily dismissed from the consolidated class actions in both federal and state court. In early 2000, we filed a motion to dismiss all claims asserted against us in the consolidated federal class actions but have not formally responded to the other complaints. That motion has been withdrawn without prejudice and the consolidated federal class actions have been stayed pending resolution of matters in a related case in which we are not a party.

        We intend to vigorously defend the actions. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the

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future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.

        Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the United States District Court in Connecticut by the Attorney General of Connecticut, Richard Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on the Federal Employee Retirement Income Security Act ("ERISA") and alleged that PHS violated its duties under ERISA by managing its prescription drug formulary in a manner that served its own financial interest rather than those of plan beneficiaries. The suit sought to have PHS revamp its formulary system and to provide patients with written denial notices and instructions on how to appeal. PHS filed a motion to dismiss which asserted that the state residents the Attorney General purported to represent all received a prescription drug appropriate for their conditions and therefore suffered no injuries whatsoever, that his office lacked standing to bring the suit and that the allegations failed to state a claim under ERISA. On July 12, 2000, the court granted PHS' motion and dismissed the action. On March 27, 2002, the United States Court of Appeals for the Second Circuit affirmed the district court's dismissal of the action. On June 25, 2002, the plaintiff filed a petition requesting that the United States Supreme Court review the Second Circuit's decision to affirm dismissal of the case.

        We intend to vigorously defend the action. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

IN RE MANAGED CARE LITIGATION

        The Judicial Panel on Multidistrict Litigation ("JPML") has transferred various class action lawsuits against managed care companies, including us, to the United States District Court for the Southern District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. This proceeding is divided into two tracks, the subscriber track, which includes actions brought on behalf of health plan members, and the provider track, which includes suits brought on behalf of physicians.

Subscriber Track

        The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems, Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v. Foundation Health Systems, Inc. (filed in the Southern District of Florida on June 23, 2000 as an amendment to a suit filed in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive

15

relief and allege that cost containment measures used by our health maintenance organizations, preferred provider organizations and point-of-service health plans violate provisions of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") and ERISA.

        The Albert suit also alleges violations of ERISA and seeks certification of a nationwide class and unspecified damages and injunctive relief. The State of Connecticut action asserts claims against our subsidiary, Physicians Health Services of Connecticut, Inc., and us that are similar, if not identical, to those asserted in the previous lawsuit which, as discussed above, the United States Court of Appeals for the Second Circuit affirmed dismissal of on March 27, 2002.

        We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the court stayed discovery until after the court ruled upon motions to dismiss the amended complaints and any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended class action complaint which re-alleges causes of action under RICO, ERISA, common law civil conspiracy and common law unjust enrichment. The third amended class action complaint seeks unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third amended complaint in Romero. On February 20, 2002, the court ruled on our motion to dismiss the third amended complaint in Romero. The court dismissed all claims against us except one ERISA claim. The court further ordered that plaintiffs may file amended complaints, but that no new plaintiffs or claims will be permitted without prior leave of the court. Both plaintiffs and defendants filed motions for reconsideration relating to various parts of the court's dismissal order, which motions were denied. On March 25, 2002, the district court amended its February 20, 2002 dismissal order to include the following statement: "This Order involves a controlling question of law, namely, whether a managed-care subscriber who has not actually been denied care can state a claim under RICO, about which there is substantial ground for difference of opinion and an immediate appeal may materially advance the ultimate termination of this litigation." On April 5, 2002, we joined in a petition to the United States Court of Appeals for the Eleventh Circuit for permission to appeal the question certified by the district court. On May 10, 2002, the Eleventh Circuit denied the petition. On June 26, 2002, the plaintiffs filed with the Court a notice that they will not file an amended complaint against the Company. Health Net filed its answer on July 26, 2002. On July 29, 2002, the Court ordered that the stay of discovery is lifted effective September 30, 2002.

Provider Track

        The provider track includes the following actions involving us: Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on August 17, 2000 as an amendment to a suit filed in the Southern District of Mississippi), California Medical Association v. Blue Cross of California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc. and Foundation Health Systems, Inc. (filed in the Northern District of California in May 2000), Klay v. Prudential Ins. Co. of America, et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), Lynch v. Physicians Health Services of Connecticut, Inc.

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(filed in Connecticut state court on February 14, 2001), Sutter v. Health Net of the Northeast, Inc. (D. N.J.) (filed in New Jersey state court on April 26, 2002), and Medical Society of New Jersey v. Health Net, Inc., et al., (D. N.J.) (filed in New Jersey state court on May 8, 2002.)

        On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief.

        On September 22, 2000, we filed a motion to dismiss, or in the alternative to compel arbitration, in Shane. On December 11, 2000, the court granted in part and denied in part our motion to compel arbitration. Under the court's December arbitration order, plaintiff Dennis Breen, the single named plaintiff to allege a direct contractual relationship with us in the August complaint, was compelled to arbitrate his direct claims against us. We filed an appeal in the United States Court of Appeals for the 11th Circuit seeking to overturn the portion of the district court's December ruling that did not order certain claims to arbitration. On April 26, 2001, the court modified its December arbitration order and is now retaining jurisdiction over certain direct claims of plaintiff Breen relating to a single contract. On March 2, 2001, the District Court for the Southern District of Florida issued an order in Shane granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without prejudice, and denying the dismissal of certain claims.

        On March 26, 2001, a consolidated amended complaint was filed in Shane against managed care companies, including us. This consolidated complaint adds new plaintiffs, including Leonard Klay and the California Medical Association (who, as set forth below, had previously filed claims against the Company), and has, in addition to revising the pleadings of the original claims, added a claim under the California Business and Professions Code. On May 1, 2001, we filed a motion to compel arbitration in Shane of the claims of all individual plaintiffs that allege to have treated persons insured by us. On that same date, we filed a motion to dismiss this action. Preliminary discovery and briefing regarding the plaintiffs' motion for class certification has taken place. On May 7, 2001, the court heard oral argument on class certification issues in Shane. On May 9, 2001, the court entered a scheduling order permitting further discovery. On May 14, 2001, Health Net joined in a motion for stay of proceedings in Shane v. Humana, Inc., et al.(including Foundation Health Systems, Inc.) (00-1334-MD) in the United States District Court for the Southern District of Florida pending appeal in the 11th Circuit Court of Appeals. On June 17, 2001, the district court stayed discovery until after the district court ruled upon motions to dismiss and motions to compel arbitration. This order staying discovery also applied to other actions transferred to the district court by the Judicial Panel on Multidistrict Litigation, namely California Medical Association v. Blue Cross of California, Inc. et al., Klay v. Prudential Ins. Co. of America, et al., Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc., and Lynch v. Physicians Health Services of Connecticut, Inc. On June 25, 2001, the 11th Circuit Court of Appeals entered an order staying proceedings in the district court pending resolution of the appeals relating to the district court's ruling on motions to compel arbitration. On March 14, 2002, the 11th Circuit affirmed the district court's ruling on motions to compel arbitration. On March 25, 2002, the plaintiffs filed with the Eleventh Circuit a motion for relief from the stay. We joined in an opposition to plaintiff's motion and joined a petition for rehearing of the arbitration issues

17

before the entire Eleventh Circuit panel. On June 21, 2001, the Eleventh Circuit denied the petition for rehearing. On July 12, 2002, the plaintiffs filed a motion requesting leave to amend their complaint. On July 29, 2002, the Court ordered that the stay of discovery is lifted effective September 30, 2002.

        The CMA action alleges violations of RICO, certain federal regulations and the California Business and Professions Code and seeks declaratory and injunctive relief, as well as costs and attorneys' fees. As set forth above, on March 26, 2001, the California Medical Association was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The Klay suit is a purported class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief, and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The CSMS case was originally brought in Connecticut state court against Physicians Health Services of Connecticut, Inc. ("PHS-CT") alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against us and other managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the federal District Court of Connecticut consolidated this action and Lynch v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        The Lynch case was also originally filed in Connecticut state court. This case was purportedly brought on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief and damages. On March 13, 2001, we removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the federal District Court of Connecticut consolidated this action and CSMS v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        On April 26, 2002, plaintiff John Ivan Sutter, M.D., P.A. filed an amended complaint in New Jersey state court joining Health Net of the Northeast, Inc. ("Health Net of the Northeast"), a subsidiary of ours, in an action originally brought against Horizon Blue Cross Blue Shield of New Jersey, Inc., CIGNA Healthcare of New Jersey, Inc. and CIGNA Corp (collectively known as "CIGNA"), United Healthcare of New Jersey, Inc. and United Healthcare Insurance Company and Oxford Health Plans, Inc. The complaint seeks certification of a statewide class of healthcare providers

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who render or have rendered services to patients who are members of healthcare plans sponsored by the defendants.

        Plaintiff alleges that the defendants engage in unfair and deceptive acts and practices which are designed to delay, deny, impede and reduce compensation to physicians. The complaint seeks unspecified damages and sets forth causes of action for breach of contract, breach of the implied duty of good faith and fair dealing, violations of the New Jersey Prompt Payment Act and the Healthcare Information Networks and Technologies Act (the "HINT Act"), reformation, violations of the New Jersey Consumer Fraud Act, unjust enrichment and conversion. On May 22, 2002, the New Jersey state court severed the action filed by Dr. Sutter into five separate cases, including an action against Health Net of the Northeast only. On May 24, 2002, Health Net of the Northeast removed the case against it to federal court. That same day, the CIGNA entities removed plaintiff Sutter's action against them to federal court and the United Healthcare entities removed plaintiff Sutter's action against them to federal court. Plaintiff moved to remand all of these cases to state court and the defendants moved to stay the cases pending ruling by the JPML as to whether these cases should be transferred to MDL 1334 for coordinated or consolidated pretrial proceedings. On July 9, 2002, the federal district court denied plaintiff's motion to remand without prejudice, consolidated the cases against Health Net of the Northeast, the CIGNA entities, and the United Healthcare entities into one case for pretrial proceedings, and stayed the case pending the JPML's ruling on transfer to MDL 1334. On July 18, 2002, the JPML transferred this action to MDL 1334 for coordinated or consolidated pretrial proceedings.

        On May 8, 2002, the Medical Society of New Jersey filed a complaint in New Jersey state court against us and our subsidiaries Health Net of the Northeast, Inc., First Option Health Plan of New Jersey, Inc., and Health Net of New Jersey, Inc. (the "Health Net defendants"). Plaintiff brought this action on its own behalf and purportedly on behalf of its physician members and alleges that the Health Net defendants engage in practices which are designed to delay, deny, impede and reduce compensation to physicians. Plaintiff has requested declaratory and injunctive relief and has set forth causes of action for violation of public policy, violations of the New Jersey Consumer Fraud Act, violations of the HINT Act and tortious interference with prospective economic relations. On June 14, 2002 the Health Net defendants removed this case to federal court. On July 3, 2002, the Health Net defendants filed a motion to stay this action pending ruling by JPML on whether to transfer this case to MDL 1334. On July 15, 2002, plaintiff filed a motion to remand this case to state court. On August 2, 2002, the JPML transferred this case to MDL 1334 for coordinated or consolidated pretrial proceedings.

        We intend to defend ourselves vigorously in this litigation. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

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MISCELLANEOUS PROCEEDINGS

        We and certain of our subsidiaries are also parties to various other legal proceedings, many of which involve claims for coverage encountered in the ordinary course of our business. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

8. CHANGES IN ACCOUNTING PRINCIPLES

GOODWILL AND OTHER INTANGIBLE ASSETS

        In July 2001, the Financial Accounting Standards Board (FASB) issued two new pronouncements: Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initiated after June 30, 2001; and b) the provisions of SFAS No. 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). Transition provisions that applied to business combinations completed before July 1, 2001, that were accounted for by the purchase method had no impact on us.

        Effective January 1, 2002, we adopted SFAS No. 142 which, among other things, eliminates amortization of goodwill and other intangibles with indefinite lives. Intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets. The impairment test follows a two-step approach. The first step determines if the goodwill is potentially impaired; the second step measures the amount of the impairment loss, if necessary. Under the first step, goodwill is considered potentially impaired if the value of the reporting unit is less than the reporting unit's carrying amount, including goodwill. Under the second step, the impairment loss is then measured as the excess of recorded goodwill over the fair value of goodwill, as calculated. The fair value of goodwill is calculated by allocating the fair value of the reporting unit to all the assets and liabilities of the reporting unit as if the reporting unit was purchased in a business combination and the purchase price was the fair value of the reporting unit.

        We identified the following six reporting units with goodwill within our businesses: Health Plans, Government Contracts, Managed Health Network (MHN), Dental & Vision, Subacute and Employer and Occupational Service Group (EOSG). In accordance with the transition requirements of SFAS No. 142, we completed an evaluation of goodwill at each of our reporting units upon adoption of this Standard. We also re-assessed the useful lives of our other intangible assets and determined that they properly reflect the estimated useful lives of these assets. As a result of these impairment tests, we identified goodwill impairment at our behavioral health subsidiary, MHN, and at our managed care and bill review unit, EOSG, in the amounts of $3.5 million and $5.4 million, respectively. Accordingly, we recorded an impairment charge of goodwill of $8.9 million, net of tax benefit of $0, which has been reflected as a cumulative effect of a change in accounting principle in the consolidated statement of

20

operations for the first quarter ended March 31, 2002. As part of our annual goodwill impairment test, we completed an evaluation of goodwill at each of our reporting units as of June 30, 2002. No goodwill impairments were identified in any of our reporting units. We will perform our annual goodwill impairment test as of June 30 in future years.

        Our measurement of fair value was based on utilization of both the income and market approaches to fair value determination. We used an independent third-party professional services firm with knowledge and experience in performing fair value measurements to assist us in the impairment testing and measurement process. The income approach was 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 were estimated for each year of a defined multi-year period until the growth pattern becomes stable. The expected interim cash flows expected after the growth pattern becomes stable were calculated using an appropriate capitalization technique and then discounted. The market approach used a market valuation methodology which included the selection of companies engaged in a line (or lines) of business similar to the company to be valued, an analysis of the comparative operating results and future prospects of the company in relation to the guideline companies selected. The market price multiples are selected and applied to the company based on the relative performance, future prospects and risk profiles of the company in comparison to the guideline companies. Methodologies for selecting guideline companies include the exchange methodology and the acquisition methodology. The exchange methodology is based upon transactions of minority-interests in publicly traded companies engaged in a line (or lines) of business similar to the company. The public companies selected are defined as guideline companies. The acquisition methodology involved analyzing the transaction involving similar companies that have been bought and sold in the public marketplace.

        The following table illustrates the effect of adopting SFAS No. 142 on net income as previously reported (amounts in millions, except per share data):

	Second Quarter Ended June 30,					Six Months Ended June 30,
	2002		2001			2002		2001
Reported net income (loss)	$	64.7	$	(14.2	)	$	114.5	$	28.2
Add back: Goodwill amortization (net of tax effect)		—		5.9			—		12.0
Adjusted net income (loss)	$	64.7	$	(8.3	)	$	114.5	$	40.2
Basic earnings per share:
Reported net income (loss)	$	0.52	$	(0.12	)	$	0.92	$	0.23
Add back: Goodwill amortization (net of tax effect)		—		0.05			—		0.10
Adjusted net income (loss)	$	0.52	$	(0.07	)	$	0.92		0.33
Diluted earnings per share:
Reported net income	$	0.51	$	(0.12	)	$	0.90	$	0.23
Add back: Goodwill amortization (net of tax effect)		—		0.05			—		0.09
Adjusted net income (loss)	$	0.51	$	(0.07	)	$	0.90	$	0.32

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        Differences between the sum of the quarterly and year-to-date earnings per share amounts are due to rounding.

        The changes in the carrying amount of goodwill by reportable segment are as follows (in millions):

	Health Plan Services			Government Contracts/ Specialty Services			Total
Balance at December 31, 2000	$	741.7		$	49.5		$	791.2
Amortization		(25.8	)		(1.8	)		(27.6	)
Other adjustments		0.8			—			0.8
Balance at December 31, 2001		716.7			47.7			764.4
Impairment losses		—			(8.9	)		(8.9	)
Reclassification from other intangible assets		6.9			—			6.9
Balance at June 30, 2002	$	723.6		$	38.8		$	762.4

        As part of adopting SFAS No. 142, we transferred $6.9 million of other intangible assets to goodwill since they did not meet the new criteria for recognition apart from goodwill. These other intangible assets were acquired through our previous purchase transactions. In addition, other intangible assets as of June 30, 2002 decreased from December 31, 2001 due to removal of fully amortized intangible assets.

        The intangible assets that continue to be subject to amortization are as follows (in millions):

	Gross Carrying Amount		Accumulated Amortization			Net Balance		Amortization Period (in years)
As of June 30, 2002:
Provider networks	$	35.7	$	(15.1	)	$	20.6	14-40
Employer groups		92.9		(89.3	)		3.6	11-23
Other		1.5		(0.8	)		0.7	1
	$	130.1	$	(105.2	)	$	24.9
As of December 31, 2001:
Provider networks	$	35.7	$	(14.2	)	$	21.5	14-40
Employer groups		92.9		(85.2	)		7.7	11-23
Other		29.0		(20.8	)		8.2	40
	$	157.6	$	(120.2	)	$	37.4

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

2002	$	8.2
2003		2.4
2004		2.4
2005		2.4
2006		2.0

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

        Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and some provisions of Accounting Principles Board (APB) Opinion 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 sets new criteria for determining when an asset can be classified as held-for-sale as well as modifying the financial statement presentation requirements of operating losses from discontinued operations. The adoption of SFAS No. 144 had no effect on our consolidated financial position or results of operations.

9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (Issue 94-3). The principal difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is that an entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, SFAS No. 146 eliminates the definition and requirements for recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability.

        The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.

10. STOCK REPURCHASE PROGRAM

        On May 2, 2002, we announced that our board of directors has authorized us to repurchase up to $250 million of our Class A Common Stock. As of June 30, 2002, we had repurchased an aggregate of one million shares of our Class A Common Stock under this repurchase program for aggregate consideration of approximately $28.4 million. Share repurchases will be made under this repurchase

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program from time to time through open market purchases or through privately negotiated transactions.

11. SUBSEQUENT EVENT

        In 1999, we sold our HMO operations in the states of Louisiana, Oklahoma and Texas to AmCareco, Inc. (AmCareco). As part of the transaction, we received shares of AmCareco convertible preferred stock with an aggregate par value of $10.7 million and established an allowance of $4.2 million based on the estimated net realizable value. During 2000, we made additional investments in AmCareco and received subordinated notes totaling $2.6 million. As of June 30, 2002, the net carrying value of our investment in AmCareco was $9.1 million and is included in other noncurrent assets on the accompanying condensed consolidated balance sheets. In July 2002, we exercised our rights to draw upon a $2 million letter of credit that was established by AmCareco to secure the redemption of a portion of our preferred stock of AmCareco. In August 2002, we became aware that the Oklahoma State Health Commissioner will consider whether to continue AmCareco's license in Oklahoma to operate an HMO at a hearing to be held on August 20, 2002 due to AmCareco's alleged violations of Oklahoma's prompt-pay law and AmCareco's failure to maintain the minimum net worth requirement to operate an HMO in that state. The Oklahoma Department of Health has advised the Commissioner not to continue the HMO's license.We also have been advised by AmCareco that there may be regulatory activity of a similar nature relating to AmCareco's HMOs operating in Texas and Louisiana. However, various capital raising activities and initiatives are being pursued by AmCareco to address its statutory capital needs.

        We will continue to monitor the outcome of these developments and consider the impact on the recoverability of our net investment of $7.1 million in AmCareco.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Health Net, Inc. (together with its subsidiaries may be referred to herein as the Company, we, us or our) is an integrated managed care organization that administers the delivery of managed health care services. Through our subsidiaries, we offer group, individual, Medicaid and Medicare health maintenance organization (HMO), point of service (POS) and preferred provider organization (PPO) plans; government sponsored managed care plans; and managed care products related to administration and cost containment, behavioral health, dental, vision and pharmaceutical products and other services.

        We currently operate within two reportable segments: Health Plan Services and Government Contracts/Specialty Services. The Health Plan Services segment operates through its health plans in the following states: Arizona, California, Connecticut, New Jersey, New York, Oregon and Pennsylvania. For most of 2001, the Health Plan Services segment consisted of two regional divisions: Western Division (Arizona, California and Oregon) and Eastern Division (Connecticut, Florida, New Jersey, New York and Pennsylvania). During the fourth quarter of 2001, we decided that we would no longer view our health plan operations through these two regional divisions.

        Effective August 1, 2001, we completed the sale of our Florida health plan. The Florida health plan had approximately 166,000 members at the close of sale.

        We are one of the largest managed health care companies in the United States, with approximately 3.9 million at-risk and administrative services only (ASO) members in our Health Plan Services segment. We also own health and life insurance companies licensed to sell PPO, POS and indemnity products, as well as certain auxiliary non-health products such as life and accidental death and disability insurance in 35 states and the District of Columbia.

        The Government Contracts/Specialty Services segment administers large, multi-year managed care federal contracts covering approximately 1.5 million eligible individuals for the United States Department of Defense's TRICARE program. Certain components of these contracts, including administrative and assumption of health care risk, are subcontracted to affiliated and unrelated third parties. We have three TRICARE contracts that cover Alaska, Arkansas, California, Hawaii, Oklahoma, Oregon, Washington and parts of Arizona, Idaho, Louisiana and Texas. Through this segment, we also offer behavioral health, dental and vision services as well as employee and occupational services comprising managed care products related to bill review, administration and cost containment for hospitals, health plans and other entities.

        This discussion and analysis and other portions of this Form 10-Q contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, that involve risks and uncertainties. All statements other than statements of historical information may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Cautionary Statements" section and other portions of our most recent Annual Report on Form 10-K filed with the SEC and the risks discussed in our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. Except as required by law, we undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this report.

        Our net income for the second quarter ended June 30, 2002 was $64.7 million, or $0.52 per basic and $0.51 per diluted share, compared to a net loss for the same period in 2001 of $(14.2) million, or $(0.12) per basic share and diluted share. Our net income for the six months ended June 30, 2002 was

25

$114.5 million, or $0.92 per basic and $0.90 per diluted share, compared to net income for the same period in 2001 of $28.2 million, or $0.23 per basic share and diluted share.

        The table below and the discussions that follow summarize our financial performance for the second quarter and six months ended June 30, 2002 and 2001.

			Second Quarter Ended June 30,						Six Months Ended June 30,
			2002			2001			2002			2001
			(Amounts in thousands, except per member per month data)
REVENUES:
	Health plan services premiums		$	2,040,519		$	2,104,501		$	4,064,152		$	4,179,200
	Government contracts/Specialty services			447,399			417,699			876,966			805,789
	Investment and other income			18,046			24,503			34,664			49,838
		Total revenues		2,505,964			2,546,703			4,975,782			5,034,827
EXPENSES:
	Health plan services			1,729,393			1,816,199			3,438,551			3,583,593
	Government contracts/Specialty services			326,779			302,300			643,331			575,335
	Selling, general and administrative			321,638			332,724			649,452			672,302
	Depreciation			15,132			16,088			28,610			33,060
	Amortization			2,847			9,460			5,633			18,839
	Interest			10,338			16,408			20,527			30,846
	Loss on assets held for sale			2,600			76,072			2,600			76,072
		Total expenses		2,408,727			2,569,251			4,788,704			4,990,047
Income (loss) before income taxes and cumulative effect of a change in accounting principle				97,237			(22,548	)		187,078			44,780
Income tax provision (benefit)				32,502			(8,343	)		63,588			16,570
Income (loss) before cumulative effect of a change in accounting principle, net of tax				64,735			(14,205	)		123,490			28,210
Cumulative effect of a change in accounting principle, net of tax				—			—			(8,941	)		—
Net income (loss)			$	64,735		$	(14,205	)	$	114,549		$	28,210
Health plan services (including capitated costs) medical care ratio (MCR)				84.8	%		86.3	%		84.6	%		85.7	%
Government contracts/Specialty services MCR				73.0	%		72.4	%		73.4	%		71.4	%
Administrative (SG&A + Depreciation) ratio				13.5	%		13.8	%		13.7	%		14.1	%
Health plan premiums per member per month (PMPM)(a)			$	178.75		$	170.63		$	178.28		$	171.23
Health plan sevices PMPM(a)			$	151.49		$	147.25		$	150.83		$	146.83

(a)

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

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Enrollment Information

        The table below summarizes our enrollment information for the second quarter ended June 30, 2002 and 2001.

		June 30,
				Percent Change
		2002	2001
		(Enrollees in Thousands)
Health Plan Services:
	Commercial	2,776	3,002	(7.5	)%
	Medicare risk program	188	224	(16.1	)%
	Medicaid programs	851	735	15.8	%
	Continuing plans	3,815	3,961	(3.7	)%
	Discontinued plans	—	166	(100.0	)%
Total Health Plan Services		3,815	4,127	(7.6	)%
Government Contracts:
	TRICARE PPO and Indemnity	458	558	(17.9	)%
	TRICARE HMO	1,000	906	10.4	%
Total Government Contracts		1,458	1,464	—
ASO		75	80	(6.3	)%

        Commercial membership decreased by 226,000 members or 7.5% at June 30, 2002 compared to the same period in 2001. The net decrease in the commercial membership is primarily due to planned exits from unprofitable large employer group accounts offset by increases in enrollment in key products and markets that we have been targeting in an effort to achieve a greater product diversity. These changes are primarily due to the following:

•

Net decrease of 97,000 members in California as a result of a 198,000 member decrease in our large group market. This decline reflects disenrollment of our HMO members due to premium rate increases averaging 13% from June 2001. Membership declines in CalPERS accounted for 56,000 members of the decline in the large group market. This decline is partially offset by an 86,000 member or 29% increase in our small group and individual markets. This increase is due to a 72,000 member or 20% increase in our PPO/POS products.


•

Decrease in Arizona of 140,000 members as a result of membership decreases in our large group market. Most of this decline was in the HMO product line. The loss of the State of Arizona employer group account in October 2001 accounted for 65,000 members of this decline.

        During April 2002, CalPERS announced that we would no longer be one of the health insurance carriers available to its members. Effective January 1, 2003, we anticipate that the remaining 182,000 members from CalPERS will no longer be enrolled in any of our plans.

        We have been targeting greater product and segment diversity, and we expect our product mix to continually change as we add membership in small group and individual markets.

        Membership in the federal Medicare program decreased by 36,000 members or 16.1% at June 30, 2002 compared to the same period in 2001. The decrease in the federal Medicare program membership is primarily due to planned exits from unprofitable counties as follows:

•

Decrease in California of 15,000 members, including 8,000 CalPERS members who were not offered the Medicare risk product.


•

Decrease in Arizona of 14,000 members because we closed enrollment in that state effective January 2002 to avoid adverse selection from a change in one of our competitors' benefits.

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        Membership in the Medicaid programs increased by approximately 116,000 members or 15.8% at June 30, 2002 compared to the same period for 2001 primarily due to the following:

•

Increase in California of 87,000 members, primarily from the Healthy Families program. The Healthy Families program provides health insurance to children from low-income families.


•

Increase in Connecticut and New Jersey of 27,000 members.

        Discontinued plans in 2001 included the Florida health plan which was sold effective August 1, 2001.

        Government contracts covered approximately 1.5 million eligible individuals under the TRICARE program at June 30, 2002 and 2001. Dependents of active-duty military personnel and retirees and their dependents are automatically eligible to receive benefits under the TRICARE program. Any changes in the enrollment reflect the timing of when the individuals become eligible.

Health Plan Services Premiums

        Health Plan Services premiums decreased $64.0 million or 3.0% for the second quarter ended June 30, 2002 and $115.0 million or 2.8% for the six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to the effects of the sale of the Florida health plan, partially offset by premium increases in the remaining health plans. Our Florida health plan, which was sold effective August 1, 2001, had premiums of $143.1 million and $293.9 million for the three and six months ended June 30, 2001, respectively, excluding the Florida PPO premiums retained by us. Our Health Plan Services premiums, excluding the Florida health Plan and the Florida PPO premiums retained by us, increased by 4.3% for the second quarter ended June 30, 2002 as compared to the same period in 2001. These changes are primarily due to the following:

•

Increase in commercial premiums of $69.0 million or 5% for the three months ended June 30, 2002 as compared to the same period in 2001 is due to a 13% increase in premiums on a PMPM basis partially offset by an 8% decrease in member months. Increase in commercial premiums of $140.6 million or 5% for the six months ended June 30, 2002 as compared to the same period in 2001 is due to a 12% increase in premiums on a PMPM basis partially offset by a 7% decrease in member months. The premium increases on a PMPM basis were in large, small and individual groups primarily in Arizona, California, Connecticut and New York. The majority of the decrease in member months were from non-renewal of members in our large group HMO product.


•

Decrease in Medicare risk premiums of $32.7 million or 8% for the three months ended June 30, 2002 as compared to the same period in 2001 is due to a 16% decrease in member months, partially offset by an 8% increase in premium yields on a PMPM basis. Increase in Medicare risk premiums of $48.2 million or 6% for the six months ended June 30, 2002 as compared to the same period in 2001 is due to a 14% decrease in member months, partially offset by an 8% increase in premiums on a PMPM basis. The decrease in member months is from exiting certain unprofitable counties.


•

Increase in Medicaid premiums of $43.7 million or 19% for the three months ended June 30, 2002 as compared to the same period in 2001 is due to a 16% increase in member months and a 3% increase in premiums on a PMPM basis. Increase in Medicaid premiums of $88.8 million or 20% for the six months ended June 30, 2002 as compared to the same period in 2001 is due to an 18% increase in member months and a 2% increase in premiums on a PMPM basis. These increases are primarily from membership increases in the Health Families program in California.

28

Government Contracts/Specialty Services Revenues

        Government Contracts/Specialty Services revenues increased by $29.7 million or 7.1% for the second quarter ended June 30, 2002 and by $71.2 million or 8.8% for the six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to the following:

•

Increase in revenues of $35.6 million for the three months ended June 30, 2002 as compared to the same period in 2001 is primarily from increases in risk sharing revenues from increased health care estimates and higher administrative change order costs from a new benefit, TRICARE for Life, provided by TRICARE for which we are providing a service for the affected beneficiaries,


•

Increase in revenues of $98.2 million for the six months ended June 30, 2002 as compared to the same period in 2001 is primarily from TRICARE contracts from anticipated growth in base contract pricing of $35.8 million, increased revenue from change order activity from our new product, TRICARE for Life, of $38.7 million and risk sharing revenue from increased health care cost estimates of $23.7 million, offset by,


•

Decreases in revenues of $1.0 million and $14.9 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001 is primarily from a change in the reimbursement methodology for TRICARE from managed care risk to an ASO basis for the mental health products, and


•

Decreases in revenues of $3.7 million and $9.1 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001 is primarily from our bill review subsidiary due to a decrease in volume from loss of business. Effective July 1, 2002, we sold our claims processing subsidiary which generated approximately $4 million in revenues per quarter.

Investment and Other Income

        Investment and other income decreased by $6.5 million or 26.4% for the second quarter ended June 30, 2002 and by $15.2 million or 30.4% for the six months ended June 30, 2002 as compared to the same periods in 2001. This decline is primarily due to investment income decreasing as a result of continued declines in interest rates of an average of 140 basis points and 95 basis points in the second quarter and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. In order to increase investment income, we began to reposition certain of our investable assets to those with longer durations within our regulated health plans.

        Effective July 1, 2002, we sold $3.0 million, par, of WorldCom (MCI) bonds and recognized a pretax loss of $1.8 million in the second quarter ended June 30, 2002.

Health Plan Services Costs and MCR

        Total health plan services costs, including capitated costs, decreased by $86.8 million or 4.8% and $145.0 million or 4% for the three and six months ended June 30, 2002 and 2001, respectively, as compared to the same periods in 2001 primarily due to the effects of the Florida health plan sale. Excluding the effects of the sale of the Florida health plan, the changes are primarily due to the following:

•

Commercial medical costs on a PMPM basis increased by 13% in the second quarter ended June 30, 2002 and by 12% in the six months ended June 30, 2002 as compared to the same periods in 2001 due to additional hospital and physician costs resulting from higher unit cost and utilization. The increases were seen in all markets.


•

Medicare medical costs on a PMPM basis increased by 6% in the second quarter ended June 30, 2002 and by 7% in the six months ended June 30, 2002 as compared to the same periods in 2001 due to increased physician and hospital costs resulting from increased utilization.

29

•

Medicaid medical costs on a PMPM basis increased by 2% in the second quarter and six months ended June 30, 2002 as compared to the same periods in 2001 due to increased pharmacy and ancillary services costs resulting from increased utilization.

        Our Health Plan Services MCR decreased to 84.8% for the second quarter ended June 30, 2002 from 86.3% for the same period in 2001 and to 84.6% for the six months ended June 30, 2002 from 85.7% for the same period in 2001. Excluding the effects of the Florida health plan sale and excluding the Florida PPO business retained by us, our Health Plan Services MCR was 85.2% for the second quarter ended June 30, 2001. The improvements in our Health Plan Services MCRs are due to pricing increases above the health care cost trend. The increases in our overall Health Plan Services premiums on a PMPM of 5% and 4% for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001 outpaced the increases in our overall health care costs on a PMPM basis of 3% for the three and six months ended June 30, 2002 as compared to the same periods in 2001.

Government Contracts/Specialty Services Costs and MCR

        Government Contracts/Specialty Services costs increased by $24.5 million or 8.1% for the second quarter ended June 30, 2002 and by $68.0 million or 11.8% for the six months ended June 30, 2002 compared to the same periods in 2001. Government Contracts/Specialty Services MCR increased to 73.0% and 73.4% in the second quarter and six months ended June 30, 2002, respectively, as compared to 72.4% and 71.4% for the same periods in 2001. These increases are primarily due to the following:

•

Increase in health care costs of $24.6 million for the three months ended June 30, 2002 as compared to the same period in 2001 primarily due to $14.3 million in change orders and $10.3 million in health care and subcontracting costs,


•

Increase in health care costs of $68.1 million for the six months ended June 30, 2002 as compared to the same period in 2001 primarily due to $22.4 million in contract extensions, $26.4 million in change orders, $9.0 million in risk sharing and $10.3 million in health care and subcontracting costs, and


•

Behavioral health, bill review and claims processing costs were essentially flat for the three and six months ended June 30, 2002 as compared to the same periods in 2001.

Selling, General and Administrative (SG&A) Expenses

        The administrative expense ratio (SG&A and depreciation as a percentage of Health Plan Services premiums and Government Contracts/Specialty Services revenues) decreased to 13.5% and 13.7% for the second quarter and six months ended June 30, 2002, respectively, as compared to 13.8% and 14.1% for the same periods in 2001. The decrease was attributable to our ongoing efforts to control our SG&A costs including implementation of a restructuring plan in the third quarter of 2001. We expect the administrative expense ratio to further decline throughout 2002 as the restructuring plan is completed. Excluding the Florida health plan sale effective on August 1, 2001, the administrative expense ratio was 14.0% and 14.3% for the three and six months ended June 30, 2001, respectively.

30

Amortization and Depreciation

        Amortization and depreciation expense decreased by $7.6 million or 29.6% for the second quarter ended June 30, 2002 and by $17.7 million or 34.0% for the six months ended June 30, 2002 as compared to the same periods in 2001 primarily due to the following:

•

Decrease in depreciation expense of $1.0 million and $4.5 million for the second quarter and six months ended June 30, 2002, respectively, primarily due to asset impairments included in the restructuring charges recorded in the third quarter of 2001, partially offset by additional depreciation from purchases of internal use software in 2001, and



•

Decrease in amortization expense of $6.6 million and $13.2 million for the second quarter and six months ended June 30, 2002, respectively, due to cessation of goodwill amortization as a result of adopting SFAS No. 142 effective January 1, 2002.

Interest Expense

        Interest expense decreased by $6.1 million or 37.0% for the second quarter ended June 30, 2002 and by $10.3 million or 33.5% for the six months ended June 30, 2002, as compared to the same periods in 2001 primarily due to the following:

•

A $109.9 million decrease in long-term debt from June 30, 2001, and



•

The average borrowing rate under our credit facility was 2.8% for the second quarter and six months ended June 30, 2002 as compared to the average borrowing rates of 6.5% and 7.1% for the second quarter and six months ended June 30, 2001, respectively.

Loss on Assets Held for Sale

        Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. (EOS Claims), to Tristar Insurance Group, Inc. (Tristar). In connection with the sale, we received $500,000 in cash, and also entered into a Payor Services Agreement. Under the Payor Services Agreement, Tristar has has agreed to exclusively use EOS Managed Care Services, Inc. (one of our remaining subsidiaries) for various managed care services to its customers and clients.

        We estimated and recorded a $2.6 million pretax loss on the sale of EOS Claims during the second quarter ended June 30, 2002. EOS Claims, excluding the $2.6 million pretax loss on sale, had the following financial results (amounts in millions):

	Second Quarter Ended June 30,					Six Months Ended June 30,
	2002		2001			2002		2001
Total revenues	$	3.6	$	3.8		$	7.2	$	8.2
Income (loss) before income taxes and cumulative effect of a change in accounting principle	$	0.1	$	(1.4	)	$	0.1	$	(2.3	)

        As of the date of sale, EOS Claims had no net equity after dividends to its parent company and the goodwill impairment charge taken in the first quarter ended March 31, 2002. EOS Claims was reported as part of our Government Contracts/Specialty Services reportable segment.

        Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc. (the Plan), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consists of $23 million in cash and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by our Florida health plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million

31

pretax loss on the sales of our Florida health plan and the related corporate facility building during the second quarter ended June 30, 2001.

        Under the Stock Purchase Agreement that evidenced the sale (as amended, the SPA), we, through our subsidiary FH Assurance Company (FHAC), entered into a reinsurance agreement (the Reinsurance Agreement) with the Plan. Under the terms of the Reinsurance Agreement, FHAC will reimburse the Plan for certain medical and hospital expenses arising after the Florida health plan sale. The Reinsurance Agreement will cover claims arising from all commercial and governmental health care contracts or other agreements in force as of July 31, 2001 and any renewals thereof up to 18 months after July 31, 2001. The Reinsurance Agreement provides that the Plan will be reimbursed for medical and hospital expenses relative to covered claims in excess of certain baseline medical loss ratios, as follows:

•

88% for the six-month period commencing on August 1, 2001;



•

89% for the six-month period commencing on February 1, 2002;



•

90% for the six-month period commencing on August 1, 2002.

        The Reinsurance Agreement is limited to $28 million in aggregate payments and is subject to the following levels of coinsurance:

•

5% for the six-month period commencing on August 1, 2001;



•

10% for the six-month period commencing on February 1, 2002;



•

15% for the six-month period commencing on August 1, 2002.

        If the baseline medical loss ratio is less than 90% at the end of the six-month period commencing on August 1, 2002, Health Net is entitled to recover medical and hospital expenses below the 90% threshold up to an amount to not exceed 1% of the total premiums for those members still covered during the six-month period under the Reinsurance Agreement.

        The maximum liability under the Reinsurance Agreement of $28 million was reported as part of loss on assets held for sale as of June 30, 2001, since this was our best estimate of our probable obligation under this arrangement. As the reinsured claims are submitted to FHAC, the liability is reduced by the amount of claims paid.

        The indemnification obligation is for all pending and threatened litigation as of the closing date and certain specific provider contract interpretation or settlement disputes. At this time, we are unable to quantify an estimated liability related to the indemnified obligations due to the status and uncertainty of any pending or threatened litigation and the specific provider contract disputes.

        The SPA provides for the following three true-up adjustments that could result in an adjustment to the loss on the sale of the Plan:

•

A retrospective post-closing settlement of statutory equity based on subsequent adjustments to the closing balance sheet for the Plan.



•

A settlement of unpaid provider claims as of the closing date based on claim payments occurring during a one-year period after the closing date.



•

A settlement of the reinsured claims in excess of certain baseline medical loss ratios. Final Settlement is not scheduled to occur until the latter part of 2003. The development of claims and claims related metrics and information provided by Florida Health Plan Holdings II, L.L.C. have not resulted in any revisions to the maximum $28 million liability we originally estimated.

        As of June 30, 2002, we did not have sufficient additional information for the true-up adjustments to estimate any adjustment to the loss on the sale of the Plan.

32

        The Florida health plan, excluding the $76.1 million loss on sale, had total revenues of $144.4 million and a pretax loss of $(12.0) million for the second quarter ended June 30, 2001, and total revenues of $297.0 million and a pretax loss of $(15.0) million for the six months ended June 30, 2001. The effect of the suspension of the depreciation on the corporate facility building was immaterial for the three and six months ended June 30, 2001. At the date of sale, the Florida health plan had $41.5 million in net equity. The Florida health plan was reported as part of our Health Plan Services reportable segment.

Income Tax Provision

        The effective income tax rate was 33.4% and 34.0% for the second quarter and six months ended June 30, 2002, respectively, as compared with 37.0% for the same periods in 2001. The decreases of 3.6 percentage points and 3.0 percentage points in the effective tax rates for the second quarter and six months ended June 30, 2002, respectively, compared to the same periods in 2001 are primarily due to the following:

•

The adoption of SFAS No. 142 and the cessation of goodwill amortization caused the tax rate to decrease by 2.1 percentage points. The majority of our goodwill amortization has historically been treated as a GAAP to tax permanent difference that has previously increased the effective tax rate, and



•

A decrease of 1.2 percentage points and 0.6 percentage points for the second quarter and six months ended June 30, 2002, respectively, compared to the same periods in 2001 due to the tax benefit arising from the sale of a claims processing subsidiary. The tax benefit reflects the effect of goodwill amortization reported in prior years for GAAP reporting purposes. Refer to "Loss on Assets Held for Sale" section of this document.

        The effective tax rates for the second quarter and six months ended June 30, 2002, differed from the statutory federal tax rate of 35.0% due primarily to state income taxes, tax-exempt investment income, business divestiture and examination settlements.

Cumulative Effect of a Change in Accounting Principle

        Effective January 1, 2002, we adopted SFAS No. 142 which, among other things, eliminates amortization of goodwill and other intangibles with indefinite lives. Intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually or more frequently if events or changes in circumstances indicate that we might not recover the carrying value of these assets.

        We identified the following six reporting units with goodwill within our businesses: Health Plans, Government Contracts, Managed Health Network (MHN), Dental & Vision, Subacute and Employer and Occupational Service Group (EOSG). In accordance with the transition requirements of SFAS No. 142, we completed an evaluation of goodwill at each of our reporting units upon adoption of this Standard. We used an independent third-party professional services firm with knowledge and experience in performing fair value measurements to assist us in the impairment testing and measurement process. As a result of these impairment tests, we identified goodwill impairment at our behavioral health subsidiary, MHN, and at our managed care and bill review unit, EOSG, in the amounts of $3.5 million and $5.4 million, respectively. Accordingly, we recorded an impairment charge of goodwill of $8.9 million, net of tax benefit of $0, which has been reflected as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the first quarter ended March 31, 2002. As part of our annual goodwill impairment test, we completed an evaluation of goodwill at each of our reporting units as of June 30, 2002. No goodwill impairments were identified in any of our reporting units. We will perform our annual goodwill impairment test as of June 30 in future years. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for more information on our goodwill.

33

IMPACT OF INFLATION AND OTHER ELEMENTS

        The managed health care industry is labor intensive and its profit margin is low; hence, it is especially sensitive to inflation. Increases in medical expenses or contracted medical rates without corresponding increases in premiums could have a material adverse effect on the Company.

        Various federal and state legislative initiatives regarding the health care industry continue to be proposed during legislative sessions. If further health care reform or similar legislation is enacted, such legislation could impact the Company. Management cannot at this time predict whether any such initiative will be enacted and, if enacted, the impact on the financial condition or results of operations of the Company.

        The Company's ability to expand its business is dependent, in part, on competitive premium pricing and its ability to secure cost-effective contracts with providers. Achieving these objectives is becoming increasingly difficult due to the competitive environment. In addition, the Company's profitability is dependent, in part, on its ability to maintain effective control over health care costs while providing members with quality care. Factors such as health care reform, regulatory changes, increased cost of medical services, utilization, new technologies and drugs, hospital costs, major epidemics and numerous other external influences may affect the Company's operating results. Accordingly, past financial performance is not necessarily a reliable indicator of future performance, and investors should not use historical records to anticipate results or future period trends.

        The Company's HMO and insurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for expenses with respect to reported and unreported claims incurred. These reserves are estimates of future payments based on various assumptions. Establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience, which in the past has resulted, and in the future could result, in loss reserves being too high or too low. The accuracy of these estimates may be affected by external forces such as changes in the rate of inflation, the regulatory environment, medical costs and other factors. Future loss development or governmental regulators could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for claims and loss reserves.

        The Company's California HMO subsidiary contracts with providers in California primarily through capitation fee arrangements. The Company's other HMO subsidiaries contract with providers, to a lesser degree, in other areas through capitation fee arrangements. Under a capitation fee arrangement, the Company's subsidiary pays the provider a fixed amount per member on a regular basis and the provider accepts the risk of the frequency and cost of member utilization of services. The inability of providers to properly manage costs under capitation arrangements can result in financial instability of such providers. Any financial instability of capitated providers could lead to claims for unpaid health care against the Company's HMO subsidiaries, even though such subsidiaries have made their regular payments to the capitated providers. Depending on state law, the Company's HMO subsidiaries may or may not be liable for such claims. In California, the issue of whether HMOs are liable for unpaid provider claims is subject to certain ongoing disputes. The California agency that until July 1, 1999 acted as regulator of HMOs, had issued a written statement to the effect that HMOs are not liable for such claims. In addition, recent court decisions have narrowed the scope of such liability in a manner generally favorable to HMOs. However, ongoing litigation on the subject continues among providers and HMOs, including the Company's California HMO subsidiary.

        On June 2, 2001, the United States Senate passed legislation, sometimes referred to as "patients' rights" or "patients' bill of rights" legislation, that seeks, among other things, to hold health plans liable for claims regarding health care delivery and improper denial of care. The United States House of Representatives passed similar legislation on August 2, 2001. Congress will attempt to reconcile the two

34

bills in a conference committee. Although, both bills provide for independent review of decisions regarding medical care, the bills differ on the circumstances under which lawsuits may be brought against managed care organizations and the scope of their liability. If patients' bill of rights legislation is enacted into law, we could be subject to significant additional litigation risk and regulatory compliance costs, which could be costly to us and could have a significant effect on our results of operations. Although we could attempt to mitigate our ultimate exposure to litigation and regulatory compliance costs through, among other things, increases in premiums, there can be no assurance that we would be able to mitigate or cover the costs stemming from litigation arising under patients' bill of rights legislation or the other costs that we could incur in connection with complying with patients' bill of rights legislation.

LIQUIDITY AND CAPITAL RESOURCES

        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. We generally manage our aggregate regulated subsidiary capital against 150% Risk Based Capital (RBC) Company Action Levels, although RBC standards are not yet applicable to all of our regulated subsidiaries. Certain of our subsidiaries must maintain ratios of current assets to current liabilities pursuant to certain government contracts. We believe we are in compliance with these contractual and regulatory requirements in all material respects.

        We believe that cash from operations, existing working capital and lines of credit are adequate to fund existing obligations, 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 additional debt or equity, the sale of investment securities or otherwise, as appropriate.

        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.

        Government health care receivables are best estimates of payments that are ultimately collectible or payable. Since these amounts are subject to government audit, negotiation and appropriations, amounts ultimately collected may vary significantly from current estimates. Additionally, the timely collection of these receivables is also impacted by government audit and negotiation and could extend for periods beyond a year. Amounts receivable under government contracts were $128.7 million and $99.6 million as of June 30, 2002 and December 31, 2001, respectively.

Operating Cash Flows

        Net cash used in operating activities was $51.1 million for the six months ended June 30, 2002 compared to net cash provided by operating activities of $316.9 million for the same period in 2001. The decrease in operating cash flows of $368.0 million was due primarily to the following:

•

A net decrease in cash flows from amounts receivable/payable under government contracts of $264.3 million for the six months ended June 30, 2002 as compared to the same period in 2001. This is primarily due to cash collection in January 2001 of $329 million of the outstanding TRICARE receivables as part of our global settlement. Of the $389 million global settlement, $60 million had been received in December 2000. The net settlement amount of $284 million, after paying vendors, providers and amounts owed back to the government, was applied to the continuing operating needs of the three TRICARE contracts and to reducing the outstanding balance of our, then, outstanding notes payable, and

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•

A net decrease in cash flows from reserves for claims and other settlements of $116.3 million for the six months ended June 30, 2002 as compared to the same period in 2001. This is primarily due to improved operations and faster claims payment cycles, increase in shared risk and other provider settlements, and a significant reduction in TRICARE claims. In addition, days claims payable were 53 as of June 30, 2002 compared to 54 as of June 30, 2001 due to improved operations and faster claims payment cycles.

        As part of our ongoing selling, general and administrative expense reduction efforts, during the third quarter of 2001, we finalized a formal plan to reduce operating and administrative expenses for all business units within the Company (the 2001 Plan). In connection with the 2001 Plan, we decided on enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions. We recorded pretax restructuring charges of $79.7 million during the third quarter ended September 30, 2001 (2001 Charge). Of the total 2001 Charge, approximately $49.5 million was expected to result in cash outlays. We plan to use cash flows from operations to fund the remaining payments of $13.3 million. As of June 30, 2002, we paid $36.2 million, of which $15.0 million was paid in the six months ended June 30, 2002. We intend to pay the remaining $13.3 million by September 30, 2002. See Note 5 to the accompanying condensed consolidated financial statements.

Investing Activities

        Net cash used in investing activities was $122.8 million during the six month ended June 30, 2002 as compared to net cash provided by investing activities of $17.9 million during the same period in 2001. In order to increase investment income, we began to reposition certain of our investable assets to those with longer durations within our regulated health plans.

        Throughout 2000, 2001 and the six months ended June 30, 2002, we provided funding in the amount of approximately $12.4 million in exchange for preferred stock and notes receivable from MedUnite, Inc., an independent company, funded and organized by seven major managed health care companies. MedUnite, Inc. is designed to provide on-line internet provider connectivity services including eligibility information, referrals, authorizations, claims submission and payment. The funded amounts are included in other noncurrent assets.

Financing Activities

        Net cash used in financing activities was $62.7 million during the six months ended June 30, 2002 as compared to $136.1 million during the same period in 2001. The change was primarily due to the following:

•

A $66.2 million net decrease in the repayment of funds previously drawn under our credit facilities, and



•

The repurchases of $28.4 million of our common stock was offset by $35.5 million in proceeds received from the exercise of stock options and employee stock purchases.

        On May 2, 2002, we announced that our board of directors has authorized us to repurchase up to $250 million of the Company's Class A Common Stock. Share repurchases will be made under this repurchase program from time to time through open market purchases or through privately negotiated transactions. We plan to use cash flows from operations to fund any share repurchases. We purchased one million shares at an average price of $28.37 per share during second quarter ended June 30, 2002 pursuant to this program.

        On April 12, 2001, we completed our offering of $400 million aggregate principal amount of 8.375 percent Senior Notes due in April 2011. The effective interest rate on the notes when all offering costs are taken into account and amortized over the term of the note is 8.54 percent per annum. The net proceeds of $395.1 million from the Senior Notes were used to repay outstanding borrowings under

36

our then-existing revolving credit facility. On October 4, 2001, we completed an exchange offer for the Senior Notes in which the outstanding Senior Notes were exchanged for an equal aggregate principal amount of new 8.375 percent Senior Notes due 2011 that have been registered under the Securities Act of 1933, as amended.

        On June 28, 2001, we refinanced our previous $1.5 billion revolving credit facility with credit agreements for two new revolving syndicated credit facilities, with Bank of America, N.A. as administrative agent. The new facilities, providing for an aggregate of $700 million in borrowings, consist of a $175 million 364-day revolving credit facility and a $525 million five-year revolving credit and competitive advance facility. Committed loans under the credit facilities bear interest at a rate equal to either (1) the greater of the federal funds rate plus 0.5% and the applicable prime rate or (2) LIBOR plus a margin that depends on our senior unsecured credit rating. Loans obtained through the bidding process bear interest at a rate determined in the bidding process.

        We pay fees on outstanding letters of credit and a facility fee, computed as a percentage of the lenders' commitments under the credit facilities, which varies from 0.130% to 0.320% per annum for the 364-day credit facility and from 0.155% to 0.375% per annum for the five-year credit facility, depending on our senior unsecured credit rating.

        On June 27, 2002, the credit agreement for the 364-day credit facility was amended to extend the term of this facility for an additional year. A copy of the amendment is filed as an exhibit to this Form 10-Q.

        The credit agreements contain negative covenants, including financial covenants, that impose restrictions on our operations. As of June 30, 2002, we were in compliance with the covenants of the credit facilities.

        We lease office space under various operating leases. In addition, we have entered into long-term service agreements with third parties. As of June 30, 2002, there are eight years remaining on these service agreements with minimum future commitments totaling $70.1 million. These lease and service agreements are cancelable with substantial penalties.

        Our future minimum lease and service fee commitments and scheduled principal repayments on the senior notes payable and capital leases are as follows (amounts in thousands):

	Future Minimum Lease and Service Fee Commitments		Senior Notes Payable and Capital Leases
2002 (excluding January—June)	$	32,654	$	198
2003		59,813		166
2004		51,481		—
2005		35,647		—
2006		30,164		120,000
Thereafter (through 2010)		119,970		400,000
Total minimum commitments	$	329,729	$	520,364

CRITICAL ACCOUNTING POLICIES

        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. Principle areas requiring the use of estimates include revenue recognition, reserves for claims and other settlements, reserves for contingent liabilities, amounts receivable or payable under government contracts and recoverability of

37

long-lived assets. 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 included in our Form 10-K for the year ended December 31, 2001.

Revenue Recognition

        Health plan services premiums 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. 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.

        Government contracts/Specialty services 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. Government contracts also contain cost and performance incentive provisions which adjust the contract price based on actual performance, and revenue under government contracts is subject to price adjustments attributable to inflation and other factors. The effects of these adjustments are recognized on a monthly basis, although the final determination of these amounts could extend significantly beyond the period during which the services were provided.

        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.

Health Care Services

        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 which have been incurred but not yet reported. Such costs include payments to primary care physicians, specialists, hospitals, outpatient care facilities and the costs associated with managing the extent of such care. 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

38

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 liabilities are reduced by estimated amounts recoverable from third parties for subrogation.

        Our HMO in California 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, 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 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.

        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 margin 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 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.

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. We and several of our competitors were named as defendants in a number of significant class action lawsuits alleging violations of various federal statutes, including the Employee Retirement Income Security Act of 1974 and the Racketeer Influenced Corrupt Organization Act.

        We recognize an estimated loss from such loss contingencies when we believe 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 and the stage of the proceedings, our relevant insurance coverage and any other relevant information available. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition. In addition, the ultimate outcome of these loss contingencies cannot be predicted with certainty and it is difficult to measure the actual loss, if any, that might be incurred.

Government Contracts

        Amounts receivable under government contracts are comprised primarily of estimated amounts receivable under these cost and performance incentive provisions, price adjustments, and change orders for services not originally specified in the contracts. These receivables develop as a result of TRICARE health care costs rising faster than the forecasted health care cost trends used in the original contract bids, data revisions on formal contract adjustments and routine contract changes for benefit adjustments.

39

        Amounts receivable or payable under government contracts are based on three TRICARE contracts in five regions which include both amounts billed and estimates for amounts to be received under cost and performance incentive provisions, price adjustments and change orders for services not originally specified in the contracts. Such estimates are determined based on information available as well as historical performance and collection of which could extend for periods beyond a year. Differences, which may be material, between the amounts estimated and final amounts collected are recorded in the period when determined.

Goodwill

        We assess the recoverability of goodwill on an annual impairment test based on the estimated fair value of the reporting units which comprise our Health Plan and Government Contracts/Specialty Services reportable segments. We assess the recoverability 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. We are utilizing an implied fair value approach in performing our goodwill impairment tests based upon both an income and market approach. In the income approach, we use a discounted cash flow methodology which 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. The market approach is a general way of determining the value of a business using one or more methods that compare the reporting unit to similar businesses that have been sold. 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 based on current and future initiatives. If these initiatives do not accomplish their targeted objectives, the assumptions and estimates underlying the transitional goodwill impairment tests performed upon adoption of SFAS No. 142 could be adversely affected and have a material effect upon our results of operations or financial condition.

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. The significant judgment required in our recoverability assessment is the determination of the estimated fair values of the long-lived assets and assessment of other-than-temporary decline in value, if applicable. We make certain assumptions regarding estimated future cash flows from the long-lived assets, other economic factors and, if applicable, the eventual disposition of the long-lived assets. If the carrying value of these long-lived assets is deemed to be not recoverable, such assets are impaired and written down to their estimated fair values.

STATUTORY CAPITAL REQUIREMENTS

        Our subsidiaries must comply with certain minimum capital requirements under applicable state laws and regulations. As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet risk-based capital or other statutory capital requirements under state laws and regulations. We contributed $10.5 million in cash to certain of our subsidiaries to meet capital requirements during the six months ended June 30, 2002. As of June 30, 2002, our subsidiaries were in compliance with all minimum capital requirements, except for our behavioral health reinsurance subsidiary domiciled in Arizona which was not in compliance with the minimum capital requirements as required by the Arizona Department of Insurance due to the cumulative effect of operating losses. This impairment was cured on August 8, 2002. Except for the $1.0 million capital contribution made to cure this impairment in August 2002, we did not make any capital contributions to our subsidiaries to meet risk-based capital or other statutory capital requirements under state laws and regulations during July 2002 and through August 9, 2002.

40

        Effective January 1, 2001, certain of the states in which our regulated subsidiaries operate adopted the codification of statutory accounting principles. This means that the amount of capital contributions required to meet risk-based capital and minimum capital requirements may change. Any reduction in the statutory surplus as a result of adopting the codification of statutory accounting principles may require us to contribute additional capital to our subsidiaries to satisfy minimum statutory net worth requirements. As of June 30, 2002, the adoption of the codification of statutory accounting principles did not have a material impact on the amount of capital contributions required to meet risk-based capital and other minimum capital requirements.

        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 the parent company. Such restrictions, unless amended or waived, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends which can be paid by our regulated company subsidiaries to us without prior approval of the insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. We believe that as of June 30, 2002, all of our health plans and insurance subsidiaries met their respective regulatory requirements, except for our behavioral health reinsurance subsidiary domiciled in Arizona as referenced above.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPAA)

        In December 2000, the Department of Health and Human Services (DHHS) promulgated regulations under HIPAA related to the privacy and security of electronically transmitted protected health information. The new regulations require health plans, clearinghouses and providers to (a) comply with various requirements and restrictions related to the use, storage and disclosure of protected health information, (b) adopt rigorous internal procedures to safeguard protected health information and (c) enter into specific written agreements with business associates to whom protected health information is disclosed. The regulations also establish significant criminal penalties and civil sanctions for noncompliance. In addition, the regulations could expose the Company to additional liability for, among other things, violations of the regulations by its business associates. The costs required to comply with these regulations under HIPAA could be significant and could have a material adverse impact on the Company's business or results of operations. However, the Company currently believes that, if it continues to properly implement changes to its operations to comply with these regulations, such costs will neither be significant nor have such a material adverse effect.

ITEM 3. 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 fixed income investments. The Company is 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, the Company is exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception may affect the value of financial instruments.

        We have several bond portfolios to fund reserves. The Company attempts to manage the interest rate risks related to its investment portfolios by actively managing the asset/liability duration of its investment portfolios. The overall goal for the investment portfolios is to provide a source of liquidity

41

and support the ongoing operations of the Company's business units. The Company's 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. The Company manages 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/covariance 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 percent for the 2002 computation of VAR. The computation further assumes that the distribution of returns is normal. Based on such methodology and assumptions, the computed VAR was approximately $5.9 million as of June 30, 2002.

        Our calculated value-at-risk exposure represents an estimate of reasonably possible net losses that could be recognized on its 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 the Company's investment portfolios during the year. The Company, however, believes that any loss incurred (other than loss due to issuer-specific credit risks) would be substantially offset by the effects of interest rate movements on the Company's liabilities, since these liabilities are affected by many of the same factors that affect asset performance; that is, economic activity, inflation and interest rates, as well as regional and industry factors.

        In addition to the market risk associated with its investments, the Company has some interest rate market risk due to its floating rate borrowings. Notes payable, capital leases and other floating rate and fixed rate financing arrangements totaled $519 million as of June 30, 2002 with a related average interest rate of 7.1% (which interest rate is subject to change because of the varying interest rates that apply to borrowings under the credit facilities). See a description of the credit facilities under "Liquidity and Capital Resources."

        The floating rate borrowings are presumed to have equal book and fair values because the interest rates paid on these accounts are based on prevailing market rates. The fair value of our fixed rate borrowing as of June 30, 2002 was approximately $442.5 million which was based on bid quotations from third party data providers. The following table presents the expected cash outflows relating to

42

market risk sensitive debt obligations consistent with the terms of the debt expected to be outstanding for the remainder of 2002 and thereafter.

		2002		2003		2004		2005		2006		Thereafter		Total
Long-term floating rate borrowings:
	Principal	$	—	$	—	$	—	$	—	$	120.0	$	—	$	120.0
	Interest		6.3		3.3		3.3		3.3		1.7		—		17.9
Cash outflow on long-term floating rate borrowings		$	6.3	$	3.3	$	3.3	$	3.3	$	121.7	$	—	$	137.9
Fixed-rate borrowings:
	Principal	$	—	$	—	$	—	$	—	$	—	$	400.0	$	400.0
	Interest		33.5		33.5		33.5		33.5		33.5		150.8		318.3
Cash outflow on fixed-rate borrowings		$	33.5	$	33.5	$	33.5	$	33.5	$	33.5	$	550.8	$	718.3
	Total cash outflow on all borrowings	$	39.8	$	36.8	$	36.8	$	36.8	$	155.2	$	550.8	$	856.2

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SUPERIOR NATIONAL INSURANCE GROUP, INC.

        We and our former wholly-owned subsidiary, Foundation Health Corporation ("FHC"), which merged into Health Net, Inc. in January 2001, were named in an adversary proceeding, Superior National Insurance Group, Inc. v. Foundation Health Corporation, Foundation Health Systems, Inc. and Milliman & Robertson, Inc. ("M&R"), filed on April 28, 2000, in the United States Bankruptcy Court for the Central District of California, case number SV00-14099GM. The lawsuit relates to the 1998 sale of Business Insurance Group, Inc. ("BIG"), a holding company of workers' compensation companies operating primarily in California, by FHC to Superior National Insurance Group, Inc. ("Superior").

        On March 3, 2000, the California Department of Insurance seized BIG and Superior's other California insurance subsidiaries. On April 26, 2000, Superior filed for bankruptcy. Two days later, Superior filed its lawsuit against us, FHC and M&R. Superior alleges in the lawsuit that:

•

the BIG transaction was a fraudulent transfer under federal and California bankruptcy laws in that Superior did not receive reasonably equivalent value for the $285 million in consideration paid for BIG;



•

we, FHC and M&R defrauded Superior by making misstatements as to the adequacy of BIG's reserves;



•

Superior is entitled to rescind its purchase of BIG;



•

Superior is entitled to indemnification for losses it allegedly incurred in connection with the BIG transaction;



•

FHC breached the stock purchase agreement relating to the sale of BIG; and



•

we and FHC were guilty of California securities laws violations in connection with the sale of BIG.

        Superior seeks $300 million in compensatory damages, unspecified punitive damages and the costs of the action, including attorneys' fees.

        On August 1, 2000, a motion filed by us and FHC to remove the lawsuit from the jurisdiction of the Bankruptcy Court to the United States District Court for the Central District of California was granted. Pursuant to a June 12, 2002 intra-district transfer order, the lawsuit is now pending in the District Court under case number CV02-5155 PA. The parties are currently engaged in discovery.

        We intend to defend ourselves vigorously in this litigation. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

FPA MEDICAL MANAGEMENT, INC.

        Since May 1998, several complaints have been filed in federal and state courts seeking an unspecified amount of damages on behalf of an alleged class of persons who purchased shares of common stock, convertible subordinated debentures and options to purchase common stock of FPA Medical Management, Inc. ("FPA") at various times between February 3, 1997 and May 15, 1998. The complaints name as defendants FPA, certain of FPA's auditors, us and certain of our former officers. The complaints allege that we and such former officers violated federal and state securities laws by

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misrepresenting and failing to disclose certain information about a 1996 transaction between us and FPA, about FPA's business and about our 1997 sale of FPA common stock held by us. All claims against our former officers were voluntarily dismissed from the consolidated class actions in both federal and state court. In early 2000, we filed a motion to dismiss all claims asserted against us in the consolidated federal class actions but have not formally responded to the other complaints. That motion has been withdrawn without prejudice and the consolidated federal class actions have been stayed pending resolution of matters in a related case in which we are not a party. We intend to vigorously defend the actions. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

STATE OF CONNECTICUT V. PHYSICIANS HEALTH SERVICES, INC.

        Physicians Health Services, Inc. (PHS), a subsidiary of ours, was sued on December 14, 1999 in the United States District Court in Connecticut by the Attorney General of Connecticut, Richard Blumenthal, acting on behalf of a group of state residents. The lawsuit was premised on the Federal Employee Retirement Income Security Act ("ERISA") and alleged that PHS violated its duties under ERISA by managing its prescription drug formulary in a manner that served its own financial interest rather than those of plan beneficiaries. The suit sought to have PHS revamp its formulary system and to provide patients with written denial notices and instructions on how to appeal. PHS filed a motion to dismiss which asserted that the state residents the Attorney General purported to represent all received a prescription drug appropriate for their conditions and therefore suffered no injuries whatsoever, that his office lacked standing to bring the suit and that the allegations failed to state a claim under ERISA. On July 12, 2000, the court granted PHS' motion and dismissed the action. On March 27, 2002, the United States Court of Appeals for the Second Circuit affirmed the district court's dismissal of the action. On June 25, 2002, the plaintiff filed a petition requesting that the United States Supreme Court review the Second Circuit's decision to affirm dismissal of the case. We intend to vigorously defend the action. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

IN RE MANAGED CARE LITIGATION

        The Judicial Panel on Multidistrict Litigation ("JPML") has transferred various class action lawsuits against managed care companies, including us, to the United States District Court for the Southern District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. This proceeding is divided into two tracks, the subscriber track, which includes actions brought on behalf of health plan members, and the provider track, which includes suits brought on behalf of physicians.

Subscriber Track

        The subscriber track includes the following actions involving us: Pay v. Foundation Health Systems, Inc. (filed in the Southern District of Mississippi on November 22, 1999), Romero v. Foundation Health Systems, Inc. (filed in the Southern District of Florida on June 23, 2000 as an amendment to a suit filed in the Southern District of Mississippi), State of Connecticut v. Physicians Health Services of Connecticut, Inc. (filed in the District of Connecticut on September 7, 2000), and Albert v. CIGNA Healthcare of Connecticut, Inc., et al. (including Physicians Health Services of Connecticut, Inc. and

45

Foundation Health Systems, Inc.) (filed in the District of Connecticut on September 7, 2000). The Pay and Romero actions seek certification of nationwide class actions, unspecified damages and injunctive relief and allege that cost containment measures used by our health maintenance organizations, preferred provider organizations and point-of-service health plans violate provisions of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO") and ERISA. The Albert suit also alleges violations of ERISA and seeks certification of a nationwide class and unspecified damages and injunctive relief. The State of Connecticut action asserts claims against our subsidiary, Physicians Health Services of Connecticut, Inc., and us that are similar, if not identical, to those asserted in the previous lawsuit which, as discussed above, the United States Court of Appeals for the Second Circuit affirmed dismissal of on March 27, 2002.

        We filed a motion to dismiss the lead subscriber track case, Romero v. Foundation Health Systems, Inc., and on June 12, 2001, the court entered an order dismissing all claims in that suit brought against us with leave for the plaintiffs to re-file an amended complaint. On this same date, the court stayed discovery until after the court ruled upon motions to dismiss the amended complaints and any motions to compel arbitration. On June 29, 2001, the plaintiffs in Romero filed a third amended class action complaint which re-alleges causes of action under RICO, ERISA, common law civil conspiracy and common law unjust enrichment. The third amended class action complaint seeks unspecified compensatory and treble damages and equitable relief. On July 24, 2001, the court heard oral argument on class certification issues. On August 13, 2001, we filed a motion to dismiss the third amended complaint in Romero. On February 20, 2002, the court ruled on our motion to dismiss the third amended complaint in Romero. The court dismissed all claims against us except one ERISA claim. The court further ordered that plaintiffs may file amended complaints, but that no new plaintiffs or claims will be permitted without prior leave of the court. Both plaintiffs and defendants filed motions for reconsideration relating to various parts of the court's dismissal order, which motions were denied. On March 25, 2002, the district court amended its February 20, 2002 dismissal order to include the following statement: "This Order involves a controlling question of law, namely, whether a managed-care subscriber who has not actually been denied care can state a claim under RICO, about which there is substantial ground for difference of opinion and an immediate appeal may materially advance the ultimate termination of this litigation." On April 5, 2002, we joined in a petition to the United States Court of Appeals for the Eleventh Circuit for permission to appeal the question certified by the district court. On May 10, 2002, the Eleventh Circuit denied the petition. On June 26, 2002, the plaintiffs filed with the Court a notice that they will not file an amended complaint against the Company. Health Net filed its answer on July 26, 2002. On July 29, 2002, the Court ordered that the stay of discovery is lifted effective September 30, 2002.

Provider Track

        The provider track includes the following actions involving us: Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on August 17, 2000 as an amendment to a suit filed in the Southern District of Mississippi), California Medical Association v. Blue Cross of California, Inc., PacifiCare Health Systems, Inc., PacifiCare Operations, Inc. and Foundation Health Systems, Inc. (filed in the Northern District of California in May 2000), Klay v. Prudential Ins. Co. of America, et al. (including Foundation Health Systems, Inc.) (filed in the Southern District of Florida on February 22, 2001 as an amendment to a case filed in the Northern District of California), Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), Lynch v. Physicians Health Services of Connecticut, Inc. (filed in Connecticut state court on February 14, 2001), Sutter v. Health Net of the Northeast, Inc. (D. N.J.) (filed in New Jersey state court on April 26, 2002), and Medical Society of New Jersey v. Health Net, Inc., et al., (D. N.J.) (filed in New Jersey state court on May 8, 2002).

        On August 17, 2000, a complaint was filed in the United States District Court for the Southern District of Florida in Shane, the lead provider track action in MDL 1334. The complaint seeks

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certification of a nationwide class action on behalf of physicians and alleges that the defendant managed care companies' methods of reimbursing physicians violate provisions of RICO, ERISA, certain federal regulations and various state laws. The action seeks unspecified damages and injunctive relief.

        On September 22, 2000, we filed a motion to dismiss, or in the alternative to compel arbitration, in Shane. On December 11, 2000, the court granted in part and denied in part our motion to compel arbitration. Under the court's December arbitration order, plaintiff Dennis Breen, the single named plaintiff to allege a direct contractual relationship with us in the August complaint, was compelled to arbitrate his direct claims against us. We filed an appeal in the United States Court of Appeals for the 11th Circuit seeking to overturn the portion of the district court's December ruling that did not order certain claims to arbitration. On April 26, 2001, the court modified its December arbitration order and is now retaining jurisdiction over certain direct claims of plaintiff Breen relating to a single contract. On March 2, 2001, the District Court for the Southern District of Florida issued an order in Shane granting the dismissal of certain claims with prejudice and the dismissal of certain other claims without prejudice, and denying the dismissal of certain claims.

        On March 26, 2001, a consolidated amended complaint was filed in Shane against managed care companies, including us. This consolidated complaint adds new plaintiffs, including Leonard Klay and the California Medical Association (who, as set forth below, had previously filed claims against the Company), and has, in addition to revising the pleadings of the original claims, added a claim under the California Business and Professions Code. On May 1, 2001, we filed a motion to compel arbitration in Shane of the claims of all individual plaintiffs that allege to have treated persons insured by us. On that same date, we filed a motion to dismiss this action. Preliminary discovery and briefing regarding the plaintiffs' motion for class certification has taken place. On May 7, 2001, the court heard oral argument on class certification issues in Shane. On May 9, 2001, the court entered a scheduling order permitting further discovery. On May 14, 2001, Health Net joined in a motion for stay of proceedings in Shane v. Humana, Inc., et al. (including Foundation Health Systems, Inc.) (00-1334-MD) in the United States District Court for the Southern District of Florida pending appeal in the 11th Circuit Court of Appeals. On June 17, 2001, the district court stayed discovery until after the district court ruled upon motions to dismiss and motions to compel arbitration. This order staying discovery also applied to other actions transferred to the district court by the Judicial Panel on Multidistrict Litigation, namely California Medical Association v. Blue Cross of California, Inc. et al., Klay v. Prudential Ins. Co. of America, et al., Connecticut State Medical Society v. Physicians Health Services of Connecticut, Inc., and Lynch v. Physicians Health Services of Connecticut, Inc. On June 25, 2001, the 11th Circuit Court of Appeals entered an order staying proceedings in the district court pending resolution of the appeals relating to the district court's ruling on motions to compel arbitration. On March 14, 2002, the 11th Circuit affirmed the district court's ruling on motions to compel arbitration. On March 25, 2002, the plaintiffs filed with the Eleventh Circuit a motion for relief from the stay. We joined in an opposition to plaintiff's motion and joined a petition for rehearing of the arbitration issues before the entire Eleventh Circuit panel. On June 21, 2001, the Eleventh Circuit denied the petition for rehearing. On July 12, 2002, the plaintiffs filed a motion requesting leave to amend their complaint. On July 29, 2002, the Court ordered that the stay of discovery is lifted effective September 30, 2002.

        The CMA action alleges violations of RICO, certain federal regulations and the California Business and Professions Code and seeks declaratory and injunctive relief, as well as costs and attorneys' fees. As set forth above, on March 26, 2001, the California Medical Association was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The Klay suit is a purported class action allegedly brought on behalf of individual physicians in California who provided health care services to members of the defendants' health plans. The complaint alleges violations of RICO, ERISA, certain federal regulations, the California Business and Professions Code and certain state common law doctrines, and seeks declaratory and injunctive relief,

47

and damages. As set forth above, on March 26, 2001, Leonard Klay was named as an additional plaintiff in the consolidated amended complaint filed in the Shane action.

        The CSMS case was originally brought in Connecticut state court against Physicians Health Services of Connecticut, Inc. ("PHS-CT") alleging violations of the Connecticut Unfair Trade Practices Act. The complaint alleges that PHS-CT engaged in conduct that was designed to delay, deny, impede and reduce lawful reimbursement to physicians who rendered medically necessary health care services to PHS-CT health plan members. The complaint, which is similar to others filed against us and other managed care companies, seeks declaratory and injunctive relief. On March 13, 2001, the Company removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the federal District Court of Connecticut consolidated this action and Lynch v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        The Lynch case was also originally filed in Connecticut state court. This case was purportedly brought on behalf of physician members of the Connecticut State Medical Society who provide health care services to PHS-CT health plan members pursuant to provider service contracts. The complaint alleges that PHS-CT engaged in improper, unfair and deceptive practices by denying, impeding and/or delaying lawful reimbursement to physicians. The complaint, similar to the complaint referred to above filed against PHS-CT on the same day by the Connecticut State Medical Society, seeks declaratory and injunctive relief and damages. On March 13, 2001, we removed this action to federal court. Before this case was transferred to MDL 1334, the plaintiffs moved to remand the action to state court and the federal District Court of Connecticut consolidated this action and CSMS v. Physicians Health Services of Connecticut, Inc., along with similar actions against Aetna, CIGNA and Anthem, into one case entitled CSMS v. Aetna Health Plans of Southern New England, et al. PHS-CT has not yet responded to the complaint.

        On April 26, 2002, plaintiff John Ivan Sutter, M.D., P.A. filed an amended complaint in New Jersey state court joining Health Net of the Northeast, Inc. ("Health Net of the Northeast"), a subsidiary of ours, in an action originally brought against Horizon Blue Cross Blue Shield of New Jersey, Inc., CIGNA Healthcare of New Jersey, Inc. and CIGNA Corp (collectively known as "CIGNA"), United Healthcare of New Jersey, Inc. and United Healthcare Insurance Company and Oxford Health Plans, Inc. The complaint seeks certification of a statewide class of healthcare providers who render or have rendered services to patients who are members of healthcare plans sponsored by the defendants.

        Plaintiff alleges that the defendants engage in unfair and deceptive acts and practices which are designed to delay, deny, impede and reduce compensation to physicians. The complaint seeks unspecified damages and sets forth causes of action for breach of contract, breach of the implied duty of good faith and fair dealing, violations of the New Jersey Prompt Payment Act and the Healthcare Information Networks and Technologies Act (the "HINT Act"), reformation, violations of the New Jersey Consumer Fraud Act, unjust enrichment and conversion. On May 22, 2002, the New Jersey state court severed the action filed by Dr. Sutter into five separate cases, including an action against Health Net of the Northeast only. On May 24, 2002, Health Net of the Northeast removed the case against it to federal court. That same day, the CIGNA entities removed plaintiff Sutter's action against them to federal court and the United Healthcare entities removed plaintiff Sutter's action against them to federal court. Plaintiff moved to remand all of these cases to state court and the defendants moved to stay the cases pending ruling by the JPML as to whether these cases should be transferred to MDL 1334 for coordinated or consolidated pretrial proceedings. On July 9, 2002, the federal district court denied plaintiff's motion to remand without prejudice, consolidated the cases against Health Net of the Northeast, the CIGNA entities, and the United Healthcare entities into one case for pretrial proceedings, and stayed the case pending the JPML's ruling on transfer to MDL 1334. On July 18,

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2002, the JPML transferred this action to MDL 1334 for coordinated or consolidated pretrial proceedings.

        On May 8, 2002, the Medical Society of New Jersey filed a complaint in New Jersey state court against us and our subsidiaries Health Net of the Northeast, Inc., First Option Health Plan of New Jersey, Inc., and Health Net of New Jersey, Inc. (the "Health Net defendants"). Plaintiff brought this action on its own behalf and purportedly on behalf of its physician members and alleges that the Health Net defendants engage in practices which are designed to delay, deny, impede and reduce compensation to physicians. Plaintiff has requested declaratory and injunctive relief and has set forth causes of action for violation of public policy, violations of the New Jersey Consumer Fraud Act, violations of the HINT Act and tortious interference with prospective economic relations. On June 14, 2002 the Health Net defendants removed this case to federal court. On July 3, 2002, the Health Net defendants filed a motion to stay this action pending ruling by JPML on whether to transfer this case to MDL 1334. On July 15, 2002, plaintiff filed a motion to remand this case to state court. On August 2, 2002, the JPML transferred this case to MDL 1334 for coordinated or consolidated pretrial proceedings.

        We intend to defend ourselves vigorously in this litigation. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

MISCELLANEOUS PROCEEDINGS

        We and certain of our subsidiaries are also parties to various other legal proceedings, many of which involve claims for coverage encountered in the ordinary course of our business. While the final outcome of these proceedings can not be determined at this time, based on information presently available we believe that the final outcome of such proceedings will not have a material adverse effect upon our results of operations or financial condition. However, our belief regarding the likely outcome of such proceedings could change in the future and an unfavorable outcome could have a material adverse effect upon our results of operations or financial condition.

ITEM 2. CHANGES IN SECURITIES

        On May 2, 2002, we announced that our board of directors has authorized us to repurchase up to $250 million of our Class A Common Stock. Share repurchases will be made under this repurchase program from time to time through open market purchases or through privately negotiated transactions. We plan to use cash flows from operations to fund any share repurchases. We repurchased one million shares at an average price of $28.37 per share during second quarter ended June 30, 2002 pursuant to this program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

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

        On May 23, 2002, we held our 2002 Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, our stockholders voted upon proposals to (i) elect ten directors, each to serve a one-year term (Proposal 1), (ii) ratify the selection of Deloitte & Touche LLP as our independent public accountants for the year ending December 31, 2002 (Proposal 2); and (iii) adopt the Health Net, Inc. 2002 Stock Option Plan (Proposal 3). The following provides voting information for all

49

matters voted upon at the Annual Meeting, and includes a separate tabulation with respect to each nominee for director:

Proposal 1

Election of Directors	Votes For	Votes Against	Votes Withheld	Broker Non-Votes
J. Thomas Bouchard	113,919,071	0	3,008,557	0
Gov. George Deukmejian	113,905,513	0	3,022,115	0
Thomas T. Farley	113,914,630	0	3,012,998	0
Gale S. Fitzgerald	116,070,787	0	856,841	0
Patrick Foley	116,092,043	0	835,585	0
Jay M. Gellert	116,065,703	0	861,925	0
Roger F. Greaves	115,813,448	0	1,114,180	0
Richard W. Hanselman	116,087,537	0	840,091	0
Richard J. Stegemeier	113,894,864	0	3,032,764	0
Bruce G. Willison	113,900,087	0	3,027,541	0

        Since each of the nominees received the affirmative vote of a majority of the votes cast, each of the nominees was elected as a director for an additional term at the Annual Meeting.

Proposal 2

        With respect to the ratification of the selection of Deloitte & Touche LLP as our independent public accountants for the year ending December 31, 2002, 109,663,004 votes were cast in favor, 7,236,151 votes were cast against and 28,473 votes were withheld for such proposal. There were no broker non-votes for this proposal. Since this proposal received the affirmative vote of a majority of the votes cast on this proposal, the selection of Deloitte & Touche LLP as our independent public accountants for the year ending December 31, 2002 was ratified.

Proposal 3

        With respect to the adoption of the Health Net, Inc. 2002 Stock Option Plan, 87,851,271 votes were cast in favor, 28,961,532 votes were cast against and 114,825 votes were withheld for such proposal. There were no broker non-votes for this proposal. Since this proposal received the affirmative vote of a majority of the votes cast on this proposal, the Health Net, Inc. 2002 Stock Option Plan was adopted.

ITEM 5. OTHER INFORMATION

RECENT DEVELOPMENTS

FLORIDA OPERATIONS

        Effective August 1, 2001, we sold our Florida health plan, known as Foundation Health, a Florida Health Plan, Inc. (the "Florida Plan"), to Florida Health Plan Holdings II, L.L.C. In connection with the sale, we received approximately $49 million which consisted of $23 million in cash and approximately $26 million in a secured six-year note bearing eight percent interest per annum. We also sold the corporate facility building used by the Florida Plan to DGE Properties, LLC for $15 million, payable by a secured five-year note bearing eight percent interest per annum. We estimated and recorded a $76.1 million pretax loss on the sales of our Florida Plan and the related corporate facility building during the second quarter ended June 30, 2001.

        Under the Stock Purchase Agreement that evidenced the sale (as amended, the "SPA"), we, through our subsidiary FH Assurance Company ("FHAC"), entered into a reinsurance agreement (the "Reinsurance Agreement") with the Florida Plan. Under the terms of the Reinsurance Agreement,

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FHAC will reimburse the Florida Plan for certain medical and hospital expenses arising after the sale. The Reinsurance Agreement will cover claims arising from all commercial and governmental health care contracts or other agreements in force as of July 31, 2001 and any renewals thereof up to 18 months after July 31, 2001. The Reinsurance Agreement provides that the Florida Plan will be reimbursed for medical and hospital expenses relative to covered claims in excess of certain baseline medical loss ratios, as follows:

•

88% for the six-month period commencing on August 1, 2001;



•

89% for the six-month period commencing on February 1, 2002;



•

90% for the six-month period commencing on August 1, 2002.

        The Reinsurance Agreement is limited to $28 million in aggregate payments and is subject to the following levels of coinsurance:

•

5% for the six-month period commencing on August 1, 2001;



•

10% for the six-month period commencing on February 1, 2002;



•

15% for the six-month period commencing on August 1, 2002.

        If the baseline medical loss ratio is less than 90% at the end of the six-month period commencing on August 1, 2002, Health Net is entitled to recover medical and hospital expenses below the 90% threshold up to an amount to not exceed 1% of the total premiums for those members still covered during the six-month period under the Reinsurance Agreement.

        The maximum liability under the Reinsurance Agreement of $28 million was reported as part of loss on assets held for sale as of June 30, 2001, since this was our best estimate of our probable obligation under this arrangement. As the reinsured claims are submitted to FHAC, the liability is reduced by the amount of claims paid.

        The indemnification obligation is for all pending and threatened litigation as of the closing date and certain specific provider contract interpretation or settlement disputes. At this time, we are unable to quantify an estimated liability related to the indemnified obligations due to the status and uncertainty of any pending or threatened litigation and the specific provider contract disputes.

        The SPA provides for the following three true-up adjustments that could result in an adjustment to the loss on the sale of the Florida Plan:

•

A retrospective post-closing settlement of statutory equity based on subsequent adjustments to the closing balance sheet for the Florida Plan.



•

A settlement of unpaid provider claims as of the closing date based on claim payments occurring during a one-year period after the closing date.



•

A settlement of the reinsured claims in excess of certain baseline medical loss ratios. Final Settlement is not scheduled to occur until the latter part of 2003. The development of claims and claims related metrics and information provided by Florida Health Plan Holdings II, L.L.C. have not resulted in any revisions to the maximum $28 million liability we originally estimated.

        As of June 30, 2002, we did not have sufficient additional information for the true-up adjustments to estimate any adjustment to the loss on the sale of the Florida Plan.

INVESTMENT IN AMCARECO, INC.

        In 1999, we sold our HMO operations in the states of Louisiana, Oklahoma and Texas to AmCareco, Inc. ("AmCareco"). As part of the transaction, we received shares of AmCareco convertible preferred stock with an aggregate par value of $10.7 million and established an allowance of

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$4.2 million based on the estimated net realizable value. During 2000, we made additional investments in AmCareco and received subordinated notes totaling $2.6 million. As of June 30, 2002, the net carrying value of our investment in AmCareco was $9.1 million and is included in other noncurrent assets on the accompanying condensed consolidated balance sheets. In July 2002, we exercised our rights to draw upon a $2 million letter of credit that was established by AmCareco to secure the redemption of a portion of our preferred stock of AmCareco. In August 2002, we became aware that the Oklahoma State Health Commissioner will consider whether to continue AmCareco's license in Oklahoma to operate an HMO at a hearing to be held on August 20, 2002 due to AmCareco's alleged violations of Oklahoma's prompt-pay law and AmCareco's failure to maintain the minimum net worth requirement to operate an HMO in that state. The Oklahoma Department of Health has advised the Commissioner not to continue the HMO's license. We also have been advised by AmCareco that there may be regulatory activity of a similar nature relating to AmCareco's HMOs operating in Texas and Louisiana. However, various capital raising activities and initiatives are being pursued by AmCareco to address its statutory capital needs.

        We will continue to monitor the outcome of these developments and consider the impact on the recoverability of our net investment of $7.1 million in AmCareco.

EOS CLAIMS SERVICES, INC.

        Effective July 1, 2002, we sold our claims processing subsidiary, EOS Claims Services, Inc. ("EOS Claims"), to Tristar Insurance Group, Inc. ("Tristar"). In connection with the sale, we received $500,000 in cash, and also entered into a Payor Services Agreement. Under the Payor Services Agreement, Tristar has agreed to exclusively use EOS Managed Care Services, Inc. (one of our remaining subsidiaries) for various managed care services to it customers and clients.

        We estimated and recorded a $2.6 million pretax loss on the sale of EOS Claims during the second quarter ended June 30, 2002. As of the date of sale, EOS Claims had no net equity after dividends to its parent company and the goodwill impairment charge taken in the first quarter ended March 31, 2002. EOS Claims was reported as part of our Government Contracts/Specialty Services reportable segment.

CREDIT AGREEMENTS.

        We have two credit facilities with Bank of America, N.A., as administrative agent, each governed by a separate credit agreement dated as of June 28, 2001. The credit facilities, providing for an aggregate of $700 million in borrowings, consist of:

•

a $175 million 364-day revolving credit facility; and



•

a $525 million five-year revolving credit and competitive advance facility.

        We established the credit facilities to refinance our then-existing credit facility and to finance any lawful general corporate purposes, including acquisitions and working capital. The credit facilities allow us to borrow funds:

•

by obtaining committed loans from the group of lenders as a whole on a pro rata basis;



•

by obtaining under the five-year facility loans from individual lenders within the group by way of a bidding process; and



•

by obtaining under the five-year facility letters of credit in an aggregate amount of up to $200 million.

        The credit agreement for the 364-day revolving credit facility was amended on June 27, 2002 to extend the term of this facility for an additional 364 days. A copy of the amendment is filed as an exhibit to this Form 10-Q.

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        Repayment.    The 364-day credit facility expires on June 26, 2003. We must repay all borrowings under the 364-day credit facility by June 27, 2005. The five-year credit facility expires on June 28, 2006, and we must repay all borrowings under the five-year credit facility by June 28, 2006, unless the five-year credit facility is extended. The five-year credit facility may, at our request and subject to approval by lenders holding two-thirds of the aggregate amount of the commitments under the five-year credit facility, be extended for up to two twelve-month periods to the extent of the commitments made under the five-year credit facility by such approving lenders.

        Covenants.    The credit agreements contain negative covenants, including financial covenants, that impose restrictions on our operations. The financial covenants in the credit agreements provide that:

•

for any period of four consecutive fiscal quarters, the consolidated leverage ratio, which is the ratio of (i) our consolidated funded debt to (ii) our consolidated net income before interest, taxes, depreciation, amortization and other specified items (consolidated EBITDA), must not exceed 3 to 1;



•

for any period of four consecutive fiscal quarters, the consolidated fixed charge coverage ratio, which is the ratio of (i) our consolidated EBITDA plus consolidated rental expense minus consolidated capital expenditures to (ii) our consolidated scheduled debt payments (defined as the sum of scheduled principal payments, interest expense and rent expense) must be at least 1.5 to 1; and



•

we must maintain our consolidated net worth at a level equal to at least $945 million (less the sum of a pretax charge associated with our sale of our Florida health plan and specified pretax charges relating to the write-off of goodwill) plus 50% of our consolidated net income and 100% of our net cash proceeds from equity issuances.

        The other covenants in the credit agreements include, among other things, limitations on incurrence of indebtedness by our subsidiaries and on our ability to

•

incur liens;



•

extend credit and make investments;



•

merge, consolidate, dispose of stock in subsidiaries, lease or otherwise dispose of assets and liquidate or dissolve;



•

engage in transactions with affiliates;



•

substantially alter the character or conduct of the business of Health Net, Inc. or any of its "significant subsidiaries" within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC;



•

make restricted payments, including dividends and other distributions on capital stock and redemptions of capital stock; and



•

become subject to other agreements or arrangements that restrict (i) the payment of dividends by any Health Net, Inc. subsidiary, (ii) the ability of Health Net, Inc. subsidiaries to make or repay loans or advances to us, (iii) the ability of any subsidiary of Health Net, Inc. to guarantee our indebtedness or (iv) the creation of any lien on our property.

        Interest and fees.    Committed loans under the credit facilities bear interest at a rate equal to either (1) the greater of the federal funds rate plus 0.5% and the applicable prime rate or (2) LIBOR plus a margin that depends on our senior unsecured credit rating. Loans obtained through the bidding process bear interest at a rate determined in the bidding process. We pay fees on outstanding letters of credit and a facility fee, computed as a percentage of the lenders' commitments under the credit facilities, which varies from 0.130% to 0.320% per annum for the 364-day credit facility and from 0.155% to 0.375% per annum for the five-year credit facility, depending on our senior unsecured credit rating.

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        Events of Default.    The credit agreements provide for acceleration of repayment of indebtedness under the credit facilities upon the occurrence of customary events of default.

CHANGE IN EXECUTIVE OFFICERS.

        Effective April 15, 2002, Gary S. Velasquez resigned as President of Business Transformation & Innovation Services Division of the Company, and effective April 30, 2002, Cora Tellez resigned as President of Health Plans Division of the Company. Effective May 23, 2002, each of the following individuals became executive officers of the Company in the capacities indicated: Jeffrey M. Folick as Executive Vice President of Regional Health Plans and Specialty Companies, Christopher Wing as Executive Vice President of Regional Health Plans and Specialty Companies and James Woys as President of Health Net Federal Services.

ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES.

        As part of our effort to reduce ongoing selling, general and administrative expenses, during the third quarter of 2001, we initiated a formal plan to reduce operating and administrative expenses for all of our business units (the "2001 Plan"). Under the 2001 Plan, we decided on enterprise-wide staff reductions and consolidations of certain administrative, financial and technology functions. We recorded pretax restructuring charges of $79.7 million in connection with the 2001 Plan during the third quarter ended September 30, 2001 (the "2001 Charge").

        The 2001 Charge included severance and benefits related costs of $43.3 million in connection with the enterprise-wide staff reductions. These reductions include the elimination of 1,517 positions throughout all of our functional groups, divisions and corporate offices within the Company.

        The 2001 Charge also included asset impairment charges of $27.9 million consisting entirely of non-cash write downs of equipment, building improvements and software application and development costs; charges of $5.1 million related to the termination of lease obligations and non-cancelable lease costs for excess office space resulting from streamlined operations and consolidation efforts; and charges of $3.4 million related to costs associated with consolidating certain information technology systems and functions and other activities. No changes to the 2001 Plan are expected.

        We plan on funding the expected future cash outlays of $13.3 million with cash flows from operations. As of June 30, 2002, we paid $36.2 million, of which $15.0 million was paid in the second quarter ended June 30, 2002. We expect the 2001 Plan to be completed by September 30, 2002. As of June 30, 2002, 1,264 of the 1,517 positions have been eliminated. We anticipate that the elimination of the remaining positions associated with the 2001 Charge will also be completed by September 30, 2002.

SHARE REPURCHASE PROGRAM.

        On May 2, 2002, we announced that our board of directors has authorized us to repurchase up to $250 million of our Class A Common Stock. As of June 30, 2002, we had repurchased an aggregate of one million shares of our Class A Common Stock under this repurchase program for aggregate consideration of approximately $28.4 million. Share repurchases will be made under this repurchase program from time to time through open market purchases or through privately negotiated transactions.

POTENTIAL DIVESTITURES.

        We continue to evaluate the profitability realized or likely to be realized by our existing businesses and operations. We are reviewing from a strategic standpoint which of such businesses or operations, if any, should be divested.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A)

EXHIBITS

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

2.1	Agreement and Plan of Merger, dated October 1, 1996, by and among Health Systems International, Inc., FH Acquisition Corp. and Foundation Health Corporation (filed as Exhibit 2.5 to the Company's Registration Statement on Form S-4 (File No. 333-19273) on January 6, 1997 and incorporated herein by reference).
3.1	Fifth Amended and Restated Certificate of Incorporation of Health Net, Inc.(filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
3.2	Eighth 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, 2002 (File No. 1-12718) and incorporated herein by reference).
†4.1	Form of Class A Common Stock Certificate, a copy of which is filed herewith.
4.2	Rights Agreement dated as of June 1, 1996 by and between Heath Systems International, Inc. and Harris Trust and Savings Bank, as Rights Agent (filed as Exhibit 99.1 to the Company's Registration Statement on Form 8-A (File No. 1-12718) on July 16, 1996 and incorporated herein by reference).
4.3	Amendment, dated as of October 1, 1996, to the Rights Agreement, by and between Health Systems International, Inc. and Harris Trust and Savings Bank (filed as Exhibit 2 to the Company's Registration Statement on Form 8-A/A (Amendment No. 1)(File No. 1-12718) on May 9, 2001 and incorporated herein by reference).
4.4	Second Amendment to Rights Agreement, dated as of May 3, 2001, by and among Health Net, Inc., Harris Trust and Savings Bank and Computershare Investor Services, L.L.C. (filed as Exhibit 3 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2) (File No. 1-12718) on May 9, 2001 and incorporated herein by reference).
10.1	Employment Letter Agreement between Foundation Health Systems, Inc. and Karin D. Mayhew dated January 22, 1999 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-12718) and incorporated herein by reference).
10.2	Letter Agreement dated June 25, 1998 between B. Curtis Westen and Foundation Heath Systems, Inc. (filed as Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-12718) and incorporated herein by reference).
10.3	Employment Letter Agreement dated July 3, 1996 between Jay M. Gellert and Health Systems International, Inc. (filed as Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (File No. 1-12718) and incorporated herein by reference).
10.4	Amended Letter Agreement between Foundation Health Systems, Inc. and Jay M. Gellert dated as of August 22, 1997 (filed as Exhibit 10.69 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12718) and incorporated herein by reference).
10.5	Letter Agreement between Foundation Health Systems, Inc. and Jay M. Gellert dated as of March 2, 2000 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-12718) and incorporated herein by reference).

55

10.6	Employment Letter Agreement between Managed Health Network and Jeffrey J. Bairstow dated as of January 29, 1998 (filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 1-12718) and incorporated herein by reference).
10.7	Employment Letter Agreement between Foundation Health Systems, Inc. and Steven P. Erwin dated March 11, 1998 (filed as Exhibit 10.72 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12718) and incorporated herein by reference).
10.8	Employment Letter Agreement between Foundation Health Corporation and Gary S. Velasquez dated May 1, 1996 (filed as Exhibit 10.13 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).
10.9	Employment Letter Agreement between Foundation Health Systems, Inc. and Cora Tellez dated November 16, 1998 (filed as Exhibit 10.16 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).
10.10	Employment Letter Agreement between Health Net, Inc. and Timothy J. Moore, M.D. dated March 12, 2001 (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-12718) and incorporated herein by reference).
10.11	Employment Letter Agreement between Health Net, Inc. and Marvin P. Rich dated January 25, 2002 (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-12718) and incorporated herein by reference).
10.12	Separation, Waiver and Release Agreement between Health Net, Inc. and Steven P. Erwin dated March 15, 2002 (filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-12718), and incorporated herein by reference).
10.13	Separation, Waiver and Release Agreement between Health Net, Inc. and Gary Velasquez dated April 15, 2002 (filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-12718) and incorporated herein by reference).
10.14	Separation, Waiver and Release Agreement between Health Net, Inc. and Cora Tellez dated April 30, 2002 (filed as Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-12718) and incorporated herein by reference).
†10.15	Employment Letter Agreement between Health Net, Inc. and Christopher P. Wing dated March 8, 2002, a copy of which is filed herewith.
†10.16	Employment Letter Agreement between Health Net, Inc. and Jeffrey M. Folick dated March 22, 2002, a copy of which is filed herewith.
10.17	Form of Severance Payment Agreement dated December 4, 1998 by and between Foundation Health Systems, Inc. and various of its executive officers (filed as Exhibit 10.21 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).

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10.18	Form of Agreement amending Severance Payment Agreement by and between Health Net, Inc. and various of its executive officers (filed as Exhibit 10.11 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).
10.19	Foundation Health Systems, Inc. Deferred Compensation Plan (filed as Exhibit 10.66 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).
10.20	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).
10.21	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).
10.22	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).
10.23	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).
10.24	Amendment to Amended and Restated 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).
†10.25	Second Amendment to Amended and Restated 1997 Stock Option Plan, a copy of which is filed herewith.
10.26	Foundation Health Systems, Inc. 1998 Stock Option Plan (as amended and restated on May 4, 2000) (filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-12718) and incorporated herein by reference).
10.27	Amendments to Amended and Restated 1998 Stock Option Plan (filed as Exhibit 10.19 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).
†10.28	Second Amendment to Amended and Restated 1998 Stock Option Plan, a copy of which is filed herewith.
†10.29	Health Net, Inc. 2002 Stock Option Plan, a copy of which is filed herewith.
10.30	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).
10.31	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).
10.32	Health Net, Inc. Employee Stock Purchase Plan, as amended and restated as of January 1, 2002 (filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 1-12718) and incorporated herein by reference.

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10.33	Foundation Health Systems, Inc. Executive Officer Incentive Plan (filed as Annex A to the Company's definitive proxy statement on March 31, 2000 (File No. 1-12718) and incorporated herein by reference).
10.34	Health Net, Inc. 401(k) Savings Plan (filed as Exhibit 10.24 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).
10.35	Foundation Health Systems, Inc. Supplemental Executive Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.65 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).
10.36	Managed Health Network, Inc. Incentive Stock Option Plan (filed as Exhibit 4.8 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
10.37	Managed Health Network, Inc. Amended and Restated 1991 Stock Option Plan (filed as Exhibit 4.9 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
10.38	1990 Stock Option Plan of Foundation Health Corporation (as amended and restated effective April 20, 1994) (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 (File No. 333-24621) on April 4, 1997 and incorporated herein by reference).
10.39	Foundation Health Corporation Directors Retirement Plan (filed as Exhibit 10.96 to Foundation Health Corporation's Annual Report on Form 10-K for the year ended June 30, 1994 (File No. 1-10540) and incorporated herein by reference).
10.40	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).
10.41	Foundation Health Corporation Supplemental Executive Retirement Plan (as Amended and Restated effective April 25, 1995) (filed as Exhibit 10.100 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).
10.42	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).
10.43	Five-Year Credit Agreement dated as of June 28, 2001 among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender (filed as Exhibit 10.34 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
10.44	364-Day Credit Agreement dated as of June 28, 2001 among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.35 to the Company's Registration Statement on Form S-4 (File No. 333-67258) on August 10, 2001 and incorporated herein by reference).
†10.45	First Amendment to 364-Day Credit Agreement dated as of June 27, 2002 among the Company, the lenders party thereto and Bank of America, N.A. as Administrative Agent, a copy of which is filed herewith.

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10.46	First Amendment to Office Lease, dated May 14, 2001, 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, 2002 (File No. 1-12718) and incorporated herein by reference).
10.47	Lease Agreement between HAS-First Associates and Foundation Health Corporation dated August 1, 1998 and form of amendment thereto (filed as Exhibit 10.20 to Foundation Health Corporation's Registration Statement on Form S-1 (File No. 33-34963) on May 17, 1990 and incorporated herein by reference).
10.48	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).
10.49	Purchase Agreement dated as of April 9, 2001, by and among the Company, JP Morgan, a division of Chase Securities Inc., Banc of America Securities LLC, Fleet Securities, Inc., Mizuho International plc, Salomon Smith Barney Inc. and Scotia Capital (USA) Inc. (filed as Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-12718) and incorporated herein by reference).
10.50	Stock Purchase Agreement dated January 19, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.51	Amendment to Stock Purchase Agreement dated February 2, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.52	Second Amendment to Stock Purchase Agreement dated February 8, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.53	Third Amendment to Stock Purchase Agreement dated February 16, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.54	Fourth Amendment to Stock Purchase Agreement dated February 28, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.55	Fifth Amendment to Stock Purchase Agreement dated May 1, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.6 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
10.56	Sixth Amendment to Stock Purchase Agreement dated June 4, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.7 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).

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10.57	Seventh Amendment to Stock Purchase Agreement dated June 29, 2001 by and between Health Net, Inc. and Florida Health Plan Holdings II, L.L.C. (filed as Exhibit 10.8 to the Company's Current Report on Form 8-K dated August 1, 2001 (File No. 1-12718) and incorporated herein by reference).
11.1	Statement relative to computation of per share earnings of the Company (included in Note 3 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).
†12.1	Statement relative to computation of ratio of earnings to fixed charges — consolidated basis, a copy of which is filed herewith.
†99.1	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.

†

A copy of the exhibit is being filed with this Quarterly Report on Form 10-Q.

(b)

REPORTS ON FORM 8-K

        No Current Reports on Form 8-K were filed by the Company during the second quarter ended June 30, 2002.

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SIGNATURES

        Pursuant to the requirements of the Securities 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. (REGISTRANT)
Date: August 14, 2002	By:	/s/  JAY M. GELLERT Jay M. Gellert President and Chief Executive Officer (Principal Executive Officer)
Date: August 14, 2002	By:	/s/  MARVIN P. RICH Marvin P. Rich Executive Vice President, Finance and Operations (Principal Accounting and Financial Officer)

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HEALTH NET, INC. INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEALTH NET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited)
HEALTH NET, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited)
HEALTH NET, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited)
HEALTH NET, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

EX-4.1

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Exhibit 4.1

	CLASS A COMMON STOCK		CLASS A COMMON STOCK
NUMBER	$.001 PAR VALUE		$.001 PAR VALUE	SHARES
HN
	INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
		[PICTURE]	SEE REVERSE FOR CERTAIN DEFINITIONS
			CUSIP 42222G 10 8
			THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF CHICAGO OR NEW YORK
	Health Net, Inc.
	This Certifies that
	Is the record holder of
	FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK, OF
	Health Net, Inc. hereunder designated "the Corporation" transferable on the share register of the Corporation upon surrender of the Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
[SEAL]	Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
	Dated:
		COUNTERSIGNED AND REGISTERED:
COMPUTERSHARE INVESTOR SERVICES, LLC
			TRANSFER AGENT AND REGISTRAR.
			By
	SECRETARY	PRESIDENT	AUTHORIZED SIGNATURE

        The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation.

        KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.

The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	—	as tenants in common	UNIF GIFT MIN ACT	—		Custodian
TEN ENT	—	as tenants by the entireties			(Cust)		(Minor)
JT TEN	—	as joint tenants with right of survivorship and not as tenants in common			under Uniform Gifts to Minors Act      (State)
			UNIF TRF MIN ACT	—		Custodian (until age             )
					(Cust)		(Minor)
					under Uniform Transfers to Minors Act      (State)

Additional abbreviations may also be used though not in the above list

        For Value Received,                                                                                                                      hereby sell(s), assign(s) and transfer(s) unto

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
		shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
	attorney-in-fact
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated
	X
	X
	NOTICE	THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 174d-15.

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Exhibit 4.1

EX-10.15

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Exhibit 10.15

[Health Net Letterhead]

March 8, 2002

Mr. Christopher Wing
236 7^th Street
Seal Beach, California 90740

Dear Mr. Wing:

        On behalf of Health Net, Inc. (the "Company") I would like to confirm our offer for the position of President Health Plans—California. The terms and conditions of your employment, which would commence on April 1, 2002, are set forth in this letter agreement (this "Agreement"):

        1.    Salary.    You will be paid a monthly base salary of $37,500 less applicable withholdings (payable on a bi-weekly basis) ("Base Salary"), which covers all hours worked. Generally, your Base Salary will be reviewed annually but the Company reserves the right to change your compensation from time-to-time. Pursuant to the By-laws of the Company, any adjustment to your compensation must be made with the approval of the Compensation and Stock Option Committee (the "Committee") of the Company's Board of Directors (or, in the event that you constitute one of the top two highest paid executive officers of the Company, with the approval of the Company's Board of Directors). In addition, you will receive an engagement bonus in the amount of $300,000 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 three (3) years 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.

        2.    Duties.    Your primary responsibility will be for the overall management of Health Net of California, but you may be assigned other duties as needed and your duties may change from time to time on reasonable notice, based on your skills and the needs of the Company. You will report to Cora Tellez, President, Health Plans but your reporting relationship may be changed from time-to-time at the discretion of the Company.

        3.    Adjustments and Changes in Employment Status.    You understand that the Company reserves the right to make personnel decisions regarding your employment, including but not limited to decisions regarding any promotion, salary adjustment, transfer or disciplinary action, up to and including termination, without notice and consistent with the needs of the business. Generally, performance and compensation are reviewed on an annual basis.

        4.    Protection of Proprietary and Confidential Information.    By signing this letter below, you agree that your 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 you during your employment.

        (a)  You agree not to directly or indirectly use or disclose any of the proprietary or confidential information of the Company or any of its affiliates at any time except in connection with the services you provide 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 information previously published publicly by the Company or other information generally in the public domain. By way of illustration but not limitation, "proprietary and/or 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)  You further agree that at all times during your employment and at all times after termination of your employment, you will keep in confidence and trust all proprietary and confidential information, and that you will not use or disclose any proprietary or 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 your duties to the Company.

        (c)  All 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 or confidential information, provided to you by the Company or any of its affiliates or produced by you or others in connection with your 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. You shall return and deliver all such property upon termination of your employment, and you may not take any such property or any reproduction of such property upon such termination.

        (d)  You recognize 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. You agree that during the term of your employment, and thereafter, you owe 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 your 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)  Your obligations under this section shall continue after the termination of your employment, and that any breach of this Section shall be a material breach of this agreement (the "Agreement").

        5.    Representation and Warranty of Employee.    You represent and warrant to the Company that the performance of your duties, and the entering into of this Agreement, has not and will not violate any agreements with or trade secrets of any other person or entity. In addition, you represent and warrant to the Company that you have not shared or disclosed, and will not share or disclose, any proprietary or confidential information of your previous employers or any other third party.

        6.    Employee Benefits.    You may be eligible for various employee benefits if you meet the applicable participation requirements. These benefits 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 and tuition reimbursement plan. It is agreed that you will be eligible for an annual PTO accrual of 24 days (representing 7.38 hours per bi-weekly pay period) through 120 months of service, and an annual PTO accrual of 26 days (representing 8.00 hours per bi-weekly pay period) thereafter. The Company also will provide you with an automobile allowance of $1,000 per month, subject to normal payroll deductions. You will be covered by workers' compensation insurance and state disability insurance, as required by state law. Although the Company or its subsidiaries or affiliates may sponsor a benefit or plan for some employees, it is not required to do so for all employees, and may exclude certain employees now or in the future from one or more benefits or plans. 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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        7.    Stock Options and Restricted Stock.    Upon your acceptance of this offer of employment, and with a grant date effective as of your first date of employment, you will be granted an option to purchase 350,000 shares of the Class A Common Stock of Health Net, Inc. (the "Common Stock"). All options granted to you will be granted under the applicable Health Net, Inc. Stock Option Plan (the "Stock Option Plan"), in accordance with and subject to each term of the Company's form of option agreement as adopted by the Committee (the "Stock Option Agreement"). These options will have a ten year term (subject to earlier termination as provided in the Stock Option Agreement or the Stock Option Plan) and will have an exercise price equal to the closing sales price of the Common Stock on your first day of employment. The option will vest at the rate of 1/4^th of the shares covered thereby on each of the first through fourth anniversaries of the grant date. As this initial option grant to you will be a "mega-grant", you will not be eligible for additional stock option grant awards until after the Executive Compensation Review process in 2004.

        In addition, as of your first date of employment you will be granted 40,000 restricted shares of Common Stock (the "Restricted Shares"), which will vest as follows:

•

13,334 of the Restricted Shares will vest and become non-forfeitable on the first anniversary of the grant date;



•

13,333 of the Restricted Shares will vest and become non-forfeitable at either (a) the date the closing sales price of Common Stock for 20 consecutive trading days is equal to or greater than $32 or (b) 5 years after the grant date;



•

13,333 of the Restricted Shares will vest and become non-forfeitable at either (a) the date the closing sales price of the Common Stock for 20 consecutive trading days is equal to or greater than $37 or (b) 5 years after the grant date;

        The Restricted Shares granted to you will be granted under the applicable Health Net, Inc. Stock Option Plan in accordance with and subject to each term of the Company's form of Restricted Stock Agreement as adopted by the Committee. In the event you should leave the employ of Company, all unvested Restricted Shares shall be forfeited. As set forth in the applicable Stock Option Plans and in the Stock Option Agreement and the Restricted Stock Agreement used by the Company, vesting of your options and the Restricted Shares may be accelerated upon the consummation of certain "Change in Control" transactions (as defined in such documents) subject to the terms and conditions of such documents. Please note that the definition of "Change in Control" contained in these documents is different in various respects from the definition set forth in Section 11 below.

        8.    Annual Bonus.    You will also be eligible to participate in the Health Net, Inc. Executive Incentive Plan (also known as the Management Incentive Plan ("MIP")) in accordance with the terms of the Plan, which provides you with a target opportunity to earn up to 70% of your Base Salary, prorated from your date of hire, as additional compensation, according to the terms of the actual plan documents. The bonus payment will range from 0% to 150% of target depending upon the actual results achieved, and specific, individually tailored measures will be established by the Company that must be achieved by you in order for you to be eligible to receive above target 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 MIP. You acknowledge that in the event you are one of the top five highest paid executive officers of the Company for a given year under applicable federal securities laws, your bonus for that year, if any, will be subject to the Company's Performance Based 162(m) Plan in lieu of the MIP.

        9.    Additional Benefits.    You will be reimbursed up to the amount of $5,000 per year for documented costs incurred for your personal financial counseling services.

Corporate housing will also be provided for a period of one year from your date of hire along with reasonable commuting expenses, in each case in accordance with all applicable Company policies and

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restrictions. Upon completion of one year, you will be responsible for any commuting expenses. You agree that, notwithstanding any Company policy that may be in effect, you will not be eligible to receive any relocation benefits in connection with your employment by the Company.

        10.    Term of Employment.    Your employment with the Company is "at-will," which means that either you or the Company may terminate the employment relationship at any time, with or without notice and with or without Cause (as defined below). Upon termination of your employment for any reason, in addition to any other payments that may be payable to you hereunder, you (or your beneficiaries or estate) will be paid (in each case to the extent not theretofore paid) within thirty (30) days following your date of termination (or such shorter period that may be required by applicable law): your Base Salary through the date of termination, any compensation previously deferred by you (together with any interest and earnings therein), accrued but unused PTO, reimbursable expenses incurred by you prior to the termination date and any other compensatory plan, arrangement or program payment to which you may be entitled.

        11.    Severance Pay.

        (a)  If your employment is terminated by the Company without Cause (as defined below) at any time that is not within two (2) years after a Change in Control (as defined below) of Health Net, Inc., you will be entitled to receive, provided you sign a 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 your Base Salary in effect immediately prior to the date of your termination and (ii) the continuation of your medical, dental and vision benefits for you and your dependents for six (6) months following the effective date of your termination and (iii) after expiration of such six (6) month benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (as maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA. The lump sum payment referred to above will be paid within thirty (30) days following your termination of employment.

        (b)  If at any time within two (2) years after a Change in Control (as defined below) of Health Net, Inc. your employment is terminated by the Company without Cause or you terminate your 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 you will be entitled to receive, provided you sign a 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 your Base Salary in effect immediately prior to the date of your termination and (ii) the continuation of your medical, dental and vision benefits for you and your dependents for eighteen (18) months following the effective date of your termination and (iii) after expiration of such eighteen (18) months of benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA; provided, however, that in the event the Company requests, in writing, prior to such voluntary termination by you for Good Reason that you continue in the employ of the Company for up to an additional three months, you must continue to remain so employed by the Company during such requested extension in order to receive such severance benefits.

        (c)  In the event that your employment is voluntarily terminated by you at any time (except for Good Reason within two years after a Change in Control of Health Net, Inc.), then you shall not be eligible to receive any payments set forth in this Section 11.

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        (d)  For purposes of this Agreement, the term Cause shall include, without limitation, (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the knowing, unauthorized use or disclosure of proprietary or confidential information relating to the business of the Company or any of its affiliates, (iii) abuse of alcohol or use of illegal drugs, (iv) conviction of or a plea of nolo contendere to a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to you, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by you following a Change in Control of those duties and responsibilities of yours that do not differ in any material respect from your 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 your 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 your obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

        (e)  For purposes of this Agreement Change in Control is defined as any of the following which occurs subsequent to the effective date of your 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 you to an individual or organization other than Health Net, Inc.

        (f)    For purposes of this Agreement the term Good Reason means any of the following which occurs subsequent to the effective date of a Change of Control:

        (i)    A demotion or a substantial reduction in the scope of your position, duties, responsibilities or status with the Company, or any removal of you from or any failure to reelect

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you to any of the positions (or functional equivalent of such positions) referred to in the introductory paragraphs hereof, except in connection with the termination of your employment for Disability (as defined below), normal retirement or Cause or by you voluntarily other than for Good Reason;

        (ii)  A reduction by the Company in your Base Salary or a material reduction in the benefits or perquisites available to you as in effect immediately prior to any such reduction;

        (iii)  A relocation of you to a work location more than fifty (50) miles from your work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for you based on your residence immediately prior to such relocation; or

        (iv)  The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 15 of this Agreement.

        (g)  Any lump sum payment that may be due to you under Section 9 of this Agreement will be paid within thirty (30) days following your termination of employment.

        12.    Termination by the Company for Cause.    The Company may terminate your employment for Cause at any time with or without notice. In the event of such termination, you will not be eligible to receive any of the payments set forth in Section 11 above.

        13.    Termination due to Death or Disability.    In the event that your employment is terminated at any time due to death or Disability, you (or your beneficiaries or estate) shall be entitled to (a) continuation of all medical and dental insurance for a period of twelve (12) months from the date of termination and (b) a lump sum payment equal to twelve (12) months of your Base Salary in effect immediately prior to the date of your termination to be paid within thirty (30) days following your termination of employment, provided in the event of a termination due to Disability, you sign the Waiver and Release of Claims which is incorporated into this Agreement by reference as Exhibit A. For purposes of this Agreement, a termination for "Disability" shall mean a termination of your employment due to your absence from your duties with the Company on a full-time basis for at least 180 consecutive days as a result of your incapacity due to physical or mental illness.

        14.    Withholding.    All payments required to be made by the Company hereunder to you or your 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.

        15.    Potential Tax Consequences for "Parachute" Payments.

        15.1     Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for your 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 11 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 interest or penalties are incurred by you 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) there are any excess parachute payments (within the meaning of section 280G(b) of the Code), in the aggregate, in respect of such Total Payments in excess of $50,000, then the Company shall pay to you 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, you shall receive such net amount of Total Payments equal to the amount that you would have received

6

if no Excise Tax was due; provided however that you shall cooperate in good faith with the Company to minimize the amount of the Excise Tax that may become payable by taking any such action or making any such election as may be reasonably requested by the Company in respect of the Total Payments due to you.

        15.2     Subject to the provisions of Section 15.3, all determinations required to be made under this Section 15, 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 you within fifteen (15) business days of the receipt of notice from you that you have 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 15, shall be paid by the Company to you 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 you, then the Accounting Firm shall furnish to you a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company. 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"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 15.3 and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit.

        15.3     You 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 you are 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. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall:

        (1)  give the Company any information reasonably requested by the Company relating to such claim,

        (2)  take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

        (3)  cooperate with the Company in good faith in order effectively to contest such claim, and

        (4)  permit the Company to participate in any proceedings relating to such claim;

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provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 15.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Tax Gross-Up would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

        15.4     If, after your receipt of an amount advanced by the Company pursuant to Section 15.3, you become entitled to receive, and receive, any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 15.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to Section 15.3, a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Tax Gross-Up required to be paid.

        15.5     At the time that payments are made under this Agreement, the Company shall provide you 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 Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

        16.    Restrictive Covenants.

        (a)  You hereby agree that, during (i) the six-month period following a termination of your employment with the Company that entitles you to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve-month period following a termination of your employment with the Company that does not entitle you to receive such severance benefits (the period referred to in either clause (i) or (ii), the "Restricted Period"), you 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 operates (the "Market Area"), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon you 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 you had access during your employment with the Company. If you take a position as a vice president (or higher position) or as a director of a Competitor it will be presumed for purposes of this Agreement that the loyal and complete fulfillment of your duties would require

8

you to use such information and you would therefore be deemed to be in breach of this provision. 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)  In addition, you agree that, during the applicable Restricted Period following termination of your employment with the Company, you shall not, directly or indirectly, (A) 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, you or any other entity or person or (B) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

        (c)  It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 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)  You also acknowledge that the services to be rendered by you 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 you of any of the provisions contained in this Section during the Restricted Period will cause the Company or any of its affiliates irreparable injury. You therefore agree that the Company may be entitled during the Restricted Period, in addition to the remedies set forth above in this Section 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 you from any such violation or threatened violations.

        17.    Successors; Binding Agreement.

        (a)  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)  The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to you (or his 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 be a breach of this Agreement and shall entitle you to compensation and other benefits from the Company in the same amount and on the same terms as you would be entitled hereunder if your 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)  This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you shall die while any amounts would be payable to you hereunder had you 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 you to receive such amounts or, if no person is so appointed, to your estate.

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        18.    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.

        19.    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 you and the Company with respect to the subject matters herein. This agreement cannot be changed unless in writing, signed by you and the President of Health Net, Inc., and approved by the Board of Directors of the Company (or the Committee, if permitted by the By-laws of the Company).

        20.    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.

        21.    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) day after being sent by Federal Express or a similar commercial overnight service or (c) three (3) 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. Attn: Karin Mayhew Senior Vice President, Organization Effectiveness 21650 Oxnard Street, 22nd Floor Woodland Hills, California 91367
If to the Employee:	Christopher Wing 236 7th Street Seal Beach, California 90740

        22.    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.

        23.    Survival and Enforcement.    Sections 4 and 16 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 your employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 4 or 16 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).

        24.    Acknowledgement.    You acknowledge that you have had the opportunity to discuss this matter with and obtain advice from your attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and you are knowingly and voluntarily entering into this Agreement. You further acknowledge that you are obligated to become familiar with and comply at all times with all Company policies.

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        We look forward to your joining our organization. In order to confirm your agreement with and acceptance of these terms, please sign one copy of this letter and return it to me. The other copy is for your records. If there is any matter in this letter that you wish to discuss further, please do not hesitate to contact to me.

Sincerely,

/s/  KARIN D. MAYHEW Karin D. Mayhew

Senior Vice President, Organization Effectiveness

cc:    Cora Tellez

I agree to the terms of employment set forth in this letter.

/s/  CHRISTOPHER WING Christopher Wing

Date:        3-13-02    

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EXHIBIT A

FORM OF WAIVER AND RELEASE OF CLAIMS

        This WAIVER AND RELEASE OF CLAIMS (this "Release") is made and entered into by and between Health Net, Inc. and it affiliates and subsidiaries (hereinafter referred to as the "Company" and Christopher Wing (hereinafter referred to as "Employee").

        WHEREAS, the Company and Employee are parties to an Employment Letter Agreement dated as of                         , 2002 (the "Severance Payment Agreement"), and are entering into this Release pursuant to Section    of the Severance Payment Agreement as a condition to Employee's receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Severance Payment Agreement).

        NOW, THEREFORE, the Company and Employee agree as follows:

1.

Employee's employment with the Company will terminate on                         . Upon termination of employment, Employee will not represent to anyone that he or she is an employee of the Company and will not say or do anything purporting to bind the Company.

2.

Employee's termination of employment with the Company shall be considered a [describe type of termination] under Section    of the Severance Payment Agreement, and Employee is therefore eligible to receive [describe payments and other benefits to be received].

3.

In partial consideration of the Company providing Employee those benefits and payments set forth above, and as required by and in the Severance Payment Agreement as a condition to receive such payments and benefits, Employee freely and voluntarily enters into this Release and by signing this Release Employee, on his/her own behalf and on behalf of his or her 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 or 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 1866, 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"), the California Fair Employment and Housing Act, the California Labor Code and the California Constitution (all as amended) 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 Employee's execution of this Release. The provisions in this paragraph are not intended to prohibit Employee from filing a claim for unemployment insurance.

4.

Employee 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 Release. Employee makes this waiver with full knowledge of his/her rights and with specific intent to release both his/her known and unknown claims, and therefore specifically waives

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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."

Employee understands and acknowledges the significance and consequence of this 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.

5.

Employee 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/her employment with the Company, unless Employee first cooperates in making his/her allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. In addition, Employee 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, Employee's employment with the Company or its predecessors or affiliates for which the Company requests Employee'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 Employee's other material business and personal obligations and commitments.

6.

Employee agrees he or she will return to the Company immediately upon termination any building key(s), security pass or other access or identification cards and any Company property that was in his or her possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Employee agrees to clear all expense accounts and pay all amounts owed on any corporate credit card(s) which the Company previously issued to Employee.

7.

Employee shall not, without the Company's written consent by an authorized representative, at any time prior or subsequent to the execution of this Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he/she acquired during the course of his/her 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.

8.

In addition to any other part or term of this Release or the Severance Payment Agreement, Employee agrees that he or she 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 or her 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, employees, providers, vendors, agents or independent contractors with whom the Employee 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

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the Company, and (b) for the six month period following the Termination Date, undertake any employment or activity prohibited by Section 10 of the Severance Payment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Employee's field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition.

9.

Any developments or discoveries by Employee during the course of his or her employment with the Company through the date of execution of this Release resulting in patents, lists of customers, trade secrets, specialized know-how or other intellectual property useful in the then current business of the Company shall be for the sole benefit of the Company.

10.

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 Release or the Severance Payment Agreement.

11.

If any part or term of this Release is held invalid or unenforceable, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Release.

12.

The Employee acknowledges that he/she has had an opportunity to consult and be represented by counsel of his/her own choosing in the review of this Release, and that he/she has been advised by the Company to do so, that the Employee is fully aware of this Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Release, and that Employee enters into this Release freely, without coercion, and based on the Employee'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 Release except in writing signed by the parties hereto.

13.

This Release shall be construed and governed by the laws of the State of Delaware.

        EMPLOYEE ACKNOWLEDGES BY SIGNING BELOW that (i) Employee has not relied upon any representations, written or oral, not set forth in this Release; (ii) at the time Employee was given this Release Employee was informed in writing by the Company that (a) Employee had at least 45 days in which to consider whether Employee would sign the Release and (b) Employee should consult with an attorney before signing the Release; and (iii) Employee had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Release without consulting an attorney. Employee also acknowledges that at the time Employee was given this Release, Employee was given written notice of the eligibility criteria for the employment termination program and the time limits applicable to the program, the job titles and ages (or dates of birth) of all individuals eligible for the program and the ages of the individuals in the same job classification or organizational unit who are not eligible for the program.

        Employee further acknowledges that he or she may revoke acceptance of this Release by delivering a letter of revocation within seven (7) days after the date set forth below addressed to: Health Net, Inc. Corporate Legal Department, 21650 Oxnard Street, Woodland Hills, California 91367.

        Finally, Employee acknowledges that he or she understands that this Release will not become effective until the eighth (8th) day following his or her signing this Release and that if Employee does not revoke his or her acceptance of the terms of this Release within the seven (7) day period following the date on which Employee signs this Release, this Release will be binding and enforceable.

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        IN WITNESS WHEREOF, the parties hereto have executed this Release as of the dates set forth below.

Employee		Health Net, Inc.
By:	[EXHIBIT COPY] Name:	By:	[EXHIBIT COPY] Name: Title:
Date:	[TO BE INSERTED	Date:	[TO BE INSERTED]

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QuickLinks

Exhibit 10.15

EX-10.16

Exhibit 10.16

[Health Net Letterhead]

May 22, 2002

Mr. Jeff Folick
13601 Belle Rive
Santa Ana, CA 92705

Dear Jeff:

        On behalf of Health Net, Inc. (the "Company"), we would like to make you an offer of employment as Executive Vice President, Regional Health Plans & Specialty Companies. The terms and conditions of your employment by the Company, which employment would commence on May 24, 2002, are as set forth in this letter agreement (this "Agreement"):

        1.    Salary and Duties.

        A.    Salary.    You will be paid an annual base salary of $500,000, less applicable withholdings (payable on a bi-weekly basis) ("Base Salary"), which covers all hours worked. Generally, your Base Salary will be reviewed annually, but the Company reserves the right to change your compensation from time-to-time. Pursuant to the By-laws of the Company, any adjustment to your compensation must be made with the approval of the Compensation and Stock Option Committee (the "Committee") of the Company's Board of Directors (or, in the event that you constitute one of the top two (2) highest paid executive officers of the Company, with the ratification of the Company's Board of Directors).

        B.    Duties.    Your duties and responsibilities will be for general operating oversight of the Company's Northeast, Arizona, Pharmacy and MHN divisions, as well as enterprise-wide responsibility for the Healthcare Delivery Policy, Pricing and Underwriting areas, but the Company reserves the right to assign you other duties as needed and to change your duties from time to time, based on your skills and the needs of the Company. You will report directly to Jay Gellert, President and Chief Executive Officer of the Company, but your reporting relationship may be changed from time to time at the discretion of the Company. Your title will be Executive Vice President, Regional Health Plans & Specialty Companies, but may be changed at the discretion of the Company to a title that reflects another senior executive position.

        2.    Adjustments and Changes in Employment Status.    You understand that the Company reserves the right to make personnel decisions regarding your 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. Generally, performance and compensation are reviewed on an annual basis.

        3.    Protection of Proprietary and Confidential Information.    You agree that your 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 you during your employment.

        A.    You agree not to directly or indirectly use or disclose any of the Proprietary and Confidential Information (as defined below) of the Company or any of its affiliates at any time except in connection with the services you provide 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 which (i) was publicly known and made generally available in the public domain prior to the time of disclosure to you by the Company or (ii) becomes publicly known and made generally available after

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disclosure to you 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 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.    You further agree that at all times during your employment and thereafter, you will keep in confidence and trust all Proprietary and Confidential Information, and that you 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 your duties to the Company.

        C.    All 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 you by the Company or any of its affiliates or produced by you or others in connection with your 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. You shall return and deliver all such property upon termination of your employment, and you may not take any such property or any reproduction of such property upon such termination.

        D.    You recognize 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. You agree that during your employment, and thereafter, you owe 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 your 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.    Your obligations under this Section 3 shall continue after the termination of your employment, and any breach of this Section 3 shall be a material breach of this Agreement.

        4.    Representation and Warranty of Employee.    You represent and warrant to the Company that the performance of your duties, and the entering into of this Agreement, has not and will not violate any agreements with or trade secrets of any other person or entity. In addition, you represent and warrant to the Company that you have not shared or disclosed, and will not share or disclose to the Company, any proprietary or confidential information of your previous employers or any other third party.

        5.    Drug Screening and Background Check.    Your employment is contingent upon your successful completion of the Company's drug screening and background check process.

        6.    Employee Benefits.

        A.    Employee Benefit Programs.    You may be eligible for various employee benefit programs if you meet the applicable participation requirements. These benefit programs 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 and tuition reimbursement plan. It is agreed that you will be eligible for an annual PTO accrual of 24 days (representing 7.38 hours per bi-weekly pay period) through 120 months of service, and an annual PTO accrual of 26 days (representing 8.00 hours per bi-weekly pay period) thereafter. You will also be eligible to

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participate in any employee benefit programs added at any future time that are generally applicable to senior executives of the Company and that have been approved by the Committee, provided that you meet the applicable participation requirements; provided, however, that this provision does not extend to any individually negotiated or tailored benefits, plans or programs covering a particular employee or employees. Although the Company may sponsor a benefit or plan or program for some employees, it is not required to do so for all employees and may exclude certain employees now or in the future from one or more benefits, plans or programs. 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.    You will be covered by workers' compensation insurance and state disability insurance, as required by state law.

        C.    Automobile Allowance.    The Company will provide you with an automobile allowance of $1,000 per month, subject to normal payroll deductions.

        D.    Financial Counseling Allowance.    You will be reimbursed up to the amount of $5,000 per year for documented costs incurred for your personal financial counseling services.

        E.    Incentive Bonus.    You will also be eligible to participate in the Health Net, Inc. Executive Incentive Plan (also known as the Management Incentive Plan ("MIP")) in accordance with the terms of the MIP, which provides you with a target opportunity to earn up to 70% of your Base Salary as an annual bonus, prorated from your date of hire for the first year, as additional compensation, according to the terms of the actual MIP 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 you in order for you 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 MIP. You acknowledge that in the event you are one of the top five (5) highest paid executive officers of the Company for a given year under applicable federal securities laws, your bonus for that year, if any, will be subject to the Company's Performance Based 162(m) Plan in lieu of the MIP.

        F.    Relocation Benefits.    You will be provided relocation benefits which will be covered under the applicable Relocation Benefit Guidelines of the Company 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.

        G.    Expenses.    Subject to and in accordance with the Company's written guidelines and procedures for business and travel expenses, as may be modified by the Company from time to time, you will receive reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by you in the performance of your duties pursuant to this Agreement.

        7.    Stock Options.    Upon your acceptance of this offer of employment, and with a grant date effective as of the first date of your employment hereunder, you will be granted non-qualified stock options to purchase an aggregate of 500,000 shares of the Class A Common Stock (the "Common Stock") of the Company (the "Stock Options"). All Stock Options granted to you will be granted under the applicable Company Stock Option Plan (the "Stock Option Plan"), and will be subject to the terms of the Company's form of option agreement as adopted by the Company's Compensation and Stock Option Committee (the "Stock Option Agreement"). These Stock Options will expire ten (10) years from the grant date (subject to earlier termination as provided in the Stock Option Agreement or the Stock Option Plan), will be subject to the vesting schedule set forth below and will have an exercise price equal to the closing sales price of the Common Stock on your first day of employment. In the

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event of any inconsistency with this Agreement, the terms of the Stock Option Agreement and the Stock Option Plan shall control. Any future recommendation for additional options made by the Company's management will be made consistent with your performance and generally comparable to your peers at the time option recommendations are presented to the Stock Option Committee. It is further agreed that this initial grant to you will be considered a "mega-grant" and you will therefore not be eligible to receive additional option grants until 2003.

        Your Stock Options will vest as follows:

        (1)  300,000 of the Stock Options will vest in four (4) equal annual installments, beginning on the first anniversary of the grant date.

        (2)  The remaining 200,000 of the Stock Options will vest in the following amounts at the earlier of (i) the occurrence of the following performance requirements which accelerate the vesting date (subject to a requirement that the shares acquired upon exercise of such portion of the Stock Options must be held for one (1) year after the acceleration date) or (ii) the following vesting dates:

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100,000 will vest at earlier of (a) the date the closing sales price of the Common Stock on the New York Stock Exchange for 20 consecutive trading days is equal to or greater than $38 or (b) 5 years after the grant date;



•

100,000 will vest at earlier of (a) the date the closing sales price of the Common Stock on the New York Stock Exchange for 20 consecutive trading days is equal to or greater than $45 or (b) 5 years after the grant date.

As set forth in the applicable Stock Option Plan and in the Stock Option Agreement used by the Company, vesting of your Stock Options may be accelerated upon the consummation of certain "Change in Control" transactions (as defined in such documents) subject to the terms and conditions of such documents. Please note that the definition of "Change in Control" contained in these documents is different in various respects from the definition set forth in Section 9 of this Agreement.

        8.    Term of Employment.    Your employment with the Company is "at-will," which means that either you or the Company may terminate the employment relationship at any time, with or without notice and with or without Cause (as defined below). Upon termination of your employment for any reason, in addition to any other payments that may be payable to you hereunder, you (or your beneficiaries or estate) will be paid (in each case to the extent not theretofore paid) within thirty (30) days following your date of termination (or such shorter period that may be required by applicable law): your Base Salary through the date of termination, any compensation previously deferred by you (together with any interest and earnings therein), accrued but unused PTO, reimbursable expenses incurred by you prior to the termination date and any other compensatory plan, arrangement or program payment to which you may be entitled.

        9.    Severance Pay.

        (a)  If your employment is terminated by the Company without Cause (as defined below) at any time that is not within two (2) years after a Change in Control (as defined below) of Health Net, Inc., you will be entitled to receive, provided you sign a 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 your Base Salary in effect immediately prior to the date of your termination and (ii) the continuation of your medical, dental and vision benefits for you and your dependents for six (6) months following the effective date of your termination and (iii) after expiration of such six (6) month benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (as maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA. The lump sum payment referred to above will be paid within thirty (30) days following your termination of employment.

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        (b)  If at any time within two (2) years after a Change in Control (as defined below) of Health Net, Inc. your employment is terminated by the Company without Cause or you terminate your 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 you will be entitled to receive, provided you sign a 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 your Base Salary in effect immediately prior to the date of your termination and (ii) the continuation of your medical, dental and vision benefits for you and your dependents for eighteen (18) months following the effective date of your termination and (iii) after expiration of such eighteen (18) months of benefits continuation period, the premium payments for continuation, under COBRA, of your medical, dental and vision benefits (maintained for your benefit immediately prior to the date of your termination) for you and your dependents for a period of eighteen (18) months, provided you properly elect to continue those benefits under COBRA; provided, however, that in the event the Company requests, in writing, prior to such voluntary termination by you for Good Reason that you continue in the employ of the Company for up to an additional three months, you must continue to remain so employed by the Company during such requested extension in order to receive such severance benefits.

        (c)  In the event that your employment is voluntarily terminated by you at any time (except for Good Reason within two years after a Change in Control of Health Net, Inc.), then you shall not be eligible to receive any payments set forth in this Section 9.

        (d)  For purposes of this Agreement, the term Cause shall include, without limitation, (i) an act of dishonesty causing harm to the Company or any of its affiliates, (ii) the knowing, unauthorized use or disclosure of proprietary or confidential information relating to the business of the Company or any of its affiliates, (iii) abuse of alcohol or use of illegal drugs, (iv) conviction of or a plea of nolo contendere to a felony or a misdemeanor involving moral turpitude, (v) willful refusal to perform or gross neglect of the duties assigned to you, (vi) the willful breach of any law that, directly or indirectly, affects the Company or any of its affiliates, (vii) a material breach by you following a Change in Control of those duties and responsibilities of yours that do not differ in any material respect from your 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 your 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 your obligations hereunder (or under any Company policy) to protect the proprietary and confidential information of the Company or any of its affiliates.

        (e)  For purposes of this Agreement Change in Control is defined as any of the following which occurs subsequent to the effective date of your 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

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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 you to an individual or organization other than Health Net, Inc.

        (f)    For purposes of this Agreement the term Good Reason means any of the following which occurs subsequent to the effective date of a Change of Control:

        (i)    A demotion or a substantial reduction in the scope of your position, duties, responsibilities or status with the Company, or any removal of you from or any failure to reelect you to any of the positions (or functional equivalent of such positions) referred to in the introductory paragraphs hereof, except in connection with the termination of your employment for Disability (as defined below), normal retirement or Cause or by you voluntarily other than for Good Reason;

        (ii)  A reduction by the Company in your Base Salary or a material reduction in the benefits or perquisites available to you as in effect immediately prior to any such reduction;

        (iii)  A relocation of you to a work location more than fifty (50) miles from your work location immediately prior to such proposed relocation; provided that such proposed relocation results in a materially greater commute for you based on your residence immediately prior to such relocation; or

        (iv)  The failure of the Company to obtain an assumption agreement from any successor contemplated under Section 15 of this Agreement.

        (g)  Any lump sum payment that may be due to you under Section 9 of this Agreement will be paid within thirty (30) days following your termination of employment.

        10.    Termination by the Company for Cause.    The Company may terminate your employment for Cause at any time with or without notice. In the event of such termination, you will not be eligible to receive any of the payments set forth in Section 9 above.

        11.    Termination due to Death or Disability.    In the event that your employment is terminated at any time due to death or Disability, you (or your beneficiaries or estate) shall be entitled to (a) continuation of all medical and dental insurance for a period of twelve (12) months from the date of termination and (b) a lump sum payment equal to twelve (12) months of your Base Salary in effect immediately prior to the date of your termination to be paid within thirty (30) days following your termination of employment, provided in the event of a termination due to Disability, you sign the Waiver and Release of Claims which is incorporated into this Agreement by reference as Exhibit A. For purposes of this Agreement, a termination for "Disability" shall mean a termination of your employment due to your absence from your duties with the Company on a full-time basis for at least 180 consecutive days as a result of your incapacity due to physical or mental illness.

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        12.    Withholding.    All payments required to be made by the Company hereunder to you or your 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.

        13.    Potential Tax Consequences for "Parachute" Payments.

        13.1 Notwithstanding any other provisions of this Agreement, in the event that (i) any payment or distribution by the Company to or for your 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 interest or penalties are incurred by you 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) there are any excess parachute payments (within the meaning of section 280G(b) of the Code), in the aggregate, in respect of such Total Payments in excess of $50,000, then the Company shall pay to you 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, you shall receive such net amount of Total Payments equal to the amount that you would have received if no Excise Tax was due; provided however that you shall cooperate in good faith with the Company to minimize the amount of the Excise Tax that may become payable by taking any such action or making any such election as may be reasonably requested by the Company in respect of the Total Payments due to you.

        13.2 Subject to the provisions of Section 13.3, all determinations required to be made under this Section 15, 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 you within fifteen (15) business days of the receipt of notice from you that you have 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 13, shall be paid by the Company to you 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 you, then the Accounting Firm shall furnish to you a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company. 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"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 13.3 and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit.

        13.3 You 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 you are informed in writing of such claim and shall apprise the Company of the nature of such claim

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and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall:

        (1)  give the Company any information reasonably requested by the Company relating to such claim,

        (2)  take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

        (3)  cooperate with the Company in good faith in order effectively to contest such claim, and

        (4)  permit the Company to participate in any proceedings relating to such claim;

8

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 13.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs you to pay such claim as sue for a refund, the Company shall advance the amount of such payment to you on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Exise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Tax Gross-Up would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

        13.4    If, after your receipt of an amount advanced by the Company pursuant to Section 13.3, you become entitled to receive, and receive, any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 13.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to Section 13.3, a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Tax Gross-Up required to be paid.

        13.5    At the time that payments are made under this Agreement, the Company shall provide you 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 Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

        14.    Restrictive Covenants.

        (a)  You hereby agree that, during (i) the six-month period following a termination of your employment with the Company that entitles you to receive severance benefits under this Agreement or a written agreement with or policy of the Company or (ii) the twelve-month period following a termination of your employment with the Company that does not entitle you to receive such severance benefits (the period referred to in either clause (i) or (ii), the "Restricted Period"), you 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 operates (the "Market Area"), where the loyal and complete fulfillment of the duties of the competitive employment or activity would call upon you 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 you had access during your employment with the Company. If you take a position as a vice president (or higher position) or as a director of a Competitor it will be presumed for purposes of this Agreement that the loyal and complete fulfillment of your duties would require

9

you to use such information and you would therefore be deemed to be in breach of this provision. 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)  In addition, you agree that, during the applicable Restricted Period following termination of your employment with the Company, you shall not, directly or indirectly, (A) 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, you or any other entity or person or (B) solicit, interfere with or otherwise contact any customer or client of the Company or any of its affiliates.

        (c)  It is hereby further agreed that if any court of competent jurisdiction shall determine that the restrictions imposed in this Section 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)  You also acknowledge that the services to be rendered by you 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 you of any of the provisions contained in this Section will cause the Company or any of its affiliates irreparable injury. You therefore agree that the Company may be entitled, in addition to the remedies set forth above in this Section 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 you from any such violation or threatened violations.

        15.    Successors; Binding Agreement.

        (a)  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)  The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in paragraph (a) of this Section, it will cause any successor or transferee unconditionally to assume, by written instrument delivered to you (or his 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 be a breach of this Agreement and shall entitle you to compensation and other benefits from the Company in the same amount and on the same terms as you would be entitled hereunder if your 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)  This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you shall die while any amounts would be payable to you hereunder had you 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 you to receive such amounts or, if no person is so appointed, to your estate.

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        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 you and the Company with respect to the subject matters herein. This agreement cannot be changed unless in writing, signed by you and the President of Health Net, Inc., and approved by the Board of Directors of the Company (or the Committee, if permitted by the By-laws of 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) day after being sent by Federal Express or a similar commercial overnight service or (c) three (3) 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. Attn: Karin Mayhew Senior Vice President, Organization Effectiveness 21650 Oxnard Street, 22nd Floor Woodland Hills, CA 91367
If to the Employee:	Mr. Jeff Folick 13601 Belle Rive Santa Ana, CA 92705

        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 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 your employment. The parties agree that the Company would be damaged irreparably in the event any provision of Sections 3 or 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).

        22.    Acknowledgement.    You acknowledge that you have had the opportunity to discuss this matter with and obtain advice from your attorney, have had sufficient time to and have carefully read and fully understood all of the provisions of this Agreement, and you are knowingly and voluntarily entering into this Agreement. You further acknowledge that you are obligated to become familiar with and comply at all times with all Company policies.

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        We look forward to your joining our organization. In order to confirm your agreement with and acceptance of these terms, please sign one copy of this letter and return it to me. The other copy is for your records. If there is any matter in this letter that you wish to discuss further, please do not hesitate to contact to me.

Sincerely,

/s/  KARIN D. MAYHEW Karin D. Mayhew
Senior Vice President, Organization Effectiveness

I agree to the terms of employment set forth in this letter.

/s/  JEFF FOLICK Jeff Folick

Date: May 27, 2002

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EXHIBIT A

FORM OF WAIVER AND RELEASE OF CLAIMS

        This WAIVER AND RELEASE OF CLAIMS (this "Release") is made and entered into by and between Health Net, Inc. and it affiliates and subsidiaries (hereinafter referred to as the "Company" and Jeff Folick (hereinafter referred to as "Employee").

        WHEREAS, the Company and Employee are parties to an Employment Letter Agreement dated as of                         , 2002 (the "Severance Payment Agreement"), and are entering into this Release pursuant to Section    of the Severance Payment Agreement as a condition to Employee's receipt of a severance payment thereunder (capitalized terms used but not defined herein shall have the meanings set forth in the Severance Payment Agreement).

        NOW, THEREFORE, the Company and Employee agree as follows:

1.

Employee's employment with the Company will terminate on                         . Upon termination of employment, Employee will not represent to anyone that he or she is an employee of the Company and will not say or do anything purporting to bind the Company.

2.

Employee's termination of employment with the Company shall be considered a [describe type of termination] under Section    of the Severance Payment Agreement, and Employee is therefore eligible to receive [describe payments and other benefits to be received].

3.

In partial consideration of the Company providing Employee those benefits and payments set forth above, and as required by and in the Severance Payment Agreement as a condition to receive such payments and benefits, Employee freely and voluntarily enters into this Release and by signing this Release Employee, on his/her own behalf and on behalf of his or her 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 or 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 1866, 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"), the California Fair Employment and Housing Act, the California Labor Code and the California Constitution (all as amended) 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 Employee's execution of this Release. The provisions in this paragraph are not intended to prohibit Employee from filing a claim for unemployment insurance.

4.

Employee 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 Release. Employee makes this waiver with full knowledge of his/her rights and with specific intent to release both his/her known and unknown claims, and therefore specifically waives

1

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."

Employee understands and acknowledges the significance and consequence of this 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.

5.

Employee 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/her employment with the Company, unless Employee first cooperates in making his/her allegations known to the Company for the Company to take corrective action at a time and place designated by the Company. In addition, Employee 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, Employee's employment with the Company or its predecessors or affiliates for which the Company requests Employee'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 Employee's other material business and personal obligations and commitments.

6.

Employee agrees he or she will return to the Company immediately upon termination any building key(s), security pass or other access or identification cards and any Company property that was in his or her possession, including but not limited to any documents, credit cards, computer equipment, mobile phones or data files. Employee agrees to clear all expense accounts and pay all amounts owed on any corporate credit card(s) which the Company previously issued to Employee.

7.

Employee shall not, without the Company's written consent by an authorized representative, at any time prior or subsequent to the execution of this Release, disclose, use, remove or copy any confidential, trade secret or proprietary information he/she acquired during the course of his/her 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.

8.

In addition to any other part or term of this Release or the Severance Payment Agreement, Employee agrees that he or she 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 or her 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, employees, providers, vendors, agents or independent contractors with whom the Employee 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

2

the Company, and (b) for the six month period following the Termination Date, undertake any employment or activity prohibited by Section 10 of the Severance Payment Agreement. The prohibitions of this paragraph are not intended to deny employment opportunities within the Employee's field of employment but are limited only to those prohibitions necessary to protect the Company from unfair competition.

9.

Any developments or discoveries by Employee during the course of his or her employment with the Company through the date of execution of this Release resulting in patents, lists of customers, trade secrets, specialized know-how or other intellectual property useful in the then current business of the Company shall be for the sole benefit of the Company.

10.

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 Release or the Severance Payment Agreement.

11.

If any part or term of this Release is held invalid or unenforceable, such invalidity or unenforceability shall not affect in any way the validity or enforceability of any other part or term of this Release.

12.

The Employee acknowledges that he/she has had an opportunity to consult and be represented by counsel of his/her own choosing in the review of this Release, and that he/she has been advised by the Company to do so, that the Employee is fully aware of this Release and of its legal effect, that the preceding paragraphs recite the sole consideration for this Release, and that Employee enters into this Release freely, without coercion, and based on the Employee'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 Release except in writing signed by the parties hereto.

13.

This Release shall be construed and governed by the laws of the State of Delaware.

        EMPLOYEE ACKNOWLEDGES BY SIGNING BELOW that (i) Employee has not relied upon any representations, written or oral, not set forth in this Release; (ii) at the time Employee was given this Release Employee was informed in writing by the Company that (a) Employee had at least 45 days in which to consider whether Employee would sign the Release and (b) Employee should consult with an attorney before signing the Release; and (iii) Employee had an opportunity to consult with an attorney and either had such consultations or has freely decided to sign this Release without consulting an attorney. Employee also acknowledges that at the time Employee was given this Release, Employee was given written notice of the eligibility criteria for the employment termination program and the time limits applicable to the program, the job titles and ages (or dates of birth) of all individuals eligible for the program and the ages of the individuals in the same job classification or organizational unit who are not eligible for the program.

        Employee further acknowledges that he or she may revoke acceptance of this Release by delivering a letter of revocation within seven (7) days after the date set forth below addressed to: Health Net, Inc. Corporate Legal Department, 21650 Oxnard Street, Woodland Hills, California 91367.

        Finally, Employee acknowledges that he or she understands that this Release will not become effective until the eighth (8th) day following his or her signing this Release and that if Employee does not revoke his or her acceptance of the terms of this Release within the seven (7) day period following the date on which Employee signs this Release, this Release will be binding and enforceable.

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        IN WITNESS WHEREOF, the parties hereto have executed this Release as of the dates set forth below.

Employee		Health Net, Inc.
By:	[EXHIBIT COPY] Name:	By:	[EXHIBIT COPY] Name: Title:
Date:	[TO BE INSERTED	Date:	[TO BE INSERTED]

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EX-10.25

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Exhibit 10.25

Second Amendment to Amended and Restated
1997 Stock Option Plan

        The Health Net, Inc. Amended and Restated 1997 Stock Option Plan is hereby amended to add the following sentence as the second sentence in Section 3.3:

"Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available under the Plan for all Stock Awards shall not exceed 500,000 shares of Common Stock."

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Exhibit 10.25

Second Amendment to Amended and Restated 1997 Stock Option Plan

EX-10.28

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Exhibit 10.28

Second Amendment to Amended and Restated
1998 Stock Option Plan

        The Health Net, Inc. Amended and Restated 1998 Stock Option Plan is hereby amended to add the following sentence as the second sentence in Section 3.3:

"Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available under the Plan for all Stock Awards shall not exceed 500,000 shares of Common Stock."

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Exhibit 10.28

Second Amendment to Amended and Restated 1998 Stock Option Plan

EX-10.29

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Exhibit 10.29

HEALTH NET, INC.
2002 STOCK OPTION PLAN

I. INTRODUCTION

        The purposes of the Health Net, Inc. 2002 Stock Option Plan (the "Plan") are (i) to align the interests of the stockholders of Health Net, Inc., a Delaware corporation (the "Company"), and the recipients of awards under the Plan by increasing the proprietary interest of such recipients in the Company's growth and success, (ii) to advance the interests of the Company by attracting and retaining key salaried employees of the Company and its subsidiaries and (iii) to motivate such employees to act in the long-term best interests of the Company's stockholders.

II. DEFINITIONS

        For purposes of the Plan, the following capitalized terms shall have the meanings set forth in this Article.

        "Agreement" shall mean the written instrument evidencing an award hereunder between the Company and the recipient of such award, the terms of which may be amended or modified as provided in Section 6.3.

        "Board" shall mean the Board of Directors of the Company.

        "Bonus Stock" shall mean shares of Common Stock which are not subject to a Restriction Period.

        "Bonus Stock Award" shall mean an award of Bonus Stock.

        "Cash Award" shall have the meaning set forth in Section 5.2(e).

        "Cause" shall have the meaning set forth in Section 6.9(b).

        "Change in Control" shall have the meaning set forth in Section 6.8(b).

        "Code" shall mean the Internal Revenue Code of 1986, as amended.

        "Committee" shall mean the Compensation and Stock Option Committee of the Board.

        "Common Stock" shall mean the Class A Common Stock, $.001 par value, of the Company.

        "Company" shall mean Health Net, Inc., a Delaware corporation, or any successor thereto.

        "Disability" shall mean the inability, as determined solely by the Committee, of the holder of an award to perform substantially such holder's duties and responsibilities for a continuous period of at least six months.

"Eligible Employee" shall mean those individuals described in Section 3.1.

        "Employer" shall mean the Company and each Subsidiary.

        "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.

        "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

        "Fair Market Value" shall mean the closing price of a share of Common Stock as reported in The Wall Street Journal on the New York Stock Exchange Composite Transactions list for the date as of which such value is being determined or, if there shall be no reported transaction for such date or if such date is not a trading day, on the next immediately preceding date for which a transaction was reported or which was a trading day; provided, however, that if Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or

1

method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate.

        "Incentive Stock Option" shall mean an option to purchase shares of Common Stock that meets the requirements of Section 422 of the Code, or any successor provision, which is intended by the Committee to constitute an Incentive Stock Option.

        "Mature Shares" shall mean previously-acquired shares of Common Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six months or (ii) has purchased on the open market.

        "Maturity Value" shall mean, unless the Committee shall determine otherwise, the average of the Fair Market Value of a share of Common Stock for a period of sixty consecutive trading days ending on the Valuation Date with respect to each Restricted Stock Award, or if the Valuation Date is not a trading day, the sixty consecutive trading days ending on the last trading day before the Valuation Date.

        "Merger" shall mean any merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving or resulting parent corporation immediately after the merger.

        "Nonqualified Stock Option" shall mean an option to purchase shares of Common Stock which is not an Incentive Stock Option.

        "Permanent and Total Disability" shall have the meaning set forth in Section 22(e)(3) of the Code or any successor thereto.

        "Restricted Stock" shall mean shares of Common Stock which are subject to a Restriction Period.

        "Restricted Stock Award" shall mean an award of Restricted Stock.

        "Restriction Period" shall mean any period designated by the Committee during which Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in the Plan or the Agreement relating to such award.

        "SAR" shall mean a stock appreciation right which is granted in tandem with, or by reference to, an option (including a Nonqualified Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock, cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered.

        "Securities Act" shall mean the Securities Act of 1933, as amended.

        "Stock Award" shall mean a Restricted Stock Award or a Bonus Stock Award.

        "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.

        "Tax Date" shall have the meaning set forth in Section 6.5.

        "Ten Percent Holder" shall have the meaning set forth in Section 4.2(a).

        "Valuation Date" with respect to any Restricted Stock Award shall mean the date designated in the Agreement with respect to each Restricted Stock Award pursuant to Section 5.2 (a).

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III. ELIGIBILITY AND ADMINISTRATION

        3.1    Eligibility.    Participants in the Plan shall consist of such key salaried employees and persons expected to become key salaried employees ("Eligible Employees") of an Employer as the Committee in its sole discretion may select from time to time. The Committee's selection of an employee to participate in the Plan at any time shall not require the Committee to select such employee to participate in the Plan at any other time.

        3.2    Administration.    (a)    In General.    The Plan shall be administered by the Committee. The Committee may grant to Eligible Employees any one or a combination of the following awards under the Plan: (i) options to purchase shares of Common Stock in the form of Incentive Stock Options or Nonqualified Stock Options, (ii) SARs and (iii) Stock Awards in the form of Restricted Stock or Bonus Stock. The Committee shall, subject to the terms of the Plan, select Eligible Employees for participation in the Plan and determine the form, amount and timing of each award to such employees and, if applicable, the number of shares of Common Stock and the number of SARs subject to such an award, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Committee may, in its sole discretion and for any reason at any time, subject to the requirements imposed under Section 162(m) of the Code and regulations promulgated thereunder in the case of an award intended to be qualified performance-based compensation, take action such that (i) any or all outstanding options and SARs shall become exercisable in part or in full and (ii) all or a portion of the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse. The Committee shall, subject to the terms of the Plan, interpret the Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of the Plan, make any determinations necessary or desirable to effectuate the purposes of the Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations, determinations and conditions shall be final, binding and conclusive. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a majority of the Committee members is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting.

        (b)    Delegation.    To the extent permitted by applicable law, the Committee may delegate some or all of its power and authority hereunder to such executive officer or officers of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the grant of an award to any person who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period an award hereunder to such employee would be outstanding or (ii) the selection for participation in the Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an award to such an officer or other person.

        (c)    Indemnification.    No member of the Board of Directors or Committee, nor any executive officer to whom the Committee delegates any of its power and authority hereunder, shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Board of Directors and the Committee and any such executive officer shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorneys' fees) arising therefrom to the full extent permitted by law, except as otherwise may be provided in the Company's Certificate of Incorporation or By-laws, and under any directors' and officers' liability insurance of the Company that may be in effect from time to time.

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        3.3    Shares Available.    Subject to adjustment as provided in Section 6.7, 5,000,000 shares of Common Stock shall be available under the Plan. Such shares of Common Stock and shares of each other class of stock which become available under the Plan shall be reduced by the sum of the aggregate number of shares of such stock then subject to awards under the Plan. To the extent that shares of Common Stock subject to an outstanding option (except to the extent shares of Common Stock are issued or delivered by the Company in connection with the exercise of an SAR) or Stock Award are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the delivery or withholding of shares of Common Stock to satisfy all or a portion of the tax withholding obligations relating to an award, then such shares of Common Stock shall again be available under the Plan. Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available under this Plan for all Stock Awards shall not exceed 350,000 shares of Common Stock. Shares of Common Stock shall be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise or a combination thereof.

        To the extent necessary for an award to be qualified performance-based compensation under Section 162(m) of the Code and the regulations thereunder, the maximum number of shares of Common Stock with respect to which options, SARs, Stock Awards, or a combination thereof may be granted during the term of the Plan to any employee shall be 3,000,000, subject to adjustment as provided in Section 6.7.

IV. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

        4.1    Stock Options.    The Committee may, in its discretion, grant options to purchase shares of Common Stock to such Eligible Employees as may be selected by the Committee. Each option, or portion thereof, that is not an Incentive Stock Option, shall be a Nonqualified Stock Option. Each Incentive Stock Option shall be granted within ten years of the effective date of the Plan. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which options designated as Incentive Stock Options are exercisable for the first time by an option holder during any calendar year (under the Plan or any other plan of the Company or any Subsidiary) exceeds $100,000 (or any other applicable dollar limitation established under the federal tax laws), such options shall constitute Nonqualified Stock Options.

        4.2    Terms of Stock Options.    Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem advisable.

        (a)    Number of Shares and Purchase Price.    The number of shares of Common Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of Common Stock purchasable upon exercise of an option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shall be granted to an employee who, at the time such option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any Subsidiary) (a "Ten Percent Holder"), then the purchase price per share of Common Stock shall not be less than the price (currently 110% of Fair Market Value) required under the Code in order to constitute an Incentive Stock Option.

        (b)    Exercise Period and Exercisability.    The period during which an option may be exercised shall be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercised later than ten years after its date of grant; provided further, that if an Incentive Stock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than five years after its date of grant. The Committee may, in its discretion, establish performance measures

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which must be satisfied as a condition either to a grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or noncumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock.

        (c)    Method of Exercise.    An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) by delivery (either actual delivery or by attestation procedures established by the Company) of Mature Shares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), in each case, except as otherwise set forth in the Agreement relating to the option, (ii) if applicable, by surrendering to the Company any SARs which are canceled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. Cash payments shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company. 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. The Company shall not be required to deliver certificates representing shares of Common Stock until the Company has confirmed the receipt of good and available funds in payment of the full purchase price therefor and any withholding taxes thereon, as described in Section 6.5.

        4.3    Stock Appreciation Rights.    The Committee may, in its discretion, grant SARs to such Eligible Employees as may be selected by the Committee. Any SAR related to an Incentive Stock Option shall be granted at the same time that such Incentive Stock Option is granted.

        4.4    Terms of SARs.    SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem advisable.

        (a)    Number of SARs and Base Price.    The number of SARs subject to an award shall be determined by the Committee. The base price of an SAR shall be the purchase price per share of Common Stock of the related option.

        (b)    Exercise Period and Exercisability.    The Agreement relating to an award of SARs shall specify whether such award may be settled in shares of Common Stock or cash or a combination thereof. The period for the exercise of an SAR shall be determined by the Committee; provided, however, that no SAR shall be exercised later than the expiration, cancellation, forfeiture or other termination of the related option. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised only with respect to whole shares of Common Stock. Prior to the exercise of an SAR for shares of Common Stock, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such SAR.

        (c)    Method of Exercise.    An SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are canceled by reason of the exercise of the SAR and (iii) by executing such documents as the Company may reasonably request.

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        4.5Termination Of Employment.

        (a)    In General.    Subject to Sections 6.9 and 4.4(b) and paragraph (b) below in the case of an Incentive Stock Option, all of the terms relating to the exercise, cancellation or other disposition of an option or SAR in the event the holder of such option or SAR, is no longer employed by an Employer, whether by reason of Disability, retirement, death or other termination of employment, shall be determined by the Committee. Such determination shall be made at the time of the grant of such option or SAR, as the case may be, and shall be specified in the Agreement relating to such option or SAR.

        (b)    Incentive Stock Options.    Each Incentive Stock Option held by an optionee who ceases to be employed by any Employer by reason of Permanent and Total Disability or death shall be exercisable only to the extent that such option is exercisable on the date of such optionee's termination of employment. In the case of the optionee's Permanent and Total Disability, the option may thereafter be exercised by such optionee (or such optionee's legal representative or similar person) for a period of one year (or such shorter period as the Committee may specify in the Agreement) after the effective date of such optionee's termination of employment by reason of Permanent and Total Disability or until the expiration of the term of such Incentive Stock Option, whichever period is shorter. In the case of the optionee's death, the option may thereafter be exercised by the beneficiary or beneficiaries duly designated by the optionee or, if none, the executor or administrator of the optionee's estate or, if none, the person to whom the optionee's rights under such option shall pass by will or by the applicable laws of descent and distribution for a period of one year (or such other period as the Committee may specify in the Agreement) after the date of such optionee's death or until the expiration of the term of such Incentive Stock Option, whichever period is shorter.

        Each Incentive Stock option held by an optionee who ceases to be employed by any Employer for any reason other than Permanent and Total Disability or death shall be exercisable only to the extent such option is exercisable on the effective date of such optionee's termination of employment, and may thereafter be exercised by such optionee (or such optionee's legal representative or similar person) for a period of three months after the effective date of such optionee's termination of employment or until the expiration of the term of the Incentive Stock Option, whichever period is shorter.

        If an optionee dies during the exercise period specified in the Agreement evidencing the award of such option following the termination of the optionee's employment by reason of Permanent and Total Disability, or if the optionee dies during the three-month period following termination of employment for any reason other than death or Permanent and Total Disability, each Incentive Stock Option held by such optionee shall be exercisable only to the extent such option is exercisable on the date of the optionee's death and may thereafter be exercised by the beneficiary or beneficiaries duly designated by the optionee or, if none, the executor or administrator of the optionee's estate or, if none, the person to whom the optionee's rights under such option shall pass by will or by the applicable laws of descent and distribution for a period of one year (or such shorter period as the Committee may specify in the Agreement) after the date of death or until the expiration of the term of such Incentive Stock Option, whichever period is shorter.

STOCK AWARDS

        5.1    Stock Awards.    The Committee may, in its discretion, grant Stock Awards to such Eligible Employees as may be selected by the Committee. The Agreement relating to a Stock Award shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock Award.

        5.2    Terms of Stock Awards.    Stock Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem advisable.

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        (a)    Number of Shares and Other Terms.    The Committee shall determine the number of shares of Common Stock subject to a Restricted Stock Award or Bonus Stock Award. In the case of a Restricted Stock Award, the Committee shall designate a Valuation Date and shall determine the price, if any, to be paid by the holder for each share of Restricted Stock subject to the Award.

        (b)    Vesting and Forfeiture.    The Agreement relating to a Restricted Stock Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of the Plan, (i) for the vesting of the shares of Common Stock subject to such award if the holder of such award remains continuously in the employment of any one or more Employers through the specified Restriction Period and satisfies any other applicable conditions and (ii) for the forfeiture of all or a portion the shares of Common Stock subject to such award if the holder of such award does not remain continuously in the employment of any one or more Employers through the specified Restriction Period or does not satisfy any other applicable conditions. Bonus Stock Awards shall not be subject to any Restriction Periods.

        (c)    Share Certificates.    In the case of a Restricted Stock Award, during the Restriction Period, a certificate or certificates representing the award may be registered in the holder's name and may bear a legend, in addition to any legend which may be required pursuant to Section 6.6, indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of the Plan and the Agreement relating to the Restricted Stock Award. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate by the Company, which would permit transfer to the Company of all or a portion of the shares of Common Stock subject to the Restricted Stock Award in the event such award is forfeited in whole or in part. Upon termination of any applicable Restriction Period (and the satisfaction or attainment of any applicable conditions), or upon the grant of a Bonus Stock Award, in each case subject to the Company's right to require payment of any taxes in accordance with Section 6.5, either (i) a certificate or certificates evidencing ownership of the requisite number of shares of Common Stock shall be delivered to the holder of such award or (ii) a notation of noncertificated shares shall be made on the stock records of the Company.

        (d)    Rights With Respect To Restricted Stock Awards.    Unless otherwise set forth in the Agreement relating to a Restricted Stock Award, and subject to the terms and conditions of a Restricted Stock Award and the Plan, the holder of such award shall have all rights as a stockholder of the Company, including, but not limited to, voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of Common Stock; provided, however, that a distribution with respect to shares of Common Stock, other than a regular cash dividend or any other distribution as the Committee may in its sole discretion designate, shall be deposited with the Company and shall be subject to the same restrictions as the shares of Common Stock with respect to which such distribution was made. Any such distributions on deposit with the Company shall not be segregated in separate accounts and shall not bear interest. Any breach of any restrictions, terms or conditions applicable to a Restricted Stock Award by the holder of such award shall cause a forfeiture of Restricted Stock, any related distributions, and all rights under the Agreement.

        (e)    Cash Awards.    In connection with any Restricted Stock Award, the Committee may authorize (either at the time such award is made or subsequently) the payment of a cash amount (a "Cash Award") to the holder of such Restricted Stock at any time after such Restricted stock shall have become vested; provided, however, that the amount of the cash payment, if any, that a holder shall be entitled to receive shall not exceed 100 percent of the aggregate Maturity Value of the Restricted Stock Award. Such Cash Awards shall be payable in accordance with such additional restrictions, terms and conditions as shall be prescribed by the Committee and shall be in addition

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to any other salary, incentive, bonus or other compensation payments which holders shall be otherwise entitled or eligible to receive from the Company.

        5.3    Termination of Employment.    Subject to Section 6.9, all of the terms relating to the termination of the Restriction Period or other conditions relating to a Restricted Stock Award, or any cancellation or forfeiture of such Restricted Stock Award in the event the holder of such Restricted Stock Award is no longer employed by an Employer, whether by reason of Disability, retirement, death or other termination of employment, shall be specified in the Agreement relating to such Restricted Stock Award.

VI. GENERAL

        6.1    Effective Date and Term of Plan.    The Plan shall be submitted to the stockholders of the Company for approval and, if approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the 2002 annual meeting of stockholders, shall become effective on the date of such meeting. The Plan shall terminate when shares of Common Stock are no longer available for the grant of awards, unless terminated earlier by the Board. Termination of the Plan shall not affect the terms or conditions of any award granted prior to termination.

        In the event that the Plan is not approved by the stockholders of the Company within twelve months of the date the Board adopts the Plan, subject to stockholder approval, the Plan and any awards granted hereunder shall be null and void.

        6.2    Amendments.    The Board may amend the Plan as it shall deem advisable, subject to any requirement of stockholder approval required by applicable law, rule or regulation, including Section 162(m) and Section 422 of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would (a) increase the maximum number of shares of Common Stock available under the Plan (subject to Section 6.7), (b) effect any change inconsistent with Section 422 of the Code or (c) extend the term of the Plan. No amendment may impair the rights of a holder of an outstanding award without the consent of such holder.

        6.3    Agreement.    Each award under the Plan shall be evidenced by an Agreement setting forth the terms and conditions applicable to such award. No award shall be valid until an Agreement is executed by a duly authorized representative of the Company and the recipient of such award and, upon execution by each party and delivery of the Agreement to the Company, such award shall be effective as of the effective date set forth in the Agreement. No award under the Plan shall be effective unless the Agreement evidencing such award is executed by the recipient and delivered to the Company. An Agreement may be modified or amended at any time by the Committee, provided that no modification or amendment may adversely affect the rights of the holder of the award evidenced by the Agreement without the holder's consent.

        6.4    Non-Transferability of Awards.    Unless otherwise specified in the Agreement relating to an award, no award (or rights thereunder) shall be transferable other than by will, the laws of descent and distribution, a qualified domestic relations order or pursuant to beneficiary designation or assignment procedures approved by the Company. Except to the extent permitted by the foregoing sentence or the Agreement relating to an award, each award may be exercised or settled during the holder's lifetime only by the holder or the holder's legal representative or similar person. Except to the extent permitted by the second preceding sentence or the Agreement relating to an award, no award may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any such award, such award and all rights thereunder and its related Agreement shall immediately become null and void.

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        6.5    Tax Withholding.    The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by the holder of such award of any federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. The holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having an aggregate Fair Market Value, determined as of the date the obligation to withhold or pay taxes arises in connection with the award (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, equal to the amount necessary to satisfy any such obligation, (C) by delivery (either actual delivery or by attestation procedures established by the Company) of shares of Common Stock having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amount necessary to satisfy any such obligation, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) a combination of (A), (B) and (C); in each case, except as otherwise set forth in the Agreement relating to the award, provided, however, that no shares of Common Stock shall be withheld or delivered in excess of the minimum statutory requirements with respect to such tax obligation unless such shares are Mature Shares. 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.

        6.6    Restrictions On Shares.    Each award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the exercise or settlement of such award or the delivery of shares thereunder, such award shall not be exercised or settled and such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act and the rules and regulations thereunder.

        6.7    Adjustment.    In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities available under the Plan, the number and class of securities subject to each outstanding option and SAR and the purchase price per security, the maximum number of securities with respect to which Stock Awards or options or SARs, or a combination thereof, may be granted during any calendar year to any person, the terms of each outstanding SAR, the terms of each outstanding Restricted Stock Award, and the number and class of securities subject to each outstanding Stock Award shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without an increase in the aggregate purchase price or base price. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being (a) available under the Plan, such fractional security shall be disregarded, or (b) subject to an award under the Plan, the Company shall pay the holder of such award, in connection with the first vesting, exercise or settlement of such award in whole or in part occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on such vesting, exercise or settlement date over (B) the exercise or base price, if any, of such award.

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        6.8    Acceleration of Awards.

        Notwithstanding any provision in the Plan, upon the occurrence of a Change in Control, as defined below, (i) all outstanding options and SARs shall immediately become exercisable in full and (ii) the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse, except as otherwise provided in the applicable Agreement.

        (a)    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 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.

        (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, SARs or Restricted Stock granted under the Plan may contain such provisions limiting the acceleration of the exercisability of options, SARs 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.

        (b)    Certain Business Combinations.    (i) With respect to any optionee who is subject to Section 16 of the Exchange Act, (A) notwithstanding the exercise periods set forth in any Agreement to which such optionee is a party, and (B) notwithstanding the expiration date of the term of such option, in the event the Company is involved in a business combination pursuant to which such optionee receives a substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Company, then each such substitute option held by such

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optionee shall be exercisable to the extent set forth in the Agreement evidencing such option until and including the later of (y) the expiration date of the term of the option or, in the event of such optionee's termination of employment, the last exercise date prescribed by the optionee's Agreement and (z) the date which is six months and one day after the consummation of such business combination; and

        (ii)  With respect to any holder of an SAR (other than an SAR which may be settled only for cash) who is subject to Section 16 of the Exchange Act, (A) notwithstanding the exercise periods set forth in any Agreement to which such holder is a party, and (B) notwithstanding the expiration date of the term of such SAR, in the event the Company is involved in a transaction pursuant to which such holder receives a substitute SAR relating to any entity, including an entity directly or indirectly acquiring the Company, then each such substitute SAR held by such holder shall be exercisable to the extent set forth in the Agreement evidencing such SAR until and including the later of (y) the date set forth in the optionee's Agreement or, the expiration date of the term of such SAR, as the case may be and (z) the date which is six months and one day after the consummation of such business combination.

        6.9    Termination of Employment.

        (a)    Acceleration of Exercisability or Vesting.    Notwithstanding any provisions to the contrary in an Agreement, if the employment of the holder of an option or Stock Award shall terminate for any reason (including, without limitation, the holder's death, Permanent and Total Disability, retirement (either pursuant to any retirement plan of the Company or any Subsidiary or, in the absence of any such plan, pursuant to the Committee's discretionary determination that such termination of employment shall be treated as retirement for purposes of the Plan), resignation or voluntary termination other than for Cause (as defined in subsection (b) hereof) as determined by the Committee in its sole discretion), the Committee may determine the following:

          (i)  Any Restriction Period applicable to any Restricted Stock Award shall be deemed to have expired upon the holder's termination of employment, and all Restricted Stock subject to such award shall become vested, and any Cash Award payable pursuant to the applicable Restricted Stock Award shall be adjusted in such manner as is provided in the Agreement; and

        (ii)  Any option shall become exercisable in full upon the holder's termination of employment.

        (b)    Termination By Company For Cause.    If the employment with an Employer of a holder of a Restricted Stock Award shall terminate for Cause during the Restriction Period, then all Restricted Stock and any Cash Awards shall be forfeited immediately on the effective date of such holder's termination of employment. If the employment with an Employer of a holder of an option shall terminate for Cause, all options and SARs held by such holder shall immediately terminate and be canceled on the effective date of such holder's termination of employment. For purposes of this Section 6.9, "Cause" shall have the meaning ascribed thereto in any employment agreement to which such holder is a party or, in the absence thereof, shall include, but not be limited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his or her duties and responsibilities for any reason other than illness or incapacity; provided, however, that if such termination occurs within 12 months after a Consummated Transaction, Control Purchase or Board Change (as such events are described in Section 6.8(a)), Cause shall mean only a felony conviction for fraud, misappropriation or embezzlement.

        (c)    General.    For purposes of the Plan, a leave of absence, unless otherwise determined by the Committee prior to the commencement thereof, shall not be considered a termination of

11

employment. Awards made under the Plan shall not be affected by any change of employment so long as the holder continues to be an employee of an Employer.

        6.10    No Right of Participation or Employment.    No person shall have any right to participate in the Plan. Neither the Plan nor any award made hereunder shall confer upon any person any right to continued employment by any Employer or affect in any manner the right of an Employer to terminate the employment of any person at any time without liability hereunder.

        6.11    Rights As Stockholder.    Subject to Section 5.2(d), no person shall have any right as a stockholder of the Company with respect to any shares of Common Stock or other equity security of the Company which is subject to an award hereunder unless and until such person becomes a stockholder of record with respect to such shares of Common Stock or equity security.

        6.12    Non-Exclusivity.    The Plan shall not be construed as creating any limitations on the Company or the Committee to adopt such other incentive arrangements as it may deem desirable, including the granting of stock options and the awards of either shares of Common Stock or cash to any individual.

        6.13    Governing Law.    The Plan, each award hereunder and the related Agreement, 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 principles of conflicts of laws.

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HEALTH NET, INC. 2002 STOCK OPTION PLAN
I. INTRODUCTION
II. DEFINITIONS
III. ELIGIBILITY AND ADMINISTRATION
IV. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

EX-10.45

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Exhibit 10.45

FIRST AMENDMENT TO 364-DAY CREDIT AGREEMENT

THIS FIRST AMENDMENT TO 364-DAY CREDIT AGREEMENT (this "Amendment"), dated as of June 27, 2002, is entered into among HEALTH NET, INC., a Delaware corporation (the "Borrower"), the Lenders identified on the signature pages hereto (the "Lenders"), and BANK OF AMERICA, N.A., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). Terms used but not otherwise defined herein shall have the meanings provided in the Credit Agreement described below.

W I T N E S S E T H

WHEREAS, the Borrower, the Lenders, and the Administrative Agent entered into that certain 364-Day Credit Agreement dated as of June 28, 2001 (the "Existing Credit Agreement"); and

WHEREAS, the Borrower has requested to extend the Commitment Termination Date for an additional 364 day period, and certain Lenders party to the Existing Credit Agreement have agreed to extend their respective Commitments and amend the Existing Credit Agreement in accordance with such request and as provided herein.

NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

PART 1
DEFINITIONS

SUBPART 1.1    Certain Definitions.    Unless otherwise defined herein or the context otherwise requires, the following terms used in this Amendment, including its preamble and recitals, have the following meanings:

        "Amended Credit Agreement" means the Existing Credit Agreement as amended hereby.

        "Amendment No. 1 Effective Date" is defined in Subpart 3.1.

SUBPART 1.2    Other Definitions.    Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Existing Credit Agreement.

PART 2
AMENDMENTS TO EXISTING CREDIT AGREEMENT

        Effective on (and subject to the occurrence of) the Amendment No. 1 Effective Date, the Existing Credit Agreement is hereby amended in accordance with this Part 2.

SUBPART 2.1    Amendments to Section 1.01.    The definition of "Commitment Termination Date" set forth in Section 1.01 of the Existing Credit Agreement is hereby amended in its entirety to read as follows:

        "Commitment Termination Date" shall mean the date 364 days following June 27, 2002.

SUBPART 2.2    Amendments to Schedule 2.01.Schedule 2.01 of the Existing Credit Agreement is hereby replaced with Schedule 2.01 attached hereto.

PART 3
CONDITIONS TO EFFECTIVENESS

SUBPART 3.1    Amendment No. 1 Effective Date.    This Amendment shall be and become effective as of the date hereof (the "Amendment No. 1 Effective Date") when all of the conditions set forth in

this Part 3 shall have been satisfied, and thereafter this Amendment shall be known, and may be referred to, as the "Amendment ".

SUBPART 3.2    Execution of Counterparts of Amendment.    The Administrative Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Administrative Agent) of this Amendment, which collectively shall have been duly executed on behalf of each of the Borrower, the Lenders, and the Administrative Agent.

SUBPART 3.3    Fees and Expenses.    The Borrower has paid all fees and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and the other transactions contemplated herein including, without limitation, the reasonable legal fees and expenses of Moore & Van Allen, counsel to the Administrative Agent.

SUBPART 3.4    Other Items.    The Administrative Agent shall have received such other documents, agreements or information which may be reasonably requested by the Administrative Agent.

PART 4
MISCELLANEOUS

SUBPART 4.1    Representations and Warranties.    The Borrower hereby represents and warrants to the Administrative Agent and the Lenders that, after giving effect to this Amendment, (a) no Default or Event of Default exists under the Credit Agreement and (b) the representations and warranties set forth in Section 3 of the Existing Credit Agreement are, subject to the limitations set forth therein, true and correct in all material respects as of the date hereof (except for those which expressly relate to an earlier date).

SUBPART 4.2    Reaffirmation of Obligations.    The Borrower hereby ratifies the Credit Agreement and acknowledges and reaffirms (a) that it is bound by all terms of the Credit Agreement applicable to it and (b) that it is responsible for the observance and full performance of its respective obligations under the Credit Agreement.

SUBPART 4.3    Cross-References.    References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment.

SUBPART 4.4    Instrument Pursuant to Existing Credit Agreement.    This Amendment is executed pursuant to the Existing Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Existing Credit Agreement.

SUBPART 4.5    References in Other Credit Documents.    At such time as this Amendment shall become effective pursuant to the terms of Subpart 3.1, all references to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment.

SUBPART 4.6    Counterparts/Telecopy.    This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery of executed counterparts of the Amendment by telecopy shall be effective as an original and shall constitute a representation that an original shall be delivered.

SUBPART 4.7    Governing Law.    THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES).

SUBPART 4.8    Successors and Assigns.    This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

SUBPART 4.9    General.    Except as amended hereby, the Existing Credit Agreement and all other credit documents shall continue in full force and effect.

        [Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the 364-Day Credit Agreement as of the date first above written.

BORROWER:	HEALTH NET, INC., a Delaware corporation
	By:	/s/  MICHAEL P. WHITE
	Name:	Michael P. White
	Title:	SVP & Treasurer

ADMINISTRATIVE AGENT:	BANK OF AMERICA, N.A.
	By:	/s/  JOSEPH L. CORAH
	Name:	Joseph L. Corah
	Title:	Principal

LENDERS:	BANK OF AMERICA, N.A.
	By:	/s/  JOSEPH L. CORAH
	Name:	Joseph L. Corah
	Title:	Principal

JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank)
By:	/s/  DAWN LEE LUM
Name:	Dawn Lee Lum
Title:	Vice President

FLEET NATIONAL BANK
By:	/s/  JUDI N. CYR
Name:	Judi N. Cyr
Title:	Vice President

MIZUHO CORPORATE BANK, LTD. (successor to The Fuji Bank, Limited, The Industrial Bank of Japan, Limited and The Dai-Ichi Kangyo Bank, Ltd., respectively)
By:	/s/  MASAHITO FUKUDA
Name:	Masahito Fukuda
Title:	Sr. Vice President & G.H.

CITICORP USA, Inc.
By:	/s/  PETER C. BICKFORD
Name:	Peter C. Bickford
Title:	Vice President

THE BANK OF NOVA SCOTIA
By:	/s/  R.P. REYNOLDS
Name:	R.P. Reynolds
Title:	Director

SUMITOMO MITSUI BANKING CORPORATION
By:	/s/  AL GALLUZZO
Name:	Al Galluzzo
Title:	Senior Vice President

THE BANK OF NEW YORK
By:	/s/  REBECCA K. LEVINE
Name:	Rebecca K. Levine
Title:	Vice President

WELLS FARGO BANK, N.A.
By:	/s/  LUCY NIXON
Name:	Lucy Nixon
Title:	Vice President

UNION BANK OF CALIFORNIA, N.A.
By:	/s/  PHILIP M. ROESNER
Name:	Philip M. Roesner
Title:	Vice President

CREDIT LYONNAIS NEW YORK BRANCH
By:	/s/  CHARLES HEIDSIECK
Name:	Charles Heidsieck
Title:	Senior Vice President

SCHEDULE 2.01

COMMITMENTS
(364-Day Credit Agreement)

Lender	Commitment Amount		Commitment Percentage
Bank of America, N.A.	$	28,500,000	16.285714285	%
The Chase Manhattan Bank	$	28,500,000	16.285714285	%
Fleet National Bank	$	28,000,000	16.000000000	%
Citicorp, USA	$	25,000,000	14.285714285	%
The Bank of Nova Scotia	$	15,000,000	8.571428571	%
The Bank of New York	$	10,000,000	5.714285714	%
Wells Fargo Bank	$	10,000,000	5.714285714	%
Union Bank of California, N.A.	$	10,000,000	5.714285714	%
Mizuho Corporate Bank, Ltd.	$	7,500,000	4.285714285	%
Sumitomo Mitsui Banking Corporation	$	7,500,000	4.285714285	%
Credit Lyonnais New York Branch	$	5,000,000	2.857142857	%
Total:	$	175,000,000	100.000000000	%

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FIRST AMENDMENT TO 364-DAY CREDIT AGREEMENT

EX-12.1

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Exhibit 12.1

Health Net, Inc.
Calculation of Ratio of Earnings to Fixed Charges—Consolidated Basis
(amount in thousands, except ratios)

	Six Months Ended June 30,						Year Ended December 31,
	2002			2001			2001			2000			1999			1998			1997
Income from continuing operations	$	187,078		$	44,780		$	137,350		$	262,747		$	244,008		$	(254,154	)	$	(89,248	)
Interest expense		20,527			30,846			54,940			87,930			83,808			92,159			63,555
Amortization of debt expense		1,366			2,023			3,280			3,395			3,170			1,100			—
Interest portion of rental expense (a)		4,168			3,831			8,403			7,470			7,350			7,545			7,305
Earnings	$	213,139		$	81,480		$	203,973		$	361,542		$	338,336		$	(153,350	)	$	(18,388	)
Fixed Charges (Total of interest expense, amort. and interest portion of rental expense)	$	26,061		$	36,700		$	66,623		$	98,795		$	94,328		$	100,804		$	70,860
Ratio of earnings to fixed charges		8.2	×		2.2	×		3.1	×		3.7	×		3.6	×			(b)			(b)

(a)

Interest portion of rental expense is estimated to be 15%.

(b)

No ratio is shown for 1998 and 1997 because earnings were insufficient to cover fixed charges by $153.4 million and $18.4 million, respectively.

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Health Net, Inc. Calculation of Ratio of Earnings to Fixed Charges—Consolidated Basis (amount in thousands, except ratios)

EX-99.1

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Exhibit 99.1

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 Quarterly Report of Health Net, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 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 Marvin P. Rich, 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:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/  JAY M. GELLERT Jay M. Gellert
Chief Executive Officer
August 14, 2002

/s/  MARVIN P. RICH Marvin P. Rich
Chief Financial Officer
August 14, 2002

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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