S-3

As filed with the Securities and Exchange Commission on January 31, 2003

Registration No. 333-          

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form S-3

Registration Statement Under The Securities Act of 1933

PACIFICARE HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or jurisdiction of incorporation or organization) 95-4591529
(I.R.S. Employer Identification No.)

5995 Plaza Drive

Cypress, California 90630

(714) 952-1121

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Joseph S. Konowiecki, Esq.

Executive Vice President, General Counsel and Secretary

PacifiCare Health Systems, Inc.

5995 Plaza Drive

Cypress, California 90630

(714) 952-1121

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Barbara L. Borden, Esq.

Cooley Godward LLP

4401 Eastgate Mall

San Diego, California 92121-9109

Tel: (858) 550-6000

Fax: (858) 550-6420

     Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

     If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.    þ

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

		Proposed Maximum	Proposed Maximum
Title of Each Class of		Offering Price Per	Aggregate Offering	Amount of
Securities to be Registered	Amount to be Registered	Security(1)	Price(1)	Registration Fee
3% Convertible Subordinated Debentures Due 2032	$135,000,000	100%	$135,000,000	$12,420
Common Stock, par value $.01 per share, including related rights to purchase Series A junior participating preferred stock(2)	3,214,283 shares(2)	—	—	(3)

(1)	Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended and exclusive of accrued interest, if any.
(2)	Represents the number of shares of common stock issuable upon conversion of the 3% convertible subordinated debentures due 2032 at an initial conversion price of $42.00 per share. The debentures are convertible into 23.8095 shares of our common stock, par value $0.01 per share, per $1,000 principal amount of debentures, subject to adjustment in certain circumstances. Pursuant to Rule 416 under the Securities Act of 1933, we are also registering an indeterminable number of shares of common stock as may be issuable from time to time upon conversion of the debentures as a result of stock splits, stock dividends or the other anti-dilution provisions of the debentures.
(3)	Pursuant to Rule 457(i), there is no additional filing fee with respect to the shares of common stock issuable upon conversion of the debentures because no additional consideration will be received by the registrant.

     The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, nor is it soliciting offers to buy these securities, in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JANUARY 31, 2003

PROSPECTUS

PacifiCare Health Systems, Inc.

$135,000,000 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

AND 3,214,283 SHARES OF COMMON STOCK ISSUABLE

UPON CONVERSION OF THE DEBENTURES

       On November 22, 2002, we issued and sold $125,000,000 of 3% convertible subordinated debentures due 2032 in a private placement in reliance on an exemption from registration under the Securities Act of 1933. On December 20, 2002, we issued $10,000,000 of the debentures in connection with the exercise in part by the initial purchasers of the debentures of their option to purchase additional debentures. The initial purchasers of the debentures in that offering resold the debentures in offerings in reliance on an exemption from registration under Rule 144A of the Securities Act of 1933. This prospectus may be used by the selling securityholders to resell their debentures and the common stock issuable upon conversion of their debentures.

      We will pay interest on the debentures semi-annually in arrears in cash on April 15 and October 15 of each year, commencing April 15, 2003. The debentures will mature on October 15, 2032, unless earlier converted, redeemed or repurchased. The debentures are subordinated to our existing and future senior indebtedness and effectively subordinated to all debt and other liabilities of our subsidiaries.

      Holders may convert the debentures into shares of our common stock at a conversion rate of 23.8095 shares per $1,000 principal amount of debentures, subject to adjustment, before close of business on October 15, 2032 only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2002, if the closing sale price of our common stock exceeds 110% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) subject to certain exceptions, during the five business day period after any ten consecutive trading day period in which the trading price of the debentures for each day of such period was less than 95% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures; (3) if the debentures have been called for redemption; or (4) upon the occurrence of certain corporate events.

      Beginning October 18, 2007, we may redeem any of the debentures at the redemption prices set forth in this prospectus, plus accrued interest. Holders of the debentures may require us to repurchase their debentures on October 15 of 2007, 2012, 2017, 2022 or 2027 or following a fundamental change at the purchase prices specified herein.

      Our common stock is quoted on the Nasdaq National Market under the symbol “PHSY.” On January 30, 2003, the last reported sale price of our common stock was $27.86 per share.

      For a more detailed description of the debentures, see “Description of the Debentures” beginning on page 18.

      The debentures and the common stock into which the debentures are convertible may be offered and sold from time to time pursuant to this prospectus by the holders of those securities or by their transferees, pledgees, donees, or successors, all of which we refer to as selling securityholders. The securities may be sold by the selling securityholders directly to purchasers or through underwriters, broker-dealers or agents. If required, at the time of a particular offering of securities by a selling securityholder, a supplement to this prospectus will be circulated setting forth the name or names of any underwriters, broker-dealers or agents, any discounts, commissions or other terms constituting compensation for underwriters and any discounts, commissions or concessions allowed or reallowed or paid to agents or broker-dealers. The selling securityholders will receive all of the net proceeds from the sale of the securities and will pay all underwriting discounts and selling commissions, if any, applicable to any sale. We are responsible for the payment of other expenses incident to the registration of the securities. The selling securityholders and any broker-dealers, agents or underwriters that participate in the distribution of any securities may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act of 1933. Any discounts, commissions, concessions or profit they earn on any sale of the securities may be deemed to be underwriting compensation under the Securities Act of 1933.

      Investing in the debentures or the common stock issuable upon their conversion involves risks. See “Risk Factors” beginning on page 4 of this prospectus and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Form 10-K or Form 10-Q that has been filed under the Securities Exchange Act of 1934, as amended, and that is incorporated by reference into this prospectus.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2003.

TABLE OF CONTENTS

EXHIBIT 4.4

EXHIBIT 4.5

EXHIBIT 4.6

EXHIBIT 5.1

EXHIBIT 12.1

EXHIBIT 15.1

EXHIBIT 23.1

EXHIBIT 25.1

TABLE OF CONTENTS

	Page
Forward-Looking Statements		ii
Summary		1
Risk Factors		4
Use of Proceeds		17
Description of the Debentures		18
Description of Our Other Indebtedness		33
Description of Capital Stock		36
Certain United States Federal Income Tax Considerations		41
Selling Securityholders		47
Plan of Distribution		50
Legal Matters		51
Experts		51
Where You Can Find Additional Information		51

      You should rely only on the information contained or incorporated by reference into this prospectus. We have not authorized anyone to provide you with different information. The selling securityholders are not making an offer of the securities to be sold under this prospectus in any jurisdictions where the offers or sales are not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, or that the information contained in any document incorporated by reference is accurate as of any date other than the date of the document incorporated by reference. The delivery of this prospectus does not, under any circumstances, mean that there has not been a change in our affairs since the date hereof.

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FORWARD-LOOKING STATEMENTS

      This prospectus contains or incorporates by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe our reserves and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. The forward-looking statements contained or incorporated by reference in this prospectus are based largely on our expectations and projections about future events and future trends affecting our business, and so are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this prospectus or the date of the applicable document incorporated by reference in this prospectus. The risks and uncertainties include, among others, the following:

•  the risk that we may substantially reduce our participation in the Medicare+Choice program and its potential effect on our results of operations;

•  the possibility that our commercial premiums and reimbursement for our Medicare+Choice program, which are generally fixed in advance of the periods covered, will not adequately cover increases in health care service costs over that period;

•  the risk that we will not accurately price our products and/or predict and control future health care costs;

•  possible losses of profitable membership or lower premiums;

•  the potential failure of our new products or products targeted for growth to gain expected levels of membership;

•  disruptions and/or insolvencies in our health care provider network;

•  the possibility that we may underestimate our incurred but not reported claims;

•  the risk that our claims processing system will not adequately handle increasing claim volume and regulatory claims payment requirements and accurately process claims;

•  the risk that we will not be able to adequately control our prescription drug costs;

•  the risk that our selling, general and administrative expenses will exceed our expectations;

•  the potential effect on our business of existing and proposed legislation, regulations or other government initiatives, including actions that government officials could take that would affect our business and our costs of complying with applicable laws and regulations;

•  the potential effect on our business of regulatory audits and pending lawsuits;

•  competitive practices in the health care and insurance industries that adversely affect our pricing, our membership, our expenses, our operating profit and/or our other results ;

•  the possibility that we may take charges for long-lived asset impairments or dispositions or restructurings;

•  the risk that the restrictive covenants and the prepayment terms contained in our senior credit facility and our 10 3/4% senior notes will limit our ability to execute on our business strategy and the risk that we will be unable to meet the financial covenants included in our senior credit facility;

•  the impact of our corporate structure and the level of our indebtedness on our business and our ability to service and otherwise meet our obligations under our indebtedness; and

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•  the impact of regulations that require nearly all of our subsidiaries to meet or exceed various capital standards on our business and our ability to service and otherwise meet our obligations under our indebtedness.

      Our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements. In addition, past financial performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

      PacifiCare^®, SecureHorizons^®, Prescription Solutions^®; and Quality Index^®; are our federally registered trademarks.

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SUMMARY

      The following summary is provided solely for your convenience. This summary is not intended to be complete and may not contain all of the information that you should consider before investing in the debentures or the shares of common stock issuable upon conversion of the debentures. It is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes to the consolidated financial statements, included elsewhere or incorporated by reference in this prospectus. You should read carefully the full text and more specific details contained elsewhere or incorporated by reference in this prospectus, including the “Risk Factors” section and the consolidated financial statements and the notes thereto, before investing in the debentures or the shares of common stock issuable upon conversion of the debentures. For a more detailed description of the debentures, see “Description of the Debentures.” Except as otherwise indicated herein or as the context may otherwise require, in this prospectus the words “we,” “our,” “ours” and “us” refer only to PacifiCare Health Systems, Inc. and its subsidiaries and not to any other person.

PacifiCare

      We offer managed care and other health insurance products to employer groups and Medicare beneficiaries in eight Western states and Guam. Our commercial and senior programs are designed to deliver quality health care and customer service to our members cost effectively. These programs include health maintenance organizations, or HMOs, preferred provider organizations, or PPOs, and Medicare supplement products. We also offer a variety of specialty products and services that employers can purchase to supplement our basic commercial plans, or as stand-alone products. These specialty products include pharmacy benefit management, or PBM, behavioral health services and dental and vision benefit plans. As of September 30, 2002, we had approximately 3.2 million HMO and other commercial and senior product members, and approximately 8.8 million members in our PBM, dental and behavioral health plans, including both members covered by our commercial or senior HMOs and members that are unaffiliated with our HMOs.

      Our principal executive offices are located at 5995 Plaza Drive, Cypress, California 90630, and our telephone number is (714) 952-1121. We maintain a worldwide website at www.pacificare.com. The reference to our worldwide web address does not constitute incorporation by reference of the information contained at this site. We were formed in 1996 as a Delaware corporation in connection with the acquisition of FHP International Corporation. We are the successor to a California corporation that was formed in 1983 and reincorporated as a Delaware corporation in 1985.

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SECURITIES TO BE REGISTERED

      The debentures were originally issued and sold by us to the initial purchasers, Morgan Stanley & Co. Incorporated and Goldman Sachs & Co., in an offering exempt from registration under the Securities Act. The initial purchasers resold the debentures in transactions exempt from registration under Rule 144A of the Securities Act. For additional information regarding the debentures, see “Description of the Debentures.”

Issuer	PacifiCare Health Systems, Inc.
Securities	$135,000,000 aggregate principal amount of 3% Convertible Subordinated Debentures due 2032.
Maturity Date	October 15, 2032.
Interest	3% per annum on the principal amount, payable semi-annually in arrears in cash on April 15 and October 15 of each year, beginning April 15, 2003.
Conversion	The debentures may be converted into shares of our common stock at a conversion rate of 23.8095 shares per $1,000 principal amount of debentures, subject to adjustment, prior to the close of business on the final maturity date under any of the following circumstances:
	• during any fiscal quarter commencing after December 31, 2002, if the closing sale price of our common stock exceeds 110% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; or
	• during the five business day period after any ten consecutive trading day period in which the trading price of the debentures for each day of such period was less than 95% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures; or
	• if the debentures have been called for redemption; or
	• upon the occurrence of specified corporate events described under “Description of the Debentures.”
Subordination	The debentures are subordinated to all of our existing and future senior indebtedness and are effectively subordinated to all debt and other liabilities of our subsidiaries. As of September 30, 2002, we had $769 million of senior indebtedness outstanding and our subsidiaries had $1.7 billion of other liabilities outstanding, excluding intercompany liabilities. Neither we nor any of our subsidiaries are prohibited from incurring debt, including senior indebtedness, under the indenture.
Redemption of the Debentures at Our Option	Beginning October 18, 2007, we may redeem for cash all or any portion of the debentures, upon not less than 30 nor more than 60 days’ notice by mail to holders of the debentures. We will pay a purchase price equal to 100% of the principal amount of the debentures to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date. For more information about

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	redemption of the debentures at our option, see “Description of the Debentures — Redemption of the Debentures at Our Option.”
Redemption at the Option of the Holder	Holders of the debentures may require us to repurchase the debentures for cash on October 15, 2007, 2012, 2017, 2022 and 2027 at a repurchase price equal to 100% of the principal amount of the debentures to be repurchased plus any accrued and unpaid interest to, but excluding, the repurchase date. See “Description of the Debentures — Redemption at Option of the Holder.”
Fundamental Change	If a fundamental change (as described under “Description of the Debentures — Redemption at Option of the Holder Upon a Fundamental Change”) occurs prior to maturity, holders of the debentures may require us to purchase all or part of their debentures at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest.
Use of Proceeds	We will not receive any of the proceeds of the sale by the selling securityholders of the debentures or the common stock into which the debentures may be converted.
Nasdaq National Market Symbol	PHSY

RISK FACTORS

      You should carefully consider all of the information contained or incorporated by reference in this prospectus prior to investing in the debentures or the common stock issuable upon conversion of the debentures. In particular, we urge you to carefully consider the information set forth under “Risk Factors” beginning on page 4 for a discussion of risks and uncertainties relating to us, our subsidiaries, our business and an investment in the debentures or the common stock issuable upon conversion of the debentures.

RATIO OF EARNINGS TO FIXED CHARGES

      Our ratio of earnings to fixed charges for the years ended December 31, 1997 through 2001 and the nine months ended September 30, 2001 and 2002 are set forth in the table below.

Nine Months

Ended

Years Ended December 31,

September 30,

1997

1998

1999

2000

2001

2001

2002

(Unaudited)

Ratio of Earnings to Fixed Charges

3.7x

6.1x

9.1x

4.0x

2.4x

2.4x

3.4x

      For purposes of determining the ratio of earnings to fixed charges, earnings are defined as income before income taxes before impairment, disposition, restructuring and other charges (credits), Office of Personnel Management credits and the cumulative effect of a change in accounting principle, plus fixed charges. Fixed charges represent interest expense, including capitalized interest, on all debt, amortized premiums, discounts and capitalized expenses related to indebtedness, and the estimated interest factor attributable to rental expenses. Our ratio of earnings to fixed charges for the year ended December 31, 2001, giving pro forma effect to the offering of the debentures by us and the application of its estimated net proceeds as set forth under “Use of Proceeds,” and our other permanent repayments and retirements of indebtedness that occurred on or after January 1, 2002 and on or before September 30, 2002, as if each had occurred on January 1, 2001, would have been 2.4x. Our ratio of earnings to fixed charges for the nine months ended September 30, 2002, giving pro forma effect to the offering of the debentures by us and the application of its estimated net proceeds as set forth under “Use of Proceeds,” and our other permanent repayments and retirements of indebtedness that occurred on or after January 1, 2002 and on or before September 30, 2002, as if each had occurred on January 1, 2002, would have been 3.3x.

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RISK FACTORS

      You should carefully consider and evaluate all of the information in or incorporated by reference in this prospectus, including the risk factors listed below. Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the market price of the debentures and the trading price of our common stock.

      Keep these risk factors in mind when you read forward-looking statements contained elsewhere or incorporated by reference in this prospectus. These statements relate to our expectations about future events and time periods. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe our reserves and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements.

Risks Relating to Us and Our Industry

We cannot predict whether we will be able to replace some or all of our lost revenue from our Medicare+Choice products with new sources of revenue. Without a replacement for any lost revenue from our Medicare+Choice products, our results of operations could be adversely affected.

      We have reduced our participation in the Medicare+Choice program, which has accounted for more than 50% of our total revenue in each year since 1998, because of shortfalls in Medicare+Choice premiums compared to our rising health care services expenses and increased Medicare administration costs. We plan to withdraw our Medicare+Choice products in five counties in California and Texas in 2003 affecting 37,000 members or approximately 5% of our senior HMO membership. These shortfalls contributed to our decision to cease offering or close enrollment in our Medicare+Choice products in various counties in 2000 through 2003. These shortfalls also contributed to changes in our benefits, copayments and deductibles.

      We also expect to experience voluntary attrition, which may be significant, in our Medicare+Choice membership as we continue to scale back benefits and increase monthly premiums under our Medicare+Choice products to achieve more profitable levels. Our market exits and voluntary attrition that we attribute to reduced benefits and increased premiums resulted in a reduction of approximately 200,000 members in the nine months ended September 30, 2002. We cannot predict the magnitude of voluntary attrition in future periods. To the extent that we continue to reduce our participation in the Medicare+Choice program, our revenue will decline unless lost revenue from our Medicare+Choice products is replaced with revenue from other sources, such as our Medicare supplement product offerings or other lines of business. We cannot predict whether or when we will be able to replace some or all of our lost revenue from our Medicare+Choice products with new sources of revenue. Without a replacement for any lost revenue from our Medicare+Choice products, our results of operations could be adversely affected, for example by increasing our administrative costs as a percentage of our revenue.

Our premiums for our commercial products and Medicare+Choice products are generally fixed in advance of the periods covered and our profitability may suffer to the extent that those premiums do not adequately allow for increases in the costs of health care services over those periods.

      Of our commercial business, more than 50% of our membership renews on January 1 of each year, with premiums that are generally fixed for periods up to one year. In addition, each of our subsidiaries that offers Medicare+Choice products must submit adjusted community rate proposals, generally by county or service area, to the Centers for Medicare and Medicaid Services, or CMS, by September 9 for each Medicare+Choice product that will be offered in a subsequent year. As a result, increases in the costs of health care services in excess of the estimated future health care costs reflected in the premiums or the adjusted community rate proposals generally cannot be recovered in the applicable contract year through higher premiums or benefit designs. Many factors, including health care costs that rise faster than premium increases, increases in utilization and regulatory changes, could cause actual health care costs to exceed what was

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estimated and reflected in premiums. To the extent that such excesses occur, our results of operations will be adversely affected.

Our future profitability will depend in part on accurately pricing our products, predicting health care costs, the provider reimbursement methodology and on our ability to control future health care costs.

      We use our underwriting systems to establish and assess premium rates based on accumulated actuarial data, with adjustments for factors such as claims experience and hospital and physician contract changes. Our future profitability will depend in part on our ability to predict health care costs, and control future health care costs through underwriting criteria, medical and disease management programs, product design and negotiation of favorable provider and hospital contracts. These factors are of greater significance, to the extent that we have entered into and may continue to increasingly enter into fee-for-service contracts with hospitals and physicians. In addition, changes in demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, continued consolidation of physician, hospital and other provider groups, contractual disputes with providers and numerous other factors may adversely affect our ability to predict and control health care costs as well as our financial condition, results of operations or cash flows.

Our financial and operating performance could be adversely affected by a reduction in revenue caused by membership losses, a failure to achieve expected membership levels in new products or products targeted for growth, or lower-than-expected premiums.

      Our revenues declined during 2002 compared to 2001 revenues due to commercial and senior membership losses, primarily as a result of our exits of unprofitable markets and products, termination of contracts with network providers and increased premiums and benefit reductions. A loss of profitable membership, an inability to increase commercial membership in targeted markets, including unaffiliated membership in our pharmacy benefit management, or PBM, and other specialty businesses, including our preferred provider organization, or PPO, and Medicare supplement products, an inability to gain market acceptance and expected membership in new product lines, including our PPO and Medicare supplement products, or an inability to achieve expected premium increases could result in lower revenues than expected and negatively affect our financial position, results of operations or cash flows. Factors that could contribute to the loss of membership, failure to gain new members in targeted markets or new product lines, or lower premium revenue include:

•  the effect of premium increases, benefit changes and member-paid supplemental premiums and copayments on the retention of existing members and the enrollment of new members;

•  the inability of our marketing and sales plans to attract new customers or retain existing customers for existing products and new products;

•  the member’s assessment of our benefits, quality of service, our ease of use and our network stability for members in comparison to competing health plans;

•  our exit from selected service areas, including Medicare+Choice markets or commercial markets;

•  our limits on enrollment of new Medicare+Choice and commercial members in selected markets, through a combination of capacity waivers and voluntary closure notices;

•  reductions in work force by existing customers and/or reductions in benefits purchased by existing customers;

•  negative publicity and news coverage about us or litigation or threats of litigation against us;

•  the loss of key sales and marketing employees; and

•  the inability of our providers to accept additional members.

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We could become subject to material unpaid health care claims and health care costs that we would not otherwise incur because of insolvencies of providers with whom we have capitated contracts.

      Providers with whom we have capitated contracts could become insolvent and could expose us to unanticipated expenses. We maintain insolvency reserves that include estimates for potentially insolvent providers, where conditions indicate claims are not being paid or have slowed considerably. Depending on states’ laws, we may be held liable for unpaid health care claims that were previously the responsibility of the capitated provider and for which we have already paid capitation. We may also incur additional health care costs in the event of provider instability where we are unable to agree upon a contract that is mutually beneficial. These costs may be incurred when we need to contract with other providers at less than cost-effective rates to continue providing health care services to our members. In addition to our insolvency exposure, our providers have deposited security reserves with us, and in third party institutions. Because our access to provider reserves has, and may continue to be subject to challenge by the provider group or other third parties at interest, we could incur additional charges for unpaid health care claims if we are ultimately denied access to these funds.

      In 2001, the Texas legislature adopted changes to legislation that may affect contracts that our Texas subsidiary enters into or renews with its delegated network providers after January 1, 2002. State regulators may take the position that this legislation provides that HMOs are liable for paying individual provider claims that are otherwise the financial responsibility of the capitated physician group if the HMO does not comply with the oversight requirements of the legislation. As of September 30, 2002, our Texas subsidiary had contracts with six capitated network providers that pay their own claims, covering approximately 61,000 or 29% of our Texas membership. We cannot predict whether the financial condition of our Texas providers will continue to deteriorate. To the extent that we do not accurately estimate the timing, amount or outcome of claims asserted against us based on providers with whom we have capitated contracts and who become insolvent, our results of operations or cash flows for a future period could be materially and adversely affected.

A disruption in our health care provider network could have an adverse effect on our ability to market our products and our profitability.

      In any particular market, health care providers could refuse to contract, demand higher payments, or take other actions that could result in higher health care costs or difficulty meeting regulatory or accreditation requirements. In some markets, some health care providers, particularly hospitals, physician/ hospital organizations or multi-specialty physician groups, may have significant market positions. If health care providers refuse to contract with us, use their market position to negotiate favorable contracts, or place us at a competitive disadvantage, then our ability to market products or to be profitable in those markets could be adversely affected. Our provider networks could also be disrupted by the financial insolvency of large provider groups such as those that occurred in Texas in 2001. A reduction in our membership resulting from disruptions in our health care provider networks would reduce our revenue and increase the proportion of our premium revenue needed to cover our health care costs.

Our results of operations could be adversely affected by understatements in our actual liabilities caused by understatements in our actuarial estimates of incurred but not reported claims.

      We estimate the amount of our reserves for incurred but not reported, or IBNR, claims primarily using standard actuarial methodologies based upon historical data. These standard actuarial methodologies include, among other factors, the average interval between the date services are rendered and the date claims are received and/or paid, denied claims activity, disputed claims activity, expected health care cost inflation, utilization, seasonality patterns and changes in membership. The estimates for submitted claims and IBNR claims liabilities are made on an accrual basis and adjusted in future periods as required. These estimates could understate or overstate our actual liability for claims and benefits payable. Any increases to these prior estimates could adversely affect our results of operations in future periods.

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If our claims processing system is unable to handle an increasing claims volume and unable to meet regulatory claims payment requirements, we may become subject to regulatory actions. If our claims processing system is unable to process claims accurately, our ability to accurately estimate claims liabilities and establish related reserves could be adversely affected.

      We have regulatory risk for the timely processing and payment of claims. If we, or any entities with whom we subcontract to process or pay claims, are unable to handle continued increased claims volume, or if we are unable to pay claims timely we may be subject to regulatory censure and penalties, which could have a material adverse effect on our operations and results of operations. In addition, if our claims processing system is unable to process claims accurately, the data we use for our IBNR estimates could be incomplete and our ability to estimate claims liabilities and establish adequate reserves could be adversely affected.

Our profitability may be adversely affected if we are unable to adequately control our prescription drug costs.

      Overall, prescription drug costs have been rising for the past few years. The increases are due to the introduction of new drugs costing significantly more than existing drugs, direct consumer advertising by the pharmaceutical industry creating consumer demand for particular brand drugs, patients seeking medications to address lifestyle changes, higher prescribed doses of medications and enhanced pharmacy benefits for members such as reduced copayments and higher benefit maximums. As a way of controlling this health care cost component, we have implemented a significant decrease in prescription drug benefits for our Medicare+Choice members in almost all of our geographic areas in 2002 and expect to continue to decrease these benefits in 2003. Despite these efforts, however, we may be unable to adequately control this health care cost component, which could adversely impact our profitability.

Increases in our selling, general and administrative expenses could harm our profitability.

      Our selling, general and administrative expenses have been rising due to our continued investment in strategic initiatives and could increase more than we anticipate as a result of a number of factors, which could adversely impact our profitability. These factors include:

•  our need for additional investments in PBM expansion, branding and advertising campaigns, medical management, underwriting and actuarial resources and technology;

•  our need for additional investments in information technology projects including consolidation of our existing systems that manage membership, eligibility, capitation, claims processing and payment information and other important information;

•  our need for increased claims administration, personnel and systems;

•  our greater emphasis on small group and individual health insurance products, which may result in an increase in the broker commissions we pay;

•  the necessity to comply with regulatory requirements, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA;

•  the success or lack of success of our marketing and sales plans to attract new customers, and create customer acceptance for new products;

•  our ability to estimate costs for our self-insured retention for medical malpractice claims;

•  our inability to achieve efficiency goals and resulting cost savings from announced restructuring or other initiatives; and

•  our ability to estimate legal expenses and settlements associated with litigation that has been or could be brought against us.

      In addition, our selling, general and administrative expenses as a percentage of our revenue could increase due to changes in our product mix between senior and commercial products and expected declines in our revenue, and could be adversely affected if we exit Medicare+Choice or commercial markets without

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replacing our revenue from those markets with revenue from other sources, such as our new Medicare supplement product offerings. If we do not generate expected cash flow from operations, we could be forced to postpone or cancel some of these planned investments, which would adversely affect our ability to meet our short term strategic plan.

We may not accurately estimate the amounts we will need to spend to comply with HIPAA, which may adversely affect our expenses and/or the ability to execute portions of our business strategy.

      HIPAA includes administrative simplification provisions directed at standardizing transactions and codes and seeking protections for confidentiality and security of patient data. We expect to modify all of our information systems and business processes to comply with HIPAA regulations regarding standardizing transactions and codes. We also expect to incur expense developing systems and refining processes and contracts to comply with HIPAA security and privacy requirements. Our HIPAA compliance costs were approximately $16 million in 2002, plus another $2 million in capital expenditures and we expect to incur comparable costs in 2003. We continue to evaluate the future work and costs that will be required to meet HIPAA requirements and mandated compliance timeframes. To the extent that our estimated HIPAA compliance costs are less than our actual HIPAA compliance costs, amounts we had budgeted for other purposes will need to be used for HIPAA compliance which may adversely affect our ability to execute portions of our business strategy or may increase our selling, general and administrative expenses.

We are subject to several lawsuits brought by health care providers and members alleging that we engage in a number of improper practices, as well as a lawsuit brought by the State of Texas. Depending upon their outcome, these lawsuits could result in material liabilities to us or cause us to incur material costs, to change our operating procedures or comply with increased regulatory requirements.

      Health care providers and members are currently attacking practices of the HMO industry through a number of lawsuits brought against us and other HMOs. The class action lawsuits brought by health care providers allege that HMOs’ claims processing systems automatically and impermissibly alter codes included on providers’ reimbursement/ claims forms to reduce the amount of reimbursement, and that HMOs impose unfair contracting terms on health care providers, impermissibly delay making capitated payments under their capitated contracts, and negotiate capitation payments that are inadequate to cover the costs of health care services provided. The Jose Cruz lawsuit filed in November 1999 alleged that we engaged in a number of purportedly undisclosed practices designed to limit the amount and cost of health care services provided to members, such as:

•  providing health care providers with financial incentives to restrict hospitalizations, referrals to specialist physicians, and prescriptions for high cost drugs;

•  entering into capitated contracts with health care providers, since capitated providers have financial incentives to limit health care services; and

•  manipulating determinations of whether health care services are medically necessary by excluding expensive procedures and treatments from being considered medically necessary.

In addition, the State of Texas alleges that we violated Texas laws relating to prompt payment in connection with the administration of our capitated contracts with three insolvent physician groups.

      These lawsuits, including those filed to date against us, may take years to resolve and cause us to incur substantial litigation expenses. Depending upon the outcomes of these cases, these lawsuits may cause or force changes in practices of the HMO industry. These cases also may cause additional regulation of the industry through new federal or state laws. These actions and actions brought by state attorney generals ultimately could adversely affect the HMO industry and, whether due to damage awards, required changes to our operating procedures, increased regulatory requirements or otherwise, have a material adverse effect on our financial position, results of operations or cash flows and prospects.

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We are subject to other litigation in the ordinary course of business that may result in material liabilities to us, including liabilities for which we may not be insured.

      From time to time, we are involved in legal proceedings that involve claims for coverage encountered in the ordinary course of business. We, like other HMOs and health insurers generally, exclude payment for some health care services from coverage under our HMO and other plans. We are, in the ordinary course of business, subject to the claims of our members arising out of decisions to deny or restrict reimbursement for services, including medical malpractice claims related to our taking a more active role in managing the cost of medical care. The loss of even one of these claims, if it results in a significant punitive damage award, could have a material adverse effect on our business. In addition, our exposure to potential liability under punitive damage theories may significantly decrease our ability to settle these claims on reasonable terms. We maintain general liability, property, managed care errors and omissions and medical malpractice insurance coverage. We are at risk for our self-insured retention on these claims, and are substantially self-insured for medical malpractice claims. Coverages typically include varying and increasing levels of self-insured retention or deductibles that increase our risk of loss.

Regulators could terminate or elect not to renew our Medicare contracts, change the program or its regulatory requirements, or audit our proposals for Medicare plans, all of which could materially affect our revenue or profitability from our Medicare+Choice products.

      The Medicare program has accounted for more than 50% of our total revenue in each year since 1998. CMS regulates the benefits provided, premiums paid, quality assurance procedures, marketing and advertising for our Medicare+Choice products. CMS may terminate our Medicare+Choice contracts or elect not to renew those contracts when those contracts come up for renewal every 12 months. The loss of Medicare contracts or changes in the regulatory requirements governing the Medicare+Choice program or the program itself could have a material adverse effect on our financial position, results of operations or cash flows.

      Our adjusted community rate proposals for the contract year 2003 have been filed and approved. In the normal course of business, all information submitted as part of the adjusted community rate process is subject to audit and approval. We cannot be certain that any ongoing and future audits will be concluded satisfactorily. We may incur additional, possibly material, liability as a result of these audits. The incurrence of such liability could have a material adverse effect on our financial position, results of operations or cash flows.

We compete in highly competitive markets and our inability to compete effectively for any reason in any of those markets could adversely affect our profitability.

      We operate in highly competitive markets. Consolidation of acute care hospitals and continuing consolidation of insurance carriers, other HMOs, employer self-funded programs and PPOs, some of which have substantially larger enrollments or greater financial resources than ours, has created competition for hospitals, physicians and members, impacting profitability and the ability to influence medical management. The cost of providing benefits is in many instances the controlling factor in obtaining and retaining employer groups as clients and some of our competitors have set premium rates at levels below our rates for comparable products. We anticipate that premium pricing will continue to be highly competitive. In addition, brokers and employers may react negatively to adverse press associated with HMOs in general or directly about us, and consequently look to alternatives such as indemnity products or self-funded programs. If we are unable to compete effectively in any of our markets, our business may be adversely affected.

Recently enacted or proposed legislation, regulations and initiatives could materially and adversely affect our business by increasing our operating costs, reducing our membership or subjecting us to additional litigation.

      Recent changes in state and federal legislation have increased and will continue to increase the costs of regulatory compliance, and proposed changes in the law may negatively impact our financial and operating results. These changes may increase our health care costs, decrease our membership or otherwise adversely

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affect our revenue and our profitability. Regulation and enforcement is increasing both at the state and federal level. Increased regulations, mandated benefits and more oversight, audits and investigations and changes in laws allowing access to federal and state courts to challenge health care decisions may increase our administrative, litigation and health care costs. The following recent or proposed legislation, regulation or initiatives could materially affect our financial position:

•  proposed legislation and regulation could include adverse actions of government or other payors, including reduced Medicare or commercial premiums, reduction of provider reimbursements, discontinuance of, or limitation on, governmentally funded programs, recovery by governmental payors of previously paid amounts, the inability to increase premiums or prospective or retroactive reductions to premium rates for federal employees;

•  draft compliance guidelines from the Office of Inspector General that propose voluntary guidelines for pharmaceutical manufacturers to establish internal controls, which if implemented, may result in pharmaceutical companies restructuring the financial terms of their business arrangements with PBMs, HMOs or other health service plans;

•  proposed legislation and regulation to provide payment and administrative relief for the Medicare+Choice program and regulate drug pricing by the state and federal government could include provisions that impact our Medicare+Choice and commercial products;

•  new and proposed “patients’ bill of rights” legislation at the state level that would hold HMOs liable for medical malpractice, including legislation enacted in Arizona, California, Oklahoma, Texas and Washington, may increase the likelihood of lawsuits against HMOs for malpractice liability. The House and Senate did not resolve their differences with the proposed federal “patients’ bill of rights” before the end of the 107th Congressional session. This legislation would have removed or limited the federal preemption set forth in the Employee Retirement Income Security Act of 1974, or ERISA, that precludes most individuals from suing their employer-sponsored health benefit plans for causes of action based upon state law and enable members to challenge coverage/benefits decisions in state and federal courts. Prospects for the reintroduction and enactment of similar legislation in 2003 are not clear. The United States Supreme Court has ruled that state laws that establish independent review boards to which members can appeal when HMOs deny coverage for certain treatments or procedures are not pre-empted by ERISA;

•  new and proposed state legislation, regulation, or litigation that would otherwise limit our ability to capitate physicians and hospitals or delegate financial risk, utilization review, quality assurance or other medical decisions to our contracting physicians and hospitals;

•  existing or new state legislation and regulation that may require increases in minimum capital, reserves, and other financial liability requirements and proposed state legislation that may limit the admissibility of certain assets;

•  state regulations that may increase the financial capital requirements of physicians and hospitals who contract with HMOs to accept financial risk for health services;

•  new and proposed state and federal legislation that would attempt to address increases in medical malpractice insurance premiums and tort reform;

•  new and proposed legislation that permits and would permit independent physicians to collectively bargain with health plans on a number of issues, including financial compensation;

•  state and federal regulations that place additional restrictions and administrative requirements on the use, retention, transmission and disclosure of personally identifiable health information, such as HIPAA, and federal regulations that enforce the current HIPAA administrative simplification deadlines of April 2003 for privacy compliance and October 2003 for data standards compliance;

•  new regulations requiring protection of the integrity and availability of personally identifiable health information which exists in electronic form, including the proposed HIPAA security standards;

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•  new regulations that place additional restrictions and administrative requirements on the transmission, processing and receipt of electronic data as required by HIPAA; and

•  existing or new state and federal legislation and regulations governing the timely payment and administration of claims by HMOs and insurers, and imposing financial and other penalties for non-compliance.

We may take charges for long-lived asset impairments or dispositions, or restructurings that could materially impact our results of operations or cash flows.

      In the future, we may announce dispositions of assets or product exits as we continue to evaluate whether our subsidiaries or products fit within our business strategy. We may also record goodwill or long-lived asset impairment charges if one or more of our subsidiaries with operating losses generates less operating cash flows than we currently expect. In addition, as we refocus and retool our work force as part of attempting to improve our operating performance, we expect some positions to change or be eliminated, which could result in future restructuring charges. We cannot be certain that dispositions, impairments or restructuring activities will not result in additional charges. In addition, disposition or restructuring charges could have a material adverse effect on our results of operations or cash flows.

We could have to change our investment practices in the future to avoid being deemed to be an investment company under the Investment Company Act of 1940, as amended, which could adversely affect our rate of return on our investments and our results of operations.

      Due to changes in accounting rules implemented in 2002, our legal structure and our recent operating results, we may inadvertently fail the statistical test for being regulated as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. The Investment Company Act requires registration of, and imposes substantial operating restrictions on, companies that engage, or propose to engage, primarily in the business of investing, reinvesting, owning, holding, or trading in securities, or that meet certain statistical tests concerning a company’s asset composition and sources of income.

      Because we are primarily engaged through our existing operating subsidiaries in the health care and insurance industries and we intend our future operating subsidiaries to be engaged in these businesses or related consumer businesses, we believe that we are primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities and that we are not an investment company. We are able to rely on an SEC rule that exempts us from the requirement of registering as an investment company for up to one year. In the interim, we and our operating subsidiaries are seeking an order from the SEC, declaring our HMO operating subsidiaries not to be investment companies so that we would be exempt from the provisions of the Investment Company Act. The granting of this type of order is a matter of SEC discretion and, therefore, we cannot assure you that it will be granted to our HMO operating subsidiaries. Even if we were to receive an SEC order, there can be no assurance that our business activities would not ultimately subject us to regulation under the Investment Company Act.

      If the SEC does not grant the requested order, to avoid registration under the Investment Company Act, we may have to restructure our subsidiaries or our investments so that we do not fail the statistical tests relating to asset composition. These changes might include increasing the component of our investments held in government securities or refraining from buying or selling securities when we would otherwise not choose to do so. This could have a negative impact on our results of operations.

Our senior credit facility and our 10 3/4% senior notes contain restrictive covenants that may limit our ability to expand or pursue our business strategy.

      Our senior credit facility and our 10 3/4% senior notes limit, and in some circumstances prohibit, our ability to:

•  incur additional indebtedness;

•  create liens;

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•  pay dividends and make distributions in respect of our capital stock and the capital stock of our subsidiaries;

•  redeem capital stock;

•  place restrictions on our subsidiaries’ ability to pay dividends, make distributions or transfer assets;

•  make investments or other restricted payments;

•  sell or otherwise dispose of assets;

•  enter into sale-leaseback transactions;

•  engage in transactions with stockholders and affiliates; and

•  effect a consolidation or merger.

      We are required under the senior credit facility to maintain compliance with certain financial ratios. We may not be able to maintain these ratios. Covenants in the senior credit facility and our 10 3/4% senior notes may impair our ability to expand or pursue our business strategies. Our ability to comply with these covenants and other provisions of the senior credit facility and our 10 3/4% senior notes may be affected by our operating and financial performance, changes in business conditions or results of operations, adverse regulatory developments or other events beyond our control. In addition, if we do not comply with these covenants, the lenders under the senior credit facility and our 10 3/4% senior notes may accelerate our debt repayment under the senior credit facility and our 10 3/4% senior notes. If the indebtedness under the senior credit facility or our 10 3/4% senior notes is accelerated, we could not assure you that our assets would be sufficient to repay all outstanding indebtedness in full.

Risks Relating to an Investment in the Debentures

Our subsidiaries are under no obligation to distribute any of their available cash flow to us, which we will need to service the debentures, and our HMO and insurance subsidiaries are subject to capitalization requirements that may significantly limit or restrict the amount of their available cash flow that they can distribute to us.

      The debentures are obligations of PacifiCare Health Systems, Inc., which is a holding company. Because we derive substantially all of our revenues and earnings before interest, taxes, depreciation and amortization, or EBITDA, from our operating subsidiaries and do not have significant operations of our own, we are dependent upon the ability of our subsidiaries to provide us with cash, in the form of dividends or intercompany credits, loans or otherwise, to meet our debt service obligations, including our obligations under the debentures. Our subsidiaries have no obligation to pay any amounts due on the debentures or to make any funds available to us for payment of the debentures, whether by dividends, loans, distributions or other payments. As of September 30, 2002, our subsidiaries held 98% of our total assets, which percentage gives effect to intercompany eliminations and excludes investment in subsidiaries.

      Our regulated HMO and insurance subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various capital standards imposed by HMO or insurance regulations, which may from time to time impact the amount of funds those subsidiaries can pay to us. After giving effect to these various capital requirements, our regulated subsidiaries had a surplus in excess of these requirements of approximately $319 million as of September 30, 2002. In addition, in September 1998, the National Association of Insurance Commissioners adopted new minimum capitalization guidelines, known as risk-based capital rules, for health care coverage provided by HMOs and other risk-bearing health care entities, which some of the states our regulated subsidiaries operate in have adopted as their governing regulations for capital requirements. Our regulated subsidiaries could become subject to increased capitalization requirements depending on the nature and extent of the risk-based capital rules, if any, ultimately adopted in the other states in which they operate.

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      From time to time, we advance funds in the form of a loan or capital contribution to our subsidiaries to assist them in satisfying state financial requirements. We may provide additional funding to a subsidiary if a state legislator imposes additional financial requirements due to concerns about the financial position of the subsidiary or if there is an adverse effect resulting from changes to the state’s financial requirements. Furthermore, varying results of operations or other business considerations, for example determinations as to the amount of funds in excess of capital requirements that our regulated subsidiaries should retain to fund their operations, may reduce or restrict the amount of dividends, loans or other distributions to us from our subsidiaries. Any of these factors could reduce the amount of funds we have available to us to make payments of principal and interest on our outstanding indebtedness, including the debentures.

Our significant amount of indebtedness and interest expense will limit our cash flow and could adversely affect our operations and our ability to make full payment on your debentures.

      We have a significant level of debt and interest expense. As of September 30, 2002, after giving pro forma effect to the issuance and sale of the debentures by us and the use of the estimated net proceeds as set forth under “Use of Proceeds” as if each had occurred on September 30, 2002, we would have had $851.2 million of outstanding indebtedness. In addition, the total size of our committed revolving line of credit would have been $38.7 million, of which at least $7.6 million would have been available for borrowing, as of September 30, 2002, after giving pro forma effect to the issuance and sale of the debentures by us and the use of the estimated net proceeds as set forth under “Use of Proceeds” as if each had occurred on September 30, 2002 and the automatic reduction in our revolving line of credit at the end of the third quarter. The amount that we may borrow under our revolving line of credit decreases by $5 million each quarter. For the quarter ended September 30, 2002, our pro forma interest expense on our pro forma outstanding indebtedness as of September 30, 2002, after giving pro forma effect to the issuance and sale by us of the debentures and the use of the estimated net proceeds as set forth under “Use of Proceeds” as if each had occurred on September 30, 2002 would have been $20.5 million. Our aggregate level of indebtedness, and our debt service requirements, increased in connection with the offering of the debentures. If market interest rates increase, our debt service requirements will increase even more. We are required under our senior credit facility to make quarterly cash amortization payments of $20 million. We may use internally generated funds, draws on our equity commitment arrangement following the expiration of our lock-up arrangement with the initial purchasers of the debentures and/or the proceeds of other issuances of securities to meet these debt service and amortization obligations.

      Our significant indebtedness poses risks to our business, including the risks that:

•  we could use a substantial portion of our consolidated cash flow from operations to pay principal and interest on our debt, thereby reducing the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes, including executing our business strategy of diversifying our product offerings and making planned investments in our branding campaign, the marketing of our specialty products and technology initiatives for further streamlining our operations;

•  insufficient cash flow from operations may force us to sell assets, or seek additional capital, which we may be unable to do at all or on terms favorable to us;

•  our level of indebtedness may make us more vulnerable to economic or industry downturns; and

•  our debt service obligations increase our vulnerabilities to competitive pressures, because many of our competitors are less leveraged than we are.

Because the debentures are subordinated to our senior debt and effectively subordinated to the debt and other liabilities of our subsidiaries, you may not receive full payment on your debentures.

      The debentures are junior to all of our existing and future indebtedness, other than any future indebtedness that expressly provides that it ranks equal with, or is subordinated in right of payment to, the debentures. As a result, upon any distribution to our creditors in a bankruptcy, liquidation, reorganization or

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similar proceeding, the holders of our senior debt will be entitled to be paid in full before any payment will be made on the debentures.

      In addition, all payments on, or acquisition of the debentures may be blocked until cured in the event of a payment default or for up to 179 days in the event of certain non-payment defaults under our senior credit facility or any other designated senior debt, including our 10 3/4% senior notes. Such payments may only be blocked once within any period of 365 days.

      In the event of a bankruptcy, liquidation or reorganization or similar proceeding relating to us, holders of the debentures will participate in our assets with trade creditors and all other holders of our indebtedness. However, because the indenture for the debentures requires that amounts otherwise payable to holders of the debentures in a bankruptcy or similar proceeding be paid to holders of senior debt instead, holders of the debentures may receive less ratably than holders of trade payables and holders of our other indebtedness in any such proceeding. In any of these cases, holders of the debentures may not be paid in full.

      As of September 30, 2002, after giving pro forma effect to the issuance and sale of the debentures by us and the application of the estimated net proceeds as set forth under “Use of Proceeds” as if each had occurred on September 30, 2002, the debentures would have been subordinated to approximately $716.2 million of our senior debt, and at least $7.6 million would have been available for borrowing as additional senior debt under our senior credit facility. The indenture governing the debentures does not restrict the amount of indebtedness, including senior debt, that we may borrow in the future.

      In addition, the debentures are effectively subordinated in right of payment to all debt and other liabilities, including trade payables and other accrued liabilities, of our subsidiaries. As of September 30, 2002, our subsidiaries had total other liabilities of approximately $1.7 billion, excluding intercompany liabilities and their obligations with respect to our senior credit facility, 10 3/4% senior notes and FHP senior notes pursuant to guarantees or otherwise. In addition, our subsidiaries have historically generated substantially all of our revenues and EBITDA. Any right we may have to receive assets of our subsidiaries upon their liquidation or reorganization, and your resulting rights to participate in those assets, would be effectively subordinated to the claims of our subsidiaries’ creditors. In addition, if one or more of our subsidiaries becomes insolvent, its regulators may seize its assets to cover its obligations under health care policies, which could result in our remaining assets being insufficient to pay the debentures in full or at all.

Because the debentures are effectively subordinated to our secured debt, you may not receive full payment on your debentures.

      The debentures are not secured by any of our assets or the assets of our subsidiaries. Our obligations under our senior credit facility are secured by liens on substantially all of the personal property assets of our domestic, unregulated subsidiaries. The FHP senior notes share in the collateral securing our senior credit facility. If we are unable to repay amounts due on our secured debt, the lenders could proceed against the collateral securing that debt and we may not have sufficient assets left to pay you.

We are prohibited from, and may be unable to, repurchase the debentures upon a fundamental change, which would cause defaults under the senior credit facility, our 10 3/4% senior notes, the FHP senior notes and other indebtedness we may incur in the future.

      Upon a fundamental change as defined in the indenture for the debentures, you may require us to repurchase all or a portion of your debentures. If a fundamental change were to occur, we may not have enough funds to pay the repurchase price for all tendered debentures. We are prohibited under our senior credit facility, and may be prohibited under indebtedness we may incur in the future, from purchasing any debentures prior to their stated maturity. In such circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, indebtedness under the senior credit facility and any such other future indebtedness or obtain the requisite consent from the lenders under the senior credit facility and the holders of any such other future indebtedness to permit the repurchase of the debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the debentures, which would constitute an event of default under the

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indenture for the debentures, which itself would also constitute a default under the senior credit facility and the indentures for our 10 3/4% senior notes and FHP senior notes and could constitute a default under the terms of any future indebtedness that we may incur. In connection with a fundamental change, we also could be required under the terms of our 10 3/4% senior notes to repurchase those notes, which could prevent us from repurchasing tendered debentures without causing a default under the indenture for our 10 3/4% senior notes. In addition, the events that constitute a fundamental change under the indenture for the debentures may also be events of default under the senior credit facility or other indebtedness we may incur in the future. The term “fundamental change” is limited to certain specified transactions and may not include other events that might adversely affect our financial condition. Our obligation to offer to repurchase the debentures upon a fundamental change would not necessarily afford you protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction because those transactions could be structured in a manner whereby they would not be considered a “fundamental change” for purposes of the indenture for the debentures.

No public market exists for the debentures. The failure of a market to develop could affect your ability to, and the price at which you may, resell your debentures.

      No public market exists for the debentures and no public market for the debentures may develop. The debentures are not listed on any securities exchange. We cannot assure you as to the liquidity of any trading market for the debentures that may develop. If the debentures are traded, they may trade at prices lower than their initial offering price as a result of, among other things, prevailing interest rates, the market for similar securities, our financial condition and prospects and general economic conditions.

The actual or anticipated resale by Acqua Wellington of shares of our common stock that it purchases from us under the equity line of credit or otherwise owns or acquires may have an adverse impact on the market price of our common stock.

      In December 2001, we entered into an equity line of credit with Acqua Wellington under which we may, at our option, sell up to 6,872,792 shares of our common stock to Acqua Wellington from time to time until June 2003. In April 2002, we sold 420,720 shares of our common stock to Acqua Wellington in connection with our first draw down under the equity line of credit. We have agreed not to sell our common stock to, or enter into any other arrangement that transfers any of the economic consequences of ownership of our common stock with, any third party, including Acqua Wellington, until February 21, 2003, subject to certain limited exceptions. On or after that date, we may elect to draw more on this equity line of credit, for example to raise additional proceeds to retire indebtedness under our senior credit facility. All the shares that we have sold and may sell to Acqua Wellington under the equity line of credit have been registered for resale by Acqua Wellington pursuant to a currently effective registration statement that we filed under the Securities Act. The resale by Acqua Wellington through open market transactions or other means of the common stock that it has purchased or purchases from us under the equity line of credit or that it otherwise owns or acquires may, depending upon the timing of the resales, depress the market price of our common stock. Moreover, as all the shares we sell to Acqua Wellington will be available for immediate resale, the mere prospect of our sales to it could depress the market price of our common stock. In addition, actual or anticipated downward pressure on the market price of our common stock due to actual or anticipated resales of our common stock by Acqua Wellington could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the market price of our common stock to decline. Any decline in the market price of our common stock for any of the reasons described above would likely also cause a decline in the trading price of the debentures.

Our issuance of shares to Acqua Wellington will dilute the equity ownership of our existing stockholders.

      Under our equity line of credit with Acqua Wellington, we may issue to Acqua Wellington up to 6,872,792 shares of our common stock, which represented 19.9% of the number of our issued and outstanding shares as of the date of that agreement. We have agreed not to sell our common stock to, or enter into any other arrangement that transfers any of the economic consequences of ownership of our common stock with,

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any third party, including Acqua Wellington, until February 21, 2003, subject to certain limited exceptions. The precise number of shares of our common stock that we will issue to Acqua Wellington on or after that date over the remaining term of the equity line of credit, if any, will depend on the threshold price we set for the applicable draw downs and the market price of our common stock during the draw down periods. To date, we have issued 420,720 shares of our common stock to Acqua Wellington under the equity line of credit. Each of our issuances of common stock to Acqua Wellington under the common stock purchase agreement, if any, will proportionately decrease our existing stockholders’ percentage ownership of our total outstanding equity interests, including the percentage ownership held by the holders of the debentures who have converted the debentures into our common stock.

Our stock price may continue to experience large fluctuations, which may significantly affect the market price of our common stock.

      The trading price of our common stock fluctuates over a wide range and is expected to continue to be extremely volatile in the future. These price fluctuations may be rapid and severe and may leave investors little time to react. Factors that may affect the market price of our common stock include the factors set forth in the risk factors described elsewhere in this prospectus and changes in securities analysts’ earnings projections or securities analysts’ recommendations. These factors could lead to a significant decrease in the market price of the debentures and our common stock and you could lose a substantial amount of your investment.

Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover of our company that might otherwise result in our stockholders receiving a premium over the market price of their shares.

      Provisions of Delaware law and our certificate of incorporation and bylaws could make it more difficult for another person to acquire us by means of a tender offer or other means or to remove our incumbent officers and directors by a proxy contest or otherwise. These provisions include:

•  Section 203 of the Delaware General Corporation Law, which prohibits a merger with a 15%-or-greater stockholder, such as a party that has completed a successful tender offer, until three years after that party became a 15%-or-greater stockholder;

•  a fair price provision in the certificate of incorporation that requires any acquisition of us to be approved by a two-thirds vote of our board of directors unless the acquiror pays at least a defined fair price and follows specified procedures;

•  our board of directors is currently divided into three classes with staggered three year terms for each class, which could make it more difficult to gain control of our board of directors while our board of directors remains classified;

•  the authorization in the certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover; and

•  provisions in our bylaws eliminating stockholders’ rights to call a special meeting of stockholders, which could make it more difficult for stockholders to wage a proxy contest for control of our board or to vote to repeal any of the anti-takeover provisions contained in our certificate of incorporation and bylaws.

      We also have a rights agreement entered into in November 1999, with Mellon Investor Services, L.L.C., as rights agent, which gives our stockholders certain rights that could substantially increase the cost of acquiring us in a transaction not approved by our board of directors.

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USE OF PROCEEDS

      We will not receive any proceeds from the sale by the selling securityholders of the debentures or the shares of common stock issuable upon conversion of the debentures.

      We received estimated net proceeds from the sale of the debentures of approximately $130.5 million after deducting discounts and commissions for the initial purchasers and estimated expenses associated with the offering payable by us. We used all of the estimated net proceeds of the offering of the debentures as follows:

•  $52.6 million was used to permanently repay indebtedness under our senior credit facility;

•  $9.5 million was used to deposit cash against outstanding letters of credit under our senior credit facility; and

•  $68.4 million was used or will be used for general corporate purposes.

      The indebtedness under our senior credit facility that was repaid bore interest at variable rates and had an average overall interest rate, excluding the facility fee, of approximately 6.8% per annum as of September 30, 2002. As of September 30, 2002, after giving pro forma effect to the offering of the debentures by us and the application of its estimated net proceeds as described above as if the offering had occurred on September 30, 2002 and the automatic reduction in our revolving line of credit at the end of the third quarter, the total size of our committed revolving line of credit would have been $38.7 million, of which at least $7.6 million would have been available for borrowing.

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DESCRIPTION OF THE DEBENTURES

      The debentures were issued under an indenture dated as of November 22, 2002 between PacifiCare, as issuer, and U.S. Bank National Association, as trustee. The debentures and the shares issuable upon conversion of the debentures are subject to a registration rights agreement.

      The following description is a summary of the material provisions of the debentures, the indenture and the registration rights agreement. It does not purport to be complete. This summary is subject to, and is qualified by reference to all the provisions of the indenture, including the definitions of certain terms used in the indenture. The indenture and the registration rights agreement have been filed as exhibits to the registration statement of which this prospectus is a part. Wherever particular provisions or defined terms of the indenture or the form of debentures are referred to, those provisions or defined terms are incorporated in this prospectus by reference and are qualified in their entirety by the reference.

      As used in this “Description of the Debentures” section, references to “PacifiCare,” “we,” “our” or “us” refer solely to PacifiCare Health Systems and not to our subsidiaries.

General

      The debentures are general unsecured obligations of PacifiCare. Our payment obligations under the debentures are subordinated to our senior indebtedness and effectively subordinated to all indebtedness and other liabilities of our subsidiaries, as described under “Subordination of Debentures.” The debentures are convertible into common stock as described under “Conversion of Debentures.”

      We issued $135,000,000 aggregate principal amount of the debentures. The debentures are issued only in denominations of $1,000 and multiples of $1,000. The debentures mature on October 15, 2032 unless earlier converted, redeemed or repurchased.

      Neither we nor any of our subsidiaries are subject to any financial covenants under the indenture. In addition, neither we nor any of our subsidiaries are restricted under the indenture from paying dividends, incurring debt, or issuing or repurchasing our securities.

      You are not afforded protection under the indenture in the event of a highly leveraged transaction or a change in control of us except to the extent described below under “Redemption at Option of the Holder Upon a Fundamental Change.”

      We will pay interest semi-annually in arrears in cash on April 15 and October 15 of each year, beginning April 15, 2003, to record holders at the close of business on the preceding April 1 and October 1, as the case may be, except:

•  interest payable upon redemption or repurchase will be paid to the person to whom principal is payable, unless the redemption or repurchase date is an interest payment date; and

•  as set forth in the next sentence.

      In case you convert any of your debentures into common stock during the period after any record date but prior to the next interest payment date, one of the following will occur:

•  we will not be required to pay interest on the interest payment date if the debenture has been called for redemption on a redemption date that occurs during this period;

•  we will not be required to pay interest on the interest payment date if the debenture is to be redeemed in connection with a fundamental change on a redemption date that occurs during this period; or

•  if otherwise, any debenture not called for redemption that is submitted for conversion during this period must also be accompanied by an amount equal to the interest due on the interest payment date on the converted principal amount, unless at the time of conversion there is a default in the payment of interest on the debentures. See “Conversion of Debentures.”

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      We maintain an office in the Borough of Manhattan, The City of New York, for the payment of interest, which initially is an office or agency of the trustee. We may pay interest either:

•  by check mailed to your address as it appears in the debenture register, provided that if you are a holder with an aggregate principal amount in excess of $2.0 million, you shall be paid, at your written election, by wire transfer in immediately available funds; or

•  by transfer to an account maintained by you in the United States.

      However, payments to The Depository Trust Company, New York, New York, which we refer to as DTC, will be made by wire transfer of immediately available funds to the account of DTC or its nominee. Interest will be computed on the basis of a 360-day year composed of twelve 30-day months.

Conversion of Debentures

      You may convert any of your debentures, in whole or in part, into common stock prior to the close of business on the final maturity date of the debentures, subject to prior redemption or repurchase of the debentures, only under the following circumstances:

•  upon satisfaction of a market price condition;

•  upon satisfaction of a trading price condition;

•  upon notice of redemption; or

•  upon specified corporate transactions.

      The number of shares of common stock you will receive upon conversion of your debentures will be determined by multiplying the number of $1,000 principal amount of debentures you convert by the conversion rate on the date of conversion. If we call debentures for redemption, you may convert the debentures only until the close of business on the business day prior to the redemption date unless we fail to pay the redemption price. If you have submitted your debentures for redemption upon a fundamental change, you may convert your debentures only if you withdraw your redemption election. You may convert your debentures in part so long as such part is $1,000 principal amount or an integral multiple of $1,000. Similarly, if you exercise your option to require us to repurchase your debentures other than upon a fundamental change, those debentures may be converted only if you withdraw your election to exercise your option in accordance with the terms of the indenture. If any debentures not called for redemption are converted after a record date for any interest payment date and prior to the next interest payment date, the debentures must be accompanied by an amount equal to the interest payable on the interest payment date on the converted principal amount unless a default in the payment of interest exists at the time of conversion.

      Conversion Upon Satisfaction of Market Price Condition. You may surrender your debentures for conversion into our common stock prior to close of business on the maturity date during any fiscal quarter commencing after December 31, 2002 if the closing sale price of our common stock exceeds 110% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter.

      The “closing sale price” of our common stock on any date means the closing per share sale price (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date as reported in composite transactions for the principal United States securities exchange on which our common stock is traded or, if our common stock is not listed on a United States national or regional securities exchange, as reported by the Nasdaq System or by the National Quotation Bureau Incorporated. The “conversion price” as of any day will equal $1,000 divided by the number of shares of common stock issuable upon a conversion of a debenture.

      Conversion Upon Satisfaction of Trading Price Condition. You may surrender your debentures for conversion into our common stock prior to maturity during the five business day period after any ten consecutive trading day period in which the trading price of the debentures (as determined following a request by a holder of the debentures in accordance with the procedures described below) for each day of such period

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was less than 95% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures (the “95% Trading Exception”); provided, however, that if on the date of any conversion pursuant to the 95% Trading Exception the closing sale price of our common stock is greater than the conversion price, then you will receive, in lieu of common stock based on the conversion price, cash or common stock or a combination of both, at our option, with a value equal to the principal amount of your debenture plus accrued interest as of the conversion date (a “Principal Value Conversion”). If you surrender your debenture for conversion and it is a Principal Value Conversion, we will notify you by the second trading day following the date of conversion whether we will pay you the principal amount plus accrued interest in cash, common stock or a combination of cash and common stock, and in what percentage. Any common stock delivered upon a Principal Value Conversion will be valued at the greater of the conversion price on the conversion date and the closing sale price on the third trading day after the conversion date. We will pay you any portion of the principal amount plus accrued interest to be paid in cash on the third trading day after the conversion date. With respect to any portion of the principal amount plus accrued interest to be paid in common stock, we will deliver the common stock to you on the fourth trading day following the conversion date.

      The “trading price” of the debentures on any date of determination means the average of the secondary market bid quotations per debenture obtained by the conversion agent for $10,000,000 principal amount of the debentures at approximately 3:30 p.m., New York City time, on such determination date from three independent nationally recognized securities dealers we select, provided that if at least three such bids cannot reasonably be obtained by the conversion agent, but two such bids are obtained, then the average of the two bids shall be used, and if only one such bid can reasonably be obtained by the conversion agent, this one bid shall be used. If the conversion agent cannot reasonably obtain at least one bid for $10,000,000 principal amount of the debentures from a nationally recognized securities dealer or in our reasonable judgment, the bid quotations are not indicative of the secondary market value of the debentures, then the trading price of the debentures will be deemed to be less than 95% of the product of the “closing sale price” of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures.

      The conversion agent shall have no obligation to determine the trading price of the debentures unless we have requested such determination; and we shall have no obligation to make such request unless the requesting holder of the debentures provides us with reasonable evidence that the trading price of the debentures would be less than 95% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures; at which time, we shall instruct the conversion agent to determine the trading price of the debentures beginning on the next trading day and on each successive trading day until the trading price is greater than or equal to 95% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures.

      Conversion Upon Notice of Redemption. If we call debentures for redemption, you may convert the debentures until the close of business on the business day immediately preceding the redemption date, after which time your right to convert will expire unless we default in the payment of the redemption price.

      Conversion Upon Specified Corporate Transactions. If we elect to:

•  distribute to all holders of our common stock certain rights entitling them to purchase, for a period expiring within 45 days, our common stock at less than the current market price (measured by averaging the closing prices for the 10 preceding trading days); or

•  distribute to all holders of our common stock, assets, debt securities or certain rights to purchase our securities, which distribution has a per share value exceeding 10% of the closing sale price of our common stock on the day preceding the declaration date for such distribution;

we must notify you at least 20 days prior to the ex-dividend date for such distribution. Once we have given such notice, you may surrender your debentures for conversion at any time until the earlier of close of business on the business day prior to the ex-dividend date or any announcement by us that such distribution will not

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take place. No adjustment to your ability to convert will be made if you will otherwise participate in the distribution without conversion.

      In addition, if we are a party to a consolidation, merger, binding share exchange or sale of all or substantially all of our assets, in each case pursuant to which our common stock would be converted into cash, securities or other property, you may surrender your debentures for conversion at any time from and after the date which is 15 days prior to the anticipated effective date of the transaction until and including the date which is 15 days after the actual date of such transaction. If we are a party to a consolidation, merger, binding share exchange or sale of all or substantially all of our assets, in each case pursuant to which our common stock is converted into cash, securities, or other property, then at the effective time of the transaction, your right to convert a debenture into our common stock will be changed into a right to convert it into the kind and amount of cash, securities and other property which you would have received if you had converted your debentures immediately prior to the transaction. If the transaction also constitutes a fundamental change, you can require us to redeem all or a portion of your debentures as described under “Redemption At Option of the Holder Upon a Fundamental Change.”

      Conversion Procedures. The initial conversion rate for the debentures is 23.8095 shares of common stock per $1,000 principal amount of debentures, subject to adjustment as described below. We will not issue fractional shares of common stock upon conversion of notes. Instead, we will pay cash equal to the closing price of the common stock on the trading day prior to the conversion date multiplied by the applicable fraction. Except as described below, you will not receive any accrued interest or dividends upon conversion.

      To convert your debenture into common stock you must:

•  complete and manually sign the conversion notice on the back of the debenture or facsimile of the conversion notice and deliver this notice to the conversion agent;

•  surrender the debenture to the conversion agent;

•  if required, furnish appropriate endorsements and transfer documents;

•  if required, pay all transfer or similar taxes; and

•  if required, pay funds equal to interest payable on the next interest payment date.

      The date you comply with these requirements is the conversion date under the indenture.

      We will adjust the conversion rate if any of the following events occurs:

•  we issue common stock as a dividend or distribution on our common stock;

•  we issue to all holders of common stock certain rights or warrants to purchase our common stock;

•  we subdivide or combine our common stock;

•  we distribute to all holders of our common stock, shares of our capital stock, evidences of indebtedness or assets, including securities but excluding:

•  rights or warrants specified above;

•  dividends or distributions specified above; and

•  cash distributions;

•  we distribute cash, excluding any dividend or distribution in connection with our liquidation, dissolution or winding up or any quarterly cash dividend on our common stock to the extent that the aggregate cash dividend per share of common stock in any quarter does not exceed the greater of:

•  the amount per share of common stock of the next preceding quarterly cash dividend on the common stock to the extent that the preceding quarterly dividend did not require an adjustment of the conversion rate pursuant to this clause, as adjusted to reflect subdivisions or combinations of the common stock; and

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•  2.5% of the average of the last reported sale price of the common stock during the ten trading days immediately prior to the declaration date of the dividend.

If an adjustment is required to be made under this clause as a result of a distribution that is a quarterly dividend, the adjustment would be based upon the amount by which the distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant to this clause. If an adjustment is required to be made under this clause as a result of a distribution that is not a quarterly dividend, the adjustment would be based upon the full amount of the distribution.

•  we or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer for our common stock to the extent that the cash and value of any other consideration included in the payment per share of common stock exceeds the current market price per share of common stock on the trading day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer; and

•  someone other than us or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer in which, as of the closing date of the offer, our board of directors is not recommending rejection of the offer. The adjustment referred to in this clause will only be made if:

•  the tender offer or exchange offer is for an amount that increases the offeror’s ownership of common stock to more than 25% of the total shares of common stock outstanding; and

•  the cash and value of any other consideration included in the payment per share of common stock exceeds the current market price per share of common stock on the business day next succeeding the last date on which tenders or exchanges may be made pursuant to the tender or exchange offer.

      However, the adjustment referred to in this clause will generally not be made if as of the closing of the offer, the offering documents disclose a plan or an intention to cause us to engage in a consolidation or merger or a sale of all or substantially all of our assets.

      To the extent that we have a rights plan in effect upon conversion of the debentures into common stock, you will receive, in addition to the common stock, the rights under the rights plan whether or not the rights have separated from the common stock at the time of conversion, subject to limited exceptions.

      In the event of:

•  any reclassification of our common stock;

•  a consolidation, merger or combination involving us; or

•  a sale or conveyance to another person or entity of all or substantially all of our property and assets;

in which holders of our common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock, upon conversion of your debentures you will be entitled to receive the same type of consideration which you would have been entitled to receive if you had converted the debentures into our common stock immediately prior to any of these events.

      You may in certain situations be deemed to have received a distribution subject to United States federal income tax as a dividend in the event of any taxable distribution to holders of common stock or in certain other situations requiring a conversion rate adjustment. See “Certain United States Federal Income Tax Considerations.”

      We may, from time to time, increase the conversion rate for a period of at least 20 days if our board of directors has made a determination that this increase would be in our best interests. Any such determination by our board will be conclusive. We would give holders at least 15 days’ notice of any increase in the conversion rate. In addition, we may increase the conversion rate if our board of directors deems it advisable to avoid or diminish any income tax to holders of common stock resulting from any stock or rights distribution. See “Certain United States Federal Income Tax Considerations.”

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      We will not be required to make an adjustment in the conversion rate unless the adjustment would require a change of at least 1% in the conversion rate. However, we will carry forward any adjustments that are less than 1% of the conversion rate. Except as described above in this section, we will not adjust the conversion rate for any issuance of our common stock or convertible or exchangeable securities or rights to purchase our common stock or convertible or exchangeable securities.

Redemption of the Debentures at Our Option

      Beginning October 18, 2007, we may redeem for cash all or part of the debentures at any time, upon not less than 30 nor more than 60 days’ notice by mail to holders of the debentures, for a price equal to 100% of the principal amount of the debentures to be redeemed plus any accrued and unpaid interest to, but excluding, the redemption date.

      If we decide to redeem fewer than all of the outstanding debentures, the trustee will select the debentures to be redeemed by lot, or on a pro rata basis or by another method the trustee considers fair and appropriate.

      If the trustee selects a portion of your debentures for partial redemption and you convert a portion of the same debentures, the converted portion will be deemed to be from the portion selected for redemption.

      In the event of any redemption in part, we will not be required to:

•  register the transfer of or exchange any debenture during a period of 15 days before any selection of debentures for redemption; or

•  register the transfer of or exchange any debenture so selected for redemption, in whole or in part, except the unredeemed portions of any debenture being redeemed in part.

      We may not redeem the debentures if we have failed to pay any interest on the debentures and such failure to pay is continuing. We will notify the holders of debentures if we redeem the debentures.

Redemption at Option of the Holder

      You have the right to require us to repurchase the debentures for cash on October 15, 2007, 2012, 2017, 2022 and 2027. We will be required to repurchase any outstanding debenture for which you deliver a written repurchase notice to the paying agent. This notice must be delivered during the period beginning at any time from the opening of business on the date that is 20 business days prior to the repurchase date until the close of business on the repurchase date. If a repurchase notice is given and withdrawn during that period, we will not be obligated to repurchase the debentures listed in the notice. Our repurchase obligation will be subject to certain additional conditions.

      The repurchase price payable will be equal to 100% of the principal amount of the debentures to be purchased plus accrued and unpaid interest, if any, to the repurchase date.

      Your right to require us to repurchase debentures is exercisable by delivering a written repurchase notice to the paying agent within 20 business days of the repurchase date. The paying agent initially will be the trustee.

      The repurchase notice must state:

      (1) if certificated debentures have been issued, the debenture certificate numbers (or, if your debentures are not certificated, your repurchase notice must comply with appropriate DTC procedures);

      (2) the portion of the principal amount of debentures to be repurchased, which must be in $1,000 multiples; and

      (3) that the debentures are to be repurchased by us pursuant to the applicable provisions of the debentures and the indenture.

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      You may withdraw any written repurchase notice by delivering a written notice of withdrawal to the paying agent prior to the close of business of the repurchase date. The withdrawal notice must state:

•  the principal amount of the withdrawn debentures;

•  if certificated debentures have been issued, the certificate numbers of the withdrawn debentures (or, if your debentures are not certificated, your withdrawal notice must comply with appropriate DTC procedures); and

•  the principal amount, if any, which remains subject to the repurchase notice.

      We must give notice of an upcoming repurchase date to all debenture holders not less than 20 business days prior to the repurchase date at their addresses shown in the register of the registrar. We will also give notice to beneficial owners as required by applicable law. This notice will state, among other things the procedures that holders must follow to require us to repurchase their debentures.

      Payment of the repurchase price for a debenture for which a repurchase notice has been delivered and not withdrawn is conditioned upon book-entry transfer or delivery of the debenture, together with necessary endorsements, to the paying agent at its office in the Borough of Manhattan, The City of New York, or any other office of the paying agent, at any time after delivery of the repurchase notice. Payment of the repurchase price for the debenture will be made promptly following the later of the repurchase date and the time of book-entry transfer or delivery of the debenture. If the paying agent holds money or securities sufficient to pay the repurchase price of the debenture on the business day following the repurchase date, then, on and after the date:

•  the debenture will cease to be outstanding;

•  interest will cease to accrue; and

•  all other rights of the holder will terminate.

      This will be the case whether or not book-entry transfer of the debenture has been made or the debenture has been delivered to the paying agent, and all other rights of the debenture holder will terminate, other than the right to receive the repurchase price upon delivery of the debenture.

Redemption at Option of the Holder Upon a Fundamental Change

      If a fundamental change of PacifiCare occurs any time prior to the maturity of the debentures, you may require us to redeem your debentures, in whole or in part, on a repurchase date that is 30 days after the date of our notice of the fundamental change. The debentures will be redeemable in integral multiples of $1,000 principal amount.

      We will redeem the debentures at a price equal to 100% of the principal amount to be redeemed, plus accrued interest to, but excluding, the repurchase date. If the repurchase date is an interest payment date, we will pay interest to the record holder on the relevant record date.

      We will mail to all record holders a notice of a fundamental change within 10 days after it has occurred. We are also required to deliver to the trustee a copy of the fundamental change notice. If you elect to redeem your debentures, you must deliver to us or our designated agent, on or before the 30th day after the date of our fundamental change notice, your redemption notice and any debentures to be redeemed, duly endorsed for transfer. We will promptly pay the redemption price for debentures surrendered for redemption following the repurchase date.

      A “fundamental change” is any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in connection with which all or substantially all of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive, consideration which is not all or substantially all common stock that:

•  is listed on, or immediately after the transaction or event will be listed on, a United States national securities exchange, or

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•  is approved, or immediately after the transaction or event will be approved, for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices.

      We will comply with any applicable provisions of Rule 13e-4 and any other tender offer rules under the Exchange Act in the event of a fundamental change.

      These fundamental change redemption rights could discourage a potential acquirer. However, this fundamental change redemption feature is not the result of management’s knowledge of any specific effort to obtain control of us by means of a merger, tender offer or solicitation, or part of a plan by management to adopt a series of anti-takeover provisions. The term “fundamental change” is limited to specified transactions and may not include other events that might adversely affect our financial condition or business operations. Our obligation to offer to redeem the debentures upon a fundamental change would not necessarily afford you protection in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

      If a fundamental change were to occur, we may not have enough funds to pay the repurchase price for all tendered debentures. We are prohibited under our senior credit facility, and may be prohibited under indebtedness we may incur in the future, from purchasing any debentures prior to their stated maturity. In such circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, indebtedness under the senior credit facility and any such other future indebtedness or obtain the requisite consent from the lenders under the senior credit facility and the holders of any such other future indebtedness to permit the repurchase of the debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the debentures, which would constitute an event of default under the indenture for the debentures, which itself would also constitute a default under the senior credit facility and the indentures for our 10 3/4% senior notes and FHP senior notes and could constitute a default under the terms of any future indebtedness that we may incur. In connection with a fundamental change, we also could be required under the terms of our 10 3/4% senior notes to repurchase those notes, which could prevent us from repurchasing tendered debentures without causing a default under the indenture for our 10 3/4% senior notes. In addition, the events that constitute a fundamental change under the indenture for the debentures may also be events of default under the senior credit facility or other indebtedness we may incur in the future.

Subordination of Debentures

      Payment on the debentures will, to the extent provided in the indenture, be subordinated in right of payment to the prior payment in full of all of our existing and future senior indebtedness. The debentures also are effectively subordinated to all debt and other liabilities, including trade payables and lease obligations, if any, of our subsidiaries.

      Upon any distribution of our assets upon any dissolution, winding up, liquidation or reorganization, the payment of the principal of, or premium, if any, interest, and liquidated damages, if any, on the debentures will be subordinated in right of payment to the prior payment in full in cash or other payment satisfactory to the holders of senior indebtedness of all senior indebtedness. In the event of any acceleration of the debentures because of an event of default, the holders of any outstanding senior indebtedness would be entitled to payment in full in cash or other payment satisfactory to the holders of senior indebtedness of all senior indebtedness obligations before the holders of the debentures are entitled to receive any payment or distribution. We are required under the indenture to promptly notify holders of senior indebtedness, if payment of the debentures is accelerated because of an event of default.

      We may not make any payment on the debentures if:

•  a default in the payment of designated senior indebtedness occurs and is continuing beyond any applicable period of grace (called a “payment default”); or

•  a default other than a payment default on any designated senior indebtedness occurs and is continuing that permits holders of designated senior indebtedness to accelerate its maturity, or in the case of a

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lease, a default occurs and is continuing that permits the lessor to either terminate the lease or require us to make an irrevocable offer to terminate the lease following an event of default under the lease, and the trustee receives a notice of such default (called “payment blockage notice”) from us or any other person permitted to give such notice under the indenture (called a “non-payment default”).

      We may resume payments and distributions on the debentures:

•  in case of a payment default, upon the date on which such default is cured or waived or ceases to exist; and

•  in case of a non-payment default, the earlier of the date on which such nonpayment default is cured or waived or ceases to exist or 179 days after the date on which the payment blockage notice is received, if the maturity of the designated senior indebtedness has not been accelerated, or in the case of any lease, 179 days after notice is received if we have not received notice that the lessor under such lease has exercised its right to terminate the lease or require us to make an irrevocable offer to terminate the lease following an event of default under the lease.

      No new period of payment blockage may be commenced pursuant to a payment blockage notice unless 365 days have elapsed since the initial effectiveness of the immediately prior payment blockage notice. No non-payment default that existed or was continuing on the date of delivery of any payment blockage notice shall be the basis for any later payment blockage notice.

      If the trustee or any holder of the debentures receives any payment or distribution of our assets in contravention of the subordination provisions on the debentures before all senior indebtedness is paid in full in cash or other payment satisfactory to holders of senior indebtedness, then such payment or distribution will be held in trust for the benefit of holders of senior indebtedness or their representatives to the extent necessary to make payment in full in cash or payment satisfactory to the holders of senior indebtedness of all unpaid senior indebtedness.

      Because of the subordination provisions discussed above, in the event of our bankruptcy, dissolution or reorganization, holders of senior indebtedness may receive more, ratably, and holders of the debentures may receive less, ratably, than our other creditors. This subordination will not prevent the occurrence of any event of default under the indenture.

      The debentures are exclusively obligations of PacifiCare, which is a holding company. Because we derive substantially all of our revenues and EBITDA from our operating subsidiaries and do not have significant operations of our own, we are dependent upon the ability of our subsidiaries to provide us with cash, in the form of dividends or intercompany credits, loans or otherwise, to meet our debt service obligations, including our obligations under the debentures. Our subsidiaries will have no obligation to pay any amounts due on the debentures or to make any funds available to us for payment of the debentures, whether by dividends, loans, distributions or other payments.

      In addition, our regulated HMO and insurance subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various capital standards imposed by HMO or insurance regulations, which may from time to time impact the amount of funds those subsidiaries can pay to us. Furthermore, in September 1998, the National Association of Insurance Commissioners adopted new minimum capitalization guidelines, known as risk-based capital rules, for health care coverage provided by HMOs and other risk-bearing health care entities, which some of the states our regulated subsidiaries operate in have adopted as their governing regulations for capital requirements. Our regulated subsidiaries could become subject to increased capitalization requirements depending on the nature and extent of the risk-based capital rules, if any, ultimately adopted in the other states in which they operate.

      From time to time, we advance funds in the form of a loan or capital contribution to our subsidiaries to assist them in satisfying state financial requirements. We may provide additional funding to a subsidiary if a state legislator imposes additional financial requirements due to concerns about the financial position of the subsidiary or if there is an adverse effect resulting from changes to the state’s financial requirements.

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Furthermore, varying results of operations or other business considerations, for example determinations as to the amount of funds in excess of capital requirements that our regulated subsidiaries should retain to fund their operations, may reduce or restrict the amount of dividends, loans or other distributions to us from our subsidiaries. Any of these factors could reduce the amount of funds we have available to us to make payments of principal and interest on our outstanding indebtedness, including the debentures.

      Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders to participate in those assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors. In addition, even if we were a creditor to any of our subsidiaries, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.

      The term “senior indebtedness” is defined in the indenture and includes principal, premium, interest, rent, fees, costs, expenses and other amounts accrued or due on our existing or future indebtedness, as defined below, or any existing or future indebtedness guaranteed or in effect guaranteed by us, subject to certain exceptions. The term does not include:

•  any indebtedness that expressly provides that it is pari passu or junior to the debentures; or

•  any indebtedness we owe to any of our majority-owned subsidiaries; or

•  the debentures.

      The term “indebtedness” is also defined in the indenture and includes, in general terms, our liabilities in respect of borrowed money, notes, bonds, debentures, letters of credit, bank guarantees, bankers’ acceptances, capital and certain other leases, interest rate and foreign currency derivative contracts or similar arrangements, guarantees and certain other obligations described in the indenture, subject to certain exceptions. The term does not include, for example, any account payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services.

      The term “designated senior indebtedness” is defined in the indenture and includes our indebtedness under our senior credit facility, our 10 3/4% senior notes and the FHP senior notes as well as, in general terms, any senior indebtedness that by its terms expressly provides that it is “designated senior indebtedness” for purposes of the indenture.

      As of September 30, 2002, we had $769 million of senior indebtedness outstanding and our subsidiaries had $1.7 billion of other liabilities outstanding, excluding intercompany liabilities. Neither we nor our subsidiaries are prohibited from incurring debt, including senior indebtedness, under the indenture. We may from time to time incur additional debt, including senior indebtedness. Our subsidiaries may also from time to time incur additional debt and liabilities.

      We are obligated to pay reasonable compensation to the trustee and to indemnify the trustee against certain losses, liabilities or expenses incurred by the trustee in connection with its duties relating to the debentures. The trustee’s claims for these payments will generally be senior to those of the holders of the debentures in respect of all funds collected or held by the trustee.

Merger and Sale of Assets by PacifiCare

      The indenture provides that we may not consolidate with or merge with or into any other person or convey, transfer or lease our properties and assets substantially as an entirety to another person, unless among other items:

•  we are the surviving person, or the resulting, surviving or transferee person, if other than us is organized and existing under the laws of the United States, any state thereof or the District of Columbia, or any other country;

•  the successor person assumes all of our obligations under the debentures and the indenture; and

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•  we or such successor person will not be in default under the indenture immediately after the transaction.

      When such a person assumes our obligations in such circumstances, subject to certain exceptions, we shall be discharged from all obligations under the debentures and the indenture. If such a transaction constitutes a “fundamental change,” as described above, we would be required to offer to repurchase the debentures as described above.

Events of Default; Notice and Waiver

      The following will be events of default under the indenture:

•  we fail to pay principal or premium, if any, when due upon redemption or otherwise on the debentures, whether or not the payment is prohibited by subordination provisions;

•  we fail to pay any interest and liquidated damages, if any, on the debentures, when due and such failure continues for a period of 30 days, whether or not the payment is prohibited by subordination provisions of the indenture;

•  we fail to perform or observe any of the covenants in the indenture for 60 days after notice; or

•  certain events involving our or our subsidiaries’ bankruptcy, insolvency or reorganization.

      The trustee may withhold notice to the holders of the debentures of any default, except defaults in payment of principal, premium, interest or liquidated damages, if any, on the debentures. However, the trustee must consider it to be in the interest of the holders of the debentures to withhold this notice.

      If an event of default occurs and continues, the trustee or the holders of at least 25% in principal amount of the outstanding debentures may declare the principal, premium, if any, and accrued interest and liquidated damages, if any, on the outstanding debentures to be immediately due and payable. In case of certain events of bankruptcy or insolvency involving us, the principal, premium, if any, and accrued interest and liquidated damages, if any, on the debentures will automatically become due and payable. However, if we cure all defaults, except the nonpayment of principal, premium, if any, interest or liquidated damages, if any, that became due as a result of the acceleration, and meet certain other conditions, with certain exceptions, this declaration may be cancelled and the holders of a majority of the principal amount of outstanding debentures may waive these past defaults.

      Payments of principal, premium, if any, or interest on the debentures that are not made when due will accrue interest at the annual rate of 1% above the then applicable interest rate from the required payment date.

      The holders of a majority of outstanding debentures will have the right to direct the time, method and place of any proceedings for any remedy available to the trustee, subject to limitations specified in the indenture.

      No holder of the debentures may pursue any remedy under the indenture, except in the case of a default in the payment of principal, premium, interest or liquidated damages, if any, on the debentures, unless:

•  the holder has given the trustee written notice of an event of default;

•  the holders of at least 25% in principal amount of outstanding debentures make a written request, and offer reasonable indemnity, to the trustee to pursue the remedy;

•  the trustee does not receive an inconsistent direction from the holders of a majority in principal amount of the debentures; and

•  the trustee fails to comply with the request within 60 days after receipt.

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Modification and Waiver

      The consent of the holders of a majority in principal amount of the outstanding debentures is required to modify or amend the indenture. However, a modification or amendment requires the consent of the holder of each outstanding debenture if it would:

•  extend the fixed maturity of any debenture;

•  reduce the rate or extend the time for payment of interest of any debenture;

•  reduce the principal amount or premium of any debenture;

•  reduce any amount payable upon redemption or repurchase of any debenture;

•  adversely change our obligation to redeem any debenture upon a fundamental change;

•  impair the right of a holder to institute suit for payment on any debenture;

•  change the currency in which any debenture is payable;

•  impair the right of a holder to convert any debenture;

•  adversely modify, in any material respect, the subordination provisions of the indenture;

•  reduce the quorum or voting requirements under the indenture;

•  change any obligation of ours to maintain an office or agency in the places and for the purposes specified in the indenture;

•  subject to specified exceptions, modify certain of the provisions of the indenture relating to modification or waiver of provisions of the indenture; or

•  reduce the percentage of debentures required for consent to any modification of the indenture.

      We are permitted to modify certain provisions of the indenture without the consent of the holders of the debentures.

Form, Denomination and Registration

      The debentures were issued:

•  in fully registered form;

•  without interest coupons; and

•  in denominations of $1,000 principal amount and integral multiples of $1,000.

      Global Debenture, Book-Entry Form. Debentures resold under the registration statement of which this prospectus forms a part will be evidenced by one or more permanent global debentures in definitive, fully registered form, which will be deposited with the trustee as custodian for DTC and registered in the name of Cede & Co. as DTC’s nominee. We initially issued the debentures in the form of a global debenture, bearing a legend relating to restrictions on transfer. We deposited the global debenture with the trustee as custodian for DTC and registered the global debenture in the name of Cede & Co. as DTC’s nominee. Except as set forth below, a global debenture may be transferred, in whole or in part, only to another nominee of DTC or to a successor of DTC or its nominee.

      You may hold your beneficial interests in a global debenture directly through DTC if you are a participant in DTC, or indirectly through organizations that are participants in DTC (called “participants”). Transfers between participants will be effected in the ordinary way in accordance with DTC rules and will be settled in clearing house funds. The laws of some states require that certain persons take physical delivery of securities in definitive form. As a result, the ability to transfer beneficial interests in the global debenture to such persons may be limited.

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      If you are not a participant in DTC, you may beneficially own interests in a global debenture held by DTC only through participants, or certain banks, brokers, dealers, trust companies and other parties that clear through or maintain a custodial relationship with a participant, either directly or indirectly (called “indirect participants”). So long as Cede & Co., as the nominee of DTC, is the registered owner of a global debenture, Cede & Co. for all purposes will be considered the sole holder of such global debenture. Except as provided below, owners of beneficial interests in a global debenture will:

•  not be entitled to have certificates registered in their names;

•  not receive physical delivery of certificates in definitive registered form; and

•  not be considered holders of the global debenture.

      We will pay interest on and the redemption price of a global debenture to Cede & Co., as the registered owner of the global debenture, by wire transfer of immediately available funds on each interest payment date or the redemption or repurchase date, as the case may be. Neither we, the trustee nor any paying agent will be responsible or liable:

•  for the records relating to, or payments made on account of, beneficial ownership interests in a global debenture; or

•  for maintaining, supervising or reviewing any records relating to the beneficial ownership interests.

      We have been informed that DTC’s practice is to credit participants’ accounts on that payment date with payments in amounts proportionate to their respective beneficial interests in the principal amount represented by a global debenture as shown in the records of DTC, unless DTC has reason to believe that it will not receive payment on that payment date. Payments by participants to owners of beneficial interests in the principal amount represented by a global debenture held through participants will be the responsibility of the participants, as is now the case with securities held for the accounts of customers registered in “street name.”

      Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having a beneficial interest in the principal amount represented by the global debenture to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate evidencing its interest.

      Neither we, the trustee, registrar, paying agent nor conversion agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. DTC has advised us that it will take any action permitted to be taken by a holder of debentures, including the presentation of debentures for conversion, only at the direction of one or more participants to whose account with DTC interests in the global debenture are credited, and only in respect of the principal amount of the debentures represented by the global debenture as to which the participant or participants has or have given such direction.

      DTC has advised us that it is:

•  a limited purpose trust company organized under the laws of the State of New York, and a member of the Federal Reserve System;

•  a “clearing corporation” within the meaning of the Uniform Commercial Code; and

•  a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act.

      DTC was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes to the accounts of its participants. Participants include securities brokers, dealers, banks, trust companies and clearing corporations and other organizations. Some of the participants or their representatives, together with other entities, own DTC. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

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      DTC has agreed to the foregoing procedures to facilitate transfers of interests in a global debenture among participants. However, DTC is under no obligation to perform or continue to perform these procedures, and may discontinue these procedures at any time. If DTC is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by us within 90 days, we will issue debentures in certificated form in exchange for global debentures.

      Certificated Debentures. Holders may request that certificated debentures be issued in exchange for debentures represented by a global debenture.

Registration Rights of the Holders of Debentures

      We entered into a registration rights agreement with the initial purchasers of the debentures. Under the registration rights agreement, we agreed to file a shelf registration statement, of which this prospectus is a part, with the SEC covering the resales of the registrable securities. We will use our reasonable best efforts to keep the shelf registration statement effective until the earlier of:

•  all of the registrable securities have been sold pursuant to the shelf registration statement; or

•  the expiration of the holding period under Rule 144(k) under the Securities Act, or any successor provision.

      When we use the term “registrable securities” in this section, we are referring to the debentures and the common stock issuable upon conversion of the debentures until the earliest of:

•  the effective registration under the Securities Act and the resale of the securities in accordance with the registration statement;

•  the expiration of the holding period under Rule 144(k) under the Securities Act; and

•  the sale to the public pursuant to Rule 144 under the Securities Act, or any similar provision then in force, but not Rule 144A.

      We may suspend the use of the prospectus under certain circumstances relating to pending corporate developments, public filings with the SEC and similar events. Any suspension period shall not:

•  exceed 30 days in any three-month period; or

•  an aggregate of 90 days for all periods in any 12-month period.

      Notwithstanding the foregoing, we will be permitted to suspend the use of the prospectus for up to 60 days in any 3-month period under certain circumstances, relating to possible acquisitions, dispositions, financings or other similar transactions.

      We will pay predetermined liquidated damages if the prospectus is unavailable for periods in excess of those permitted above:

•  on the debentures at an annual rate equal to 0.5% of the aggregate principal amount of the debentures outstanding during the additional period the prospectus is unavailable; and

•  on the shares of our common stock that have been issued on conversion of the debentures, at an annual rate equal to 0.5% of an amount equal to the number of shares of common stock multiplied by the quotient of $1,000 divided by the conversion rate during such periods.

      A holder who elects to sell registrable securities pursuant to the shelf registration statement of which this prospectus is a part will be required to:

•  be named as a selling stockholder in this prospectus;

•  deliver this prospectus to purchasers; and

•  be subject to the provisions of the registration rights agreement, including indemnification provisions.

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      Under the registration rights agreement we will:

•  pay all expenses of the shelf registration statement of which this prospectus is a part;

•  provide each registered holder copies of this prospectus;

•  notify holders when the shelf registration statement has become effective; and

•  take other reasonable actions as are required to permit unrestricted resales of the registrable securities in accordance with the terms and conditions of the registration rights agreement.

      Holders of registrable securities that have not delivered a notice and questionnaire to us and are interested in selling their registrable securities pursuant to the shelf registration statement of which this prospectus is a part must complete and deliver a selling securityholder notice and questionnaire to us at least three business days prior to their intended distribution. Upon receipt of a completed questionnaire, together with any other information we may reasonably request, we will, within 15 business days, file any amendments to the shelf registration statement or supplements to the related prospectus as are necessary to permit holders to deliver this prospectus to purchasers of registrable securities, subject to our right to suspend the use of this prospectus. We will pay the predetermined liquidated damages described above to the holder if we fail to make the filing in the time required or, if such filing is post-effective amendment to the shelf registration statement required to be declared effective under the Securities Act, if such amendment is not declared effective within 45 days of the filing. If holders of registrable securities do not complete and deliver a questionnaire or provide the other information we may request, they will not be named as a selling securityholder in this prospectus and will not be permitted to sell their registrable securities pursuant to the shelf registration statement of which this prospectus is a part. This summary of the registration rights agreement is not complete. This summary is subject to, and is qualified in its entirety by reference to, all the provisions of the registration rights agreement. The registration rights agreement has been filed as an exhibit to the shelf registration statement of which this prospectus is a part.

Information Concerning the Trustee

      We have appointed U.S. Bank National Association, the trustee under the indenture, as paying agent, conversion agent, debenture registrar and custodian for the debentures. The trustee or its affiliates may provide banking and other services to us in the ordinary course of their business.

      The indenture contains certain limitations on the rights of the trustee, if it or any of its affiliates is then our creditor, to obtain payment of claims in certain cases or to realize on certain property received on any claim as security or otherwise. The trustee and its affiliates will be permitted to engage in other transactions with us. However, if the trustee or any affiliate continues to have any conflicting interest and a default occurs with respect to the debentures, the trustee must eliminate such conflict or resign.

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DESCRIPTION OF OUR OTHER INDEBTEDNESS

Senior Credit Facility

      General. As of September 30, 2002, there was $214 million outstanding under the senior credit facility, all of which was under the term loan, and the total size of the committed revolving line of credit was $51 million, of which at least $20 million was available for borrowing. Our senior credit facility matures on January 3, 2005. As of September 30, 2002, after giving pro forma effect to the offering of the debentures by us and the application of its estimated net proceeds as set forth under “Use of Proceeds” as if each had occurred on September 30, 2002 and the required repayment of our term loan and the automatic reduction of our revolving line of credit at the end of the third quarter, we would have had $160.7 million outstanding under the senior credit facility, all of which was under the term loan, the total size of our committed revolving line of credit would have been $38.7 million, and we would have had the ability to incur at least $7.6 million in additional debt under our revolving line of credit. Our senior credit facility amortizes $25 million per quarter, including a $20 million cash payment on the term loan and a $5 million reduction in borrowing capacity under the revolving line of credit.

      Interest Rates; Fees. The interest rates per annum applicable to amounts outstanding under the term loan and revolving line of credit are, at our option, either the administrative agent’s publicly announced “prime rate” (or, if greater, the Federal Funds Rate plus 0.5%) plus a margin of 4.0% per annum, or the rate for Eurodollar borrowings for the applicable interest period plus a margin of 5.0% per annum. Based on our outstanding balance under the senior credit facility at September 30, 2002, our average overall interest rate, excluding the facility fee, was approximately 6.8% per annum.

      We are required to pay the lenders under the senior credit facility a commitment fee equal to 0.50% per annum, payable quarterly in arrears, on the unused portion of the facility. We are also required to pay letter of credit fees for outstanding letters of credit equal to the Eurodollar margin for loans under the revolving line of credit and 0.125% per annum to the bank issuing the letters of credit.

      Amortization; Prepayments. The senior credit facility amortizes $25 million per quarter, including a $20 million cash payment on the term loan and a $5 million reduction in borrowing capacity under the revolving line of credit. We are also required to make prepayments, subject to certain exceptions, of the outstanding or committed amounts, as applicable, under the term loan and the revolving line of credit from asset sales, issuance of debt and equity securities and extraordinary receipts, including tax refunds, indemnity payments, pension reversions, insurance or condemnation proceeds and purchase price adjustments received in connection with any purchase agreement. Any such prepayments will be applied to the latest remaining scheduled amortization payment or payments under that facility, and our use of a portion of the net proceeds from the offering by us of the debentures to permanently repay indebtedness under that facility were also so applied. We may prepay amounts borrowed under the term loan and revolving line of credit at our option without any fee. We used a portion of the net proceeds from the issuance and sale by us of the debentures to permanently repay a portion of the outstanding amount under the senior credit facility.

      Collateral and Guarantees. The senior credit facility is secured by liens on substantially all of the personal property assets of our domestic, unregulated subsidiaries and pledges of the capital stock of certain of our subsidiaries, including a number of our regulated subsidiaries. Our domestic, unregulated subsidiaries also guarantee our obligations under the senior credit facility.

      Covenants. The terms of the senior credit facility require us to provide certain customary covenants for a senior credit facility, including minimum net worth, fixed-charge coverage and debt to EBITDA ratio requirements. In addition, we agreed to covenants that, among other things, limit our ability to incur additional indebtedness, liens and lease obligations, sell and transfer assets, make loans or investments, engage in mergers, consolidations or acquisitions, enter into joint ventures, pay dividends or other distributions to stockholders, redeem capital stock, prepay other indebtedness, including the debentures, and engage in other matters customarily restricted in senior secured credit facilities. These covenants are subject to qualifications and exceptions.

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      Events of Default. The senior credit facility contains customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults, certain events of bankruptcy and insolvency, certain ERISA-related events, judgment defaults, failure of any guaranty or security agreement supporting our obligations under the senior credit facility to be in full force and effect, and change of control transactions.

10 3/4% Senior Notes due 2009

      On May 21, 2002, we issued $500 million in aggregate principal amount of 10 3/4% senior notes due 2009. The 10 3/4% senior notes bear interest at 10.75% per annum, payable semi-annually in arrears on June 1 and December 1.

      Guarantees. Certain of our domestic, unregulated subsidiaries fully and unconditionally guarantee the 10 3/4% senior notes on an unsecured unsubordinated basis. These subsidiaries are PacifiCare Health Plan Administrators, Inc., or PHPA, PacifiCare eHoldings, Inc. and SeniorCo, Inc. Certain of our other domestic, unregulated subsidiaries are currently restricted from guaranteeing the 10 3/4% senior notes by the terms of the FHP senior notes but will fully and unconditionally guarantee the 10 3/4% senior notes on an unsecured unsubordinated basis once we permanently repay the FHP senior notes. These subsidiaries are RxSolutions, Inc., doing business as Prescription Solutions, PacifiCare Behavioral Health, Inc. and SecureHorizons USA, Inc. Certain other future subsidiaries also may guarantee the 10 3/4% senior notes. Each of the guarantor subsidiaries also guarantees our indebtedness under the senior credit facility.

      Optional Redemption. We may redeem any of the 10 3/4% senior notes beginning on June 1, 2006. The initial redemption price is 105.375% of their principal amount plus accrued and unpaid interest to the redemption date. The redemption price will decline annually. In addition, before June 1, 2005, we may redeem up to 35% of the 10 3/4% senior notes at a redemption price of 110.750% of their principal amount plus accrued and unpaid interest to the redemption date, using the proceeds from sales of specified kinds of our capital stock. We may make such redemption only if after such redemption at least 65% of the aggregate principal amount of the 10 3/4% senior notes originally issued remains outstanding. We may also redeem all of the 10 3/4% senior notes before June 1, 2006 upon a change of control at 100% of their principal amount, plus accrued and unpaid interest and a “make-whole” premium.

      Change of Control. Upon a change of control, we will be required to make an offer to purchase the 10 3/4% senior notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. We may not have sufficient funds available at the time of any change of control to make any required debt repayment, including payments required under our senior credit facility, which will prohibit us, absent applicable lender consent, from repurchasing the 10 3/4% senior notes upon a change of control.

      Ranking. The 10 3/4% senior notes are senior unsecured obligations. The 10 3/4% senior notes rank equally in right of payment with all of our existing and future unsecured unsubordinated indebtedness and rank senior to the debentures and any subordinated indebtedness we create in the future. The guarantees of the 10 3/4% senior notes rank equally in right of payment with all unsecured unsubordinated indebtedness of our subsidiary guarantors existing at the time those subsidiaries became or become guarantors or incurred thereafter, and rank senior to all subordinated indebtedness of our subsidiary guarantors existing at the time those subsidiaries became or become guarantors or incurred thereafter. The 10 3/4% senior notes are effectively subordinated to the indebtedness and other liabilities, including trade credit, of our non-guarantor subsidiaries and, until they become guarantors, our subsidiaries that are not providing guarantees for the 10 3/4% senior notes.

      Certain Covenants. The terms of the 10 3/4% senior notes will limit our ability and the ability of our subsidiaries to incur additional indebtedness, create liens, pay dividends and make distributions in respect of our capital stock and the capital stock of our subsidiaries, redeem capital stock, place restrictions on their ability to pay dividends, make distributions or transfer assets, make investments or other restricted payments, sell or otherwise dispose of assets, enter into sale-leaseback transactions, engage in transactions with stockholders and affiliates, issue or sell stock of our subsidiaries, and effect a consolidation or merger. Each of these covenants are subject to a number of important qualifications and exceptions.

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FHP Senior Notes

      Pursuant to our acquisition of FHP International Corporation, or FHP, in 1997, we assumed $100 million in senior notes due September 15, 2003. The FHP senior notes bear interest at 7% per annum payable semiannually. We used $85 million of the net proceeds from our 10 3/4% senior notes offering in May 2002 to fund a restricted cash collateral account under our senior credit facility that has been and will be used, subject to our being in compliance with the senior credit facility, to repurchase or repay the FHP senior notes prior to or on their stated maturity date.

      As of September 30, 2002, we had used $42 million of the restricted cash collateral account to purchase and permanently retire FHP senior notes. The FHP senior notes are not redeemable by us prior to maturity. The FHP senior notes share in the collateral and guarantees securing our senior credit facility. The FHP senior notes rank pari passu with indebtedness under our senior credit facility and the 10 3/4% senior notes and rank senior to the debentures. The FHP senior notes are effectively subordinated in right of payment to all liabilities of our subsidiaries, other than our subsidiaries that guarantee the FHP senior notes. The indenture under which the FHP senior notes are issued contains covenants that, among other limitations, limit the ability of PacifiCare Health Plan Administrators, Inc., or PHPA, a wholly-owned subsidiary of ours into which FHP was ultimately merged in March 1999, to create liens and engage in sale-and-lease back transactions. The indenture also limits the ability of PHPA’s subsidiaries to incur debt and issue preferred stock. Upon our assumption of the FHP senior notes, we agreed to be bound by covenants concerning the preservation of corporate existence, maintenance of property and payment of taxes. The FHP senior notes contain customary events of default, including payment defaults, breach of covenants or warranties, cross-defaults, judgment defaults and certain events of bankruptcy and insolvency.

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DESCRIPTION OF CAPITAL STOCK

      As of the date of this prospectus, our certificate of incorporation authorizes us to issue 200,000,000 shares of common stock, par value $0.01 per share and 40,000,000 shares of preferred stock, par value $0.01 per share. As of January 28, 2003, 36,130,000 shares of common stock were outstanding and no shares of preferred stock were outstanding.

Common Stock

      Voting. Common stockholders are entitled to one vote per share for the election of directors and on all other matters that require stockholder approval.

      Dividends and Other Distributions. Holders of our common stock are entitled to share in an equal amount per share in any dividends declared by our board of directors and paid out of legally available assets.

      Distribution on Dissolution. Subject to any preferential rights of any outstanding preferred stock, in the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in the assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock.

      Other Rights. Our common stock does not carry any preemptive or redemption rights enabling a holder to subscribe for, or receive shares of, any class of our common stock or any other securities convertible into shares of any class of our common stock.

Preferred Stock

      Under our certificate of incorporation, our board of directors has the authority, without further action by stockholders, to designate up to 40,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preference and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation. The issuance could have the effect of decreasing the market price of the common stock. The issuance of preferred stock also could have the effect of delaying, deterring or preventing a change in control of us.

      Share Purchase Rights Plan. Each outstanding share of our common stock has attached to it one preferred share purchase right, which we refer to as a right. Each right entitles the registered holder of our common stock to purchase from us one one-hundredth of a share of Series A Junior Participating Preferred Stock, which we refer to as participating preferred shares, at a price of $180.00 per one one-hundredth of a participating preferred share, subject to adjustment. Each one one-hundredth of a share of participating preferred shares has designations and powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of a share of our common stock. The description and terms of the rights are set forth in a Rights Agreement, dated as of November 19, 1999, between us and Mellon Investor Services, L.L.C., as rights agent.

      Until the distribution date described below, we will not issue separate certificates evidencing the rights. Until that date, the rights will be evidenced, with respect to any common stock certificate, by that common stock certificate. The rights will detach from the common stock and a distribution date will occur upon the earlier of the following dates:

•  the date of a public announcement that an “acquiring person,” which may include an entity or group of affiliated or associated persons, has acquired beneficial ownership of 15% or more of our outstanding common stock, or

•  the tenth business day following the commencement of, or the first public announcement by any person or group of an intention to commence, a tender offer that would result in any person or entity, including

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a group of affiliated or associated persons, acquiring beneficial ownership of 15% or more of our outstanding common stock.

Our board of directors may postpone the distribution date by determining a later distribution date before the time any person or group becomes an acquiring person.

      The term “acquiring person” does not include us, any of our subsidiaries, any of our or our subsidiaries’ employee benefit plans or any entity holding our common stock for or under any of our or our subsidiaries’ employee benefit plans. In addition, a person who would otherwise be an acquiring person will not be considered an acquiring person if our board of directors determines in good faith that such person inadvertently became the beneficial owner of 15% or more of our common stock and such person divests itself, as promptly as practicable, of beneficial ownership of a sufficient number of shares of our common stock so that it would no longer otherwise qualify as an acquiring person.

      In addition, except under limited circumstances, no person or entity shall become an acquiring person as the result of the acquisition of our common stock which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such person or entity to 15% or more of our outstanding common stock.

      The rights agreement provides that, until the distribution date, or earlier redemption or expiration of the rights, the rights will be transferred only with our common stock. The rights will be evidenced, with respect to any common stock certificate outstanding as of November 19, 1999, by that common stock certificate with a summary of the rights attached to it. Until the distribution date, or earlier redemption or expiration of the rights, new common stock certificates issued after November 19, 1999, upon transfer or new issuances of common stock will contain a notation incorporating the rights agreement by reference. Until the distribution date, the surrender for transfer of any certificates for common stock, even without a summary of the rights attached to it, also will constitute the transfer of the rights associated with the common stock represented by that certificate. As soon as practicable after the distribution date, separate certificates evidencing the rights will be mailed to holders of record of our common stock as of the close of business on the distribution date, and the separate right certificates alone will evidence the rights. Only our common stock issued before the distribution date will be issued with rights.

      The rights are not exercisable until the distribution date. The rights will expire on November 19, 2009, unless the rights are earlier redeemed or exchanged by us, in each case, as described below.

      The purchase price payable for the participating preferred shares, and the number of participating preferred shares or other securities or property issuable, upon exercise of the rights, as well as the number of rights outstanding, are subject to adjustment from time to time to prevent dilution in the following circumstances:

•  in the event of a stock dividend on, or a subdivision, combination or reclassification of the participating preferred shares,

•  upon the grant to holders of the participating preferred shares of rights or warrants to subscribe for or purchase participating preferred shares at a price, or securities convertible into participating preferred shares with a conversion price, less than the current market price of the participating preferred shares, or

•  upon the distribution to holders of the participating preferred shares of evidences of indebtedness, securities or assets, excluding regular quarterly cash dividends or dividends payable in participating preferred shares or of subscription rights or warrants, other than those referred to above.

      The number of outstanding rights and the number of one one-hundredths of a participating preferred share issuable upon exercise of each right are also subject to adjustment in the event of a dividend or other distribution on the common stock payable in common stock or subdivisions, consolidations or combinations of our common stock occurring, in any of those cases, before the distribution date.

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      Participating preferred shares purchasable upon exercise of the rights will not be redeemable. Each participating preferred share will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share, but will be entitled to an aggregate dividend of 100 times the dividend declared per share of our common stock. If there is a liquidation, the holders of the participating preferred shares will be entitled to a minimum preferential liquidation payment of $100 per share, but will be entitled to an aggregate payment of 100 times the payment made per share of our common stock. Each participating preferred share will have 100 votes, voting together with our common stock. If there is a merger, consolidation or other transaction in which our common stock is exchanged, each participating preferred share will be entitled to receive 100 times the amount received per share of our common stock. These rights are protected by customary antidilution provisions.

      Because of the nature of the dividend, liquidation and voting rights of the participating preferred shares, the value of the one one-hundredth interest in a participating preferred share purchasable upon exercise of each right should approximate the value of one share of our common stock.

      If any person or group becomes an acquiring person, or if we are the surviving corporation in a merger with an acquiring person or any affiliate or associate of an acquiring person and our common stock is not changed or exchanged, proper provision will be made so that each holder of a right, other than rights beneficially owned by the acquiring person, which will become null and void, will have the right to receive upon exercise of the right at the then-current market price, instead of participating preferred shares, that number of shares of our common stock having a market value of two times the exercise price of the right. If we do not have sufficient common stock issued but not outstanding, or authorized but unissued, to permit the exercise in full of the rights, we will be required to take all action necessary to authorize additional common stock for issuance upon exercise of the rights.

      If, after a person or group has become an acquiring person, we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power are sold, proper provision will be made so that each holder of a right, other than rights beneficially owned by the acquiring person, which will become null and void, will have the right to receive, upon the exercise of the right at its then-current exercise price and instead of participating preferred shares, that number of shares of common stock of the acquiring company, or its parent, which at the time of the transaction will have a market value of two times the exercise price of the right.

      At any time after any person or group becomes an acquiring person and before the acquisition by that person or group of 50% or more of our outstanding common stock, our board of directors may exchange the rights, in whole or in part, for a number of shares of our common stock, per right, having an aggregate value equal to the excess of the value of the shares of our common stock issuable upon exercise of a right after a person or group becomes an acquiring person over the purchase price, subject to adjustment. Our board of directors will not exchange the rights owned by the acquiring person or group, which will have become null and void.

      With specified exceptions, no adjustments in the purchase price for the preferred shares will be required until cumulative adjustments require an adjustment of at least 1% of that purchase price. No fractional participating preferred shares will be issued, other than fractions which are integral multiples of one one-hundredth of a participating preferred share, which may, at our election, be evidenced by depositary receipts. Instead of issuing fractional participating preferred shares, we will make an adjustment in cash based on the market price of the participating preferred shares on the last trading day before the date of exercise.

      Upon approval by our board of directors, we may redeem the rights, in whole, but not in part, at a price of $.01 per right at any time until the earlier of:

•  the day of a public announcement that a person or group has become an acquiring person, or

•  November 19, 2009.

      Until a right is exercised, the holder of the right, in the capacity of a holder, will have no rights as a stockholder of ours, including, without limitation, the right to vote or to receive dividends. Although the

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distribution of the rights will not be taxable to stockholders or to us, stockholders may, depending upon the circumstances, recognize taxable income in the event that the rights become exercisable for our common stock or other consideration, or for common stock of the acquiring company or its parent as set forth above.

      Any of the provisions of the rights agreement may be amended or supplemented by our board of directors before the distribution date. From and after the distribution date, we and the rights agent may amend or supplement the rights agreement from time to time without the approval of any holders of rights:

•  to cure any ambiguity, to correct or supplement any defective or inconsistent provisions,

•  to make any other provisions with respect to the rights which we and the rights agent may deem necessary or desirable.

      Notwithstanding this right to amend or supplement, from and after the distribution date, the rights agreement may not be amended in any manner which would adversely affect the interest of the holders of rights.

      The rights have certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by the board of directors since the rights may be amended to permit such an acquisition or they can be redeemed by us at $.01 per right prior to the earliest of the time that a person or group has acquired beneficial ownership of 15% or more of our common stock or the final expiration date of the rights.

Anti-Takeover Provisions

      Delaware Law. We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless before the date that the person became an “interested stockholder,” the board of directors approved either the “business combination” or the transaction which makes the person an “interested stockholder,” or after the date that the person became an “interested stockholder,” the business combination is approved by our board of directors and the vote of at least 66 2/3% of our outstanding voting stock that is not owned by the “interested stockholder.” Generally, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder. An “interested stockholder” is a person who either owns 15% or more of our outstanding stock or, together with affiliates and associates, owns or, within three prior years, did own, 15% or more of our outstanding voting stock. The statute could have the effect of delaying, deferring or preventing a change in our control.

      Certificate of Incorporation and Bylaw Provisions. Our certificate of incorporation and bylaws provide that the board of directors will be divided into three classes of directors, with each class serving a staggered three-year term. The classification system of electing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may maintain the composition of the board of directors, as the classification of the board of directors generally increases the difficulty of replacing a majority of directors. In October 2002, our board of directors approved an amendment to our certificate of incorporation to declassify our board and agreed to submit a proposal to amend our certificate of incorporation to declassify the board to our stockholders at the 2003 annual stockholders’ meeting. Our certificate provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders. In addition, our bylaws provide that special meetings of our stockholders may be called only by the Chairman of the board of directors, our Chief Executive Officer, our President, or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors. Our certificate also specifies that the authorized number of directors may be changed only by resolution of the board of directors and does not include a provision for cumulative voting for directors. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors. Our certificate also includes a fair price provision that requires

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any acquisition of us to be approved by two-thirds vote of our board of directors unless the acquiror pays at least a defined fair price and follows specified procedures. These and other provisions contained in our certificate and bylaws could delay or discourage transactions involving an actual or potential change in control of us or our management, including transactions in which stockholders might otherwise receive a premium for their shares over then current prices. Such provisions could also limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests and could adversely affect the price of our common stock.

Transfer Agent and Registrar

      The transfer agent and registrar for our common stock is Mellon Investor Services L.L.C.

Quotation on the Nasdaq Stock Market’s National Market

      Our common stock is listed on The Nasdaq National Market under the symbol “PHSY.”

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

      The following is a summary of certain U.S. federal income tax considerations relating to the purchase, ownership and disposition of the debentures and common stock into which the debentures may be converted, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change or differing interpretation possibly with retroactive effect. Except as specifically discussed below with regard to Non-U.S. Holders (as defined below), this summary applies only to U.S. Holders (as defined below) that are beneficial owners of the debentures and that will hold the debentures and the common stock into which the debentures may be converted as “capital assets” (within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”)). For purposes of this summary, “U.S. Holders” include (i) individuals who are citizens or residents of the U.S., (ii) corporations (and entities taxable as corporations) created or organized in or under the laws of the U.S., (iii) estates, the incomes of which are subject to U.S. federal income taxation regardless of the source of such income or (iv) trusts subject to the primary supervision of a U.S. court and the control of one or more U.S. persons. Persons other than U.S. Holders (“Non-U.S. Holders”) are subject to special U.S. federal income tax considerations, some of which are discussed below.

      This discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules such as financial institutions, banks, holders subject to the alternative minimum tax, tax-exempt organizations, investors in pass-through entities, such as partnerships, insurance companies, foreign persons or entities (except to the extent specifically set forth below), dealers in securities or currencies, traders in securities who elect to apply a mark-to-market method of accounting, persons that will hold the debentures as a position in a hedging transaction, “straddle” or “conversion transaction” for tax purposes or persons deemed to sell the debentures or the common stock under the constructive sale provisions of the Code. We have not sought any ruling from the Internal Revenue Service (the “IRS”) with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions. In addition, the IRS is not precluded from successfully adopting a contrary position. This summary does not consider the effect of the federal estate or gift tax laws (except as set forth below with respect to Non-U.S. Holders) or the tax laws of any foreign, state, local or other jurisdiction.

      INVESTORS CONSIDERING THE PURCHASE OF THE DEBENTURES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

U.S. Holders

      Taxation of Interest. Interest payable on the debentures will be included in the income of a U.S. Holder as ordinary income at the time such interest is received or accrued, in accordance with such holder’s regular method of accounting for U.S. federal income tax purposes.

      Liquidated Damages. Under Treasury Regulations, the possibility of an additional payment under a debenture may be disregarded for purposes of determining the amount of interest or original issue discount income to be recognized by a holder in respect of such debenture (or the timing of such recognition) if the likelihood of the payment, as of the date the debentures are issued, is remote. Our failure to file or cause to be declared effective a post-effective amendment to the shelf registration statement, if any such post-effective amendment is required, or our suspension of the use of this prospectus for a period in excess of those permitted, each as described under “Description of the Debentures — Registration Rights of the Holders of Debentures” may result in the payment of predetermined liquidated damages in the manner described therein. We believe that the likelihood of a liquidated damages payment with respect to the debentures is remote and do not intend to treat such possibility as affecting the yield to maturity of any debenture. However, there can

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be no assurance that the IRS will agree with such position. In the event such contingency occurs, it could affect the amount and timing of the income that must be recognized by a U.S. Holder of the debentures.

      Adjustments to Conversion Price. Holders of convertible debt instruments such as the debentures may, in certain circumstances, be deemed to have received distributions of stock if the conversion price of such instruments is adjusted. Adjustments to the conversion price made pursuant to a bona fide reasonable adjustment formula which has the effect of preventing the dilution of the interest of the holders of the debt instruments, however, will generally not be considered to result in a constructive distribution of stock. Certain of the possible adjustments provided in the debentures (including, without limitation, adjustments in respect of taxable dividends to our stockholders) will not qualify as being pursuant to a bona fide reasonable adjustment formula. If such adjustments are made, the U.S. Holders of the debentures may be deemed to have received constructive distributions taxable as dividends to the extent of our current and accumulated earnings and profits even though they have not received any cash or property as a result of such adjustments. In certain circumstances, the failure to provide for such an adjustment may result in taxable dividend income to the U.S. Holders of common stock.

      Sale, Exchange or Redemption of the Debentures. Upon the sale, exchange (other than a conversion) or redemption of a debenture, a U.S. Holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash proceeds and the fair market value of any property received on the sale, exchange or redemption (except to the extent such amount is attributable to accrued interest income not previously included in income, which will be taxable as ordinary income, or is attributable to accrued interest that was previously included in income, which amount may be received without tax) and (ii) such holder’s adjusted tax basis in the debenture. A U.S. Holder’s adjusted tax basis in a debenture generally will equal the cost of the debenture to such holder, increased by the amounts of any market discount previously included in income by the holder with respect to such debenture, and reduced by any amounts previously deducted with respect to amortizable bond premium with respect to such debenture. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the debenture is more than one year at the time of sale, exchange or redemption. Long-term capital gains recognized by certain noncorporate U.S. Holders, including individuals, will generally be subject to a maximum rate of tax of 20%. The deductibility of capital losses is subject to limitations.

      Market Discount. The resale of the debentures may be affected by the impact on a purchaser of the “market discount” provisions of the Internal Revenue Code. For this purpose, the market discount on the debentures generally will be equal to the amount, if any, by which the stated redemption price at maturity of the debentures immediately after acquisition (other than at original issue) exceeds the holder’s adjusted tax basis in the debentures. Subject to a de minimis exception, these provisions generally require a U.S. Holder who acquires debentures at a market discount to treat as ordinary income any gain recognized on the disposition of such debentures to the extent of the “accrued market discount” on such debentures at the time of maturity or disposition, unless the holder elects to include accrued market discount in income over the life of the debentures.

      This election to include market discount in income over the life of the debentures, once made, applies to all market discount obligations acquired on or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS. In general, market discount will be treated as accruing on a straight-line basis over the remaining term of the debentures at the time of acquisition, or, at the election of the holder, under a constant yield method. If an election is made, it will apply only to the debentures with respect to which it is made, and may not be revoked. A U.S. Holder who acquires debentures at a market discount and who does not elect to include accrued market discount in income over the life of the debentures may be required to defer the deduction of a portion of the interest on any indebtedness incurred or maintained to purchase or carry the debentures until maturity or until such debentures are disposed of in a taxable transaction. If a U.S. Holder acquires debentures with market discount and receives our common stock upon conversion of such debentures, the amount of accrued market discount not previously included in income with respect to the converted debentures through the date of conversion will be treated as ordinary income upon the disposition of the common stock.

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      Amortizable Premium. A U.S. Holder who purchases a debenture at a premium over its stated principal amount, plus accrued interest, generally may elect to amortize such premium (“Section 171 premium”) from the purchase date to the debenture’s maturity date under a constant-yield method that reflects semi-annual compounding based on the debenture’s payment period (with a corresponding decrease in tax basis). Amortizable premium, however, will not include any premium attributable to a debenture conversion feature. The premium attributable to the conversion feature is the excess, if any, of the debenture’s purchase price over what the debenture’s fair market value would be if there were no conversion feature. Amortized Section 171 premium is treated as an offset to interest income on a debenture and not as a separate deduction. The election to amortize a premium on a constant yield method, once made, applies to all debt obligations held or subsequently acquired by the electing U.S. Holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS.

      Deductibility of Interest. Under Section 163(l) of the Internal Revenue Code, no deduction is permitted for interest paid or accrued on any indebtedness of a corporation that is “payable in equity” of the issuer or a related party. Debt is treated as debt payable in equity of the issuer if the debt is part of an arrangement designed to result in payment of the instrument with or by reference to the equity. Such arrangements could include debt instruments that are convertible at the holder’s option if it is substantially certain that the option will be exercised. The legislative history indicates that it is not expected the provision will affect debt with a conversion feature where the conversion price is significantly higher than the market price of the stock on the date of the debt issuance. Accordingly, we do not believe that our interest deduction with respect to interest payments on the debentures will be adversely affected by these rules.

      Conversion of the Debentures. A U.S. Holder generally will not recognize any income, gain or loss upon conversion of a debenture into common stock except with respect to cash received in lieu of a fractional share of common stock or common stock that is attributable to accrued interest not previously included in income. A U.S. Holder’s tax basis in the common stock received on conversion of a debenture will be the same as such Holder’s adjusted tax basis in the debenture at the time of conversion (reduced by any basis allocable to a fractional share interest), and the holding period for the common stock received on conversion will generally include the holding period of the debenture converted. However, a U.S. Holder’s tax basis in shares of common stock considered attributable to accrued interest on the debenture generally will equal the amount of such accrued interest included in income, and the holding period for such shares should begin on the date after conversion.

      Cash received in lieu of a fractional share of common stock upon conversion will be treated as a payment in exchange for the fractional share of common stock. Accordingly, the receipt of cash in lieu of a fractional share of common stock generally will result in capital gain or loss (measured by the difference between the cash received for the fractional share and the holder’s adjusted tax basis in the fractional share).

      Sale of Common Stock. Upon the sale or exchange of common stock a U.S. Holder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any property received upon the sale or exchange and (ii) such U.S. Holder’s adjusted tax basis in the common stock. Such capital gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period in the common stock is more than one year at the time of the sale or exchange. Long-term capital gains recognized by certain non-corporate U.S. Holders, including individuals, will generally be subject to a maximum rate of tax of 20%. A U.S. Holder’s basis and holding period in common stock received upon conversion of a debenture are determined as discussed above under “Conversion of the Debentures.” The deductibility of capital losses is subject to limitations.

      Dividends. Distributions, if any, made on the common stock after a conversion generally will be included in the income of a U.S. Holder as ordinary dividend income to the extent of our current or accumulated earnings and profits. Distributions in excess of our current and accumulated earnings and profits will be treated as a return of capital to the extent of the U.S. Holder’s basis in the common stock and thereafter as capital gain.

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      Special Tax Rules Applicable to Non-U.S. Holders. In general, subject to the discussion below concerning backup withholding:

      (a) Payments of principal or interest on the debentures by us or our paying agent to a beneficial owner of a debenture that is a Non-U.S. Holder will not be subject to U.S. federal income tax or U.S. withholding tax, provided that, in the case of interest, (i) such Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code, (ii) such Non-U.S. Holder is not a “controlled foreign corporation” within the meaning of Section 957(a) of the Code with respect to which we are a “related person” within the meaning of Section 864(d)(4) of the Code, (iii) such Non-U.S. Holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code, and (iv) the certification requirements under Section 871(h) or Section 881(c) of the Code and Treasury Regulations thereunder (discussed below) are satisfied;

      (b) A Non-U.S. Holder of a debenture or common stock will not be subject to U.S. federal income tax on gains realized on the sale, exchange or other disposition of such debenture or common stock unless (i) such Non-U.S. Holder is an individual who is present in the U.S. for 183 days or more in the taxable year of sale, exchange or other disposition, and certain conditions are met, (ii) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the U.S. and, if certain U.S. income tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder, (iii) the Non-U.S. Holder is subject to Code provisions applicable to certain U.S. expatriates, or (iv) in the case of common stock held by a person who holds more than 5% of such stock, we are or have been, at any time within the shorter of the five-year period preceding such sale or other disposition or the period such Non-U.S. Holder held the common stock, a U.S. real property holding corporation (a “USRPHC”) within the meaning of Section 897(c)(2) of the Code for U.S. federal income tax purposes. We do not believe that we are currently a USRPHC or that we will become one in the future; and

      (c) Interest on the debentures not excluded from U.S. federal income tax or U.S. withholding tax as described in (a) above and dividends on common stock after conversion generally will be subject to U.S. withholding tax at a 30% rate, except where an applicable U.S. income tax treaty provides for the reduction or elimination of such withholding tax. It is not clear whether the above discussion would be applicable to liquidated damages, if any, received by Non-U.S. Holders.

      To satisfy the certification requirements referred to in (a)(iv) above, Sections 871(h) and 881(c) of the Code and Treasury Regulations thereunder require that either (i) the beneficial owner of a debenture certify, under penalties of perjury, to us or our paying agent, as the case may be, that such owner is a Non-U.S. Holder, or (ii) a securities clearing organization, bank or other financial institution that holds customer securities in the ordinary course of its trade or business (a “Financial Institution”) and holds the debenture on behalf of the beneficial owner thereof certify, under penalties of perjury, to us or our paying agent, as the case may be, that such certificate has been received from the beneficial owner and furnish the payor with a copy thereof. Such requirement will be fulfilled if the beneficial owner of a debenture certifies on IRS Form W-8 BEN, under penalties of perjury, that it is a Non-U.S. Holder or any Financial Institution holding the debenture on behalf of the beneficial owner files a statement with the withholding agent to the effect that it has received such a statement from the beneficial owner (and furnishes the withholding agent with a copy thereof).

      If a Non-U.S. Holder of a debenture or common stock is engaged in a trade or business in the U.S. and if interest on the debenture, dividends on the common stock, or gain realized on the sale, exchange or other disposition of the debenture or common stock is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder in the U.S.), the Non-U.S. Holder, although exempt from U.S. withholding tax (provided that the certification requirements discussed in the next sentence are met), will generally be subject to U.S. federal income tax on such interest, dividends or gain on a net income basis in the same manner as if it were a U.S. Holder. In lieu of the certificate described above, such a Non-U.S. Holder will be required, under

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currently effective Treasury Regulations, to provide us with a properly executed IRS Form W-8ECI in order to claim an exemption from U.S. tax withholding. In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable U.S. income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year.

      U.S. Federal Estate Tax. A debenture held by an individual who at the time of death is not a citizen or resident of the U.S. (as specially defined for U.S. federal estate tax purposes) will not be subject to U.S. federal estate tax if the individual did not actually or constructively own 10% or more of the total combined voting power of all classes of our stock and, at the time of the individual’s death, payments with respect to such debenture would not have been effectively connected with the conduct by such individual of a trade or business in the U.S. Common stock held by an individual who at the time of death is not a citizen or resident of the U.S. (as specially defined for U.S. federal estate tax purposes) will be included in such individual’s estate for U.S. federal estate tax purposes, unless an applicable U.S. estate tax treaty otherwise applies.

      Non-U.S. Holders should consult with their tax advisors regarding U.S. and foreign tax consequences with respect to the debentures and common stock.

Backup Withholding and Information Reporting

      Backup withholding of U.S. federal income tax may apply to payments pursuant to the terms of a debenture or common stock to a U.S. Holder that is not an “exempt recipient” and that fails to provide certain identifying information (such as the holder’s TIN) in the manner required. Generally, individuals are not exempt recipients, whereas corporations and certain other entities are exempt recipients. Payments made in respect of a debenture or common stock must be reported to the IRS, unless the U.S. Holder is an exempt recipient or otherwise establishes an exemption.

      In the case of payments of interest on a debenture to a Non-U.S. Holder, backup withholding and information reporting will not apply to payments with respect to which either requisite certification has been received or an exemption has otherwise been established (provided that neither we nor a paying agent has actual knowledge or reason to know that the holder is a U.S. Holder or that the conditions of any other exemption are not in fact satisfied).

      Dividends on the common stock paid to Non-U.S. Holders that are subject to U.S. withholding tax, as described above, generally will be exempt from U.S. backup withholding tax but will be subject to certain information reporting requirements.

      Payments of the proceeds of the sale of a debenture or common stock to or through a foreign office of a U.S. Holder or a foreign office of a broker that is a U.S. related person (either a “controlled foreign corporation” or a foreign person, 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment was effectively connected with the conduct of a trade or business within the U.S.), or a foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership, or such foreign partnership is engaged in a U.S. trade or business, are subject to certain information reporting requirements, unless the payee is an exempt recipient or such broker has evidence in its records that the payee is a Non-U.S. Holder and no actual knowledge or reason to know that such evidence is false and certain other conditions are met. Such payments are not currently subject to backup withholding.

      Payments of the proceeds of a sale of a debenture or common stock to or through the U.S. office of a broker will be subject to information reporting and backup withholding unless the payee certifies under penalties of perjury as to his or her status as a Non-U.S. Holder and satisfies certain other qualifications (and no agent of the broker who is responsible for receiving or reviewing such statement has actual knowledge or reason to know that it is incorrect) and provides his or her name and address or the payee otherwise establishes an exemption.

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      Any amounts withheld under the backup withholding rules from a payment to a holder of a debenture or common stock will be allowed as a refund or credit against such holder’s U.S. federal income tax provided that the required information is furnished to the IRS in a timely manner.

      A holder of a debenture or common stock should consult with its tax advisor regarding the application of the backup withholding rules to its particular situation, the availability of an exemption therefrom and the procedure for obtaining such an exemption, if available.

      THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE DEBENTURES AND OUR COMMON STOCK. TAX ADVISORS SHOULD ALSO BE CONSULTED AS TO THE U.S. ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE DEBENTURES AND OUR COMMON STOCK, AS WELL AS THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

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SELLING SECURITYHOLDERS

      We originally issued the debentures to the initial purchasers, Morgan Stanley & Co. Incorporated and Goldman Sachs & Co., in a private placement in November 2002 and in connection with the exercise in part by the initial purchasers of their option to purchase additional debentures in December 2002. The debentures were immediately resold by the initial purchasers in transactions exempt from registration under Rule 144A under the Securities Act. Selling securityholders, which term includes their transferees, pledgees, donees or their successors, may from time to time offer and sell the debentures and the common stock into which the debentures are convertible pursuant to this prospectus or any applicable prospectus supplement.

      The following table sets forth certain information concerning the principal amount of debentures beneficially owned and the number of shares of common stock issuable upon conversion of those debentures that may be offered from time to time under this prospectus by the selling securityholders named in the table. We prepared this table based on the information supplied to us by the selling securityholders named in the table and we have not sought to verify such information. This table only reflects information regarding selling securityholders who have provided us with such information. We expect that we will update this table as we receive more information from holders of the debentures who have not yet provided us with their information. We will supplement or amend this prospectus to include additional selling securityholders upon request and upon provision of all required information to us. Information concerning the selling securityholders may change from time to time and any changed information will be set forth in supplements to this prospectus if and when necessary.

      The number of shares of common stock issuable upon conversion of the debentures shown in the table below assumes conversion of the full amount of debentures held by each selling securityholder at an initial conversion rate of 23.8095 shares per $1,000 principal amount of debentures. This conversion price is subject to adjustment in certain events. Accordingly, the number of conversion shares may increase or decrease from time to time. The percentages of common stock beneficially owned and being offered are based on the number of shares of our common stock that were outstanding as of January 28, 2003. Because the selling securityholders may offer all or some portion of the debentures or the shares of common stock issuable upon conversion of the debentures pursuant to this prospectus, we have assumed for purposes of the table below that the selling securityholders will sell all of the debentures and all of the shares of common stock offered by this prospectus pursuant to this prospectus. In addition, the selling securityholders identified below may have sold, transferred or otherwise disposed of all or a portion of their debentures in transactions exempt from the registration requirements of the Securities Act since the date on which they provided the information to us regarding their holdings. As of January 28, 2003, we had $135,000,000 in principal amount of the debentures and 36,130,000 shares of common stock outstanding.

      Based upon information provided by the selling securityholders, none of the selling securityholders nor any of their affiliates, officers, directors or principal equity holders has held any position or office or has had any material relationship with us within the past three years.

	Principal					Shares of				Common Stock Owned
	Amount of					Common		Conversion		Upon Completion of
	Debentures					Stock		Shares of		the Offering
	Beneficially		Percentage of			Beneficially		Common
	Owned and		Debentures			Owned Before		Stock		Number of
Name	Offered		Outstanding			the Offering(1)		Offered		Shares		Percentage
Grace Brothers Management, LLC	$	2,750,000		2	%		—		65,476		—		*
Highbridge International LLC	$	1,250,000		*			—		29,761		—		*
Cobra Fund U.S.A., LP	$	222,000		*			—		5,285		—		*
Cobra Master Fund Ltd.	$	1,778,000		1	%		—		42,333		—		*
AIG DKR SoundShore Opportunity Holding Fund Ltd.	$	1,000,000		*			—		23,809		—		*
KBC Financial Products USA Inc.	$	5,975,000		4	%		—		142,261		—		*
McMahan Securities Co. L.P.	$	4,700,000		3	%		—		111,904		—		*
Calamos® Market Neutral Fund-Calamos® Investment Trust	$	12,450,000		9	%		—		296,428		—		*

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	Principal					Shares of				Common Stock Owned
	Amount of					Common		Conversion		Upon Completion of
	Debentures					Stock		Shares of		the Offering
	Beneficially		Percentage of			Beneficially		Common
	Owned and		Debentures			Owned Before		Stock		Number of
Name	Offered		Outstanding			the Offering(1)		Offered		Shares		Percentage
Drake Offshore Master Fund, Ltd.	$	4,000,000		3	%		—		95,238		—		*
Victus Capital, LP	$	1,000,000		*			—		23,809		—		*
MFS Total Return Fund	$	2,000,000		1	%		—		47,619		—		*
Man Convertible Bond Master Fund, Ltd.	$	3,846,000		3	%		—		91,571		—		*
Alpine Associates	$	6,150,000		4	%		—		146,428		—		*
Alpine Partners, L.P.	$	850,000		*			—		20,238		—		*
Consulting Group Capital Markets Funds	$	1,200,000		*			—		28,571		—		*
BNP Paribas Equity Strategies SNC	$	476,000		*			46,014		11,333		—		*
CooperNeff Convertible Strategies (Cayman) Master Fund, LP	$	263,000		*			—		6,261		—		*
UFJ Investments Asia Limited	$	250,000		*			—		5,952		—		*
Laurel Ridge Capital LP	$	100,000		*			—		2,380		—		*
St. Thomas Trading, Ltd.	$	6,404,000		5	%		—		152,476		—		*
Clinton Riverside Convertible Portfolio Limited	$	3,300,000		2	%		—		78,571		—		*
Clinton Multistrategy Master Fund, Ltd.	$	3,300,000		2	%		—		78,571		—		*
SG Cowen Securities Corporation	$	1,000,000		*			—		23,809		—		*
S.A.C. Capital Associates, LLC	$	2,000,000		1	%		—		47,619		—		*
D.E. Shaw Valence Portfolios, L.P.	$	2,400,000		2	%		—		57,142		—		*
D.E. Shaw Investment Group, L.P.	$	600,000		*			—		14,285		—		*
OCM Convertible Trust	$	240,000		*			—		5,714		—		*
Delta Air Lines Master Trust (c/o Oaktree Capital Management, LLC)	$	80,000		*			—		1,904		—		*
State Employees’ Retirement Fund of the State of Delaware	$	105,000		*			—		2,499		—		*
Partner Reinsurance Company Ltd.	$	80,000		*			—		1,904		—		*
Chrysler Corporation Master Retirement Trust	$	355,000		*			—		8,452		—		*
Motion Picture Industry Health Plan — Active Member Fund	$	25,000		*			—		595		—		*
Motion Picture Industry Health Plan — Retiree Member Fund	$	15,000		*			—		357		—		*
Vanguard Convertible Securities Fund, Inc.	$	385,000		*			—		9,166		—		*
Delta Pilots D & S Trust (c/o Oaktree Capital Management, LLC)	$	50,000		*			—		1,190		—		*
Microsoft Corporation	$	135,000		*			—		3,214		—		*
Qwest Occupational Health Trust	$	30,000		*			—		714		—		*
Canyon Value Realization MAC 18, Ltd. (RMF)	$	500,000		*			—		11,904		—		*
Canyon Value Realization Fund, L.P.	$	2,000,000		1	%		—		47,619		—		*
Canyon Value Realization Fund (Cayman), Ltd.	$	4,500,000		3	%		—		107,142		—		*

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	Principal					Shares of				Common Stock Owned
	Amount of					Common		Conversion		Upon Completion of
	Debentures					Stock		Shares of		the Offering
	Beneficially		Percentage of			Beneficially		Common
	Owned and		Debentures			Owned Before		Stock		Number of
Name	Offered		Outstanding			the Offering(1)		Offered		Shares		Percentage
Canyon Capital Arbitrage Master Fund, Ltd.	$	3,000,000		2	%		—		71,428		—		*
JP Morgan Securities Inc.	$	7,000,000		5	%		—		166,666		—		*
Amaranth LLC	$	1,700,000		1	%		—		40,476		—		*
Argent Classic Convertible Arbitrage Fund L.P.	$	2,000,000		1	%		—		47,619		—		*
Argent Classic Convertible Arbitrage Fund (Bermuda) Ltd.	$	7,500,000		6	%		—		178,571		—		*
LLT Limited	$	78,000		*			—		1,857		—		*
Btop Equity Opportunity	$	80,000		*			—		1,904		—		*
Btcs — Convertible Arbitrage	$	20,000		*			—		476		—		*
Forest Multi-Strategy Master Fund SPC, on behalf of Series F, Multi-Strategy Segregated Portfolio	$	59,000		*			—		1,404		—		*
Forest Fulcrum Fund LLP	$	167,000		*			—		3,990		—		*
B.G.I. Global Investors c/o Forest Investment Management LLC	$	62,000		*			—		1,476		—		*
Zurich Master Hedge Fund c/o Forest Investment Management LLC	$	100,000		*			—		2,389		—		*
Forest Global Convertible Fund Series A-5	$	822,000		*			—		19,571		—		*
Lyxor Master Fund c/o Forest Investment Management LLC	$	217,00		*			—		5,166		—		*
Reylay 11 Holdings c/o Forest Investment Management LLC	$	31,000		*			—		738		—		*
RBC Alternative Assets LP c/o Forest Investment Management LLC	$	47,000		*			—		1,119		—		*
Sphinx Convertible Arbitrage c/o Forest Investment Management LLC	$	17,000		*			—		404		—		*

(1)	Figures in this column do not include the shares of common stock issuable upon conversion of the debentures listed in the column to the right.
*	Less than one percent

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PLAN OF DISTRIBUTION

      The selling securityholders, which term includes all transferees, pledges, donees or their successors, may from time to time sell the debentures and the common stock into which the debentures are convertible covered by this prospectus, which we refer to in this section as the “securities,” directly to purchasers or offer the securities through underwriters, broker-dealers or agents, who may receive compensation in the form of underwriting discounts, concessions or commissions from the selling securityholders and/or the purchasers of securities for whom they may act as agent, which discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may be in excess of those customary in the types of transactions involved.

      The securities may be sold in one or more transactions.

•  at fixed prices;

•  at prevailing market prices at the time of sale;

•  at varying prices determined at the time of sale; or

•  at negotiated prices.

      These sales may be effected in transactions, which may involve crosses or block transactions, in the following manner:

•  on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

•  in the over-the-counter-market;

•  in transactions otherwise than on these exchanges or services or in the over-the-counter market; or

•  through the writing and exercise of options, whether these options are listed on any options exchange or otherwise.

      In connection with the sale of the securities, the selling securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging positions they assume. The selling securityholders may sell the securities short and deliver securities to close out short positions, or loan or pledge the securities or broker-dealers that in turn may sell these securities.

      Our outstanding common stock is listed for trading on The Nasdaq National Market under the symbol “PHSY.” We do not intend to list the debentures on any securities exchange. We cannot assure you as to the liquidity of any trading market for the debentures that may develop.

      In order to comply with the securities laws of some jurisdictions, if applicable, the holders of securities may offer and sell those securities in such jurisdictions only through registered or licensed brokers or dealers. In addition, under certain circumstances, in some jurisdictions the securities may not be offered or sold unless they have been registered or qualified for sale in the applicable jurisdiction or an exemption from registration or qualification requirements is available and is complied with.

      The selling securityholders, and any underwriters, broker-dealers or agents that participate in the sale of the securities, may be “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any sale of the securities may be underwriting compensation under the Securities Act. The selling securityholders have acknowledged that they understand their obligations to comply with the provisions of the Exchange Act and the rules thereunder relating to stock manipulation, particularly Regulation M, and have agreed that they will not engage in any transaction in violation of such provisions.

      If required, at the time of a particular offering of securities by a selling securityholder, a supplement to this prospectus will be circulated setting forth the name or names of any underwriters, broker-dealers or agents, any discounts, commissions or other terms constituting compensation for underwriters and any discounts, commissions or concessions allowed or reallowed or paid to agents or broker-dealers.

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      We entered into a registration rights agreement for the benefit of holders of the securities to register their securities under applicable federal and state securities laws under specific circumstances and at specific times. The registration rights agreements provided for cross indemnification of the selling securityholders and us and their and our respective directors, officers and controlling persons against specific liabilities in connection with the offer and sale of the securities, including liabilities under the Securities Act. In the event the selling securityholders sell their securities through any underwriter, the registration rights agreement provides for indemnification by us of those underwriters and their respective directors, officers and controlling persons against specified liabilities in connection with the offer and sale of those securities. Pursuant to the registration rights agreement, we will bear all fees and expenses incurred in connection with the registration of the securities, except that selling securityholders will pay all broker’s commissions and, in connection with any underwritten offering, underwriting discounts and commissions.

LEGAL MATTERS

      Cooley Godward LLP, San Diego, California, will pass upon the validity of the debentures and the common stock issuable upon conversion of the debentures being offered hereby.

EXPERTS

      Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule included in our Annual Report on Form 10-K for the year ended December 31, 2001, as set forth in their report, which is incorporated by reference into this prospectus and elsewhere in the registration statement, of which this prospectus is a part. Our consolidated financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

      With respect to our unaudited condensed consolidated interim financial information for the three, six and nine-month periods ended March 31, June 30, and September 30, 2002 and 2001, respectively, incorporated by reference in this prospectus, Ernst & Young LLP has reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate reports, included in our Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2002, and incorporated herein by reference, state that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted considering the limited nature of the review procedures applied. The independent auditors are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by the auditors within the meaning of Sections 7 and 11 of the Securities Act.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

      We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 233 Broadway, New York, New York 10279 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC allows us to “incorporate by reference” into this prospectus the information in documents we have filed or will file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded, for purposes of this prospectus, to the extent that a

51

statement contained in or omitted from this prospectus, or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus.

      We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act until the offering is completed:

•  Our Form 10-K for our fiscal year ended December 31, 2001, which was filed on March 19, 2002;

•  Our Form 10-Q for our fiscal quarter ended March 31, 2002, which was filed on May 3, 2002;

•  Our Form 10-Q for our fiscal quarter ended June 30, 2002, which was filed on August 13, 2002;

•  Our Form 10-Q for our fiscal quarter ended September 30, 2002, which was filed on November 12, 2002; and

•  Our Current Reports on Form 8-K, which were filed on May 3, May 14, May 16, May 17, August 13, August 30, November 18, November 19 and December 23, 2002.

      You may request a copy of these filings at no cost, by writing or telephoning us at the following address:

PacifiCare Health Systems, Inc.

5995 Plaza Drive

Cypress, California 90630-5028

(714) 952-1121

Attention: Investor Relations

      In addition, copies of these filings are available through our internet website at http://www.pacificare.com as soon as reasonably practicable after we electronically file such material with, or furnish it, to the SEC.

      We have filed with the SEC a registration statement on Form S-3 under the Securities Act covering the debentures and the shares of common stock issuable upon conversion of the debentures to be offered and sold by this prospectus. This prospectus does not contain all of the information included in the registration statement, some of which is contained in exhibits to the registration statement. The registration statement, including the exhibits, can be read at the SEC web site or at the SEC offices referred to above. Any statement made or incorporated by reference into this prospectus concerning the contents of any contract, agreement or other document is only a summary of the actual contract, agreement or other document. If we have filed any contract, agreement or other document as an exhibit to the registration statement, you should read the exhibit for a more complete understanding of the document or matter involved. Each statement regarding a contract, agreement or other document is qualified in its entirety by reference to the actual document.

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14.  Other Expenses of Issuance and Distribution

      The following table sets forth the costs and expenses payable by the registrant in connection with the resales of the securities being registered. All the amounts shown are estimates except the SEC registration statement filing fee. None of the expenses listed below will be paid by the selling securityholders.

		Amount to Be
		Paid
SEC registration statement filing fee		$	12,420
Legal fees and expenses		$	250,000
Accounting fees and expenses		$	36,000
Printing fees and expenses		$	85,000
Trustee fees and expenses		$	9,000
Miscellaneous		$	50,000
	Total	$	442,420

Item 15.  Indemnification of Directors and Officers

      Under Section 145 of the Delaware General Corporation Law, the registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act. The registrant’s bylaws provide that the registrant will indemnify its directors, officers, employees or agents in a manner consistent with the provisions of the Delaware General Corporation Law.

      In addition, the registrant’s certificate of incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to the registrant and its stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to the registrant, for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

      The registrant maintains a policy providing directors’ and officers’ liability insurance, which insures directors and officers of the registrant in certain circumstances.

      Insofar as the indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

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Item 16.  Exhibits

Exhibit No.			Description
	3	.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the registrant’s Registration Statement on Form S-3 (File No. 333-83069) filed on July 16, 1999)
	3	.2	Bylaws (incorporated by reference to Exhibit 99.2 to the registrant’s Registration Statement on Form S-3 (File No. 333-83069) filed on July 16, 1999)
	4	.1	Specimen Common Stock certificate (incorporated by reference to Exhibit 4.02 to the registrant’s Form 10-K for the year ended December 31, 1999)
	4	.2	Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed on November 19, 1999)
	4	.3	Rights Agreement, dated as of November 19, 1999, between the registrant and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 99.2 to the registrant’s Form 8-K filed on November 19, 1999)
	4	.4	Indenture, dated as of November 22, 2002, between the registrant and U.S. Bank National Association (as Trustee)
	4	.5	Form of Debenture
	4	.6	Registration Rights Agreement, dated as of November 22, 2002, between the registrant and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.
	5	.1	Opinion of Cooley Godward LLP
	12	.1	Statement regarding computation of ratio of earnings to fixed charges
	15	.1	Acknowledgment of Ernst & Young LLP, Independent Auditors
	23	.1	Consent of Ernst & Young LLP, Independent Auditors
	23	.2	Consent of Cooley Godward LLP (see Exhibit 5.1)
	24	.1	Power of Attorney (contained on signature page)
	25	.1	Form T-1 Statement of Eligibility of U.S. Bank National Association as Trustee

Item 17.  Undertakings.

      The undersigned registrant hereby undertakes:

      (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii) to reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement, and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement; provided, however, that clauses (i) and (ii) do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement;

      (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

      (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

      Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise,

II-2

the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

      The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

      The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act.

II-3

SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, the registrant named below certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cypress, State of California, on this 31st day of January, 2003.

PACIFICARE HEALTH SYSTEMS, INC.

By:  /s/ HOWARD G. PHANSTIEL

Howard G. Phanstiel

President and Chief Executive Officer

II-4

POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Howard G. Phanstiel and Gregory W. Scott, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

      IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite the name.

      Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Date	Signature	Title
January 31, 2003	/s/ HOWARD G. PHANSTIEL Howard G. Phanstiel	President and Chief Executive Officer (Principal Executive Officer)
January 31, 2003	/s/ GREGORY W. SCOTT Gregory W. Scott	Executive Vice President and Chief Financial Officer (Principal Financial Officer)
January 31, 2003	/s/ PETER A. REYNOLDS Peter A. Reynolds	Senior Vice President and Corporate Controller (Chief Accounting Officer)
January 24, 2003	/s/ DAVID A. REED David A. Reed	Chairman of the Board
January 31, 2003	/s/ BRADLEY C. CALL Bradley C. Call	Director
January 27, 2003	/s/ SHIRLEY S. CHATER Shirley S. Chater	Director
January 31, 2003	/s/ TERRY O. HARTSHORN Terry O. Hartshorn	Director
January 31, 2003	/s/ GARY L. LEARY Gary L. Leary	Director
January   , 2003	Sanford M. Litvack	Director
January 31, 2003	/s/ WARREN E. PINCKERT, II Warren E. Pinckert, II	Director
January   , 2003	Lloyd E. Ross	Director

II-5

INDEX TO EXHIBITS

Exhibit No.			Description
	3	.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the registrant’s Registration Statement on Form S-3 (File No. 333-83069) filed on July 16, 1999)
	3	.2	Bylaws (incorporated by reference to Exhibit 99.2 to the registrant’s Registration Statement on Form S-3 (File No. 333-83069) filed on July 16, 1999)
	4	.1	Specimen Common Stock certificate (incorporated by reference to Exhibit 4.02 to the registrant’s Form 10-K for the year ended December 31, 1999)
	4	.2	Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed on November 19, 1999)
	4	.3	Rights Agreement, dated as of November 19, 1999, between the registrant and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 99.2 to the registrant’s Form 8-K filed on November 19, 1999)
	4	.4	Indenture, dated as of November 22, 2002, between the registrant and U.S. Bank National Association (as Trustee)
	4	.5	Form of Debenture
	4	.6	Registration Rights Agreement, dated as of November 22, 2002, between the registrant and Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.
	5	.1	Opinion of Cooley Godward LLP
	12	.1	Statement regarding computation of ratio of earnings to fixed charges
	15	.1	Acknowledgment of Ernst & Young LLP, Independent Auditors
	23	.1	Consent of Ernst & Young LLP, Independent Auditors
	23	.2	Consent of Cooley Godward LLP (see Exhibit 5.1)
	24	.1	Power of Attorney (contained on signature page)
	25	.1	Form T-1 Statement of Eligibility of U.S. Bank National Association as Trustee

EX-4.4

                                                                    EXHIBIT 4.4

                         PACIFICARE HEALTH SYSTEMS, INC.

                     3% CONVERTIBLE SUBORDINATED DEBENTURES
                                    DUE 2032

                                    INDENTURE

                                   DATED AS OF

                                NOVEMBER 22, 2002

                       STATE STREET BANK AND TRUST COMPANY
                              OF CALIFORNIA, N.A.,

                                     TRUSTEE

                                TABLE OF CONTENTS



                                                                                                                  PAGE
                                                                                                               
ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE..........................................................     1

                      Section 1.1         Definitions..........................................................     1
                      Section 1.2         Other Definitions....................................................     8
                      Section 1.3         Incorporation by Reference of Trust Indenture Act....................     8
                      Section 1.4         Rules of construction................................................     9
                      Section 1.5         Acts of Holders......................................................     9

ARTICLE II. THE SECURITIES.....................................................................................    10

                      Section 2.1         Form and Dating......................................................    10
                      Section 2.2         Execution and Authentication.........................................    12
                      Section 2.3         Registrar, Paying Agent and Conversion Agent.........................    12
                      Section 2.4         Paying Agent and Trustee To Hold Money in Trust......................    13
                      Section 2.5         Securityholder Lists.................................................    13
                      Section 2.6         Transfer and Exchange................................................    13
                      Section 2.7         Replacement Securities...............................................    15
                      Section 2.8         Outstanding Securities; Determinations of Holders' Action............    16
                      Section 2.9         Temporary Securities.................................................    17
                      Section 2.10        Cancellation.........................................................    17
                      Section 2.11        Persons Deemed Owners................................................    17
                      Section 2.12        Global Securities....................................................    18
                      Section 2.13        CUSIP Numbers........................................................    22
                      Section 2.14        Ranking..............................................................    22

ARTICLE III. REDEMPTION AND PURCHASES..........................................................................    23

                      Section 3.1         Company's Right To Redeem; Notices to Trustee........................    23
                      Section 3.2         Selection of Securities To Be Redeemed...............................    23
                      Section 3.3         Notice of Redemption.................................................    23
                      Section 3.4         Effect of Notice of Redemption.......................................    24
                      Section 3.5         Deposit of Redemption Price..........................................    24
                      Section 3.6         Securities Redeemed in Part..........................................    24
                      Section 3.7         Purchase of Securities by the Company at Option of the Holder........    25
                      Section 3.8         Purchase of Securities at Option of the Holder upon a
                                          Fundamental Change...................................................    27
                      Section 3.9         Effect of Purchase Notice or Fundamental Change Purchase Notice......    29
                      Section 3.10        Deposit of Purchase Price or Fundamental Change Purchase Price.......    30
                      Section 3.11        Securities Purchased in Part.........................................    30


                                      i



                                                                                                                  PAGE
                                                                                                               
                      Section 3.12        Covenant To Comply with Securities Laws upon Purchase of
                                          Securities...........................................................    30
                      Section 3.13        Repayment to the Company.............................................    31

ARTICLE IV. COVENANTS .........................................................................................    31

                      Section 4.1         Payment of Securities................................................    31
                      Section 4.2         SEC and Other Reports................................................    31
                      Section 4.3         Compliance Certificate...............................................    32
                      Section 4.4         Further Instruments and Acts.........................................    32
                      Section 4.5         Maintenance of Office or Agency......................................    32
                      Section 4.6         Delivery of Certain Information......................................    32
                      Section 4.7         Notice of Liquidated Damages Amount..................................    33

ARTICLE V. CONSOLIDATION, MERGER OR SALE.......................................................................    33

                      Section 5.1         Consolidation, Merger or Sale........................................    33
                      Section 5.2         Securities and Indenture To Be Assumed by Successor on
                                          Consolidation, Merger or Sale........................................    33

ARTICLE VI. DEFAULTS AND REMEDIES..............................................................................    34

                      Section 6.1         Events of Default....................................................    34
                      Section 6.2         Acceleration.........................................................    35
                      Section 6.3         Other Remedies.......................................................    36
                      Section 6.4         Waiver of Past Defaults..............................................    36
                      Section 6.5         Control by Majority..................................................    36
                      Section 6.6         Limitation on Suits..................................................    36
                      Section 6.7         Rights of Holders To Receive Payment.................................    37
                      Section 6.8         Collection Suit by Trustee...........................................    37
                      Section 6.9         Trustee May File Proofs of Claim.....................................    37
                      Section 6.10        Priorities...........................................................    38
                      Section 6.11        Undertaking for Costs................................................    38
                      Section 6.12        Waiver of Stay, Extension or Usury Laws..............................    38

ARTICLE VII. TRUSTEE ..........................................................................................    39

                      Section 7.1         Duties of Trustee....................................................    39
                      Section 7.2         Rights of Trustee....................................................    40
                      Section 7.3         Individual Rights of Trustee.........................................    41
                      Section 7.4         Trustee's Disclaimer.................................................    41
                      Section 7.5         Notice of Defaults...................................................    41
                      Section 7.6         Reports by Trustee to Holders........................................    42
                      Section 7.7         Compensation and Indemnity...........................................    42
                      Section 7.8         Replacement of Trustee...............................................    43
                      Section 7.9         Successor Trustee by Merger..........................................    43
                      Section 7.10        Eligibility; Disqualification........................................    44
                      Section 7.11        Preferential Collection of Claims Against Company....................    44


                                      ii



                                                                                                                  PAGE
                                                                                                               
ARTICLE VIII. SATISFACTION AND DISCHARGE OF INDENTURE;  DEPOSITED MONEYS AND GOVERNMENT OBLIGATIONS............    44

                      Section 8.1         Satisfaction and Discharge of Indenture..............................    44
                      Section 8.2         Application of Trust Moneys..........................................    45
                      Section 8.3         Repayment to Company.................................................    45
                      Section 8.4         Reinstatement........................................................    46

ARTICLE IX. AMENDMENTS.........................................................................................    46

                      Section 9.1         Without Consent of Holders...........................................    46
                      Section 9.2         With Consent of Holders..............................................    47
                      Section 9.3         Compliance with Trust Indenture Act..................................    48
                      Section 9.4         Revocation and Effect of Consents, Waivers and Actions...............    48
                      Section 9.5         Notation on or Exchange of Securities................................    48
                      Section 9.6         Trustee To Sign Supplemental Indentures..............................    48
                      Section 9.7         Effect of Supplemental Indentures....................................    48

ARTICLE X. CONVERSIONS.........................................................................................    49

                      Section 10.1        Conversion Privilege.................................................    49
                      Section 10.2        Conversion Procedure.................................................    50
                      Section 10.3        Fractional Shares....................................................    51
                      Section 10.4        Taxes on Conversion..................................................    51
                      Section 10.5        Company To Provide Stock.............................................    51
                      Section 10.6        Adjustment for Change in Capital Stock...............................    52
                      Section 10.7        Adjustment for Rights Issue..........................................    52
                      Section 10.8        Adjustment for Certain Distributions.................................    53
                      Section 10.9        Adjustment for Certain Quarterly Dividends...........................    55
                      Section 10.10       Adjustment for Tender Offers.........................................    56
                      Section 10.11       When Adjustment May Be Deferred......................................    57
                      Section 10.12       When No Adjustment Required..........................................    57
                      Section 10.13       Notice of Adjustment.................................................    58
                      Section 10.14       Voluntary Increase...................................................    58
                      Section 10.15       Notice of Certain Transactions.......................................    58
                      Section 10.16       Reorganization of Company; Special Distributions.....................    59
                      Section 10.17       Company Determination Final..........................................    59
                      Section 10.18       Trustee's Adjustment Disclaimer......................................    59
                      Section 10.19       Simultaneous Adjustments.............................................    60
                      Section 10.20       Successive Adjustments...............................................    60
                      Section 10.21       Restriction on Common Stock Issuable upon Conversion.................    60

ARTICLE XI. SUBORDINATION......................................................................................    61

                      Section 11.1        Securities Subordinate to Senior Debt................................    61



                                      iii



                                                                                                                  PAGE
                                                                                                               
                      Section 11.2        No Payments in Certain Circumstances; Payment Over of Proceeds
                                          Upon Dissolution, Etc................................................    61
                      Section 11.3        Trustee to Effectuate Subordination..................................    63
                      Section 11.4        No Waiver of Subordination Provisions................................    63
                      Section 11.5        Notice to Trustee....................................................    64
                      Section 11.6        Reliance on Judicial Order of Certificate of Liquidating Agent.......    64
                      Section 11.7        Trustee Not Fiduciary for Holders of Senior Debt.....................    64
                      Section 11.8        Reliance by Holders of Senior Debt on Subordination Provisions.......    65
                      Section 11.9        Rights of Trustee as Holder of Senior Debt; Preservation of
                                          Trustee's Rights.....................................................    65

                      Section 11.10       Article Applicable to Paying Agents..................................    65
                      Section 11.11       Certain Conversions and Repurchases Deemed Payment...................    65

ARTICLE XII. MISCELLANEOUS.....................................................................................    66

                      Section 12.1        Trust Indenture Act Controls.........................................    66
                      Section 12.2        Notices..............................................................    66
                      Section 12.3        Communication by Holders with Other Holders..........................    67
                      Section 12.4        Certificate and Opinion as to Conditions Precedent...................    67
                      Section 12.5        Statements Required in Certificate or Opinion........................    67
                      Section 12.6        Separability Clause..................................................    68
                      Section 12.7        Rules by Trustee, Paying Agent, Conversion Agent and Registrar.......    68
                      Section 12.8        Legal Holidays.......................................................    68
                      Section 12.9        GOVERNING LAW........................................................    68
                      Section 12.10       No Recourse Against Others...........................................    68
                      Section 12.11       Successors...........................................................    68
                      Section 12.12       Multiple Originals...................................................    68


Exhibits

Exhibit    A-1        - Form of Global Security
Exhibit    A-2        - Form of Certificated Security
Exhibit    B          - Transfer Certificate
Exhibit    C          - Form of Restricted Common Stock Legend
Exhibit    D          - Form of Transfer Certificate for Transfer of Restricted
                           Common Stock

                                      iv

         INDENTURE dated as of November 22, 2002 between PacifiCare Health
Systems, Inc., a corporation incorporated and existing under the laws of the
State of Delaware (the "Company") and STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A., a national banking association (the "Trustee").

         Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Company's 3% Convertible
Subordinated Debentures due 2032:

                                   ARTICLE I.
                   DEFINITIONS AND INCORPORATION BY REFERENCE

         Section 1.1 Definitions.

         "Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any specified person means the power to
direct or cause the direction of the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.

         "Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Global Security, in each case to
the extent applicable to such transaction and as in effect from time to time.

         "Board of Directors" means either the board of directors of the Company
or any duly authorized committee of such board.

         "Business Day" means any day other than a Saturday, a Sunday or a day
that in the City of New York, is a day on which banking institutions are
authorized or required by law, regulation or executive order to close.

         "Capital Stock" for any entity means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) stock issued by that entity.

         "Capitalized Lease" means, as applied to any person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such person.

         "Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.

                                       1

         "Certificated Securities" means Securities that are in the form of the
Securities attached hereto as Exhibit A-2.

         "Common Stock" shall mean the shares of common stock, par value $0.01
per share, of the Company existing on the date of this Indenture or any other
shares of Capital Stock of the Company into which such common stock shall be
reclassified or changed.

         "Company" means the party named as the "Company" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

         "Company Request" or "Company Order" means a written request or order
signed in the name of the Company by any Officer and delivered to the Trustee.

         "Corporate Trust Office" means the principal office of the Trustee at
which at any time its corporate trust business shall be administered, which
office at the date hereof is located at 633 W. Fifth Street, 12th Floor, Los
Angeles, California 90071, Attention: Corporate Trust Department, or such other
address as the Trustee may designate from time to time by notice to the Holders
and the Company, or the principal corporate trust office of any successor
Trustee (or such other address as a successor Trustee may designate from time to
time by notice to the Holders and the Company).

         "Debt" of any person means, with respect to any person at any date of
determination (without duplication):

         (a)      all indebtedness of such person for borrowed money;

         (b)      all obligations of such person evidenced by bonds, debentures,
notes or other similar instruments;

         (c)      all obligations of such person in respect of bankers'
acceptances, letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit and letters of
credit in respect of workers' compensation, self insurance or banker's
acceptance) securing obligations (other than obligations described in (a) or (b)
above or (e), (f) or (g) below) or accrued expense;

         (d)      all obligations of such person to pay the deferred and unpaid
purchase price of any property or services, except trade payables;

         (e)      all Capitalized Lease Obligations;

         (f)      all Debt of other persons secured by a Lien on any asset of
such person, whether or not such Debt is assumed by such person; provided that
the amount of such Debt shall be the lesser of (A) the fair market value of such
asset at such date of determination and (B) the amount of such Debt;

                                        2

         (g)      all Debt of other persons Guaranteed by such person to the
extent such Debt is Guaranteed by such person; and

         (h)      all obligations of such person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
(ii) foreign exchange contracts and currency swap agreements and (iii) other
agreements or arrangements entered into in the ordinary course of business
designed to protect such person against fluctuations in interest rates or
currency exchange rates; provided, however, that Debt shall not include current
accounts payable arising in the ordinary course of business; and

         The amount of any Debt outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Debt issued with original issue
discount and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other Debt.

         "Default" means any event, which is, or after notice or passage of time
or both would be, an Event of Default.

         "Depositary" means, with respect to any Global Security, a clearing
agency that is registered as such under the Exchange Act and is designated by
the Company to act as Depositary for such Global Security (or any successor
securities clearing agency so registered), which shall initially be DTC.

         "Designated Senior Debt" means (i) any indebtedness outstanding under
(a) the Senior Credit Facility, (b) the 10 3/4% Senior Notes and (c) the FHP
Senior Notes and (ii) the Company's obligations under any particular Senior Debt
in which the instrument creating or evidencing the same, or the assumption or
guarantee thereof, or related agreements or documents to which the Company is a
party, expressly provides that such indebtedness shall be "Designated Senior
Debt" for purposes of this Indenture (provided that no Senior Debt except the
Senior Credit Facility may exercise the rights of Designated Senior Debt in
respect of a Payment Blockage Notice pursuant to Section 11.2 in the event of a
non-payment default on Designated Senior Debt without the Company's prior
written consent delivered to the Trustee unless such right is provided for in
the applicable governing instrument or related agreements or documents). If any
payment in respect of Designated Senior Debt is rescinded or must otherwise be
returned upon the insolvency, bankruptcy or reorganization of the Company or
otherwise, the reinstated Debt of the Company arising as a result thereof shall
constitute Designated Senior Debt of the Company effective as of the date of
such recission or return.

         "DTC" means the Depositary Trust Company.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "FHP Senior Notes" means the 7% Senior Notes due 2003 issued by FHP
International Corporation (and subsequently renamed PacifiCare Health Plan
Administrators, Inc.) in an aggregate principal amount of $100 million pursuant
to an Indenture, dated as of September 22, 1993, between FHP International
Corporation and The Chase Manhattan Bank, N.A., as amended or supplemented from
time to time, and maturing on September 15, 2003

                                        3

         "Guarantee" means any obligation, contingent or otherwise, of any
person directly or indirectly guaranteeing any Debt of any other person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt of such other
person (whether arising by virtue of partnership arrangements, or by agreements
to keep-well, to purchase assets, goods, securities or services (unless such
purchase arrangements are on arm's-length terms and are entered into in the
ordinary course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or (2) entered into for purposes of assuring in any
other manner the obligee of such Debt of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part). The term
"Guarantee" used as a verb has a corresponding meaning.

         "Global Securities" means Securities that are in the form of the
Securities attached hereto as Exhibit A-1, and that are issued to a Depositary.

         "Holder" or "Securityholder" means a person in whose name a Security is
registered on the Registrar's books.

         "Indenture" means this Indenture, as amended or supplemented from time
to time in accordance with the terms hereof, including the provisions of the TIA
that are deemed to be a part hereof.

         "Initial Purchasers" means Morgan Stanley & Co. Incorporated and
Goldman, Sachs & Co.

         "Issue Date" of any Security means the date on which the Security was
originally issued or deemed issued as set forth on the face of the Security.

         "Lien" means any pledge, mortgage, lien, security interest,
hypothecation, assignment for security interest or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any agreement to give a security interest or any Capitalized
Lease.

         "Liquidated Damages Amount" has the meaning specified in the
Registration Rights Agreement dated as of November 22, 2002, by and among the
Company and the Initial Purchasers.

         "Nasdaq" means The Nasdaq National Market.

         "Officer" means the Chairman of the Board, the Vice Chairman, the Chief
Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, any Vice President, the Controller, the Treasurer, the
Secretary and any Assistant Treasurer or Assistant Secretary of the Company.

         "Officers' Certificate" means a written certificate containing the
information specified in Sections 12.4 and 12.5, signed in the name of the
Company by any two Officers, and delivered to the Trustee. An Officers'
Certificate given pursuant to Section 4.3 shall be signed by an

                                        4

authorized financial or accounting officer of the Company but need not contain
the information specified in Sections 12.4 and 12.5.

         "Opinion of Counsel" means a written opinion containing the information
specified in Sections 12.4 and 12.5, from legal counsel. The counsel may be an
employee of, or counsel to, the Company.

         "person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.

         "Redemption Date" or "redemption date" shall mean the date specified in
a notice of redemption on which the Securities may be redeemed in accordance
with the terms of the Securities and this Indenture.

         "Redemption Price" or "redemption price" shall have the meaning set
forth in Section 3.1.

         "Responsible Officer" shall mean, when used with respect to the
Trustee, any officer within the corporate trust administration division of the
Trustee having direct responsibility for the administration of this Indenture,
including, without limitation, any vice president, assistant vice president,
assistant treasurer or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject and who shall have direct responsibility
for the administration of this Indenture.

         "Restricted Common Stock Legend" means the legend labeled as such and
that is set forth in Exhibit C hereto.

         "Restricted Security" means a Security required to bear the restrictive
legend set forth in the form of Security set forth in Exhibits A-1 and A-2 of
this Indenture.

         "Rule 144A" means Rule 144A under the Securities Act (or any successor
provision), as it may be amended from time to time.

         "Sale Price" of the shares of Common Stock on any date means the
closing per share sale price (or, if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and the average asked prices) on such date as
reported in composite transactions for the principal United States securities
exchange on which the Common Stock is traded, or if the Common Stock is not
listed on a United States national or regional securities exchange, as reported
by the Nasdaq or by the National Quotation Bureau Incorporated. In the absence
of such quotations or listing, the Company shall be entitled to determine the
sales price on the basis of such quotations as it considers appropriate.

         "SEC" means the Securities and Exchange Commission.

                                        5

         "Securities" means any of the Company's 3% Convertible Subordinated
Debentures due 2032, as amended or supplemented from time to time, issued under
this Indenture.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Senior Credit Facility" means the Amended and Restated Credit
Agreement, dated as of August 20, 2001, among the Company, the subsidiary
guarantors set forth therein, the banks, financial institutions and other
institutional lenders listed on the signature pages thereto as the Initial
Lenders, Banc of America Securities LLC and J.P. Morgan Securities Inc. as
co-lead arrangers, Banc of America Securities LLC, J.P. Morgan Securities Inc.
and Salomon Smith Barney Inc. as joint book-running managers, and Bank of
America, N.A. as collateral agent and administrative agent, as such agreement is
amended, supplemented, extended, restated, renewed or otherwise modified from
time to time and any refinancing, replacement or substitution thereof or
therefore, or of or for any previous refinancing, replacement or substitution.

         "Senior Debt" means:

         (1)      all Debt of the Company or any Guarantor outstanding under the
Senior Credit Facility and all hedging obligations with respect thereto;

         (2)      any other Debt of the Company, unless the instrument under
which such Debt is created, incurred, assumed or guaranteed expressly provides
that it is subordinated to any Senior Debt or on a parity with or subordinated
in right of payment to the debentures; and

         (3)      all obligations with respect to the items listed in the
preceding clauses (1) and (2).

         Notwithstanding anything to the contrary in the preceding, Senior Debt
will not include:

         (1)      any liability for federal, state, local or other taxes owed or
owing;

         (2)      any intercompany Debt of the Company or any of its
Subsidiaries;

         (3)      any trade payables; and

         (4)      Debt which, when incurred and without respect to any election
under section 1111(b) of Title 11, United States Code, is without recourse to
the Company or any of its Subsidiaries.

         "Shelf Registration Statement" shall have the meaning set forth in the
Registration Rights Agreement dated as of November 22, 2002, by and among the
Company and the Initial Purchasers.

         "Stated Maturity," when used with respect to any Security, means
October 15, 2032.

         "Significant Subsidiary" means, at any date of determination, any
Subsidiary that, together with its Subsidiaries, would be a "Significant
Subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.

                                        6

         "Subsidiary" means any corporation of which the Company, or the Company
and one or more Subsidiaries, or any one or more Subsidiaries, directly or
indirectly own at the time (i) more than fifty per cent (50%) of the outstanding
capital stock having under ordinary circumstances (not dependent upon the
happening of a contingency) voting power in the election of members of the board
of directors, managers or trustees of said corporation, and (ii) securities
having at such time voting power to elect at least a majority of the members of
the board of directors, managers or trustees of said corporation.

         "TIA" means the Trust Indenture Act of 1939 as in effect on the date of
this Indenture, provided, however, that in the event the TIA is amended after
such date, TIA means, to the extent required by any such amendment, the TIA as
so amended.

         "trading day" means any day on which the securities exchange or
quotation system that is used to determine the Sale Price or the Trading Price,
as applicable, is open for trading or quotation or, if the Common Stock (in the
case of the Sale Price) is or the Securities (in the case of the Trading Price)
are not so listed or quoted, any Business Day.

         "Trading Price" of the Securities on any date of determination means
the average of the secondary market bid quotations per debenture obtained by the
conversion agent for $10,000,000 principal amount of the debentures at
approximately 3:30 p.m., New York City time, on such determination date from
three independent nationally recognized securities dealers selected by the
Company, provided that if at least three such bids cannot reasonably be obtained
by the Conversion Agent, but two such bids are obtained, then the average of the
two bids shall be used, and if only one such bid can reasonably be obtained by
the Conversion Agent, such one bid shall be used. For purposes of the conversion
right specified in Section 8(c) of the Securities, if the Conversion Agent
cannot reasonably obtain at least one bid for $10,000,000 principal amount of
the Securities from a nationally recognized securities dealer or in the
Company's reasonable judgment, the bid quotations are not indicative of the
secondary market value of the debentures, then the trading price of the
debentures will be deemed to be less than 95% of the product of the "Sale Price"
of the Common Stock and the number of shares of Common Stock issuable upon
conversion of $1,000 principal amount of the Securities.

         "Trustee" means the party named as the "Trustee" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

         "Vice President," when used with respect to the Company, means any vice
president, whether or not designated by a number or a word or words added before
or after the title "vice president."

         "10 3/4% Senior Notes" means the 10 3/4% Senior Notes due 2009 issued
by the Company in an aggregate principal amount of $500 million pursuant to an
Indenture, dated as of May 21, 2002, among the Company, the Subsidiary
Guarantors named therein and State Street Bank and Trust Company of California,
N.A., as amended or supplemented from time to time, and maturing on June 1,
2009.

                                        7

         Section 1.2 Other Definitions.

                                                                                         
Term:                                                                                       Defined in Section:
"Act".................................................................................      1.5
"Agent Members".......................................................................      2.12(e)
"Average Sale Price"..................................................................      10.1
"Company Notice"......................................................................      3.7(b)
"Conversion Agent"....................................................................      2.3
"Conversion Date".....................................................................      10.2
"Conversion Price"....................................................................      10.1
"Conversion Rate".....................................................................      10.1
"Event of Default"....................................................................      6.1
"Ex-Dividend Time"....................................................................      10.1
"Expiration Time".....................................................................      10.10
"fair market value"...................................................................      10.1
"Fundamental Change"..................................................................      3.8(a)
"Fundamental Change Purchase Date"....................................................      3.8(a)
"Fundamental Change Purchase Notice"..................................................      3.8(b)
"Fundamental Change Purchase Price"...................................................      3.8(a)
"Interest Payment Date"...............................................................      Exhibit A-1
"junior securities"...................................................................      11.11
"Legal Holiday".......................................................................      12.8
"Legend"..............................................................................      2.6(f)
"Notice of Default"...................................................................      6.1
"Paying Agent"........................................................................      2.3
"Payment Blockage Notice".............................................................      11.2
"payment default".....................................................................      11.2
"Purchase Date".......................................................................      3.7(a)
"Purchase Notice".....................................................................      3.7(a)
"Purchase Price"......................................................................      3.7(a)
"Purchased Shares"....................................................................      10.10
"QIB".................................................................................      2.1(a)
"Registrar"...........................................................................      2.3
"Regular Record Date".................................................................      Exhibit A-1
"Rule 144A"...........................................................................      2.1(a)
"Rule 144A Information"...............................................................      4.6
"Spin-off"............................................................................      10.8
"Time of Determination"...............................................................      10.1
"transfer"............................................................................      2.12(d)
"U.S. Government Obligations".........................................................      8.1



         Section 1.3 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The Indenture
shall also include those provisions of the TIA required to be included herein by
the provisions of the Trust Indenture Reform Act of 1990. The following TIA
terms used in this Indenture have the following meanings:

                           "Commission" means the SEC.

                                        8

                           "indenture securities" means the Securities.

                           "indenture securityholder" means a Securityholder.

                           "indenture to be qualified" means this Indenture.

                           "indenture trustee" or "institutional trustee" means
the Trustee.

                           "obligor" on the indenture securities means the
Company.

         All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.

         Section 1.4 Rules of Construction. Unless the context otherwise
requires:

                           (1)      a term has the meaning assigned to it;

                           (2)      an accounting term not otherwise defined has
the meaning assigned to it in accordance with generally accepted accounting
principles as in effect in the United States from time to time;

                           (3)      "or" is not exclusive;

                           (4)      "including" means including, without
limitation; and

                           (5)      words in the singular include the plural,
and words in the plural include the
singular.

         Section 1.5 Acts of Holders.

         (a)      Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of Holders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 7.1) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section 1.5.

         (b)      The fact and date of the execution by any person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to such officer the execution thereof.
Where such execution is by a signer acting in a capacity other than such
signer's

                                        9

individual capacity, such certificate or affidavit shall also constitute
sufficient proof of such signer's authority. The fact and date of the execution
of any such instrument or writing, or the authority of the person executing the
same, may also be proved in any other manner which the Trustee deems sufficient.

         (c)      The principal amount and serial number of any security and the
ownership of Securities shall be proved by the register for the Securities.

         (d)      Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is made
upon such Security.

         (e)      The Company may, in the circumstances permitted by the TIA,
fix any day as the record date for the purpose of determining the Holders
entitled to give or take any request, demand, authorization, direction, notice,
consent, waiver or other action, or to vote on any action, authorized or
permitted to be given or taken by Holders. If not set by the Company prior to
the first solicitation of a Holder made by any person in respect of any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section 7.6)
prior to such first solicitation or vote, as the case may be. With regard to any
record date, only the Holders on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.

                                  ARTICLE II.

                                 THE SECURITIES

         Section 2.1 Form and Dating. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibits A-1
and A-2, which are a part of this Indenture. To the extent any provisions of the
Securities and this Indenture are in conflict, the provisions of this Indenture
shall control. The Securities may have notations, legends or endorsements
required by law, stock exchange rule or usage (provided that any such notation,
legend or endorsement required by usage is in a form acceptable to the Company).
The Company shall provide any such notations, legends or endorsements to the
Trustee in writing. Each Security shall be dated the date of its authentication.

         (a)      144A Global Securities. The Securities are being offered and
sold to "qualified institutional buyers" as defined in Rule 144A ("QIBs") in
reliance on Rule 144A under the Securities Act ("Rule 144A"), and shall be
issued in the form of one or more permanent Global Securities substantially in
the form of Exhibit A-1. Such Global Securities shall be deposited on behalf of
the purchasers of the Securities represented thereby with the Trustee at its
Corporate Trust Office, as custodian for the Depositary, registered in the name
of the Depositary or a nominee of the Depositary for the accounts of
participants in the Depositary, duly executed by the Company and authenticated
by the Trustee as hereinafter provided. The aggregate principal amount of a
Global Security may from time to time be increased or decreased by adjustments
made on the records of the Trustee and the Depositary or its nominee as
hereinafter provided.

                                        10

         (b)      Global Securities in General. Each Global Security shall
represent such of the outstanding Securities as shall be specified therein and
each shall provide that it shall represent the aggregate amount of outstanding
Securities from time to time endorsed thereon and that the aggregate amount of
outstanding Securities represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges, redemptions, repurchases and
conversions.

         Any adjustment of the aggregate principal amount of a Global Security
to reflect the amount of any increase or decrease in the amount of outstanding
Securities represented thereby shall be made by the Trustee in accordance with
instructions given by the Holder thereof as required by Section 2.12 hereof and
shall be made on the records of the Trustee and the Depositary.

         (c)      Book-Entry Provisions. This Section 2.1(c) shall apply only
to Global Securities deposited with or on behalf of the Depositary.

         The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(c), authenticate and deliver initially one or more Global
Securities that (a) shall be registered in the name of the Depositary, (b) shall
be delivered by the Trustee to the Depositary or pursuant to the Depositary's
instructions and (c) shall bear legends substantially to the following effect:

                  "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
                  REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER
                  OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
                  PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME
                  OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
                  AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND
                  ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER
                  ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
                  DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE
                  HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
                  SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
                  HEREIN.

                  TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
                  TRANSFERS TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
                  SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
                  PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
                  MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE
                  TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF."

         (d)      Certificated Securities. In the event that the Securities are
issued as Certificated Securities, including pursuant to Section 2.12(a)(ii),
such Securities will be issued substantially in the form of Exhibit A-2 attached
hereto.

                                       11

         Section 2.2 Execution and Authentication. The Securities shall be
executed on behalf of the Company by any Officer. The signature of the
Officer on the Securities may be manual or facsimile.

         Securities bearing the manual or facsimile signatures of individuals
who were at the time of the execution of the Securities Officers of the Company
shall bind the Company, notwithstanding that such individuals or any of them
have ceased to hold such offices prior to the authentication and delivery of
such Securities or did not hold such offices at the date of authentication of
such Securities.

         No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized officer, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder.

         The Trustee shall authenticate and deliver the Securities for original
issue in an aggregate principal amount of up to $150,000,000 upon one or more
Company Orders without any further action by the Company. The aggregate
principal amount of the Securities due at the Stated Maturity thereof
outstanding at any time may not exceed the amount set forth in the foregoing
sentence, except as provided in Section 2.7.

         The Securities shall be issued only in registered form without coupons
and only in denominations of $1,000 of principal amount and any integral
multiple thereof.

         Section 2.3 Registrar, Paying Agent and Conversion Agent. The Company
shall maintain an office or agency where Securities may be presented for
registration of transfer or for exchange ("Registrar"), an office or agency
where Securities may be presented for purchase or payment ("Paying Agent") and
an office or agency where Securities may be presented for conversion
("Conversion Agent"). The Registrar shall keep a register of the Securities and
of their transfer and exchange. The Company may have one or more co-registrars,
one or more additional Paying Agents and one or more additional conversion
agents. The term Paying Agent includes any additional Paying Agent, including
any named pursuant to Section 4.5. The term Conversion Agent includes any
additional conversion agent, including any named pursuant to Section 4.5.

         The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent, Conversion Agent or co-registrar (that is not also the
Trustee). The agreement shall implement the provisions of this Indenture that
relate to such agent. The Company shall notify the Trustee of the name and
address of any such agent. If the Company fails to maintain a Registrar, Paying
Agent or Conversion Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 7.7. The Company or any
Subsidiary or an Affiliate of either of them may act as Paying Agent, Registrar,
Conversion Agent or co-registrar.

         The Company initially appoints the Trustee as Registrar, Conversion
Agent and Paying Agent in connection with the Securities.

                                        12

         Section 2.4 Paying Agent and Trustee To Hold Money in Trust. Except as
otherwise provided herein, on or prior to each due date of payments in respect
of any Security, the Company shall deposit with the Paying Agent a sum of money
(in immediately available funds if deposited on the due date) sufficient to
make such payments when so becoming due. The Company shall require each Paying
Agent (other than the Trustee) to agree in writing that the Paying Agent shall
hold in trust for the benefit of Securityholders or the Trustee all money held
by the Paying Agent for the making of payments in respect of the Securities and
shall notify the Trustee of any default by the Company in making any such
payment. At any time during the continuance of any such default, the Paying
Agent shall, upon the written request of the Trustee, forthwith pay to the
Trustee all money so held in trust. If the Company, a Subsidiary or an
Affiliate of either of them acts as Paying Agent, it shall segregate the money
held by it as Paying Agent and hold it as a separate trust fund. The Company at
any time may require a Paying Agent to pay all money held by it to the Trustee
and to account for any funds disbursed by it. Upon doing so, the Paying Agent
shall have no further liability for the money.

         The Trustee and the Paying Agent shall return to the Company any money
held by them for the payment of any amount with respect to the Securities that
remains unclaimed for two years, subject to applicable unclaimed property law.
After return to the Company, Holders entitled to the money must look to the
Company for payment as general creditors unless an applicable abandoned property
law designates another person.

         Section 2.5 Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall cause the Registrar to furnish to the Trustee at
least semiannually on January 15 and July 15 a listing of Securityholders dated
within 15 days of the date on which the list is furnished and at such other
times as the Trustee may request in writing a list in such form and as of such
date as the Trustee may reasonably require of the names and addresses of
Securityholders.

         Section 2.6 Transfer and Exchange.

         (a)      Subject to Section 2.12 hereof, upon surrender for
registration of transfer of any Security, together with a written instrument of
transfer satisfactory to the Registrar duly executed by the Securityholder or
such Securityholder's attorney duly authorized in writing, at the office or
agency of the Company designated as Registrar or co-registrar pursuant to
Section 2.3, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denomination or denominations, of a like
aggregate principal amount. The Company shall not charge a service charge for
any registration of transfer or exchange, but the Company may require payment of
a sum sufficient to pay all taxes, assessments or other governmental charges
that may be imposed in connection with the transfer or exchange of the
Securities from the Securityholder requesting such transfer or exchange.

         At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denomination or denominations, of a like aggregate
principal amount, upon surrender of the Securities to be exchanged, together
with a written instrument of transfer satisfactory to the Registrar duly
executed by the Securityholder or such Securityholder's attorney duly

                                        13

authorized in writing, at such office or agency. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities, which the Holder making the exchange
is entitled to receive.

         The Company shall not be required to make, and the Registrar need not
register, transfers or exchanges of Securities selected for redemption (except,
in the case of Securities to be redeemed in part, the portion thereof not to be
redeemed) or any Securities in respect of which a Purchase Notice or Fundamental
Change Purchase Notice has been given and not withdrawn by the Holder thereof in
accordance with the terms of this Indenture (except, in the case of Securities
to be purchased in part, the portion thereof not to be purchased) or any
Securities for a period of 15 days before the mailing of a notice of redemption
of Securities to be redeemed.

         The Trustee shall have no obligation or duty to monitor, determine or
inquire as to compliance with any restrictions on transfer imposed under this
Indenture or under applicable law with respect to any transfer of any interest
in any Security other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and when
expressly required by the terms of, this Indenture, and to examine the same to
determine substantial compliance as to form with the express requirements
hereof.

         (b)      Notwithstanding any provision to the contrary herein, so long
as a Global Security remains outstanding and is held by or on behalf of the
Depositary, transfers of a Global Security, in whole or in part, shall be made
only in accordance with Section 2.12 and this Section 2.6(b); provided, however,
that beneficial interests in a Global Security may be transferred to persons who
take delivery thereof in the form of a beneficial interest in the Global
Security in accordance with the transfer restrictions set forth under the
heading "Transfer Restrictions" in the offering memorandum relating to the
Securities dated November 18, 2002 and, if applicable, in the Legend.

         Except for transfers or exchanges made in accordance with Section 2.12,
transfers of a Global Security shall be limited to transfers of such Global
Security in whole, but not in part, to nominees of the Depositary or to a
successor of the Depositary or such successor's nominee.

         In the event that a Global Security is exchanged for Securities in
definitive form pursuant to Section 2.12 prior to the effectiveness of a Shelf
Registration Statement with respect to such Securities, such exchange may occur,
and such Securities may be further exchanged or transferred, only upon receipt
by the Registrar of (1) such Global Security or such Securities in definitive
form, duly endorsed as provided herein, as applicable, (2) instructions from the
holder directing the Trustee to authenticate and deliver one or more Securities
in definitive form of the same aggregate principal amount as the Global Security
or the Securities in definitive form (or portion thereof), as applicable, to be
transferred, such instructions to contain the name or names of the designated
transferee or transferees, the authorized denomination or denominations of the
Securities in definitive form to be so issued and appropriate delivery
instructions, and (3) such certifications or other information and, in the case
of transfers pursuant to Rule 144 under the Securities Act, legal opinions as
the Company may reasonably require to confirm that such transfer is being made
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act (including the certification
requirements intended to ensure that such transfers comply with Rule 144A under
the Securities Act), and upon

                                        14

compliance with such other procedures as may from time to time be adopted by the
Company and the Registrar.

         (c)      Successive registrations and registrations of transfers and
exchanges as aforesaid may be made from time to time as desired, and each such
registration shall be noted on the register for the Securities.

         (d)      Any Registrar appointed pursuant to Section 2.3 hereof shall
provide to the Trustee such information as the Trustee may reasonably require in
connection with the delivery by such Registrar of Securities upon transfer or
exchange of Securities.

         (e)      No Registrar shall be required to make registrations of
transfer or exchange of Securities during any periods designated in the text of
the Securities or in this Indenture as periods during which such registration of
transfers and exchanges need not be made.

         (f)      Except for transfers in connection with a Shelf Registration
Statement, if Securities are issued upon the transfer, exchange or replacement
of Securities subject to restrictions on transfer and bearing the legends set
forth on the forms of Security attached hereto as Exhibits A-1 and A-2 setting
forth such restrictions (collectively, the "Legend"), or if a request is made to
remove the Legend on a Security, the Securities so issued shall bear the Legend,
or the Legend shall not be removed, as the case may be, unless there is
delivered to the Company and the Registrar such satisfactory evidence (which may
include a legal opinion), as may be reasonably required by the Company and the
Registrar, that neither the Legend nor the restrictions on transfer set forth
therein are required to ensure that transfers thereof comply with the provisions
of Rule 144A or Rule 144 under the Securities Act or that such Securities are
not "restricted" within the meaning of Rule 144 under the Securities Act. Upon
(i) provision of such satisfactory evidence, or (ii) notification by the Company
to the Trustee and Registrar of the sale of such Security pursuant to a
registration statement that is effective at the time of such sale, the Trustee,
at the written direction of the Company, shall authenticate and deliver a
Security that does not bear the Legend. If the Legend is removed from the face
of a Security and the Security is subsequently held by the Company or an
Affiliate of the Company, the Legend shall be reinstated.

         (g)      Anything to the contrary herein notwithstanding, the Company
and the Trustee may impose such transfer, certification, exchange or other
requirements, and require such restrictive legends on certificates evidencing
the Securities, as (i) they may determine are necessary to ensure compliance
with the securities laws of the United States and the states therein and any
other applicable laws, (ii) to ensure that the Shelf Registration Statement or
amendment thereto covering the Securities or shares of Common Stock to be issued
upon conversion of the Securities is declared effective by the Commission or
(iii) as the Depositary may require.

         Section 2.7 Replacement Securities. If (a) any mutilated Security is
surrendered to the Trustee, or (b) the Company and the Trustee receive evidence
to their satisfaction of the destruction, loss or theft of any Security, and
there is delivered to the Company and the Trustee such security or indemnity as
may be required by them to save each of them harmless, then, in the absence of
notice to the Company or the Trustee that such Security has been acquired by a

                                        15

protected purchaser as defined in the New York Uniform Commercial Code, the
Company shall execute and upon its written request the Trustee shall
authenticate and deliver, in exchange for any such mutilated Security or in lieu
of any such destroyed, lost or stolen Security, a new Security of like tenor and
principal amount, bearing a certificate number not contemporaneously
outstanding.

         In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be purchased by the
Company pursuant to Article III hereof, the Company in its discretion may,
instead of issuing a new Security, pay or purchase such Security, as the case
may be.

         Upon the issuance of any new Securities under this Section 2.7, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

         Every new Security issued pursuant to this Section 2.7 in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.

         The provisions of this Section 2.7 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.

         Section 2.8 Outstanding Securities; Determinations of Holders' Action.
Securities outstanding at any time are all the Securities authenticated by the
Trustee except for those cancelled by it, those paid pursuant to Section 2.7,
those delivered to it for cancellation and those described in this Section 2.8
as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate thereof holds the Security; provided, however, that in
determining whether the Holders of the requisite principal amount of Securities
have given or concurred in any request, demand, authorization, direction,
notice, consent, waiver or other Act hereunder, Securities owned by the Company
or any other obligor upon the Securities or any Affiliate of the Company or
such other obligor shall be disregarded and deemed not to be outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent,
waiver or other Act, only Securities which a Responsible Officer of the Trustee
actually knows to be so owned shall be so disregarded. Subject to the
foregoing, only Securities outstanding at the time of such determination shall
be considered in any such determination (including, without limitation,
determinations pursuant to Articles VI and IX).

         If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a protected purchaser.

                                       16

         If the Paying Agent holds, in accordance with this Indenture, on a
Redemption Date, or on the Business Day following a Purchase Date or a
Fundamental Change Purchase Date, or on Stated Maturity, money sufficient to pay
Securities payable on that date, then immediately after such Redemption Date,
Purchase Date, Fundamental Change Purchase Date or Stated Maturity, as the case
may be, such Securities shall cease to be outstanding and interest, if any, on
such Securities shall cease to accrue; provided, however, that if such
Securities are to be redeemed, notice of such redemption has been duly given
pursuant to this Indenture or provision therefor satisfactory to the Trustee has
been made.

         If a Security is converted in accordance with Article X, then from and
after the Conversion Date, such Security shall cease to be outstanding and
interest, if any, shall cease to accrue on such Security.

         Section 2.9 Temporary Securities. Pending the preparation of definitive
Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which
are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor
of the definitive Securities in lieu of which they are issued and
with such appropriate insertions, omissions, substitutions and other
variations as the Officers executing such Securities may determine,
as conclusively evidenced by their execution of such Securities.

         If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the office
or agency of the Company designated for such purpose pursuant to Section 2.3,
without charge to the Holder. Upon surrender for cancellation of any one or more
temporary Securities the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.

         Section 2.10 Cancellation. All Securities surrendered for payment,
purchase by the Company pursuant to Article III, conversion, redemption or
registration of transfer or exchange shall, if surrendered to any person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder that the Company may
have acquired in any manner whatsoever, and all Securities so delivered shall be
promptly cancelled by the Trustee. The Company may not issue new Securities to
replace Securities it has paid or delivered to the Trustee for cancellation or
that any Holder has converted pursuant to Article X. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section 2.10, except as expressly permitted by this Indenture. All
cancelled Securities held by the Trustee shall be disposed of by the Trustee in
accordance with the Trustee's customary procedure.

         Section 2.11 Persons Deemed Owners. Prior to due presentment of a
Security for registration of transfer, the Company, the Trustee and
any agent of the Company or the Trustee may treat the person in whose
name such Security is registered in the records of the Registrar as

                                       17

the owner of such Security for the purpose of receiving payment of principal of
the Security or the payment of any Redemption Price, Purchase Price or
Fundamental Change Purchase Price in respect thereof, and interest thereon, for
the purpose of conversion and for all other purposes whatsoever, whether or not
such Security be overdue, and neither the Company, the Trustee nor any agent of
the Company or the Trustee shall be affected by notice to the contrary.

         Section 2.12 Global Securities. (a) Notwithstanding any other
provisions of this Indenture or the Securities, (A) transfers of a Global
Security, in whole or in part, shall be made only in accordance with Section
2.6(b) and Section 2.12(a)(i), (B) transfers of a beneficial interest in a
Global Security for a Certificated Security shall comply with Section 2.6 and
Section 2.12(a)(ii) below, and (C) transfers of a Certificated Security shall
comply with Section 2.6 and Sections 2.12(a)(iii) and (iv) below.

                           (i)      Transfer of Global Security. A Global
         Security may not be transferred, in whole or in part, to any person
         other than the Depositary or one or more nominees or any successor
         thereof, and no such transfer to any such other person may be
         registered; provided, however, that this clause (i) shall not prohibit
         any transfer of a Security that is issued in exchange for a Global
         Security but is not itself a Global Security. No transfer of a Security
         to any person shall be effective under this Indenture or the Securities
         unless and until such Security has been registered in the name of such
         person. Nothing in this Section 2.12(a)(i) shall prohibit or render
         ineffective any transfer of a beneficial interest in a Global Security
         effected in accordance with the other provisions of this Section
         2.12(a).

                           (ii)     Restrictions on Transfer of a Beneficial
         Interest in a Global Security for a Certificated Security. A beneficial
         interest in a Global Security may not be exchanged for a Certificated
         Security except upon the circumstances contemplated in Section
         2.12(e)(1) below and additionally, upon satisfaction of the
         requirements set forth below. Upon receipt by the Trustee of a transfer
         of a beneficial interest in a Global Security in accordance with
         Applicable Procedures for a Certificated Security in the form
         satisfactory to the Trustee, together with:

                                    (A)     so long as the Securities are
                                    Restricted Securities, certification in the
                                    form set forth in Exhibit B,

                                    (B)     written instructions to the Trustee
                                    to make, or direct the Registrar to make, an
                                    adjustment on its books and records with
                                    respect to such Global Security to reflect a
                                    decrease in the aggregate principal amount
                                    of the Securities represented by the Global
                                    Security, such instructions to contain
                                    information regarding the Depositary account
                                    to be credited with such decrease, and

                                    (C)     if the Company so requests, an
                                    opinion of counsel or other evidence
                                    reasonably satisfactory to it as to the
                                    compliance with the restrictions set forth
                                    in the Legend,

                                       18

the Trustee shall cause, or direct the Registrar to cause, in accordance with
the standing instructions and procedures existing between the Depositary and the
Registrar, the aggregate principal amount of the Securities represented by the
Global Security to be decreased by the aggregate principal amount of the
Certificated Security to be issued, shall issue such Certificated Security and
shall debit or cause to be debited to the account of the person specified in
such instructions a beneficial interest in the Global Security equal to the
principal amount of the Certificated Security so issued.

                  (iii)    Transfer and Exchange of Certificated Securities.
         When Certificated Securities are presented to the Registrar with a
         request:

                           (y)     to register the transfer of such
                  Certificated Securities; or

                           (z)     to exchange such Certificated Securities for
                  an equal principal amount of Certificated Securities of other
                  authorized denominations,

the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the Certificated Securities surrendered for transfer or exchange:

(1)      shall be duly endorsed or accompanied by a written instrument of
         transfer in form reasonably satisfactory to the Company and the
         Registrar, duly executed by the Holder thereof or his attorney duly
         authorized in writing; and

(2)      so long as such Securities are Restricted Securities, such Securities
         are being transferred or exchanged pursuant to an effective
         registration statement under the Securities Act or pursuant to clause
         (A), (B) or (C) below, and are accompanied by the following additional
         information and documents, as applicable:

         (A)      if such Certificated Securities are being transferred to the
                  Company, a certification to that effect; or

         (B)      if such Certificated Securities are being delivered to the
                  Registrar by a Holder for registration in the name of such
                  Holder, without transfer, a certification from such Holder to
                  that effect; or

         (C)      if such Certificated Securities are being transferred pursuant
                  to an exemption from registration, (i) a certification to that
                  effect (in the form set forth in Exhibit B, if applicable) and
                  (ii) if the Company so requests, an opinion of counsel or
                  other evidence reasonably satisfactory to it as to the
                  compliance with the restrictions set forth in the Legend.

                  (iv)     Restrictions on Transfer of a Certificated
         Security for a Beneficial Interest in a Global Security. A Certificated
         Security may not be exchanged for a beneficial interest in a Global
         Security except upon satisfaction of the requirements set forth below.

                                       19

                  Upon receipt by the Trustee of a Certificated Security, duly
         endorsed or accompanied by appropriate instruments of transfer, in form
         satisfactory to the Trustee, together with:

                  (I)      so long as the Securities are Restricted Securities,
         certification, in the form set forth in Exhibit B, that such
         Certificated Security is being transferred in accordance with Rule 144A
         or Rule 144; and

                  (II)     written instructions directing the Trustee to make,
         or to direct the Registrar to make, an adjustment on its books and
         records with respect to such Global Security to reflect an increase in
         the aggregate principal amount of the Securities represented by the
         Global Security, such instructions to contain information regarding the
         Depositary account to be credited with such increase, then the Trustee
         shall cancel such Certificated Security and cause, or direct the
         Registrar to cause, in accordance with the standing instructions and
         procedures existing between the Depositary and the Registrar, the
         aggregate principal amount of Securities represented by the Global
         Security to be increased by the aggregate principal amount of the
         Certificated Security to be exchanged, and shall credit or cause to be
         credited to the account of the person specified in such instructions a
         beneficial interest in the Global Security equal to the principal
         amount of the Certificated Security so cancelled. If no Global
         Securities are then outstanding, the Company shall issue and the
         Trustee shall authenticate, upon receipt of a Company Order, a new
         Global Security in the appropriate principal amount.

         (b)      Subject to Section 2.12(c), every Security shall be subject to
the restrictions on transfer provided in the Legend. Whenever any Restricted
Security is presented or surrendered for registration of transfer or for
exchange for a Security registered in a name other than that of the Holder, such
Security must be accompanied by a certificate in substantially the form set
forth in Exhibit B, dated the date of such surrender and signed by the Holder of
such Security, as to compliance with such restrictions on transfer. The
Registrar shall not be required to accept for such registration of transfer or
exchange any Security not so accompanied by a properly completed certificate.

         (c)      The restrictions imposed by the Legend upon the
transferability of any Security shall cease and terminate when such Security has
been sold pursuant to an effective registration statement under the Securities
Act or transferred in compliance with Rule 144 under the Securities Act (or any
successor provision thereto) or, if earlier, upon the expiration of the holding
period applicable to sales thereof under Rule 144(k) under the Securities Act
(or any successor provision). Any Security as to which such restrictions on
transfer shall have expired in accordance with their terms or shall have
terminated may, upon a surrender of such Security for exchange to the Registrar
in accordance with the provisions of this Section 2.12 (accompanied, in the
event that such restrictions on transfer have terminated by reason of a transfer
in compliance with Rule 144 or any successor provision, by an opinion of counsel
addressed to the Company and in form acceptable to the Company, to the effect
that the transfer of such Security has been made in compliance with Rule 144 or
such successor provision), be exchanged for a new Security, of like tenor and
aggregate principal amount, which shall not bear the restrictive Legend. The
Company shall inform the Trustee of the effective date of any registration
statement registering the resale of the Securities under the Securities Act. The
Trustee shall not

                                       20

be liable for any action taken or omitted to be taken by it in
good faith in accordance with the aforementioned opinion of counsel or
registration statement.

         (d)      As used in the Section 2.12(b) and (c), the term "transfer"
encompasses any sale, pledge, transfer, loan, hypothecation, or other
disposition of any Security.

         (e)      The provisions of clauses (1), (2), (3) and (4) below shall
apply only to Global Securities:

         (1)      Notwithstanding any other provisions of this Indenture or the
                  Securities, a Global Security shall not be exchanged in whole
                  or in part for a Security registered in the name of any person
                  other than the Depositary or one or more nominees or any
                  successor thereof; provided, however, that a Global Security
                  may be exchanged for Securities registered in the names of any
                  person designated by the Depositary in the event that (i) the
                  Depositary has notified the Company that it is unwilling or
                  unable to continue as Depositary for such Global Security or
                  such Depositary has ceased to be a "clearing agency"
                  registered under the Exchange Act, and a successor Depositary
                  is not appointed by the Company within 90 days, (ii) an Event
                  of Default has occurred and is continuing with respect to the
                  Securities or (iii) the Company in its sole discretion elects
                  not to have the Securities represented by a Global Security
                  and to cause the issuance of Certificated Securities. Any
                  Global Security exchanged pursuant to clause (i) or (iii)
                  above shall be so exchanged in whole and not in part, and any
                  Global Security exchanged pursuant to clause (ii) above may be
                  exchanged in whole or from time to time in part as directed by
                  the Depositary. Any Security issued in exchange for a Global
                  Security or any portion thereof shall be a Global Security;
                  provided, however, that any such Security so issued that is
                  registered in the name of a person other than the Depositary
                  or a nominee thereof shall not be a Global Security and shall
                  be deemed a Certificated Security.

         (2)      Securities issued in exchange for a Global Security or any
                  portion thereof shall be issued in definitive, fully
                  registered form, without interest coupons, shall have an
                  aggregate principal amount equal to that of such Global
                  Security or portion thereof to be so exchanged, shall be
                  registered in such names and be in such authorized
                  denominations as the Depositary shall designate and shall bear
                  the applicable legends provided for herein. Any Global
                  Security to be exchanged in whole shall be surrendered by the
                  Depositary to the Trustee, as Registrar. With regard to any
                  Global Security to be exchanged in part, either such Global
                  Security shall be so surrendered for exchange or, if the
                  Trustee is acting as custodian for the Depositary or its
                  nominee with respect to such Global Security, the principal
                  amount thereof shall be reduced, by an amount equal to the
                  portion thereof to be so exchanged, by means of an appropriate
                  adjustment made on the records of the Trustee. Upon any such
                  surrender or adjustment, the Trustee shall authenticate and
                  deliver the Security issuable on such exchange to or upon the
                  order of the Depositary or an authorized representative
                  thereof.

                                       21

         (3)      Subject to the provisions of clause (5) below, the registered
                  Holder may grant proxies and otherwise authorize any person,
                  including Agent Members and persons that may hold interests
                  through Agent Members, to take any action which a holder is
                  entitled to take under this Indenture or the Securities.

         (4)      In the event of the occurrence of any of the events specified
                  in clause (1) above, the Company will promptly make available
                  to the Trustee a reasonable supply of Certificated Securities
                  in definitive, fully registered form, without interest
                  coupons.

         (5)      Neither any members of, or participants in, the Depositary
                  (collectively, the "Agent Members") nor any other persons on
                  whose behalf Agent Members may act shall have any rights under
                  this Indenture with respect to any Global Security registered
                  in the name of the Depositary or any nominee thereof, or under
                  any such Global Security, and the Depositary or such nominee,
                  as the case may be, may be treated by the Company, the Trustee
                  and any agent of the Company or the Trustee as the absolute
                  owner and holder of such Global Security for all purposes
                  whatsoever. Notwithstanding the foregoing, nothing herein
                  shall prevent the Company, the Trustee or any agent of the
                  Company or the Trustee from giving effect to any written
                  certification, proxy or other authorization furnished by the
                  Depositary or such nominee, as the case may be, or impair, as
                  between the Depositary, its Agent Members and any other person
                  on whose behalf an Agent Member may act, the operation of
                  customary practices of such persons governing the exercise of
                  the rights of a holder of any Security.

         Section 2.13 CUSIP Numbers. The Company may issue the Securities with
one or more "CUSIP," "ISIN" and "CINS" numbers (if then generally in use), and,
if so, the Trustee shall use "CUSIP," "ISIN" and "CINS" numbers in notices of
redemption as a convenience to Holders; provided, however, that any such notice
may state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be
affected by any defect in or omission of such numbers. The Company will
promptly notify the Trustee of any change in the "CUSIP," "ISIN" and "CINS"
numbers.

         Section 2.14 Ranking. The Debt of the Company arising under or in
connection with this Indenture and every outstanding Security issued under this
Indenture from time to time constitutes and will constitute a subordinated
unsecured obligation of the Company, ranking equally with other existing and
future subordinated unsecured Debt of the Company.

         Section 2.15 Opinion of Counsel. Any provision in this Indenture that
permits the Company to require an opinion of counsel in respect of any
securities transfer, such counsel shall have substantial experience in practice
under the Securities Act and otherwise be reasonably acceptable to the Company.

                                       22

                                  ARTICLE III.

                            REDEMPTION AND PURCHASES

         Section 3.1 Company's Right To Redeem; Notices to Trustee. Beginning on
October 18, 2007, the Company, at its option, may redeem, in accordance with
the provisions of Paragraph 5 of the Securities, the Securities, in whole or in
part, for cash at a redemption price equal to 100% of the principal amount of
the Securities to be redeemed plus accrued and unpaid interest thereon to, but
excluding, the Redemption Date (the "Redemption Price"). If the Company elects
to redeem Securities pursuant to Paragraph 5 of the Securities, it shall notify
the Trustee in writing of the Redemption Date, the principal amount of
Securities to be redeemed and the Redemption Price. The Company shall give the
notice to the Trustee provided for in Section 3.3 by a Company Order, at least
40 days before the Redemption Date (unless a shorter notice shall be
satisfactory to the Trustee). The Company may not redeem the Securities if it
has failed to pay any interest on the Securities, and such failure to pay
interest is continuing.

         Section 3.2 Selection of Securities To Be Redeemed. If less than all
the Securities are to be redeemed, unless the procedures of the Depositary
provide otherwise, the Trustee shall select the Securities to be redeemed by
lot, on a pro rata basis or by another method the Trustee considers fair and
appropriate (so long as such method is not prohibited by the rules of any stock
exchange on which the Securities are then listed). The Trustee shall make the
selection at least 35 days but not more than 60 days before the Redemption Date
from outstanding Securities not previously called for redemption. The Trustee
may select for redemption portions of the principal amount of Securities that
have denominations larger than $1,000. Securities and portions of Securities
that the Trustee selects shall be in principal amounts of $1,000 or an integral
multiple of $1,000, if less than all of the Securities are being redeemed.
Provisions of this Indenture that apply to Securities called for redemption
also apply to portions of Securities called for redemption. The Trustee shall
notify the Company promptly of the Securities or portions of the Securities to
be redeemed. If any Security selected for partial redemption is converted in
part before termination of the conversion right with respect to the portion of
the Security so selected, the converted portion of such Security shall be
deemed (so far as may be) to be the portion selected for redemption.
Securities, which have been converted during a selection of Securities to be
redeemed, may be treated by the Trustee as outstanding for the purpose of such
selection.

         Section 3.3 Notice of Redemption. At least 30 days but not more than 60
days before a Redemption Date, the Company shall mail a notice of redemption by
first-class mail, postage prepaid, to each Holder of Securities to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:

         (1)      the Redemption Date;

         (2)      the Redemption Price;

         (3)      the Conversion Rate;

         (4)      the name and address of the Paying Agent and Conversion Agent;

                                       23

         (5)      that Securities called for redemption may be converted at any
                  time before the close of business on the Business Day
                  immediately preceding the Redemption Date, unless the Company
                  defaults in making the payment due on the Redemption Date, in
                  which case the conversion right shall terminate at the close
                  of business on the date such default is cured and such payment
                  is made;

         (6)      that Holders who want to convert their Securities must satisfy
                  the requirements set forth in Paragraph 8 of the Securities;

         (7)      if fewer than all of the outstanding Securities are to be
                  redeemed, the certificate numbers, if any, and principal
                  amounts of the particular Securities to be redeemed;

         (8)      that, unless the Company defaults in making payment of such
                  Redemption Price, interest, if any, on Securities called for
                  redemption will cease to accrue on and after the Redemption
                  Date; and

         (9)      the CUSIP, ISIN and CINS number(s) (as applicable) of the
                  Securities.

         At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense, provided that the
Company makes such request at least five Business Days prior to the date by
which such notice of redemption must be given to Holders in accordance with this
Section 3.3 unless a shorter period is agreed upon by the Trustee.

         Section 3.4 Effect of Notice of Redemption. Once notice of redemption
is given, Securities called for redemption become due and payable on the
Redemption Date and at the Redemption Price stated in the notice except for
Securities which are converted in accordance with the terms of this Indenture.
Upon surrender to the Paying Agent, such Securities shall be paid at the
Redemption Price stated in the notice.

         Section 3.5 Deposit of Redemption Price. Prior to 11:00 a.m. (New York
City time), on the Redemption Date, the Company shall deposit with the Paying
Agent (or if the Company or a Subsidiary or an Affiliate of either of them is
the Paying Agent, shall segregate and hold in trust) money sufficient to pay
the Redemption Price of all Securities to be redeemed on that date other than
Securities or portions of Securities called for redemption which on or prior
thereto have been delivered by the Company to the Trustee for cancellation or
have been converted. The Paying Agent shall as promptly as practicable return
to the Company any money not required for that purpose because of conversion of
Securities pursuant to Article X. If such money is then held by the Company in
trust and is not required for such purpose it shall be discharged from such
trust.

         Section 3.6 Securities Redeemed in Part. Upon surrender of a Security
that is redeemed in part, the Company shall execute and the Trustee shall
authenticate and deliver to the Holder a new Security in an authorized
denomination equal in principal amount to the unredeemed portion of the
Security surrendered.

                                       24

         Section 3.7 Purchase of Securities by the Company at Option of the
Holder.

         (a)      General. Securities shall be purchased by the Company for cash
pursuant to Paragraph 7(a) of the Securities at the option of the Holder on
October 15, 2007, October 15, 2012, October 15, 2017, October 15, 2022 and
October 15, 2027 (each, a "Purchase Date"), at 100.0% of the principal amount
thereof plus accrued and unpaid interest thereon, if any, to, but excluding,
such Purchase Date (the "Purchase Price"). Purchases of Securities hereunder
shall be made, at the option of the Holder thereof, upon:

         (1)      delivery to the Paying Agent by the Holder of a written notice
                  of purchase (a "Purchase Notice") during the period beginning
                  at any time from the opening of business on the date that is
                  20 Business Days prior to the relevant Purchase Date until
                  11:00 a.m. (New York City time) on such Purchase Date stating:

                  (A)      the certificate number of the Security which the
                           Holder will deliver to be purchased or the
                           appropriate Depositary procedures if Certificated
                           Securities have not been issued,

                  (B)      the portion of the principal amount of the Security
                           which the Holder will deliver to be purchased, which
                           portion must be in principal amounts of $1,000 or an
                           integral multiple thereof, if less than all of the
                           Securities are being delivered, and

                  (C)      that such Security shall be purchased by the Company
                           as of the Purchase Date pursuant to the terms and
                           conditions specified in Paragraph 7 of the Securities
                           and in this Indenture; and

         (2)      delivery of such Security to the Paying Agent prior to, on or
                  after the Purchase Date (together with all necessary
                  endorsements) at the offices of the Paying Agent, such
                  delivery being a condition to receipt by the Holder of the
                  Purchase Price therefor; provided, however, that such Purchase
                  Price shall be so paid pursuant to this Section 3.7 only if
                  the Security so delivered to the Paying Agent shall conform in
                  all respects to the description thereof in the related
                  Purchase Notice, as determined by the Company.

         The Company shall purchase from the Holder thereof, pursuant to this
Section 3.7, a portion of a Security, only if the principal amount of such
portion is $1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to the purchase of all of a Security also apply to the
purchase of such portion of such Security.

         Any purchase by the Company contemplated pursuant to the provisions of
this Section 3.7 shall be consummated by the delivery of the cash to be received
by the Holder promptly following the later of the Purchase Date and the time of
delivery of the Security.

         Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Purchase Notice contemplated by this Section 3.7(a)
shall have the right to withdraw such Purchase Notice at any time prior to the
close of business on the Business Day immediately

                                       25

preceding the Purchase Date by delivery of a written notice of withdrawal to the
Paying Agent in accordance with Section 3.9.

         The Paying Agent shall promptly notify the Company of the receipt by it
of any Purchase Notice or written notice of withdrawal thereof.

         (b)      Notice of Purchase Option. In connection with any purchase of
Securities pursuant to Paragraph 7(a) of the Securities, the Company shall give
notice to Holders setting forth information specified in this Section 3.7(b)
(the "Company Notice"). The Company Notice shall be sent by first-class mail to
the Trustee and each Holder not less than 20 Business Days prior to any Purchase
Date.

         Each Company Notice shall include a form of Purchase Notice to be
completed by a Holder and shall state:

         (1)      the Purchase Price and the Conversion Rate;

         (2)      the name and address of the Paying Agent and the Conversion
Agent;

         (3)      that Securities as to which a Purchase Notice has been given
may be converted if they are otherwise convertible only in accordance with
Article X hereof and Paragraph 8 of the Securities if the applicable Purchase
Notice has been withdrawn in accordance with the terms of this Indenture;

         (4)      that Securities must be surrendered to the Paying Agent to
collect payment;

         (5)      that the Purchase Price for any security as to which a
Purchase Notice has been given and not withdrawn will be paid promptly following
the later of the Purchase Date and the time of surrender of such Security as
described in clause (4) above;

         (6)      the procedures the Holder must follow to exercise its rights
under this Section 3.7 and a brief description of those rights;

         (7)      briefly, the conversion rights of the Securities;

         (8)      the procedures for withdrawing a Purchase Notice;

         (9)      that, unless the Company defaults in making payment on
Securities for which a Purchase Notice has been submitted, interest, if any, on
such Securities will cease to accrue on and after the Purchase Date; and

         (10)     the CUSIP, ISIN and CINS number(s) (as applicable) of the
Securities.

         At the Company's request, the Trustee shall give such Company Notice in
the Company's name and at the Company's expense; provided, however, that, in all
cases, the text of such Company Notice shall be prepared by the Company.

                                       26

         (c)      Procedure upon Purchase. The Company shall deposit cash at the
time and in the manner as provided in Section 3.10, sufficient to pay the
aggregate Purchase Price of all Securities to be purchased pursuant to this
Section 3.7.

         Section 3.8 Purchase of Securities at Option of the Holder upon a
Fundamental Change.

         (a)      If a Fundamental Change occurs, the Securities not previously
purchased by the Company shall, be purchased by the Company pursuant to
Paragraph 7(b) of the Securities, at the option of the Holder thereof, for cash
at a purchase price equal to 100.0% of the principal amount thereof plus accrued
and unpaid interest, if any, to, but excluding, the date of purchase (the
"Fundamental Change Purchase Price"), as of the date that is 30 days after the
date of the notice of Fundamental Change delivered by the Company (or, if such
30th day is not a Business Day, the next succeeding Business Day) (the
"Fundamental Change Purchase Date"), subject to satisfaction by or on behalf of
the Holder of the requirements set forth in Section 3.8(c).

         A "Fundamental Change" is any transaction or event (whether by means of
an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) in connection with
which all or substantially all of the Company's Common Stock is exchanged for,
converted into, acquired for or constitutes solely the right to receive,
consideration which is not all or substantially all common stock that:

                  (i)      is listed on, or immediately after the transaction or
         event will be listed on, a United States national securities exchange;
         or

                  (ii)     is approved, or immediately after the transaction or
         event will be approved, for quotation on Nasdaq or any similar United
         States system of automated dissemination of quotations of securities
         prices.

         (b)      No later than 10 days after the occurrence of a Fundamental
Change, the Company shall mail a written notice of the Fundamental Change by
first-class mail to the Trustee and to each Holder. The notice shall include a
form of written notice of purchase (the "Fundamental Change Purchase Notice") to
be completed by the Holder and shall state:

                  (1)      briefly, the events causing a Fundamental Change and
                           the date of such Fundamental Change;

                  (2)      the date by which the Fundamental Change Purchase
                           Notice pursuant to this Section 3.8 must be given;

                  (3)      the Fundamental Change Purchase Date;

                  (4)      the Fundamental Change Purchase Price;

                  (5)      the name and address of the Paying Agent and the
                           Conversion Agent;

                  (6)      the Conversion Rate and any adjustments thereto;

                                       27

                  (7)      that the Securities as to which a Fundamental Change
                           Purchase Notice has been given may be converted if
                           they are otherwise convertible pursuant to Article X
                           hereof only if the Fundamental Change Purchase Notice
                           has been withdrawn in accordance with the terms of
                           this Indenture;

                  (8)      that the Securities must be surrendered to the Paying
                           Agent to collect payment;

                  (9)      that the Fundamental Change Purchase Price for any
                           Security as to which a Fundamental Change Purchase
                           Notice has been duly given and not withdrawn will be
                           paid promptly following the later of the Fundamental
                           Change Purchase Date and the time of surrender of
                           such Security as described in clause (8) above;

                  (10)     briefly, the procedures the Holder must follow to
                           exercise rights under this Section 3.8;

                  (11)     the procedures for withdrawing a Fundamental Change
                           Purchase Notice;

                  (12)     that, unless the Company defaults in making payment
                           of such Fundamental Change Purchase Price, interest,
                           if any, on Securities surrendered for purchase by the
                           Company will cease to accrue on and after the
                           Fundamental Change Purchase Date; and

                  (13)     the CUSIP, ISIN and CINS number(s) (as applicable) of
                           the Securities.

         At the Company's request, the Trustee shall give the notice of the
Fundamental Change in the Company's name and at the Company's expense, provided
that the Company makes such request at least five Business Days prior to the
date by which such notice of the Fundamental Change must be given to Holders in
accordance with this Section 3.8 unless a shorter period is agreed upon by the
Trustee.

         (c)      A Holder may exercise its rights specified in Section 3.8(a)
upon delivery of a Fundamental Change Purchase Notice to the Paying Agent at any
time on or prior to the 30th day after the date the Company delivers its written
Fundamental Change notice, stating:

                  (1)      the certificate number of the Security which the
                           Holder will deliver to be purchased;

                  (2)      the portion of the principal amount of the Security
                           which the Holder will deliver to be purchased, which
                           portion, if not the entire amount of the Security,
                           must be $1,000 or an integral multiple thereof; and

                  (3)      that such Security shall be purchased pursuant to the
                           terms and conditions specified in Paragraph 7(b) of
                           the Securities.

         The delivery of such Security to the Paying Agent with the Fundamental
Change Purchase Notice (together with all necessary endorsements) at the offices
of the Paying Agent

                                       28

shall be a condition to the receipt by the Holder of the Fundamental Change
Purchase Price therefor; provided, however, that such Fundamental Change
Purchase Price shall be so paid pursuant to this Section 3.8 only if the
Security so delivered to the Paying Agent shall conform in all respects to the
description thereof set forth in the related Fundamental Change Purchase Notice.

         (d)      The Company shall purchase from the Holder thereof, pursuant
to this Section 3.8, a portion of a Security only if the principal amount of
such portion is $1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to the purchase of all of a Security also apply to the
purchase of such portion of such Security.

         Any purchase by the Company contemplated pursuant to the provisions of
this Section 3.8 shall be consummated by the delivery of the cash to be received
by the Holder on the Fundamental Change Purchase Date.

         (e)      The Paying Agent shall promptly notify the Company of the
receipt by it of any Fundamental Change Purchase Notice.

         (f)      Notwithstanding the foregoing provisions of this Section 3.8,
the Company shall not be required to offer to purchase Securities following a
Fundamental Change if a third party makes the offer contemplated by this Section
3.8 in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 3.8 and purchases on the Fundamental
Change Purchase Date all Securities in respect of which a valid Fundamental
Change Purchase Notice was delivered and not withdrawn.

         Section 3.9 Effect of Purchase Notice or Fundamental Change Purchase
Notice. Upon receipt by the Paying Agent of the Purchase Notice or the
Fundamental Change Purchase Notice specified in Section 3.7(a) or Section
3.8(b), as applicable, the Holder of the Security in respect of which such
Purchase Notice or Fundamental Change Purchase Notice, as the case may be, was
given shall (unless such Purchase Notice or Fundamental Change Purchase Notice,
as the case may be, is withdrawn as specified in the following paragraph)
thereafter be entitled to receive solely the Purchase Price or the Fundamental
Change Purchase Price, as the case may be, in cash, with respect to such
Security. Such Purchase Price or Fundamental Change Purchase Price shall be
paid to such Holder, subject to receipts of funds by the Paying Agent, as soon
as practicable following the later of (x) the Purchase Date or the Fundamental
Change Purchase Date, as the case may be, with respect to such Security
(provided the conditions in Section 3.7(a) or Section 3.8(c), as applicable,
have been satisfied) and (y) the time of delivery of such Security to the
Paying Agent by the Holder thereof in the manner required by Section 3.7(a) or
Section 3.8(c), as applicable. Securities in respect of which a Purchase Notice
or Fundamental Change Purchase Notice has been given by the Holder thereof may
not be converted pursuant to Article X hereof on or after the date of the
delivery of such Purchase Notice or Fundamental Change Purchase Notice unless
such Purchase Notice or Fundamental Change Purchase Notice has first been
validly withdrawn as specified in the following paragraph.

         A Purchase Notice or Fundamental Change Purchase Notice may be
withdrawn by means of a written notice of withdrawal delivered to the office of
the Paying Agent in accordance with the Purchase Notice or Fundamental Change
Purchase Notice at any time prior to the close of

                                       29

business on the Business Day immediately preceding the Purchase Date or
Fundamental Change Purchase Date specifying:

                  (1)      the certificate number, if any, of the Security in
                           respect of which such notice of withdrawal is being
                           submitted or the appropriate Depositary procedures if
                           Certificated Securities have not been issued,

                  (2)      the principal amount of the Security with respect to
                           which such notice of withdrawal is being submitted,
                           and

                  (3)      the principal amount, if any, of such Security which
                           remains subject to the original Purchase Notice or
                           Fundamental Change Purchase Notice, as the case may
                           be, and which has been or will be delivered for
                           purchase by the Company.

         Section 3.10 Deposit of Purchase Price or Fundamental Change Purchase
Price. Prior to 11:00 a.m. (local time in the City of New York) on the Purchase
Date or the Fundamental Change Purchase Date, as the case may be, the Company
shall deposit with the Trustee or with the Paying Agent (or, if the Company or
a Subsidiary or an Affiliate of either of them is acting as the Paying Agent,
shall segregate and hold in trust as provided in Section 2.4) an amount of cash
(in immediately available funds if deposited on such Business Day) sufficient
to pay the aggregate Purchase Price or Fundamental Change Purchase Price, as
the case may be, of all the Securities or portions thereof which are to be
purchased as of the Purchase Date or Fundamental Change Purchase Date, as the
case may be.

         Section 3.11 Securities Purchased in Part. Any Security which is to be
purchased only in part shall be surrendered at the office of the Paying Agent
(with, if the Company or the Trustee so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security, without service
charge, a new Security or Securities, of any authorized denomination as
requested by such Holder in aggregate principal amount equal to, and in
exchange for, the portion of the principal amount of the Security so
surrendered which is not purchased.

         Section 3.12 Covenant To Comply with Securities Laws upon Purchase of
Securities. When complying with the provisions of Section 3.7 or 3.8 hereof
(provided that such offer or purchase constitutes an "issuer tender offer" for
purposes of Rule 13e-4 (which term, as used herein, includes any successor
provision thereto) under the Exchange Act at the time of such offer or
purchase), the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 (or any
successor provision) under the Exchange Act, (ii) file any required Schedule TO
(or any successor schedule, form or report) under the Exchange Act, and (iii)
otherwise comply with all Federal and state securities laws so as to permit the
rights and obligations under Sections 3.7 and 3.8 to be exercised in the time
and in the manner specified in Sections 3.7 and 3.8. In the event of any
conflict between the time limitations specified in this Section 3 and the
applicable U.S. Securities laws, the time limitations in the U.S. Securities
laws shall govern.

                                       30

         Section 3.13 Repayment to the Company. The Trustee and the Paying Agent
shall return to the Company any cash that remains unclaimed as provided in
Paragraph 13 of the Securities, together with interest, if any, thereon
(subject to the provisions of Section 7.1(f)), held by them for the payment of
the Purchase Price or Fundamental Change Purchase Price, as the case may be;
provided, however, that to the extent that the aggregate amount of cash
deposited by the Company pursuant to Section 3.10 exceeds the aggregate
Purchase Price or Fundamental Change Purchase Price, as the case may be, of the
Securities or portions thereof which the Company is obligated to purchase as of
the Purchase Date or Fundamental Change Purchase Date, as the case may be,
then, unless otherwise agreed in writing with the Company, promptly after the
Business Day following the Purchase Date or Fundamental Change Purchase Date,
as the case may be, the Trustee shall return any such excess to the Company
together with interest, if any, thereon (subject to the provisions of Section
7.1(f)).

         Section 3.14 Cash Payment Upon Principal Value Conversion. The Company
shall have the right to pay, in whole or in part, the conversion value in cash
as and to the extent permitted by Section 8(c) of the Securities in accordance
with the procedures specified therein.

                                   ARTICLE IV.

                                    COVENANTS

         Section 4.1 Payment of Securities. The Company shall promptly make all
payments in respect of the Securities on the dates and in the manner provided
in the Securities or pursuant to this Indenture. Any amounts of cash to be
given to the Trustee or Paying Agent, shall be deposited with the Trustee or
Paying Agent by 11:00 a.m. New York City time by the Company. Principal amount,
Redemption Price, Purchase Price, Fundamental Change Purchase Price and
interest, if any, shall be considered paid on the applicable date due if on
such date the Trustee or the Paying Agent holds, in accordance with this
Indenture, cash sufficient to pay all such amounts then due.

         Section 4.2 SEC and Other Reports. The Company shall file with the
Trustee, within 15 days after it files such annual and quarterly reports,
information, documents and other reports with the SEC, copies of its annual
report and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. In the event the Company is at any
time no longer subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act, it shall continue to provide the Trustee with reports
containing substantially the same information as would have been required to be
filed with the SEC had the Company continued to have been subject to such
reporting requirements. In such event, such reports shall be provided at the
times the Company would have been required to provide reports had it continued
to have been subject to such reporting requirements. The Company also shall
comply with the other provisions of TIA Section 314(a). Delivery of such
reports, information and documents to the Trustee is for informational purposes
only and the Trustee's receipt of such shall not constitute constructive notice
of any information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely conclusively on Officers'
Certificates).

                                       31

         Section 4.3 Compliance Certificate. (a) The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company
(beginning with the fiscal year ending on December 31, 2003) an Officers'
Certificate of which at least one of the Officers executing such certificate is
either the Chief Executive Officer or Chief Financial Officer, stating whether
or not to the best knowledge of the signers thereof, the Company is in default
in the performance and observance of any of the terms, provisions and
conditions of this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and if the Company shall be in
default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.

         Section 4.4 Further Instruments and Acts. The Company will execute and
deliver such further instruments and do such further acts as may be reasonably
necessary or proper to carry out more effectively the purposes of this
Indenture.

         Section 4.5 Maintenance of Office or Agency. The Company will maintain
in the Borough of Manhattan, the City of New York, an office or agency of the
Trustee, Registrar, Paying Agent and Conversion Agent where Securities may be
presented or surrendered for payment, where Securities may be surrendered for
registration of transfer, exchange, purchase, redemption or conversion and
where notices and demands to or upon the Company in respect of the Securities
and this Indenture may be served. The office of State Street Bank and Trust
Company, N.A., 61 Broadway, New York, New York 10006 (Attention: Corporate
Trust Department), shall initially be such office or agency for all of the
aforesaid purposes. The Company shall give prompt written notice to the Trustee
of the location, and of any change in the location, of any such office or
agency (other than a change in the location of the office of the Trustee). If
at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
address of the Trustee set forth in Section 12.2.

         The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York, for such purposes.

         Section 4.6 Taxes. The Company shall, and shall cause each of its
subsidiaries to, pay prior to delinquency all taxes, assessments and
governmental levies, except as contested in good faith and by appropriate
proceedings.

         Section 4.7 Delivery of Certain Information. At any time when the
Company is not subject to Section 13 or 15(d) of the Exchange Act or upon the
request of a Holder or any beneficial owner of Securities or holder or
beneficial owner of shares of Common Stock issued upon conversion thereof, the
Company will promptly furnish or cause to be furnished Rule 144A Information to
such Holder or any beneficial owner of Securities or holder or beneficial owner
of shares of Common Stock issued upon conversion of a Security, or to a
prospective purchaser of any such security designated by any such holder, as the
case may be, to the extent required to permit compliance by such Holder or
holder with Rule 144A under the Securities Act in connection with the resale of
any such security. "Rule 144A Information" shall be such

                                       32

information as is specified pursuant to Rule 144A(d)(4) under the Securities
Act. Whether a person is a beneficial owner shall be determined by the Company
to the Company's reasonable satisfaction.

         Section 4.8 Notice of Liquidated Damages Amount. If any Liquidated
Damages Amount is payable by the Company pursuant to the Registration Rights
Agreement, the Company shall deliver to the Trustee a certificate to that
effect stating (i) the amount of such Liquidated Damages Amount that is payable
and (ii) the date on which such Liquidated Damages Amount is payable. Unless
and until a Responsible Officer of the Trustee receives such a certificate, the
Trustee may assume without inquiry that no Liquidated Damages Amount is
payable. If the Company has paid any Liquidated Damages Amount directly to the
person(s) entitled to such amount, the Company shall deliver to the Trustee a
certificate setting forth the particulars of such payment.

                                   ARTICLE V.

                          CONSOLIDATION, MERGER OR SALE

         Section 5.1 Consolidation, Merger or Sale. The Company covenants and
agrees that it will not consolidate or merge with or into any other person, or
convey, transfer or lease its property and assets substantially as an entirety
to any other person, unless (a) the Company is the surviving person, or the
resulting, surviving or transferee person, if other than the Company, is
organized and existing under the laws of the United States, any state thereof
or the District of Columbia, or any other country, (b) the successor person
assumes all of the Company's obligations under the Securities and this
Indenture, and (c) immediately after giving effect to the transaction no
Default shall have occurred and be continuing.

         Section 5.2 Securities and Indenture To Be Assumed by Successor on
Consolidation, Merger or Sale. Subject to the provisions of Section 5.1,
nothing in this Indenture shall prevent any consolidation or merger of the
Company with or into any other person, or any conveyance, transfer or lease of
the property and assets of the Company to any other person lawfully entitled to
acquire the same; provided, however, and the Company covenants and agrees, that
any such consolidation, merger, conveyance, transfer or lease shall be upon the
condition that the due and punctual payment of the principal, premium, if any,
and interest of all the Securities according to their tenor, and the due and
punctual performance and observance of all the terms, covenants and conditions
of the Indenture to be kept or performed by the Company shall, by an indenture
supplemental hereto, executed and delivered to the Trustee, be assumed by the
person formed by or resulting from any such consolidation or merger (provided
that no such supplemental indenture shall be required if the Company is the
surviving person upon the consolidation or merger), or which shall have
received the transfer of all or substantially all of the property and assets of
the Company, just as fully and effectually as if such successor person had been
the original party of the first part hereto. Every such successor person upon
executing an indenture supplemental hereto, as provided in this Section 5.2, in
form satisfactory to the Trustee, shall succeed to and be substituted for the
Company with the same effect as if it had been named herein as party of the
first part hereto; and any order, certificate, statement, request,
instructions, advice or resolutions of the Board of Directors or officers of
the Company provided for in this Indenture may be made by like officials of
such successor person.

                                       33

         In case of any such consolidation, merger, conveyance, transfer or
lease such changes in phraseology and form (but not in substance) may be made in
the Securities thereafter to be issued as may be appropriate.

         In the event of any such conveyance or transfer (other than a transfer
by way of lease), the Company or any successor person which shall theretofore
have become such in the manner described in this Article V shall be discharged
from all obligations and covenants under this Indenture and the Securities.

         Subject to the provisions of Section 7.1, the Trustee may receive an
Opinion of Counsel as conclusive evidence that any such indenture supplemental
hereto complies with the foregoing conditions and provisions of this Section
5.2.

         This Section 5.2 shall be applicable to successive consolidations or
mergers to which the Company (including any successor) is a party and to
successive sales or transfers by the Company (including any successor).

                                  ARTICLE VI.

                              DEFAULTS AND REMEDIES

         Section 6.1 Events of Default. An "Event of Default" occurs if:

         (1)      the Company defaults in the payment of the principal amount or
premium, if any, on any Security when the same becomes due and payable upon
redemption or otherwise, whether or not the payment is prohibited by the
provisions of Article XI hereof; or

         (2)      the Company defaults in the payment of any accrued and unpaid
interest or Liquidated Damages Amounts, if any, when due and payable, and
continuance of such default for a period of 30 days, whether or not the payment
is prohibited by the provisions of Article XI hereof; or

         (3)      the Company fails to comply in any material respect with any
of its agreements or covenants in the Securities or this Indenture (other than
those referred to in clause (1) or (2) above) and such failure continues for 60
days after receipt by the Company of a Notice of Default; or

         (4)      the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order adjudging the Company or any Significant Subsidiary as bankrupt
or insolvent, or approving as properly filed a petition by one or more persons
other than the Company or any Significant Subsidiary seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Significant Subsidiary under any applicable federal or state law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official for the Company or any Significant Subsidiary or for all or
substantially all of their respective property, or ordering the winding up or
liquidation of their respective affairs, and the continuance of any such decree
or order for relief or any such other decree or order unstayed and in effect for
a period of 90 consecutive days; or

                                       34

         (5)      the commencement by the Company or any Significant Subsidiary
of a case or proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree or order for relief in respect of the Company or any
Significant Subsidiary in a case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, or
the filing by it of a petition or answer or consent seeking reorganization or
relief under any applicable federal or state law, or the consent by any of them
to the filing of such petition or to the appointment of or taking possession by
a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or of all or substantially
all of their respective property, or the making by any of them of an assignment
for the benefit of creditors, or the admission by any of them in writing of
their respective inability to pay their respective debts generally as they
become due, or the taking of corporate action by the Company or any Significant
Subsidiary in furtherance of any such action.

         A Default under clause (3) above is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount of the Securities at the time outstanding notify the Company
and the Trustee, of the Default and the Company does not cure such Default (and
such Default is not waived) within the time specified in clause (3) above after
actual receipt of such notice. Any such notice must specify the Default, demand
that it be remedied and state that such notice is a "Notice of Default."

         The Company shall deliver to the Trustee, within 30 days after it
becomes aware of the occurrence thereof, written notice of any Event of Default
under clause (4) or (5) above or any Default, its status and what action the
Company is taking or proposes to take with respect thereto.

         Section 6.2 Acceleration. If an Event of Default (other than an Event
of Default specified in Section 6.1(4) or (5)) occurs and is continuing, the
Trustee by notice to the Company, or the Holders of at least 25% in aggregate
principal amount of the Securities at the time outstanding by notice to the
Company and the Trustee, may declare the principal amount, premium, if any,
plus accrued and unpaid interest and Liquidated Damages Amount, if any, on all
the outstanding Securities to be immediately due and payable.

         Upon such a declaration, such accelerated amount shall be due and
payable immediately. If an Event of Default specified in Section 6.1(4) or (5)
occurs and is continuing, the principal amount, premium, if any, plus accrued
and unpaid interest and Liquidated Damages Amount, if any, on all the Securities
shall become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Securityholders. The Holders of a majority
in aggregate principal amount of the Securities at the time outstanding, by
notice to the Trustee (and without notice to any other Securityholder) may
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default have
been cured or waived except nonpayment of the principal amount plus accrued and
unpaid interest, if any, that have become due solely as a result of acceleration
and if all amounts due to the Trustee under Section 7.7 have been paid. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.

                                       35

         Section 6.3 Other Remedies. If an Event of Default occurs and is
continuing,the Trustee may pursue any available remedy to collect the payment
of the principal amount, premium, if any, plus accrued and unpaid interest and
Liquidated Damages Amount, if any, on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.

         The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of, or acquiescence in, the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.

         Section 6.4 Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of the Securities at the time outstanding, by notice
to the Trustee (and without notice to any other Securityholder), may waive an
existing Default and its consequences except (a) an Event of Default described
in Section 6.1(1) or (2), or (b) a Default in respect of a provision that under
Section 9.2 cannot be amended without the consent of each Securityholder
affected. When a Default is waived, it is deemed cured, but no such waiver shall
extend to any subsequent or other Default or impair any consequent right. This
Section 6.4 shall be in lieu of Section 316(a)(1)(B) of the TIA and such Section
316(a)(1)(B) is hereby expressly excluded from this Indenture, as permitted by
the TIA.

         Section 6.5 Control by Majority. The Holders of a majority in aggregate
principal amount of the Securities at the time outstanding may direct the
time,method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee.
However,the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or that the Trustee determines in good faith is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee
in personal liability unless the Trustee is offered indemnity satisfactory to
it. This Section 6.5 shall be in lieu of Section 316(a)(1)(A) of the TIA and
such Section 316(a)(1)(A) is hereby expressly excluded from this Indenture, as
permitted by the TIA.

         Section 6.6 Limitation on Suits. A Securityholder may not pursue any
remedy with respect to this Indenture, except in the case of a default in the
payment of principal amount, premium, if any, plus accrued and unpaid interest
and Liquidated Damages Amount, if any, or the Securities unless:

         (1)      the Holder gives to the Trustee written notice stating that
an Event of Default is continuing;

         (2)      the Holders of at least 25% in aggregate principal amount
of the Securities at the time outstanding make a written request to the Trustee
to pursue the remedy and offer to the Trustee security or indemnity reasonably
satisfactory to the Trustee against any loss, liability or expense;

         (3)      the Trustee does not receive an inconsistent direction from
the holders of a majority in principal amount of the debentures; and

                                       36

         (4)      the Trustee does not comply with the request within 60 days
after receipt of such notice, request and offer of security or indemnity.

         A Securityholder may not use this Indenture to prejudice the rights of
any other Securityholder or to obtain a preference or priority over any other
Securityholder.

         Section 6.7 Rights of Holders To Receive Payment.Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
the principal amount of the Securities, premium, if any, plus accrued and unpaid
interest and the Liquidated Damages Amount, if any, in respect of the Securities
held by such Holder, on or after the respective due dates expressed in the
Securities or any Redemption Date, and to convert the Securities in accordance
with Article X, or to bring suit for the enforcement of any such payment on or
after such respective dates or the right to convert, shall not be impaired or
affected adversely without the consent of such Holder.

         Section 6.8 Collection Suit by Trustee. If an Event of Default
described in Section 6.1(1) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
for the whole amount owing with respect to the Securities and the amounts
provided for in Section 7.7.

         Section 6.9 Trustee May File Proofs of Claim. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Securities or
the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal amount of the Securities plus
accrued and unpaid interest in respect of the Securities shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Trustee shall have made any demand on the Company for the payment of
any such amount) shall be entitled and empowered, by intervention in such
proceeding or otherwise,

         (a)      to file and prove a claim for the whole amount of the
principal amount of the Securities plus accrued and unpaid interest and to file
such other papers or documents as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel or
any other amounts due the Trustee under Section 7.7) and of the Holders allowed
in such judicial proceeding, and

         (b)      to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or similar official in any
such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay the Trustee any amount
due to it for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.7.

         Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement,

                                       37

adjustment or composition affecting the Securities or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.

         Section 6.10 Priorities. If the Trustee collects any money pursuant to
this Article 6, it shall pay out the money in the following order:

                 FIRST: to the Trustee for amounts due under Section 7.7;

                 SECOND: to Securityholders for amounts due and unpaid on the
         Securities for the principal amount of the Securities, premium, if any,
         plus accrued and unpaid interest and Liquidated Damages Amount, if any,
         ratably, without preference or priority of any kind, according to such
         amounts due and payable on the Securities; and

                  THIRD: the balance, if any, to the Company.

         The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 6.10. At least 15 days before such
record date, the Trustee shall mail to each Securityholder and the Company a
notice that states the record date, the payment date and the amount to be paid.

         Section 6.11 Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant (other than the Trustee) in the suit of
an undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in the suit, having due regard to the
merits and good faith of the claims or defenses made by the party litigant. This
Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7 or a suit by Holders of more than 10% in aggregate
principal amount of the Securities at the time outstanding. This Section 6.11
shall be in lieu of Section 315(e) of the TIA and such Section 315(e) is hereby
expressly excluded from this Indenture, as permitted by the TIA.

         Section 6.12 Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury or other law
wherever enacted, now or at any time hereafter in force, which would prohibit or
forgive the Company from paying all or any portion of the principal amount of
the Securities plus accrued and unpaid interest or any interest on such amounts,
as contemplated herein, or which may affect the covenants or the performance of
this Indenture; and the Company (to the extent that it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any power herein
granted to the Trustee, but will suffer and permit the execution of every such
power as though no such law had been enacted.

                                       38

                                  ARTICLE VII.

                                     TRUSTEE

         Section 7.1 Duties of Trustee.

         (a)      If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.

         (b)      Except during the continuance of an Event of Default:

                  (1)      the Trustee need perform only those duties that are
                           specifically set forth in this Indenture and no
                           others; and

                  (2)      in the absence of bad faith on its part, the Trustee
                           may conclusively rely, as to the truth of the
                           statements and the correctness of the opinions
                           expressed therein, upon certificates or opinions
                           furnished to the Trustee and conforming to the
                           requirements of this Indenture, but in case of any
                           such certificates or opinions which by any provision
                           hereof are specifically required to be furnished to
                           the Trustee, the Trustee shall examine the
                           certificates and opinions to determine whether or not
                           they conform to the requirements of this Indenture,
                           but need not confirm or investigate the accuracy of
                           mathematical calculations or other facts stated
                           therein. This Section 7.1(b) shall be in lieu of
                           Section 315(a) of the TIA and such Section 315(a) is
                           hereby expressly excluded from this Indenture, as
                           permitted by the TIA.

         (c)      The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:

                  (1)      this paragraph (c) does not limit the effect of
                           paragraph (b) of this Section 7.1;

                  (2)      the Trustee shall not be liable for any error of
                           judgment made in good faith by a Responsible Officer
                           unless it is proved that the Trustee was negligent in
                           ascertaining the pertinent facts; and

                  (3)      the Trustee shall not be liable with respect to any
                           action it takes or omits to take in good faith in
                           accordance with a direction received by it pursuant
                           to Section 6.5.

Subparagraphs (c)(1), (2) and (3) shall be in lieu of Sections 315(d)(1),
315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and
315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the
TIA.

         (d)      Every provision of this Indenture that in any way relates
                  to the Trustee is subject to paragraphs (a), (b), (c)
                  and (e) of this Section 7.1.

                                       39

         (e)      The Trustee may refuse to perform any duty or exercise any
right or power or extend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity reasonably satisfactory to it against
any loss, liability or expense.

         (f)      Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
(acting in any capacity hereunder) shall be under no liability for
interest on any money received by it hereunder unless otherwise agreed in
writing with the Company.

         Section 7.2 Rights of Trustee. Subject to its duties and
responsibilities under the TIA,

         (a)      the Trustee may conclusively rely and shall be protected
in acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;

         (b)      whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee unless other evidence be
herein specifically prescribed) may, in the absence of bad faith on its part,
conclusively rely upon an Officers' Certificate;

         (c)      the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;

         (d)      the Trustee shall not be liable for any action taken,
suffered, or omitted to be taken by it in good faith which it believes to be
authorized or within its rights or powers conferred under this Indenture;

         (e)      the Trustee may consult with counsel selected by it and any
advice or Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it hereunder
in good faith and in accordance with such advice or Opinion of Counsel;

         (f)      the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders, pursuant to the provisions of this Indenture,
unless such Holders shall have offered to the Trustee security or indemnity
reasonably satisfactory to it against the costs, expenses and liabilities which
may be incurred therein or thereby;

         (g)      any request or direction of the Company mentioned here in
shall be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a board
resolution;

         (h)      the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request,

                                       40

direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts
or matters as it may see fit, and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney
at the sole cost of the Company and shall incur no liability or additional
liability of any kind by reason of such inquiry or investigation;

         (i)      the Trustee shall not be deemed to have notice of any Default
or Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the Trustee,
and such notice references the Securities and this Indenture;

         (j)      the rights, privileges, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other person
employed to act hereunder; and

         (k)      the Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign
an Officers' Certificate, including any person specified as so authorized
in any such certificate previously delivered and not superseded.

         Section 7.3 Individual Rights of Trustee. The Trustee in its individual
or any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee. Any Paying Agent, Registrar, Conversion Agent or
co-registrar may do the same with like rights. However, the Trustee must comply
with Sections 7.10 and 7.11.

         Section 7.4 Trustee's Disclaimer. The Trustee makes no representation
as to the validity or adequacy of this Indenture or the Securities, it shall not
be accountable for the Company's use or application of the proceeds from the
Securities, it shall not be responsible for any statement in the registration
statement for the Securities under the Securities Act or in any offering
document for the Securities, the Indenture or the Securities (other than its
certificate of authentication), or the determination as to which beneficial
owners are entitled to receive any notices hereunder.

         Section 7.5 Notice of Defaults. If a Default occurs and if it is known
to the Trustee, the Trustee shall give to each Securityholder notice of the
Default within 90 days after the occurrence of such Default, or if later, within
30 days after it is known to the Trustee, unless such Default shall have been
cured or waived before the giving of such notice. Notwithstanding the preceding
sentence, except in the case of a Default described in Section 6.1(1) or (2),
the Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of Securityholders. The second sentence of this Section 7.5 shall
be in lieu of the proviso to Section 315(b) of the TIA and such proviso is
hereby expressly excluded from this Indenture, as permitted by the TIA.

                                       41

The trustee shall not be deemed to have knowledge of a Default unless a
Responsible Officer of the Trustee has received written notice of such Default.

         Section 7.6 Reports by Trustee to Holders. Within 60 days after each
May 15 beginning with May 15, 2003, the Trustee shall mail to each
Securityholder a brief report dated as of such reporting date that complies with
TIA Section 313(a), if required by such Section 313(a). The Trustee also shall
comply with TIA Section 313(b).

         A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each securities exchange, if any, on which the
Securities are listed. The Company agrees to notify the Trustee promptly
whenever the Securities become listed on any securities exchange and of any
delisting thereof.

         Section 7.7 Compensation and Indemnity. The Company agrees:

         (a)      to pay to the Trustee from time to time such compensation as
the Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited
(to the extent permitted by law) by any provision of law in regard to the
compensation of a trustee of an express trust);

         (b)      to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the reasonable
compensation, expenses, advances and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be caused by its
negligence, bad faith, willful misconduct or recklessness; and

         (c)      to indemnify the Trustee or any predecessor Trustee and their
agents for, and to hold them harmless against, any loss, damage, claim,
liability, cost or expense (including reasonable attorney's fees and expenses,
and taxes (other than taxes based upon, measured by or determined by the income
of the Trustee)) incurred without negligence, bad faith, willful misconduct or
recklessness on its part, arising out of or in connection with the acceptance or
administration of this trust, including the costs and expenses of defending
itself against any claim (whether asserted by the Company or any Holder or any
other person) or liability in connection with the exercise or performance of any
of its powers or duties hereunder.

         The Trustee shall notify the Company promptly of any claim for which it
may seek indemnity; provided that failure to so notify the Company shall not
relieve the Company of its obligations hereunder unless the Company is
materially prejudiced thereby. The Company may elect to defend any such claim
and the Trustee shall cooperate in such defense, in which case, after notice of
such election to defend such claim, the Company shall not be liable to the
Trustee for any legal or other expenses subsequently incurred by the Trustee in
connection with the defense of such claim, unless the Trustee reasonably
determines that representation of the Trustee and the Company by the same
counsel would present a conflict of interest. The Company need not pay for any
settlement made without its consent, which consent shall not be unreasonably
withheld. To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the

                                         42

Trustee, except that held in trust to pay the principal
amount, plus accrued and unpaid interest on particular Securities.

         The Company's payment obligations pursuant to this Section 7.7 shall
survive the discharge of this Indenture and the resignation or removal of the
Trustee. When the Trustee incurs expenses after the occurrence of a Default
specified in Section 6.1(4) or (5), the expenses including the reasonable
charges and expenses of its counsel, are intended to constitute expenses of
administration under any bankruptcy law.

         Section 7.8 Replacement of Trustee. The Trustee may resign by so
notifying the Company; provided, however, no such resignation shall be effective
until a successor Trustee has accepted its appointment pursuant to this Section
7.8. The Holders of a majority in aggregate principal amount of the Securities
at the time outstanding may remove the Trustee by so notifying the Trustee and
the Company. The Company shall remove the Trustee if:

                  (1)      the Trustee fails to comply with Section 7.10;

                  (2)      the Trustee is adjudged bankrupt or insolvent;

                  (3)      a receiver or public officer takes charge of the
         Trustee or its property; or

                  (4)      the Trustee otherwise becomes incapable of acting.

         If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint, by
resolution of its Board of Directors, a successor Trustee.

         A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company satisfactory in form and
substance to the retiring Trustee and the Company. Thereupon the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Securityholders. The retiring Trustee shall promptly transfer all property held
by it as Trustee to the successor Trustee, subject to the lien provided for in
Section 7.7.

         If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in aggregate principal amount of the Securities at the
time outstanding may petition any court of competent jurisdiction at the expense
of the Company for the appointment of a successor Trustee.

         If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.

         Section 7.9 Successor Trustee by Merger. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another

                                          43

corporation, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.

         Section 7.10 Eligibility; Disqualification. The Trustee shall at all
times satisfy the requirements of TIA Sections 310(a)(1) and 310(b). No obligor
on the Securities or person directly or indirectly controlling, controlled by or
under common control with such obligor shall serve as Trustee. The Trustee (or
its parent holding company) shall have a combined capital and surplus of at
least $50,000,000 as set forth in its most recent published annual report of
condition. Nothing herein contained shall prevent the Trustee from filing with
the Commission the application referred to in the penultimate paragraph of TIA
Section 310(b).

         Section 7.11 Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.

                                  ARTICLE VIII.
                    SATISFACTION AND DISCHARGE OF INDENTURE;
                   DEPOSITED MONEYS AND GOVERNMENT OBLIGATIONS

         Section 8.1 Satisfaction and Discharge of Indenture. This Indenture
shall cease to be of further effect with respect to the Securities, and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture, when:

         (a)      all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen and which
have been replaced or paid as provided in Section 2.7 and (ii) Securities for
whose payment money has theretofore been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust, as provided in Section 2.4) have been delivered to the Trustee
for cancellation;

         (b)      the Company has paid or caused to be paid all other sums
payable hereunder by the Company with respect to such Securities; and

         (c)      the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that the conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with.

         In addition, the Company may terminate all of its obligations under
this Indenture (except the Company's obligations under Sections 7.7 and 8.3)
if:

                  (1)      the Securities mature within one year or all of
         them are to be called for redemption within one year under
         arrangements satisfactory to the Trustee for giving the notice of
         redemption; and

                  (2)      the Company irrevocably deposits in trust with the
         Trustee money or U.S. Government Obligations or a combination thereof
         sufficient to pay principal and interest

                                       44

         on the Securities to maturity or redemption, as the case may be,
         and to pay all other sums payable by it hereunder. The Company may make
         the deposit only during the one-year period and only if Article 11
         permits it.

Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 7.7 shall survive such
satisfaction and discharge.

         After a deposit made pursuant to this Section 8.1, the Trustee upon
request shall acknowledge in writing the discharge of the Company's obligations
under this Indenture except for those surviving obligations specified above.

         "U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank or trust company as custodian
with respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such U.S. Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt.

         Section 8.2 Application of Trust Moneys. Subject to the provisions of
Section 2.4, all money or U.S. Government Obligations deposited with the Trustee
pursuant to Sections 8.1 shall be held in trust and applied by it, in accordance
with the provisions of the Securities, this Indenture and, in the case of
Section 8.1, such irrevocable trust agreement, to the payment, either directly
or through any Paying Agent (including the Company acting as its own Paying
Agent) as the Trustee may determine, to the persons entitled thereto, of the
principal, premium, if any, and interest for whose payment such money has been
deposited with the Trustee. The money or U.S. Government Obligations so held in
trust under Section 8.1 shall not be part of the trust estate under this
Indenture but shall constitute a separate trust fund for the benefit of all
Holders of Securities entitled thereto.

         Section 8.3 Repayment to Company. Upon termination of the trust
established pursuant to Section 8.1, the Trustee and the Paying Agent shall
promptly pay to the Company upon request any excess money held by them. The
Trustee and the Paying Agent shall pay to the Company upon request and, if
applicable, in accordance with the irrevocable trust established pursuant to
Section 8.1 any money or U.S. Government Obligations held by them for the
payment of principal of, premium, if any, or interest on any Securities that
remains unclaimed for two years; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper of general
circulation in the Borough of Manhattan, the City and State of New York, or mail
to the Holder of any such Security, or both, notice that such money remains
unclaimed and that, after a date specified therein, which date shall not be less
than thirty days from the date

                                       45

of such publication or mailing, any unclaimed balance of such money then
remaining will be repaid to the Company. After payment to the Company,
Securityholders entitled to such payment of principal, premium, if any, and
interest must look to the Company for payment as general creditors unless an
applicable abandoned property law designates another person.

         Section 8.4 Reinstatement. If the Trustee or any Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with Section 8.4
by reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, or by reason of U.S. Government Obligations not paying
principal and interest in such amounts and at such times as are sufficient to
pay the principal of, premium, if any, and interest on the Securities in
accordance with the terms of this Indenture, the Company's obligations under
this Indenture with respect to such Securities shall be revived and reinstated
as though no deposit had occurred pursuant to Section 8.1 until such time as the
Trustee or any Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with Section 8.4; provided, however,
that if the Company has made any payment of interest on, or principal of, such
Securities because of the reinstatement of its obligations hereunder, the
Company shall be subrogated to the rights of the Holders of Securities to
receive such payment from the money or U.S. Government Obligations held by the
Trustee or such Paying Agent for such purpose.

                                   ARTICLE IX.

                                   AMENDMENTS

         Section 9.1 Without Consent of Holders. The Company and the Trustee may
amend or supplement this Indenture or the Securities without the consent of any
Securityholder:

         (a)      to cure any ambiguity, omission, defect or inconsistency
provided that such modification or amendment does not adversely affect the
interests of the holders of the Securities in any material respect;

         (b)      to modify the restrictions on, and procedures for, resale and
other transfers of Securities pursuant to any change in applicable law or
regulation (or the interpretation thereof) or in practice relating to the resale
or transfer of "restricted securities" under the Securities Act generally;

         (c)      to comply with Article V or Section 10.16;

         (d)      to secure the Company's obligations or add any guarantee
under the Securities and this Indenture;

         (e)      to add Events of Default with respect to the Securities;

         (f)      to add to the Company's covenants for the benefit of the
Securityholders or to surrender any right or power conferred upon
the Company;

         (g)      to make any change necessary for the registration of the
Securities under the Securities Act or to comply with the TIA, or any amendment
thereto, or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA;

                                       46

         (h)      to provide for uncertificated Securities in addition to or
in place of certificated Securities or to provide for bearer
Securities;

         (i)      to increase the Conversion Price in accordance with Section
10.14;

         (j)      to evidence and provide for the acceptance of appointment
 hereunder by a successor Trustee pursuant to Section 7.8; or

         (k)      to add or modify other provisions herein with respect to
matters or questions arising hereunder that the Company and the Trustee may deem
necessary or desirable and that will not materially adversely affect the
interests of the Holders.

         Section 9.2 With Consent of Holders. With the written consent
(including consent obtained in connection with a tender offer or exchange offer
for the Securities) of the Holders of at least a majority in aggregate principal
amount of the Securities at the time outstanding, the Company and the Trustee
may amend or supplement this Indenture or the Securities. However, without the
consent of each Securityholder affected, an amendment or supplement to this
Indenture or the Securities may not:

         (1)      extend the Stated Maturity date of any of the Security;

         (2)      reduce the interest rate or extend the time for payment of
 interest thereon;

         (3)      reduce the principal amount of or premium of any Security;

         (4)      reduce the Redemption Price, Purchase Price or Fundamental
 Change Purchase Price of any Security;

         (5)      adversely change the Company's obligation to redeem any
 Security upon a Fundamental Change;

         (6)      make any change that impairs the right of a Securityholder
to institute suit for the enforcement of any payment on any Security;

         (7)      change the currency in which any Security is payable other
 than as stated in the Security;

         (8)      make any change that impairs the right of a Securityholder
to convert any Security in accordance with the terms thereof and this Indenture;

         (9)      make any change that modifies, in any manner that is
materially adverse to the Holders, the provisions of Article XI
hereof;

         (10)     reduce the quorum or voting requirements set forth in this
Indenture;

         (11)     change any obligation of the Company to maintain an office or
agency in the places and for the purposes specified in this Indenture;

                                       47

         (12)     subject to specified exceptions, modify certain of the
provisions set forth in Sections 9.1 and 9.2 hereof relating to
modification or waiver of provisions set forth in this Indenture; or

         (13)     reduce the percentage of Securities required for consent
 to any modification of this Indenture.

         It shall not be necessary for the consent of the Holders under this
Section 9.2 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.

         After an amendment under this Section 9.2 becomes effective, the
Company shall mail to each Holder a notice briefly describing the amendment.

         Section 9.3 Compliance with Trust Indenture Act. Every amendment or
supplemental indenture executed pursuant to this Article shall comply with the
TIA.

         Section 9.4 Revocation and Effect of Consents, Waivers and Actions.
Until an amendment, waiver or other action by Holders becomes effective, a
consent thereto by a Holder of a Security hereunder is a continuing consent by
the Holder and every subsequent Holder of that Security or portion of the
Security that evidences the same obligation as the consenting Holder's Security,
even if notation of the consent, waiver or action is not made on the Security.
However, any such Holder or subsequent Holder may revoke the consent, waiver or
action as to such Holder's Security or portion of the Security if the Trustee
receives the notice of revocation before the date the amendment, waiver or
action becomes effective. After an amendment, waiver or action becomes
effective, it shall bind every Securityholder.

         Section 9.5 Notation on or Exchange of Securities. Securities
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article IX may, and shall if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Company shall so determine, new Securities so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
outstanding Securities.

         Section 9.6 Trustee To Sign Supplemental Indentures. The Trustee shall
sign any supplemental indenture authorized pursuant to this Article IX if the
amendment contained therein does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign such supplemental indenture. In signing such supplemental indenture
the Trustee shall receive, and (subject to the provisions of Section 7.1) shall
be fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that such amendment is authorized or permitted by this
Indenture.

         Section 9.7 Effect of Supplemental Indentures. Upon the execution of
any supplemental indenture under this Article, this Indenture shall be modified
in accordance therewith, and such supplemental indenture shall form a part of
this Indenture for all purposes; and every Holder of Securities theretofore or
thereafter authenticated and delivered hereunder shall be bound thereby.

                                       48

                                   ARTICLE X.

                                   CONVERSIONS

         Section 10.1 Conversion Privilege. Subject to and upon compliance with
the provisions of this Indenture, a Holder of a Security may convert such
Security into shares of Common Stock at any time during the period stated in
Paragraph 8 of the Securities. Neither the Conversion Agent nor the Company
shall have any obligation to determine the Trading Price for purposes of
determining whether the Securities are convertible pursuant to Paragraph 8(c) of
the Securities, unless a Holder sends to the Company a written notice requesting
such determination and provides reasonable evidence that the conditions to a
conversion under Paragraph 8(c) of the Securities have been met. Upon receipt of
such notice, together with such reasonable evidence, the Company shall instruct
the Conversion Agent to determine the Trading Price beginning with the first
trading day after receipt of such notice and ending on the first trading day
when the condition to conversion under Paragraph 8(c) is no longer met.

         The rate at which Common Stock shall be delivered upon conversion
(herein called the "Conversion Rate") shall be initially 23.8095 shares of
Common Stock for each U.S. $1,000 principal amount of Securities. The Conversion
Rate shall be adjusted in certain instances as provided in this Article X. The
price at which Common Stock shall be delivered upon conversion (herein called
the "Conversion Price") shall at any time be equal to U.S. $1,000 divided by the
then applicable Conversion Rate (and rounded to the nearest cent).

         A Holder may convert a portion of the principal amount of a Security if
the portion converted is in a $1,000 principal amount or an integral multiple of
$1,000. Provisions of this Indenture that apply to conversion of all of a
Security also apply to conversion of a portion of a Security.

         "Average Sale Price" means the average of the Sales Prices of the
shares of Common Stock for the shorter of:

                  (i)      30 consecutive trading days ending on the last full
         trading day prior to the Time of Determination with respect to the
         rights, warrants or options or distribution in respect of which the
         Average Sale Price is being calculated;

                  (ii)     the period (x) commencing on the date next succeeding
         the first public announcement of (a) the issuance of rights, warrants
         or options or (b) the distribution, in each case, in respect of which
         the Average Sale Price is being calculated and (y) proceeding through
         the last full trading day prior to the Time of Determination with
         respect to the rights, warrants or options or distribution in respect
         of which the Average Sale Price is being calculated (excluding days
         within such period, if any, which are not trading days); or

                  (iii)    the period, if any, (x) commencing on the date next
         succeeding the Ex-Dividend Time with respect to the next preceding (a)
         issuance of rights, warrants or options or (b) distribution, in each
         case, for which an adjustment is required by the provisions of Section
         10.7, 10.8 or 10.9 and (y) proceeding through the last full trading day
         prior to the Time of Determination with respect to the rights, warrants
         or options or

                                       49

         distribution in respect of which the Average Sale Price is being
         calculated (excluding days within such period, if any, which are not
         trading days).

         In the event that the Ex-Dividend Time (or in the case of a
subdivision, combination or reclassification, the effective date with respect
thereto) with respect to a dividend, subdivision, combination or
reclassification to which Section 10.6(1), (2),(3) or (4) applies occurs during
the period applicable for calculating "Average Sale Price" pursuant to the
definition in the preceding sentence, "Average Sale Price" shall be calculated
for such period in a manner determined by the Board of Directors to reflect the
impact of such dividend, subdivision, combination or reclassification on the
Sale Price of the shares of Common Stock during such period.

         "Time of Determination" means the time and date of the earlier of (i)
the determination of stockholders entitled to receive rights, warrants or
options or a distribution, in each case, to which Section 10.7, 10.8 or 10.9
applies and (ii) the time ("Ex-Dividend Time") immediately prior to the
commencement of "ex-dividend" trading for such rights, warrants or options or
distribution on Nasdaq or such other U.S. national or regional exchange or
market on which the shares of Common Stock are then listed or quoted.

         For purposes of this Article X, "fair market value" means the fair
market value, as determined in good faith by the Board of Directors (except as
Section 10.8 otherwise provides in the case of a Spin-off) and set forth in a
certified resolution filed with the Trustee.

         Section 10.2 Conversion Procedure. To convert a Security, a Holder must
satisfy the requirements in Paragraph 8 of the Securities. The first Business
Day on which the Holder satisfies all those requirements and submits such
Holder's Securities for conversion is the conversion date (the "Conversion
Date").

         As soon as practicable after the Conversion Date, the Company shall
deliver to the Holder, through the Conversion Agent, a certificate for, or a
beneficial interest in a global certificate representing, the number of full
shares of Common Stock issuable upon the conversion or exchange and cash in lieu
of any fractional share determined pursuant to Section 10.3. The person in whose
name the certificate is registered shall be treated as a shareholder of record
as of the close of business on the Conversion Date. Upon conversion by a Holder
of a Security in its entirety, such person shall no longer be a Holder of such
Security.

         No payment or adjustment will be made for dividends on, or other
distributions with respect to, any shares of Common Stock except as provided in
this Article X. On conversion of a Security, except as provided below with
respect to interest payable on Securities or portions thereof converted after a
Regular Record Date, that portion of accrued and unpaid interest on the
converted Securities attributable to the period from the most recent Interest
Payment Date through the Conversion Date shall not be cancelled, extinguished or
forfeited, but rather shall be deemed to be paid in full to the Holder thereof
through delivery of the shares of Common Stock (together with the cash payment,
if any, in lieu of fractional shares) for the Security being converted pursuant
to the provisions hereof. The Company will not adjust the Conversion Rate to
account for accrued interest, if any. If the Holder converts more than one
Security at the same time, the number of shares of Common Stock issuable upon
the conversion shall be based on the total principal amount of the Securities
converted.

                                       50

         The Securities or portions thereof surrendered for conversion during
the period from the close of business on any Regular Record Date to the opening
of business on the date on which such interest is payable shall be accompanied
by payment to the Company or its order, in New York Clearing House funds or
other funds acceptable to the Company, of an amount equal to the interest
payable on such interest payment date on the principal amount of the Securities
or portions thereof being surrendered for conversion; provided that interest
shall not be payable upon the interest payment date if (i) the Security has been
called for redemption on a Redemption Date that occurs during this period or
(ii) the Security is to be redeemed in connection with a Fundamental Change on a
Redemption Date that occurs during this period.

         If the last day on which a Security may be converted is a Legal
Holiday, the Security may be surrendered on the next succeeding day that is not
a Legal Holiday.

         Upon surrender of a Security that is converted in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder, a
new Security in an authorized denomination equal in principal amount to the
unconverted portion of the Security surrendered.

         Section 10.3 Fractional Shares. The Company will not issue fractional
shares of Common Stock upon conversion of a Security. Instead, the Company will
pay cash based on the current market value for all fractional shares. The
current market value of a fractional share shall be determined, to the nearest
1/1,000th of a share, by multiplying the Sale Price on the last trading day
immediately prior to the Conversion Date, of a full share by the fractional
amount and rounding the product to the nearest whole cent. It is understood that
if a Holder elects to have more than one Security converted, the number of
shares of Common Stock shall be based on the aggregate principal amount of
Securities to be converted.

         Section 10.4 Taxes on Conversion. If a Holder submits a Security for
conversion, the Company shall pay all documentary, transfer or stamp taxes or
duties and all other taxes or duties, if any, which may be imposed by the United
States or any political subdivision thereof or taxing authority thereof or
therein with respect to the issuance of shares of Common Stock upon the
conversion. However, the Holder shall pay any such tax which is due because the
Holder requests the shares to be issued in a name other than the Holder's name.
The Conversion Agent may refuse to deliver the certificates representing the
shares of Common Stock being issued in a name other than the Holder's name until
the Conversion Agent receives a sum sufficient to pay any tax which will be due
because the shares are to be issued in a name other than the Holder's name.

         Nothing herein shall preclude any tax withholding required by law or
regulations.

         Section 10.5 Company To Provide Stock. The Company shall, prior to
issuance of any Securities under this Article X, and from time to time as may be
necessary, reserve out of its authorized but unissued shares of Common Stock a
sufficient number of shares of Common Stock to permit the conversion of the
Securities in full.

         All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares or treasury shares, shall be duly and validly
issued and fully paid and nonassessable, and shall be free from preemptive
rights and free of any lien or adverse claim.

                                       51

The Company will endeavor promptly to comply with all federal and state
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Securities, if any, and will list or cause to have quoted such
shares of Common Stock on each national securities exchange on which the shares
of Common Stock are then listed or quoted.

         Section 10.6 Adjustment for Change in Capital Stock. If the Company:

         (1)      pays a dividend or makes another distribution to all holders
of its Common Stock payable exclusively in shares of its Common Stock;

         (2)      subdivides the outstanding shares of its Common Stock into
 a greater number of shares of Common Stock;

         (3)      combines the outstanding shares of its Common Stock into a
smaller number of shares of Common Stock; or

         (4)      issues by reclassification of its Common Stock any shares of
Capital Stock (other than Capital Stock adjustments requiring an adjustment
pursuant to Sections 10.7 and 10.8);

then the conversion privilege and the Conversion Rate in effect immediately
prior to such action shall be adjusted so that the Holder of a Security
thereafter converted may receive the number of shares of Capital Stock of the
Company which such Holder would have owned immediately following such action if
such Holder had converted the Security immediately prior to the record date for
such action.

         The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.

         If after an adjustment a Holder of a Security upon conversion of such
Security may receive shares of two or more classes of Capital Stock of the
Company, the Conversion Rate shall thereafter be subject to adjustment upon the
occurrence of an action taken with respect to any such class of Capital Stock as
is contemplated by this Article X with respect to the shares of Common Stock, on
terms comparable to those applicable to shares of Common Stock in this Article
X.

         Section 10.7 Adjustment for Rights Issue. If the Company distributes
any rights or warrants to all or substantially all holders of shares of its
Common Stock entitling them (for a period within 45 days after such
distribution) to purchase shares of Common Stock at a price per share less than
the Average Sale Price as of the Time of Determination (except that no
adjustment will be made if the Holders of Securities may participate in the
distribution without conversion on a basis and with the notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of shares of Common Stock participate in the distribution), the
Conversion Rate shall be adjusted in accordance with the formula:

                                           (O + N)
                             R' = R x  ---------------
                                       (O + (N x P)/M)

                                          52

         where:

         R'   =   the adjusted Conversion Rate.

         R    =   the current Conversion Rate.

         O    =   the number of shares of Common Stock outstanding on
                  the record date for the distribution to which this
                  Section 10.7 is being applied.

         N    =   the number of additional shares of Common Stock offered
                  pursuant to the distribution.

         P    =   the offering price per share of the additional shares.

         M    =   the Average Sale Price, minus, in the case of (i) a
                  distribution to which Section 10.6(4) applies or (ii) a
                  distribution to which Section 10.8 or 10.9 applies, for which,
                  in each case, (x) the record date shall occur on or before
                  the record date for the distribution to which this
                  Section 10.7 applies and (y) the Ex-Dividend Time shall occur
                  on or after the date of the Time of Determination for the
                  distribution to which this Section 10.7 applies, the fair
                  market value (on the record date for the distribution to which
                  this Section 10.7 applies) of the:

                           (1)      Capital Stock of the Company
                  distributed in respect of each share of Common Stock in such
                  Section 10.6(4) distribution; and

                           (2)      the Company's debt, securities or assets or
                  certain rights, warrants or options to purchase securities of
                  the Company distributed in respect of each share of Common
                  Stock in such Section 10.8 or 10.9 distribution.

         The adjustment shall become effective immediately after the record date
for the determination of shareholders entitled to receive the rights, warrants
or options to which this Section 10.7 applies. To the extent the shares of
Common Stock subject to such rights, warrants or options have not been issued
when such rights, warrants or options expire, then the Conversion Rate shall
promptly be readjusted to the Conversion Rate which would then be in effect had
the adjustment upon the issuance of such rights, warrants or options been made
on the basis of the actual number of shares of Common Stock issued upon the
exercise of such rights, warrants or options.

         No adjustment shall be made under this Section 10.7 if the application
of the formula stated above in this Section 10.7 would result in a value of R'
that is equal to or less than the value of R.

         Section 10.8 Adjustment for Certain Distributions. If the Company
distributes to all holders of its shares of Common Stock any of its debt,
securities or assets or any rights, warrants or options to purchase securities
of the Company (including securities or cash, but excluding (x) distributions of
Capital Stock referred to in Section 10.6, distributions of rights, warrants or

                                       53

options referred to in Section 10.7 and distributions exclusively in cash
pursuant to Section 10.9, (y) payments made to redeem rights issued under any
present or future rights agreement or plan of the Company (except that no
adjustment will be made if the Holders of Securities may participate in the
distribution without conversion on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of the Common Stock participate in the distribution), the
Conversion Rate shall be adjusted, subject to the provisions of the last
paragraph of this Section 10.8, in accordance with the formula:

                                   R x M
                           R' =  ---------
                                  (M - F)

         where:

         R'  =   the adjusted Conversion Rate.

         R   =   the current Conversion Rate.

         M   =   the Average Sale Price, minus, in the case of (i) a
                 distribution to which Section 10.6(4) applies or (ii) a
                 distribution to which Section 10.7 or 10.9 applies, for which,
                 in each case, (x) the record date shall occur on or before the
                 record date for the distribution to which this Section 10.8
                 applies and (y) the Ex-Dividend Time shall occur on or after
                 the date of the Time of Determination for the distribution to
                 which this Section 10.8 applies, the fair market value (on the
                 record date for the distribution to which this Section 10.8
                 applies) of the:

                           (1)      Capital Stock of the Company distributed in
                  respect of each share of Common Stock in such Section
                  10.6(4) distribution; and

                           (2)      the Company's debt, securities or assets or
                  certain rights, warrants or options to purchase securities of
                  the Company distributed in respect of each share of Common
                  Stock in such Section 10.7 or 10.9 distribution.

         F   =   the fair market value (on the record date for the
                 distribution to which this Section 10.8 applies) of the
                 assets, securities, rights, warrants or options to be
                 distributed in respect of each share of Common Stock in the
                 distribution to which this Section 10.8 is being applied
                 (including, in the case of cash dividends or other cash
                 distributions giving rise to an adjustment, all such cash
                 distributed concurrently).

         In the event the Company distributes shares of Capital Stock of a
Subsidiary, the Conversion Rate will be adjusted, if at all, based on the fair
market value of the Subsidiary stock so distributed relative to the market value
of the Common Stock, as discussed below. The Board of Directors of the Company
shall determine fair market values for the purposes of this Section 10.8, except
that in respect of a dividend or other distribution of shares of publicly traded
Capital Stock of any class or series, or similar equity interests, of or
relating to a Subsidiary or other business unit of the Company (a "Spin-off"),
the fair market value of the securities to be

                                       54

distributed shall equal the average of the daily Sales Prices of those
securities for the five consecutive trading days commencing on and including the
sixth day of trading of those securities after the effectiveness of the Spin-off
and the average of the Sales Prices shall mean the average Sales Prices for the
Common Stock for the same five trading days. In the event, however, that an
underwritten initial public offering of the securities in the Spin-off occurs
simultaneously with the Spin-off, fair market value of the securities
distributed in the Spin-off shall mean the initial public offering price of such
securities and the Average Sale Price shall mean the Sales Price for the Common
Stock on the same trading day.

         The adjustment shall become effective immediately after the record date
for the determination of shareholders entitled to receive the distribution to
which this Section 10.8 applies, except that an adjustment related to a Spin-off
shall become effective at the earlier to occur of (i) 10 trading days after the
effective date of the Spin-off and (ii) the initial public offering of the
securities distributed in the Spin-off.

         In the event that, with respect to any distribution to which this
Section 10.8 would otherwise apply, the difference "M-F" as defined in the above
formula is less than $1.00 or "F" is equal to or greater than "M," then the
adjustment provided by this Section 10.8 shall not be made and in lieu thereof
the provisions of Section 10.16 shall apply to such distribution.

         Section 10.9 Adjustment for All-Cash Distribution. If the Company shall
pay or make a dividend or other distribution consisting exclusively of cash to
all holders of its Common Stock (excluding any cash that is distributed (x)
upon a merger or consolidation to which Section 10.16 applies or (y) as part of
a distribution referred to in Section 10.8), in an aggregate amount (A) by
which a quarterly cash dividend declared by the Board and paid during any
fiscal quarter on a per share basis exceeds the greater of (i) the amount so
distributed during the fiscal quarter immediately preceding such fiscal quarter
and (ii) 2.5% of the average of the Sale Prices of the Common Stock during the
10 trading days immediately prior to the declaration of the dividend or other
distribution or (B) of any special cash dividend or other all-cash distribution
that is not a quarterly dividend covered by clause (A) above the Conversion
Rate shall be adjusted, subject to the last paragraph of this Section 10.9, in
accordance with the following formula:

                                   R x M
                           R' =  ---------
                                  (M - C)

         where:

         R'  =   the adjusted Conversion Rate.

         R   =   the current Conversion Rate.

         M   =   the Average Sale Price, minus, in the case of (i) a
                 distribution to which Section 10.6(4) applies or (ii) a
                 distribution to which Section 10.7 or 10.8 applies, for which,
                 in each case, (x) the record date shall occur on or before the
                 record date for the distribution to which this Section 10.9
                 applies and (y) the Ex-Dividend Time shall occur on or after
                 the date of the Time of Determination for the

                                       55

                  distribution to which this Section 10.9 applies, the fair
                  market value (on the record date for the distribution to
                  which this Section 10.9 applies) of the:

                           (1)      Capital Stock of the Company distributed
                  in respect of each share of Common Stock in such Section
                  10.6(4) distribution; and

                           (2)      the Company's debt, securities or assets or
                  certain rights, warrants or options to purchase securities of
                  the Company distributed in respect of each share of Common
                  Stock in such Section 10.7 or 10.8 distribution.

         C   =    (1) the amount by which a quarterly cash dividend exceeds
                  the threshold specified in clause (A), or (2) the amount of
                  any distribution per share as contemplated by clause (B), as
                  applicable.

         The adjustment shall become effective immediately prior to the opening
of business on the day following the date fixed for payment of such
distribution.

         In the event that, with respect to any distribution to which this
Section 10.9 would otherwise apply, the difference "M-C" as defined in the above
formula is less than $1.00 or "C" is equal to or greater than "M," then the
adjustment provided by this Section 10.9 shall not be made and in lieu thereof
the provisions of Section 10.16 shall apply to such distribution. Any adjustment
pursuant to this Section made as a result of a distribution described in Section
10.9 above shall be made only to the extent that the amount distributed exceeds
the amount so distributed during the fiscal quarter immediately preceding the
date of issuance of the Securities.

         Section 10.10 Adjustment for Tender Offers. If (a) the Company or any
Subsidiary of the Company acquires shares of the Company's Common Stock by way
of a tender or exchange offer, other than an odd-lot offer by the Company or any
of its Subsidiaries, for the Common Stock (excluding stock options) to the
extent that the offer involves consideration per share of Common Stock that,
exceeds the Sale Price of a share of Common Stock on the trading day next
succeeding the Expiration Time; or (b) a person other than the Company or any
Subsidiary, in respect of a tender or exchange offer that increases the
offeror's beneficial ownership (as used in Section 13(d) of the Exchange Act) of
Common Stock to more than twenty-five percent (25%) of the total shares of
Common Stock outstanding, makes a payment of consideration per share of Common
Stock that exceeds the Sale Price of a share of Common Stock on the trading day
next succeeding the Expiration Time, and as of the Expiration Time, the Board of
Directors is not recommending rejection of the offer, in each case the
Conversion Rate shall be adjusted in accordance with the formula:

                                      F + (N x M)
                           R' = R x  -------------
                                        (O x M)
         where:

         R'  =   the adjusted Conversion Rate.

         R   =   the current Conversion Rate.

                                       56

         O   =    the number of shares of Common Stock outstanding (including
                  any tendered or exchanged shares) at the last time tenders of
                  exchanges may be made pursuant to such tender or exchange
                  offer (the "Expiration Time").

         M   =    the Sale Price per share of Common Stock on the trading day
                  on the NYSE next succeeding the Expiration Time.

         F   =    the sum of the fair market value of the aggregate
                  consideration payable to stockholders based on the acceptance
                  (up to any maximum specified in the terms of the tender or
                  exchange offer) of all shares of Common Stock validly tendered
                  or exchanged and not withdrawn as of the Expiration Time (the
                  shares deemed so accepted, up to any such maximum, being
                  referred to as the "Purchased Shares").

         N   =    the number of shares of Common Stock (less any Purchased
                  Shares) at the Expiration Time.

         The adjustment shall become effective immediately prior to the opening
of business on the day following the Expiration Time.

         If the person is obligated to purchase shares pursuant to any such
tender or exchange offer, but such person is permanently prevented by applicable
law from effecting any such purchases or all such purchases are rescinded, the
Conversion Rate shall again be adjusted to be the Conversion Rate that would
then be in effect if such tender or exchange offer had not been made.
Notwithstanding the foregoing, the adjustment described in this Section 10.10(b)
shall not be made if, as of the Expiration Time, the offering documents with
respect to such offer disclose a plan or intention to cause the Company to
engage in any transaction described in Article V.

         Section 10.11 When Adjustment May Be Deferred. No adjustment in the
Conversion Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Conversion Rate. Any adjustments that are not
made shall be carried forward and taken into account in any subsequent
adjustment.

         All calculations under this Article X shall be made to the nearest cent
or to the nearest 1/1,000th of a share, as the case may be.

         Section 10.12 When No Adjustment Required. Notwithstanding any
provision to the contrary herein, no adjustment to the Conversion Rate need be
made as a result of:

         (1)      (i) the issuance of the rights; (ii) the distribution of
separate certificates representing the rights; (iii) the exercise or
redemption of the rights in accordance with any rights agreement;
or (iv) the termination or invalidation of the rights, in each case,
pursuant to the Company's existing stockholders rights plan, as amended,
modified, or supplemented from time to
time or any newly adopted stockholders rights plans;

         (2)      upon the issuance of any shares of Common Stock pursuant to
any present or future plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under any plan;

                                       57

         (3)      upon the issuance of any shares of Common Stock or options or
rights to purchase those shares pursuant to any present or future employee,
director or consultant benefit plan or program of or assumed by the Company or
any of its Subsidiaries; or

         (4)      upon the issuance of any shares of Common Stock pursuant to
any option, warrant, right, or exercisable, exchangeable or convertible security
outstanding as of the date the Securities were first issued.

         No adjustment need be made for a change in the par value or no par
value of the Common Stock.

         To the extent the Securities become convertible pursuant to this
Article X in whole or in part into cash, no adjustment need be made thereafter
as to the cash. Interest will not accrue on the cash.

         Section 10.13 Notice of Adjustment. Whenever the Conversion Rate is
adjusted, the Company shall promptly mail to Holders a notice of the adjustment.
The Company shall file with the Trustee and the Conversion Agent such notice
briefly stating the facts requiring the adjustment and the manner of computing
it. The certificate shall be conclusive evidence that the adjustment is correct.
Neither the Trustee nor any Conversion Agent shall be under any duty or
responsibility with respect to any such certificate except to exhibit the same
to any Holder desiring inspection thereof.

         Section 10.14 Voluntary Increase. The Company from time to time may
increase the Conversion Rate by any amount at any time for at least 20 days, so
long as the increase is irrevocable during such period. In addition, the Company
may increase the Conversion Rate if the Board of Directors deems it advisable to
avoid or diminish any income tax to holders of Common Stock resulting from any
stock or rights distribution. Whenever the Conversion Rate is increased, the
Company shall mail to Securityholders and file with the Trustee and the
Conversion Agent a notice of the increase. The Company shall mail the notice at
least 15 days before the date the increased Conversion Rate takes effect. The
notice shall state the increased Conversion Rate and the period it will be in
effect. A voluntary increase of the Conversion Rate does not change or adjust
the Conversion Rate otherwise in effect for purposes of Section 10.6, 10.7,
10.8, 10.9 or 10.10.

         Section 10.15 Notice of Certain Transactions. If:

         (a)      the Company takes any action that would require an adjustment
in the Conversion Rate pursuant to Section 10.6, 10.7, 10.8, 10.9 or 10.10
(unless no adjustment is to occur pursuant to Section 10.12); or

         (b)      the Company takes any action that would require a supplemental
indenture pursuant to Section 10.16; or

         (c)      there is a liquidation or dissolution of the Company;

then the Company shall mail to Holders and file with the Trustee and the
Conversion Agent a notice stating the proposed record date for a dividend,
distribution or subdivision or the proposed

                                       58

effective date of a combination, reclassification, consolidation, merger,
binding share exchange, transfer, liquidation or dissolution. The Company shall
file and mail the notice at least 15 days before such date. Failure to file or
mail the notice or any defect in it shall not affect the validity of the
transaction.

         Section 10.16 Reorganization of Company; Special Distributions. If
the Company is a party to a transaction subject to Article V (other than a sale
of all or substantially all of the properties and assets of the Company in a
transaction in which the holders of shares of Common Stock immediately prior to
such transaction do not receive securities, cash or other assets of the Company
or any other person) or a merger or binding share exchange which reclassifies or
changes its outstanding shares of Common Stock, the person obligated to deliver
securities, cash or other assets upon conversion of Securities shall enter into
a supplemental indenture. If the issuer of securities deliverable upon
conversion of Securities is an Affiliate of the successor Company, that issuer
shall join in the supplemental indenture.

         The supplemental indenture shall provide that the Holder of a Security
may convert it into the kind and amount of securities, cash or other assets
which such Holder would have received immediately after the consolidation,
merger, or transfer if such Holder had converted the Security immediately before
the effective date of the transaction, assuming (to the extent applicable) that
such Holder (i) was not a constituent person or an Affiliate of a constituent
person to such transaction; (ii) made no election with respect thereto; and
(iii) was treated alike with the plurality of non-electing Holders. The
supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as may be practical to the adjustments provided for in this Article
X. The successor Company shall mail to Securityholders a notice briefly
describing the supplemental indenture.

         If this Section 10.16 applies, neither Section 10.6 nor 10.7 applies.

         If the Company makes a distribution to all holders of its shares of
Common Stock of any of its debt, securities or assets or any rights, warrants or
options to purchase securities of the Company or any cash that, but for the
provisions of the last paragraph of Section 10.8 or 10.9, would otherwise result
in an adjustment in the Conversion Rate pursuant to the provisions of Section
10.8 or 10.9, then, from and after the record date for determining the holders
of shares of Common Stock entitled to receive the distribution, a Holder of a
Security that converts such Security in accordance with the provisions of this
Indenture shall upon such conversion be entitled to receive, in addition to the
shares of shares of Common Stock into which the Security is convertible, the
kind and amount of securities, cash or other assets comprising the distribution
that such Holder would have received if such Holder had converted the Security
immediately prior to the record date for determining the holders of shares of
Common Stock entitled to receive the distribution.

         Section 10.17 Company Determination Final. Any determination that the
Company or the Board of Directors must make pursuant to Section 10.3, 10.6,
10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.16 or 10.19 is conclusive, absent
manifest error.

         Section 10.18 Trustee's Adjustment Disclaimer. The Trustee has no duty
to determine when an adjustment under this Article X should be made, how it
should be made or what it

                                       59

should be. The Trustee has no duty to determine whether a supplemental indenture
under Section 10.16 need be entered into or whether any provisions of any
supplemental indenture are correct. The Trustee shall not be accountable for and
makes no representation as to the validity or value of any securities or assets
issued upon conversion of Securities. The Trustee shall not be responsible for
the Company's failure to comply with this Article X. Each Conversion Agent shall
have the same protection under this Section 10.18 as the Trustee.

         Section 10.19 Simultaneous Adjustments. In the event that this
Article X requires adjustments to the Conversion Rate under more than one of
Sections 10.6(4), 10.7, 10.8 or 10.9, and the record dates for the distributions
giving rise to such adjustments shall occur on the same date, then such
adjustments shall be made by applying, first, the provisions of Section 10.6,
second, the provisions of Section 10.8, third, the provisions of Section 10.7
and, fourth, the provisions of Section 10.9.

         Section 10.20 Successive Adjustments. After an adjustment to the
Conversion Rate under this Article X, any subsequent event requiring an
adjustment under this Article X shall cause an adjustment to the Conversion Rate
as so adjusted.

         Section 10.21 Restriction on Common Stock Issuable upon Conversion.

         (a)      Shares of Common Stock to be issued upon conversion of the
Securities prior to the effectiveness of a Shelf Registration Statement shall be
physically delivered in certificated form or in the form of beneficial interests
in book-entry Common Stock registered in the name of the Depositary or a nominee
thereof to the holders converting such Securities, and the certificate or
certificates representing such shares of Common Stock shall bear the Restricted
Common Stock Legend unless removed in accordance with Section 10.21(c).

         (b)      If (i) shares of Common Stock to be issued upon conversion of
a Security prior to the effectiveness of a Shelf Registration Statement are to
be registered in a name other than that of the holder of such Security or (ii)
shares of Common Stock represented by a certificate bearing the Restricted
Common Stock Legend are transferred subsequently by such holder, then, unless
the Shelf Registration Statement has become effective and such shares are being
transferred pursuant to the Shelf Registration Statement, the holder must
deliver to the transfer agent for the Common Stock a certificate in
substantially the form of Exhibit D as to compliance with the restrictions on
transfer applicable to such shares of Common Stock, and neither the transfer
agent nor the registrar for the Common Stock shall be required to register any
transfer of such Common Stock not so accompanied by a properly completed
certificate.

         (c)      Except for transfers in connection with a Shelf Registration
Statement, if certificates representing shares of Common Stock are issued upon
the registration of transfer, exchange or replacement of any other certificate
representing shares of Common Stock bearing the Restricted Common Stock Legend,
or if a request is made to remove such Restricted Common Stock Legend from
certificates representing shares of Common Stock, the certificates so issued
shall bear the Restricted Common Stock Legend, or the Restricted Common Stock
Legend shall not be removed, as the case may be, unless there is delivered to
the Company such satisfactory evidence, which may include an opinion of counsel
as may be reasonably required by the Company, that neither the legend nor the
restrictions on transfer set forth therein are

                                       60

required to ensure that transfers thereof comply with the provisions of Rule
144A, Rule 144 or Regulation S under the Securities Act or that such shares of
Common Stock are securities that are not "restricted" within the meaning of Rule
144 under the Securities Act. Upon provision to the Company of such reasonably
satisfactory evidence, the Company shall cause the transfer agent for the Common
Stock to countersign and deliver certificates representing shares of Common
Stock that do not bear the legend.

                                   ARTICLE XI.

                                  SUBORDINATION

         Section 11.1 Securities Subordinate to Senior Debt. The Company
covenants and agrees, and each Holder of a Security by his acceptance thereof
likewise covenants and agrees, that to the extent and in the manner hereinafter
set forth in this Article (subject to the provisions of Article VIII) the
indebtedness represented by the Securities and the payment of the principal
amount, premium, if any, plus accrued and unpaid interest and Liquidated Damages
Amount, if any, on, and any payment of the Purchase Price, the Fundamental
Change Purchase Price or the Redemption Price with respect to, each and all of
the Securities are hereby expressly made subordinate and subject in right of
payment to the prior payment in full of all Senior Debt in cash or other payment
satisfactory to holders of Senior Debt, whether outstanding at the date of this
Indenture or thereafter incurred.

         Section 11.2 No Payments in Certain Circumstances; Payment Over of
Proceeds Upon Dissolution, Etc. No payment on account of the principal amount,
premium, if any, or accrued and unpaid interest and Liquidated Damages Amount,
if any, on, or redemption or repurchase of, the Securities shall be made (other
than payments made from any trust created pursuant to Section 8.1 hereof) if, at
the time of such payment: (a) a default in the payment of principal, premium, if
any, or interest or other amounts due on or in connection with any Designated
Senior Debt, including any default under any redemption or repurchase
obligation, occurs and is continuing (or, in the case of Designated Senior Debt
for which there is a period of grace, in the event of such a default that
continues beyond the period of grace, if any, specified in the instrument or
lease evidencing such Senior Debt), unless and until such default shall have
been cured or waived or shall have ceased to exist (a "payment default"); or (b)
a default, other than a payment default, on Designated Senior Debt occurs and is
continuing that then permits holders of such Designated Senior Debt to
accelerate its maturity, or in the case of a lease, a default occurs and is
continuing that permits the lessor to either terminate the lease or require the
Company to make an irrevocable offer to terminate the lease following an event
of default under the lease, and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company, a holder of Designated Senior Debt
or any other person permitted to give such notice hereunder. Notwithstanding the
foregoing, the Company may make, and the Trustee may receive and shall apply,
any payment in respect of the Securities (for principal amount, premium, if any,
or accrued and unpaid interest and Liquidated Damages Amount, if any, or
repurchase) if such payment was made prior to the occurrence of any of the
contingencies specified in clauses (a) and (b) above.

         If the Trustee receives any Payment Blockage Notice pursuant to clause
(b) above, no subsequent Payment Blockage Notice shall be effective for purposes
of this Section 11.2 unless and until at least 365 days shall have elapsed since
the initial effectiveness of the immediately

                                       61

prior Payment Blockage Notice. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
(unless such default was waived, cured or otherwise ceased to exist and
thereafter subsequently reoccurred) shall be, or be made, the basis for a
subsequent Payment Blockage Notice.

         The Company may and shall resume payments on and distributions in
respect of the Securities (including missed payments, if any) upon the earlier
of: (A) the date upon which the default is cured or waived or ceases to exist,
or (B) in the case of a default referred to in clause (b) of the second
preceding paragraph, the earlier of the date on which such nonpayment default is
cured or waived or ceases to exist or 179 days after such Payment Blockage
Notice is received, if the maturity of such Designated Senior Debt has not been
accelerated, or in the case of any lease, 179 days after notice is received if
the Company has not received notice that the lessor under such lease has
exercised its rights to terminate the lease or require the Company to make an
irrevocable offer to terminate the lease following an event of default under
such lease.

         Upon (i) any acceleration of the principal amount due on the Securities
or (ii) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to creditors upon any
dissolution, winding up or total or partial liquidation or reorganization of the
Company, whether voluntary or involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all principal amount, premium, if any,
sinking fund and interest or other amounts due, or to become due, upon or in
connection with all Senior Debt shall first be paid in full in cash or other
payment satisfactory to the holders of such Senior Debt, or payment thereof
provided for in cash or other form of acceptable payment in accordance with its
terms, before any payment is made on account of the principal amount, premium,
if any, or accrued and unpaid interest and Liquidated Damages Amount, if any,
on, or repurchase of, the indebtedness evidenced by the Securities, and upon any
such dissolution or winding up or liquidation or reorganization any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the Holders of the Securities or the Trustee
under this Indenture would be entitled, except for the provisions hereof, shall
be paid by the Company or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, or by the
Holders of the Securities or by the Trustee under this Indenture if received by
them or it, as the case may be, directly to the holders of Senior Debt (pro rata
to each such holder on the basis of the respective amounts of Senior Debt held
by such holder) or their representatives, to the extent necessary to pay all
Senior Debt in full, in cash, or other payment satisfactory to the holders of
such Senior Debt, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Debt, before any payment or distribution is made
to the Holders of the Securities or to the Trustee under this Indenture.

         In the event that, contrary to the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities (other than junior securities, as defined in Section
11.11), shall be received by the Trustee or the Holders of the Securities before
all Senior Debt is paid in full in cash or other payment satisfactory to the
holders of Senior Debt or provision made for such payment in accordance with its
terms, such payment or distribution shall be paid over or delivered to the
holders of such Senior Debt or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any instruments
evidencing any of such Senior Debt have been issued, as their respective
interests may appear, for application to the payment of all Senior Debt
remaining unpaid to the

                                       62

extent necessary to pay all such Senior Debt in full in cash or other payment
satisfactory to the holders of such Senior Debt, in accordance with its terms,
after giving effect to any concurrent payment or distribution to or for the
holders of such Senior Debt.

         Subject to the payment in full in cash of all Senior Debt in cash or
other payment satisfactory to holders of such Senior Debt, the Holders of the
Securities (together with the holders of any other indebtedness of the Company
that is subordinated in right of payment to the payment in full of all Senior
Debt that is not subordinated in right of payment to the Securities and that by
its terms grants such right of subrogation to the holders thereof) shall be
subrogated to the rights of the holders of Senior Debt to receive payments or
distribution of assets of the Company made on the Senior Debt until the
principal of, premium, if any, and interest on, or amounts payable upon
repurchase of, the Securities shall be paid in full; and, for the purposes of
such subrogation, no payments or distributions to the holders of Senior Debt of
any cash, property or securities to which the Holders of the Securities or the
Trustee would be entitled except for the provisions of this Article, and no
payment over pursuant to the provisions of this Article to the holders of Senior
Debt by the Holders of the Securities or the Trustee, shall, as between the
Company, its creditors other than the holders of Senior Debt, and the Holders of
Securities, be deemed to be a payment by the Company to the holders of or on
account of Senior Debt, it being understood that the provisions of this Article
are and are intended solely for the purpose of defining the relative rights of
the Holders of the Securities, on the one hand, and the holders of Senior Debt,
on the other hand.

         Section 11.3 Trustee to Effectuate Subordination. Each Holder of a
Security by his acceptance thereof authorizes and directs the Trustee on his
behalf to take such action as may be necessary or appropriate to effectuate the
subordination provided in this Article and appoints the Trustee his
attorney-in-fact for any and all such purposes.

         Section 11.4 No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Debt to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder of any Senior Debt or by any non-compliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.

         Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Debt may, at any time and from time to time, without the
consent of or notice to the Trustee or the Holders of the Securities, without
incurring responsibility to the Holders of the Securities and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Securities to the holders of Senior Debt, do any
one or more of the following: (a) change the manner, place or terms of payment
or extend the time of payment of, or renew or alter, Senior Debt or otherwise
amend or supplement in any manner Senior Debt or any instrument evidencing the
same or any agreement under which Senior Debt is outstanding; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Debt; (c) release any person liable in any manner for
the collection of Senior Debt; and (d) exercise or refrain from exercising any
rights against the Company and any other person.

                                       63

         Section 11.5 Notice to Trustee. The Company shall give prompt written
notice to the Trustee of any fact known to the Company that would prohibit the
making of any payment to or by the Trustee in respect of the Securities.
Notwithstanding the provisions of this Article or any other provision of this
Indenture, the Trustee shall not be charged with knowledge of the existence of
any facts that would prohibit the making of any payment to or by the Trustee in
respect of the Securities, unless and until a Responsible Officer of the Trustee
shall have received written notice thereof from the Company or a holder of
Senior Debt or from any trustee, agent or representative therefor; and, prior to
the receipt of any such written notice, the Trustee, subject to the provisions
of Section 5.1, shall be entitled in all respects to assume that no such facts
exist; provided, however, that if the Trustee shall not have received the notice
provided for in this Section 11.5 prior to the date upon which by the terms
hereof any money may become payable for any purpose (including without
limitation the payment of the principal of (and premium, if any) or interest on
any Security), then, anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such money and to
apply the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary that may be received by it within two
Business Days prior to such date.

         Subject to the provisions of Section 7.1, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a person representing
himself to be a holder of Senior Debt (or a trustee, agent or representative
therefor) to establish that such notice has been given by a holder of Senior
Debt (or a trustee, agent or representative therefor). In the event that the
Trustee determines in good faith that further evidence is required with respect
to the right of any person as a holder of Senior Debt to participate in any
payment or distribution pursuant to this Article XI, the Trustee may request
such person to furnish evidence to the reasonable satisfaction of the Trustee as
to the amount of Senior Debt held by such person, the extent to which such
person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such person under this Article XI, and if such
evidence is not furnished, the Trustee may defer any payment to such person
pending judicial determination as to the right of such person to receive such
payment.

         Section 11.6 Reliance on Judicial Order of Certificate of Liquidating
Agent. Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Section 7.1, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other person making such payment or distribution,
delivered to the Trustee or to the Holders of Securities, for the purpose of
ascertaining the persons entitled to participate in such payment or
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.

         Section 11.7 Trustee Not Fiduciary for Holders of Senior Debt. The
Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior
Debt and shall not be liable to any such holders if it shall in good faith
mistakenly pay over or distribute to Holders of Securities or to the Company or
to any other person cash, property or securities to which any holders of Senior

                                       64

Debt shall be entitled by virtue of this Article or otherwise. With respect to
the holders of Senior Debt, the Trustee undertakes to perform or to observe only
such of its covenants or obligations as are specifically set forth in this
Article XI, and no implied covenants or obligations with respect to holders of
Senior Debt shall be read into this Indenture against the Trustee.

         Section 11.8 Reliance by Holders of Senior Debt on Subordination
Provisions. Each Holder by accepting a Security acknowledges and agrees that the
foregoing subordination provisions are, and are intended to be, an inducement
and a consideration to each holder of any Senior Debt, whether such Senior Debt
was created or acquired before or after the issuance of the Securities, to
acquire and continue to hold, or to continue to hold, such Senior Debt, and such
holder of Senior Debt shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or in continuing
to hold, such Senior Debt. Such holders of the Company's Senior Debt are
intended by the parties to the Indenture to be third party creditor
beneficiaries under this Indenture for the purposes of enforcing the provisions
of this Article XI.

         Section 11.9 Rights of Trustee as Holder of Senior Debt; Preservation
of Trustee's Rights. The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article XI with respect to any Senior Debt that
may at any time be held by it, to the same extent as any other holder of Senior
Debt, and nothing in this Indenture shall deprive the Trustee of any of its
rights as such holder.

                  Nothing in this Article XI shall apply to claims of, or
payments to, the Trustee under or pursuant to Section 7.7.

         Section 11.10 Article Applicable to Paying Agents. In case at any time
any Paying Agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article shall
in such case (unless the context otherwise requires) be construed as extending
to and including such Paying Agent within its meaning as fully for all intents
and purposes as if such Paying Agent were named in this Article XI in addition
to or in place of the Trustee; provided, however, that Section 11.9 shall not
apply to the Company or any Affiliate of the Company if it or such Affiliate
acts as Paying Agent.

         Section 11.11 Certain Conversions and Repurchases Deemed Payment. For
the purposes of this Article XI only, (a) the issuance and delivery of junior
securities upon conversion of Securities in accordance with Article X or upon
the repurchase of Securities in accordance with Article III shall not be deemed
to constitute a payment or distribution on account of the principal amount, or
premium or interest or Liquidated Damages Amount on the Securities or on account
of the purchase or other acquisition of Securities, and (b) the payment,
issuance or delivery of cash, property or securities (other than junior
securities) upon conversion of a Security shall be deemed to constitute payment
on account of the principal of such Security. For the purposes of this Section
11.11, the term "junior securities" means (1) shares of any stock of any class
of the Company and (2) securities of the Company that are subordinated in right
of payment to all Senior Debt that may be outstanding at the time of issuance or
delivery of such securities to substantially the same extent as, or to a greater
extent than, the Securities are so subordinated as provided in this Article XI.
Nothing contained in this Article XI or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than

                                       65

holders of Senior Debt and the Holders of the Securities, the right, which is
absolute and unconditional, of the Holder of any Security to convert such
Security in accordance with Article X or to exchange such Security for Common
Stock in accordance with Article X if the Company elects to satisfy the
obligations under Article III by the delivery of Common Stock.

                                  ARTICLE XII.

                                  MISCELLANEOUS

         Section 12.1 Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies, or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.

         Section 12.2 Notices. Any request, demand, authorization, notice,
waiver, consent or communication shall be in writing and delivered in person or
mailed by first-class mail, postage prepaid, addressed as follows or transmitted
by facsimile transmission (confirmed by guaranteed overnight courier) to the
following facsimile numbers:

         if to the Company:

         PacifiCare Health Systems, Inc.
         5995 Plaza Drive
         Cypress, California 90630
         Attn: General Counsel
         Facsimile No: (714)226-3171
         Telephone No: (714)825-5200

         with a copy to:

         Cooley Godward LLP
         4401 Eastgate Mall
         San Diego, California 92121
         Attn: Barbara Borden, Esq.
         Facsimile No: (858)550-6420
         Telephone No: (858)550-6064

         with a copy to:

         Konowiecki & Rank LLP
         350 South Grand Ave.
         Suite 2100
         Los Angeles, CA 90071
         Attn: Edna Chism, Esq.
         Facsimile No: (213)229-0992
         Telephone No: (213)229-0990

         if to the Trustee:

         State Street Bank and Trust Company of California, N.A.
         633 W. Fifth Street, 12th Floor

                                       66

         Los Angeles, California 90071
         Attention: Corporate Trust Department
                    PacifiCare Health Systems, Inc.
                    3% Convertible Subordinated Debentures due 2032
         Facsimile No: (213)362-7357
         Telephone No: (213)362-7373

         The Company or the Trustee by notice given to the other in the manner
provided above may designate additional or different addresses for subsequent
notices or communications.

         Any notice or communication given to a Securityholder shall be mailed
to the Securityholder, by first-class mail, postage prepaid, at the
Securityholder's address as it appears on the registration books of the
Registrar and shall be sufficiently given if so mailed within the time
prescribed.

         Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not received by the addressee.

         If the Company mails a notice or communication to the Securityholders,
it shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion
Agent or co-registrar.

         The Company shall, upon (i) the filing of any Shelf Registration
Statement (as defined in the Registration Rights Agreement) and (ii) the
effectiveness of any Shelf Registration Statement, announce the same, in each
case by release to Reuters Economic Services and Bloomberg Business News.

         Section 12.3 Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar, the Paying Agent, the
Conversion Agent and anyone else shall have the protection of TIA Section
312(c).

         Section 12.4 Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:

         (1)      an Officers' Certificate stating that, in the opinion of the
signer, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and

         (2)      an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.

         Section 12.5 Statements Required in Certificate or Opinion. Each
Officers' Certificate or Opinion of Counsel with respect to compliance with a
covenant or condition provided for in this Indenture shall include:

                                       67

         (1)      a statement that each person making such Officers' Certificate
or Opinion of Counsel has read such covenant or condition;

         (2)      a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such Officers' Certificate or Opinion of Counsel are based;

         (3)      a statement that, in the opinion of each such person, he has
made such examination or investigation as is necessary to enable such person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

         (4)      a statement that, in the opinion of such person, such covenant
or condition has been complied with.

         Section 12.6 Separability Clause. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

         Section 12.7 Rules by Trustee, Paying Agent, Conversion Agent and
Registrar. The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar, the Conversion Agent and the Paying Agent may
make reasonable rules for their functions.

         Section 12.8 Legal Holidays. A "Legal Holiday" is any day other than a
Business Day. If any specified date (including a date for giving notice) is a
Legal Holiday, the action shall be taken on the next succeeding day that is not
a Legal Holiday, and, if the action to be taken on such date is a payment in
respect of the Securities, no interest, if any, shall accrue for the intervening
period.

         Section 12.9 GOVERNING LAW. THE INDENTURE AND THE SECURITIES WILL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD AS TO CONFLICT OF LAWS PRINCIPLES.

         Section 12.10 No Recourse Against Others. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.

         Section 12.11 Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successor. All agreements of the
Trustee in this Indenture shall bind its successor.

         Section 12.12 Multiple Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.

                                       68

                            [Signature Page Follows]

                                       69

         IN WITNESS WHEREOF, the undersigned, being duly authorized, have
executed this Indenture on behalf of the respective parties hereto as of the
date first above written.

                                    PACIFICARE HEALTH SYSTEMS, INC.

                                    By:   /s/ Gregory W. Scott
                                       -----------------------------------
                                       Name:  Gregory W. Scott
                                       Title: Executive Vice President and
                                              Chief Financial Officer

                                    STATE STREET BANK AND TRUST
                                    COMPANY OF CALIFORNIA, N.A., as Trustee

                                    By:   /s/ Mark Henson
                                       ------------------------------------
                                       Name:  Mark Henson
                                       Title: Vice President

                                       70

                                  EXHIBIT A-1

                       {FORM OF FACE OF GLOBAL SECURITY}

         UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

         TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS TO
NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.

         THIS SECURITY AND ANY COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF UNITED STATES PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS (A) A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT), (B) AN INSTITUTIONAL "ACCEPTED INVESTOR" (AS DEFINED IN RULE 501 (A) (1),
(2), (3) OR (7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR")
OR (C) A NON-U.S. PERSON; (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED HEREBY UNDER
RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR
OTHERWISE TRANSFER THIS SECURITY OR THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS SECURITY EXCEPT (A) TO PACIFICARE, OR ANY SUBSIDIARY THEREOF, (B)
INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO
TRUSTEE, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS
ON TRANSFER OF THE SECURITIES (OR THE COMMON STOCK AS THE CASE MAY BE) (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRUSTEE OR A SUCCESSOR TRUSTEE,
AS APPLICABLE), AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL
AMOUNT OF SECURITIES OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE
EFFECTIVE AT THE TIME OF SUCH

                                     A-1-1

TRANSFER); (3) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO
CLAUSE 2(F) ABOVE), IF THE TRANSFEREE IS AN INSTITUTIONAL ACCEPTED INVESTOR OR
A NON-U.S. PERSON, IT WILL FURNISH TO TRUSTEE, AS TRUSTEE (OR A SUCCESSOR
TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS THE TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER
IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT; AND (4) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF
THIS SECURITY PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES
OF THIS SECURITY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE
HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO
[TRUSTEE], AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE). IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR IS A PURCHASER WHO IS NOT
A UNITED STATES PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO
[TRUSTEE], AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS SUCH TRUSTEE MAY
REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE
EARLIER OF THE TRANSFER OF THIS SECURITY PURSUANT TO CLAUSE 2(F) ABOVE OR UPON
ANY TRANSFER OF THIS SECURITY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR
ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S.
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES
ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO
REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING
RESTRICTION.

         The foregoing legend may be removed from this Security on satisfaction
of the conditions specified in the Indenture.

                                     A-1-2

                        PACIFICARE HEALTH SYSTEMS, INC.

                3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

No.                                                 Rule 144A CUSIP: 695112AF9
Issue Date:
Issue Price: 100% of principal amount
Interest Payment Dates: April 15 and October 15
Record Dates: April 1 and October 1

         PACIFICARE HEALTH SYSTEMS, INC., a corporation duly organized and
existing under the laws of the State of Delaware, promises to pay to Cede & Co.
or registered assigns, the principal amount set forth on Schedule I hereto
(which amount may from time to time be increased or decreased by adjustments
made on Schedule I hereto by or on behalf of the Depositary in accordance with
the Applicable Procedures) on October 15, 2032.

         This Security shall bear interest at the initial rate of 3% per annum,
subject to the adjustments set forth on the other side of this Security. This
Security is convertible as specified on the other side of this Security.

         Additional provisions of this Security are set forth on the other side
of this Security.

Dated: ________________________              PACIFICARE HEALTH SYSTEMS, INC.,
                                             a Delaware corporation

                                             By: __________________________
                                                 Name:
                                                 Title:

TRUSTEE'S CERTIFICATE OF AUTHENTICATION

STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
     as Trustee, certifies that this is one
     of the Securities referred to in the
     within-mentioned Indenture.

By: ____________________________
         Authorized Signatory

Dated: _________________________

                                     A-1-3

                      {FORM OF REVERSE OF GLOBAL SECURITY}

                3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

1.       Interest.

         This Security shall bear interest at an initial rate of 3% per year on
the principal amount hereof, from November 22, 2002 or from the most recent
Interest Payment Date (as defined below) to which payment has been paid or duly
provided for, payable semiannually in arrears on April 15 and October 15 of
each year (each, an "Interest Payment Date") to the persons in whose names the
Securities are registered at the close of business on April 1 and October 1
(each, a "Regular Record Date") (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date. Interest shall be computed
on the basis of a 360-day year comprised of twelve 30-day months.

         Interest on Securities converted during the period after a Regular
Record Date, but prior to the corresponding Interest Payment Date, (i) will not
be required to be paid on the Interest Payment Date if the Security has been
called for redemption on a redemption date that occurs during the period; (ii)
will not be required to be paid if the Security is to be redeemed in connection
with a fundamental change on a redemption date that occurs during this period;
or (iii) if the Security is not called for redemption during this period, will
be paid to the Holder of the Securities on the Regular Record Date but, upon
conversion, the Holder must pay the Company the interest which has accrued and
will be paid on such Interest Payment Date unless at the time of conversion
there is a default in the payment of interest on the Securities.

         If the principal amount of a Security, premium, if any, plus accrued
and unpaid interest, or any portion thereof, is not paid when due (whether upon
acceleration pursuant to Section 6.2 of the Indenture, upon the date set for
payment of the Redemption Price pursuant to Paragraph 5 hereof, upon the date
set for payment of the Purchase Price or the Fundamental Change Purchase Price
pursuant to Paragraph 7 hereof, or upon the Stated Maturity of this Security),
then, in each such case, the overdue amount shall, to the extent permitted by
law, bear interest at the annual rate of 1% above the applicable interest rate
on the Securities, compounded semi-annually, which interest shall accrue from
the date such overdue amount was originally due to the date of payment of such
amount, including interest thereon, has been made or duly provided for. All
such interest shall be payable on demand and shall be based on a 360-day year
comprised of twelve 30-day months.

         Except as provided below, interest and Liquidated Damages Amounts, if
any, will be paid (i) on the Global Securities to the Depositary by wire
transfer in immediately available funds, (ii) on the definitive Securities
having an aggregate principal amount of $2,000,000 or less, by check mailed to
the Holders of such Securities, and (iii) on the definitive Securities having
an aggregate principal amount of more than $2,000,000, by wire transfer in
immediately available funds at the written election of the Holders of these
Securities.

                                     A-1-4

2.       Method of Payment.

         Subject to the terms and conditions of the Indenture, the Company will
make payments in cash in respect of Redemption Prices, Purchase Prices,
Fundamental Change Purchase Prices and at Stated Maturity to Holders who
surrender Securities to the Paying Agent to collect such payments in respect of
the Securities. The Company will pay cash amounts in money of the United States
that at the time of payment is legal tender for payment of public and private
debts. However, the Company may make such cash payments by wire transfer of
immediately available funds or check payable in such money.

3.       Paying Agent, Conversion Agent and Registrar.

         Initially, State Street Bank and Trust Company of California, N.A.
(the "Trustee") will act as Paying Agent, Conversion Agent and Registrar. The
Company may appoint and change any Paying Agent, Conversion Agent or Registrar
without notice, other than notice to the Trustee; provided, however, that the
Company will maintain at least one Paying Agent in the State of New York, City
of New York, Borough of Manhattan, which shall initially be an office or agency
of the Trustee. The Company or any of its Subsidiaries or any of their
Affiliates may act as Paying Agent, Conversion Agent or Registrar.

4.       Indenture.

         The Company issued the Securities under an Indenture dated as of
November 22, 2002 (the "Indenture"), between the Company and the Trustee. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as in
effect from time to time (the "TIA"). Capitalized terms used herein and not
defined herein have the meanings ascribed thereto in the Indenture. The
Securities are subject to all such terms, and Securityholders are referred to
the Indenture and the TIA for a statement of those terms. To the extent any
provisions of this Security and the Indenture conflict, the provisions of the
Indenture shall control.

         The Securities are subordinated unsecured obligations of the Company
limited to $150,000,000 aggregate principal amount.

         The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture which has in it the text of this
Security in larger type. Requests may be made to:

                  PacifiCare Health Systems, Inc.
                  5995 Plaza Drive
                  Cypress, California 90630
                  Attn: General Counsel

5.       Redemption at the Option of the Company.

         No sinking fund is provided for the Securities. The Securities are
redeemable at the option of the Company in whole or in part, on or after
October 18, 2007 upon not less than 30 nor more than 60 days' notice by mail
for a redemption price equal to 100.0% of the principal

                                     A-1-5

amount thereof plus accrued and unpaid interest, if any, to, but excluding,
the Redemption Date (the "Redemption Price"). The redemption price shall be
paid in cash.

6.       Notice of Redemption.

         Notice of redemption pursuant to Paragraph 5 of this Security will be
mailed at least 30 days but not more than 60 days before the Redemption Date to
each Holder of Securities to be redeemed at the Holder's registered address. If
money sufficient to pay the Redemption Price of all Securities or portions
thereof to be redeemed on the Redemption Date is deposited with the Paying
Agent prior to or on the Redemption Date, interest ceases to accrue on such
Securities or portions thereof immediately after such Redemption Date.
Securities in denominations larger than $1,000 of principal amount may be
redeemed in part but only in integral multiples of $1,000 of principal amount,
if less than all of the Securities are being redeemed.

7.       Purchase by the Company at the Option of the Holder.

         (a)      Subject to the terms and conditions of the Indenture, the
Company shall become obligated to purchase, at the option of the Holder, all
or any portion of the Securities held by such Holder on any Purchase Date in
integral multiples of $1,000, if less than all of the Securities are being
purchased, at a purchase price equal to 100.0% of the principal amount thereof
plus accrued and unpaid interest, if any, to, but excluding, the Purchase Date.
To exercise such right, a Holder shall deliver to the Company a Purchase Notice
containing the information set forth in the Indenture at any time from the
opening of business on the date that is 20 Business Days prior to such Purchase
Date until the close of business on such Purchase Date, and shall deliver the
Securities to the Paying Agent as set forth in the Indenture.

         The Purchase Price shall be paid in cash.

         (b)      At the option of the Holder and subject to the terms and
conditions of the Indenture, the Company shall become obligated to offer to
purchase the Securities held by such Holder as of a date that is 30 days after
the date of notice of a Fundamental Change delivered by the Company (or, if
such 30th day is not a Business Day, the next succeeding Business Day) for a
purchase price equal to 100.0% of the principal amount thereof plus accrued and
unpaid interest, if any, to, but excluding, the Fundamental Change Purchase
Date. The Company shall mail a written notice of a Fundamental Change by first
class mail to the Trustee and the Holders no later than 10 days after the
occurrence of the Fundamental Change. Such notice shall describe the purchase
right arising as a result of such Fundamental Change. To exercise such purchase
right, a Holder shall deliver to the Company a Fundamental Change Purchase
Notice containing the information set forth in the Indenture at any time prior
to the 30th day after the date of the delivery of the Fundamental Change Notice
and shall deliver the Securities to the Paying Agent as set forth in the
Indenture.

         The Fundamental Change Purchase Price shall be paid in cash.

         (c)      Holders have the right to withdraw any Purchase Notice or
Fundamental Change Purchase Notice, as the case may be, by delivering to the
Paying Agent a written notice of withdrawal in accordance with the provisions
of the Indenture.

                                     A-1-6

         If cash sufficient to pay the Purchase Price or Fundamental Change
Purchase Price, as the case may be, of all Securities or portions thereof to be
purchased on the Purchase Date or the Fundamental Change Purchase Date, as the
case may be, is deposited with the Paying Agent on the Purchase Date or the
Fundamental Change Purchase Date, interest ceases to accrue on such Securities
or portions thereof immediately after such Purchase Date or Fundamental Change
Purchase Date, and the Holder thereof shall have no other rights as such other
than the right to receive the Purchase Price or Fundamental Change Purchase
Price upon surrender of such Security.

8.       Conversion.

         (a)      The Securities may be converted into shares of common stock
on the terms and subject to the conditions of the Indenture and this Security.

         (b)      Holders may surrender Securities or portions thereof for
conversion into shares of Common Stock during any calendar quarter if the Sale
Price of the Common Stock for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the previous
calendar quarter exceeds 110% of the applicable Conversion Price per share of
Common Stock on such last trading day.

         (c)      During the five Business Day period after any ten consecutive
trading day period in which the Trading Price per $1,000 principal amount of
the Debentures for each day of such ten day period was less than 95% of the
product of the Sale Price and the number of shares of Common Stock issuable
upon conversion of $1,000 principal amount of the Debentures; PROVIDED that if
on the date of any conversion pursuant to this clause (c) the Sale Price of the
Common Stock is greater than the Conversion Price, a holder shall receive, in
lieu of Common Stock based on the Conversion Price, cash or Common Stock or a
combination of cash and Common Stock, at the Company's option, with a value
equal to the principal amount of the holder's Debentures plus accrued interest
as of the Conversion Date. Any Common Stock delivered pursuant to the foregoing
proviso will be valued at the greater of (i) the Conversion Price on the
conversion date and (ii) the Sale Price on the third trading day after the
conversion date.

         (d)      A Holder also may surrender for conversion a Security or
portion of a Security which has been called for redemption pursuant to
Paragraph 5 hereof, even if the Security would not otherwise be eligible for
conversion, until the close of business on the Business Day immediately
preceding the Redemption Date, unless the Company defaults in making the
payment due on the Redemption Date, in which case the conversion right shall
terminate at the close of business on the date such default is cured and such
payment is made.

         (e)      If the Company (1) distributes any rights or warrants to all
holders of shares of its Common Stock entitling them (for a period expiring
within 45 days of such distribution) to purchase shares of Common Stock at less
than the average of the Sales Prices of a share of the Common Stock for the 10
consecutive trading days ending on the trading day immediately preceding the
date of such distribution or (2) distributes to all holders of shares of its
Common Stock any of its debt securities or assets or any rights, warrants or
options to purchase securities of the Company, which distribution has a per
share value exceeding 10% of the Sales Price on

                                     A-1-7

the trading day immediately preceding the declaration date for such
distribution, unless the Holder may participate in this distribution without
conversion, the Securities may be surrendered for conversion beginning on the
date the Company gives notice to the Holders of such right, which shall be not
less than 20 days prior to the Ex-Dividend Time for such dividend or
distribution, and the Securities may be surrendered for conversion at any time
thereafter until the close of business on the Business Day immediately
preceding the Ex-Dividend Time or until the Company announces that such
distribution will not take place.

         (f)      A Security in respect of which a Holder has delivered a
Purchase Notice or Fundamental Change Purchase Notice exercising the option of
such Holder to require the Company to purchase such Security may be converted
only if such notice of exercise is withdrawn in accordance with the terms of
the Indenture.

         The initial Conversion Rate is 23.8095 shares of Common Stock per
$1,000 principal amount of Securities, subject to adjustment in certain events
described in the Indenture. A Holder that surrenders Securities for conversion
will receive cash or a check, or, at the Company's option, a whole share of
Common Stock, in lieu of any fractional shares of Common Stock.

         To surrender a Security for conversion, a Holder must (1) complete and
manually sign the irrevocable conversion notice below (or complete and manually
sign a facsimile of such notice) and deliver such notice to the Conversion
Agent, (2) surrender the Security to the Conversion Agent, (3) furnish
appropriate endorsements and transfer documents and (4) pay any transfer or
similar tax, if required.

         A Holder may convert a portion of a Security if the principal amount
of such portion is $1,000 or an integral multiple of $1,000. No payment or
adjustment will be made for dividends on the shares of Common Stock except as
provided in the Indenture. Except as provided in Paragraph 1 hereof, on
conversion of a Security, the Holder will not receive any cash payment
representing accrued interest with respect to the converted Securities.
Instead, upon conversion the Company will deliver to the Holder a fixed number
of shares of Common Stock and any cash payment to account for fractional
shares. Accrued interest will be deemed paid in full rather than canceled,
extinguished or forfeited. The Company will not adjust the Conversion Rate to
account for accrued interest.

         The Conversion Rate will be adjusted as provided in Article X of the
Indenture. The Company may increase the Conversion Rate for any period of at
least 20 days, upon at least 15 days' notice so long as the increase is
irrevocable during such period. In addition, the Company may increase the
Conversion Rate if the Board of Directors deems it advisable to avoid or
diminish any income tax to holders of Common Stock resulting from any stock or
rights distribution.

         In addition, if the Company is a party to a consolidation, merger,
binding share exchange or sale of all or substantially all of the Company's
assets, in each case pursuant to which the Company's common stock would be
converted into cash, securities or other property, the Holder may surrender its
debentures for conversion at any time from and after the date which is 15 days
prior to the anticipated effective date of the transaction until and including
the date which is 15

                                     A-1-8

days after the actual date of such transaction. If the Company is a party to a
consolidation, merger, binding share exchange or sale of all or substantially
all of the Company's assets, in each case pursuant to which the Company's
common stock is converted into cash, securities, or other property, then at the
effective time of the transaction, the Holder's right to convert a debenture
into the Company's common stock will be changed into a right to convert it into
the kind and amount of cash securities and other property which the Holder
would have received if the Holder had converted the its debenture immediately
prior to the transaction.

9.       Conversion Arrangement on Call for Redemption.

         Any Securities called for redemption, unless surrendered for
conversion before the close of business on the Business Day immediately
preceding the Redemption Date, may be deemed to be purchased from the Holders
of such Securities at an amount not less than the Redemption Price, by one or
more investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders, to convert them into shares of
Common Stock and to make payment for such Securities to the Trustee in trust
for such Holders.

10.      Subordination.

         The Securities are subordinated to Senior Debt as provided in the
Indenture. To the extent provided in the Indenture, Senior Debt must be paid
before the Securities may be paid. The Company agrees, and each Securityholder
by accepting a Security agrees, to the subordination and authorizes the Trustee
to give it effect.

11.      Denominations; Transfer; Exchange.

         The Securities are in fully registered form, without coupons, in
minimum denominations of $1,000 of principal amount and integral multiples of
$1,000. A Holder may transfer or exchange the Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture. The Registrar need not transfer
or exchange any Securities selected for redemption (except, in the case of a
Security to be redeemed in part, the portion of the Security not to be
redeemed) or any Securities in respect of which a Purchase Notice or
Fundamental Change Purchase Notice has been given and not withdrawn (except, in
the case of a Security to be purchased in part, the portion of the Security not
to be purchased) or any Securities for a period of 15 days before the mailing
of a notice of redemption of Securities to be redeemed.

12.      Persons Deemed Owners.

         The registered Holder of this Security may be treated as the owner of
this Security for all purposes.

13.      Unclaimed Money or Securities.

         The Trustee and the Paying Agent shall return to the Company any money
held by them for the payment of any amount with respect to the Securities that
remains unclaimed for two years, subject to applicable unclaimed property law.
After return to the Company, Holders

                                     A-1-9

entitled to the money or securities must look to the Company for payment as
general creditors unless an applicable abandoned property law designates
another person.

14.      Amendment; Waiver.

         Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate principal amount of the Securities
at the time outstanding and (ii) certain Defaults may be waived with the
written consent of the Holders of a majority in aggregate principal amount of
the Securities at the time outstanding. Subject to certain exceptions set forth
in the Indenture, without the consent of any Holder, the Company and the
Trustee may amend the Indenture or the Securities among other things, (i) to
cure any ambiguity, omission, defect or inconsistency, provided that such
modification or amendment does not adversely affect the interests of the
Holders of the Securities in any material respect; (ii) to modify the
restrictions on, and procedures for, resale and other transfers of Securities
pursuant to any change in applicable law or regulation (or the interpretation
thereof) or in practice relating to the resale or transfer of "restricted
securities" under the Securities Act generally; (iii) to comply with Article V
or Section 10.16 of the Indenture; (iv) to secure the Company's obligations or
to add any guarantee under the Securities and the Indenture; (v) to add events
of default with respect to the Securities; (vi) to add to the covenants of the
Company for the benefit of the Holders or to surrender any right or power
conferred upon the Company; (vii) to make any change necessary for the
registration of the Securities under the Securities Act or to comply with the
TIA, or any amendment thereto, or to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the TIA, provided that
such modification or amendment does not materially and adversely affect the
interests of the Holders of the Securities; (viii) to provide for
uncertificated Securities in addition to or in place of certificated Securities
or to provide for bearer Securities; (ix) to increase the Conversion Price in
accordance with Paragraph 8 of the Securities; (x) to evidence and provide for
the acceptance of appointment hereunder by a successor Trustee pursuant to
Section 7.8 of the Indenture; or (xi) to add or modify other provisions herein
with respect to matters or questions arising hereunder that the Company and the
Trustee may deem necessary or desirable and that will not materially adversely
affect the interests of the Holders.

15.      Defaults and Remedies.

         Under the Indenture, Events of Default include (i) default in payment
of the principal amount or premium, if any, on any Security when the same
becomes due and payable upon redemption or otherwise, whether or not the
payment is prohibited by the provisions of Article XI of the Indenture; (ii)
default in the payment of any interest or Liquidated Damages Amounts, if any,
when due and payable, and the continuance of such default for a period of 30
days, whether or not the payment is prohibited by the provisions of Article XI
of the Indenture; (iii) failure by the Company to comply in any material
respect with other agreements or covenants in the Indenture or the Securities,
for sixty (60) days after notice; and (iv) certain events of bankruptcy,
insolvency and reorganization of the Company or its Subsidiaries.

         Holders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives

                                     A-1-10

reasonable indemnity or security. Subject to certain limitations, Holders of a
majority in aggregate principal amount of the Securities at the time
outstanding may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from the Holders notice of any continuing Default (except
a Default in payment of amounts specified in clause (i) or (ii) above) if it
determines that withholding notice is in their interests.

16.      Trustee Dealings with the Company.

         Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with the Company or its Affiliates
with the same rights it would have if it were not Trustee.

17.      Calculations in Respect of Securities.

         The Company or its agents will be responsible for making all
calculations called for under the Securities. These calculations include, but
are not limited to, determination of the Sales Prices for the Common Stock, the
rate of interest payable on the Securities and the Conversion Rate of the
Securities. Any calculations made in good faith and without manifest error will
be final and binding on Holders of the Securities. The Company or its agents
will be required to deliver to the Trustee a schedule of its calculations and
each of the Trustee and the Trustee will be entitled to rely upon the accuracy
of such calculations without independent verification. The Trustee will forward
the Company's calculations to any Holder of the Securities upon the request of
such Holder.

18.      Successor Persons.

         When a successor person or other entity assumes all the obligations of
its predecessor under the Securities and the Indenture, the predecessor person
will be released from those obligations.

19.      No Recourse Against Others.

         A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Holder waives and releases all such liability. The waiver and release are
part of the consideration for the issue of the Securities.

20.      Authentication.

         This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.

 21.     Abbreviations.

         Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants

                                     A-1-11

with right of survivorship and not as tenants in common), CUST (=custodian),
and U/G/M/A (=Uniform Gift to Minors Act).

22.      GOVERNING LAW.

         THE INDENTURE AND THIS SECURITY WILL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD AS TO CONFLICT
OF LAW PRINCIPLES.

23.      Registration Rights.

         The Holders of the Securities are entitled to the benefits of a
Registration Rights Agreement, dated as of November 22, 2002, by and among the
Company and the Initial Purchasers, including the receipt of Liquidated Damages
Amounts in respect of Events (each as defined in such agreement).

                                     A-1-12

                           FORM OF CONVERSION NOTICE

               {NOTICE PURSUANT TO SECTION 10.2 OF THE INDENTURE}

{Name and Address of Conversion Agent}

                     Re: PacifiCare Health Systems, Inc. 3% Convertible
                         Subordinated Debentures due October 15, 2032
                         (the "Securities")

         Reference is hereby made to the Indenture, dated as of November 22,
2002 (the "Indenture"), between PacifiCare Health Systems, Inc., as Issuer, and
State Street Bank and Trust Company of California, N.A., as Trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.

         This letter relates to the Securities specified below, which are
registered in the name of the undersigned (the "Holder"). The Holder hereby
irrevocably exercises its right to convert such Securities, or the portion
thereof, if any, specified below, into Common Stock and, except to the extent
specified or required as described below, directs that certificates
representing such Common Stock, together with any check in payment for a
fractional share and any Security representing any unconverted principal
amount, be issued and delivered through the facilities of the Depositary, for
credit to the account(s) of the person(s) indicated below.

         The Holder acknowledges and agrees that no Common Stock will be
delivered on conversion until any amount payable by the Holder on account of
interest is paid, any certificates evidencing specified Securities not held in
book-entry form are duly endorsed or assigned to the Company or in blank and
surrendered and any taxes or other charges or documents required in connection
with a transfer on conversion, and any other required items, are delivered to
the Conversion Agent.

         The Holder acknowledges and agrees that, notwithstanding this request
for conversion, the Company may require that the Common Stock delivered on
conversion of the specified Securities be delivered in certificated form
subject to a restrictive legend, or that additional certifications be delivered
on behalf of the relevant beneficial owner(s), if it determines that doing so
is necessary to comply with the requirements of the Securities Act or
otherwise, as provided in the Indenture.

         Conversion of the specified Securities is subject to the requirements
established by the Company as well as to the procedures of the Depositary, all
as in effect from time to time. The specified Securities will be deemed to have
been converted as of the close of business on the Business Day on which this
conversion notice and all other required items have been delivered to the
Conversion Agent as provided above and, upon such conversion, shall cease to
accrue interest or be outstanding (subject to the Holder's right to receive
the Common Stock as provided in the Indenture). Prior to such conversion, the
Holder will have no rights in the Common Stock.

         Please provide the information requested below, as applicable.

                                     A-1-13

1.       PLEASE SPECIFY THE SECURITIES HELD AND THE PORTION THEREOF TO BE
         CONVERTED:

         Principal amount held: U.S. $ _______________________________
         CUSIP number(s): ____________________________________________
         Depositary (DTC) account where held: ________________________

                  Principal amount being converted (if less than all):
                           U.S. $ ___________________________________

2.       UNLESS AND TO THE EXTENT OTHERWISE SPECIFIED BELOW, all Securities
         (together with any unconverted Securities) will be delivered in
         book-entry form to the DTC account specified in Item 1 above.

3.       IF OTHER ARRANGEMENTS ARE DESIRED, please (a) specify the type, number
         and form of securities to be delivered on conversion and the name(s) of
         the account holder(s) or registered owner(s), by checking the
         appropriate boxes and providing the information requested and (b)
         complete Item (4) below:

         [ ]      Common Stock

         [ ]      Book-Entry

                  Number of shares of Common Stock: __________________

                  DTC Account: _______________________________________

         [ ]      Certificates

                  Number of shares of Common Stock: __________________

                  Registered Owner: __________________________________

         [ ]      Unconverted Securities

                  [ ]      Certificates

                           Principal Amount: U.S. $ __________________

                           Registered Owner: _________________________

                  [ ]      Book-Entry

                           Principal Amount: U.S. $ __________________

                  DTC Account: _______________________________________

4.       {TO BE COMPLETED ONLY IF UNCONVERTED SECURITIES OR SHARES OF COMMON
         STOCK ARE TO BE ISSUED OTHER THAN TO THE HOLDER

                                     A-1-14

         PURSUANT TO ITEM (3) ABOVE.} The undersigned confirms that such
         unconverted Securities or shares of Common Stock are being
         transferred:

         CHECK ONE BOX BELOW

                  (a) [ ]  to the Company; or

                  (b) [ ]  pursuant to and in compliance with Rule 144A under
                           the Securities Act of 1933; or

                  (c) [ ]  pursuant to and in compliance with Regulation S
                           under the Securities Act of 1933; or

                  (d) [ ]  pursuant to an exemption from registration under the
                           Securities Act of 1933 provided by Rule 144
                           thereunder.

         Unless one of the boxes is checked, the transfer agent will refuse to
         register any of the Common Stock evidenced by this certificate in the
         name of any person other than the registered holder thereof;
         provided, however, that if box (c) or (d) is checked, the transfer
         agent may require, prior to registering any such transfer of the
         Common Stock such certifications and other information, and if box
         (d) is checked such legal opinions, as the Company has reasonably
         requested in writing, by delivery to the transfer agent of a standing
         letter of instruction, to confirm that such transfer is being made
         pursuant to an exemption from, or in a transaction not subject to,
         the registration requirements of the Securities Act of 1933.

- ----------------

*        Aggregate principal amount of each certificate must equal U.S. $1,000
         or any amount in excess thereof in integral multiples of U.S. $1,000.

         Please sign and date this notice in the space provided below.

         DATE:                           _______________________________________
                                                       Name of Holder

                                         _______________________________________
                                                     Signature(s) of Holder
                                                     Title(s):

                                    (If the Holder is a corporation,
                                    partnership or fiduciary, the title of the
                                    person signing on behalf of the Holder must
                                    be stated.)

Notice: Signature(s) must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Trustee, which requirements will include
membership or participation in the Securities Transfer Agents Medallion Program
(STAMP), the Stock Exchange Medallion Program (SEMP) and the New York Stock
Exchange Medallion Signature Program (MSP) or such other "signature guarantee
program" as may be determined by the Trustee in addition to, or

                                     A-1-15

in substitution for, STAMP, SEMP or MSP, all in accordance with the Securities
Exchange Act of 1934.

                                                     ___________________________
                                                          Signature Guarantee

                                     A-1-16

                                 ASSIGNMENT FORM

         To assign this Security, fill in the form below:

         (I) or (we) assign and transfer this Security to

________________________________________________________________________________
               (Insert assignee's social security or tax I.D. no.)
________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
              (Print or type assignee's name, address and zip code)

and irrevocably appoint ____________________________________ agent to transfer
this Security on the books of the Company. The agent may substitute another to
act for him.

         Your Signature: _______________________________________________________
                             (Sign exactly as your name appears on the other
                                         side of this Security)

         Date: __________________________

         Medallion Signature Guarantee: _________________________________

{FOR INCLUSION ONLY IF THIS SECURITY BEARS A RESTRICTED SECURITIES LEGEND} In
connection with any transfer of any of the Securities evidenced by this
certificate which are "restricted securities" (as defined in Rule 144 (or any
successor thereto) under the Securities Act), the undersigned confirms that such
Securities are being transferred:

         CHECK ONE BOX BELOW

                  (1)[ ]     to the Company; or

                  (2)[ ]     pursuant to and in compliance with Rule 144A under
                             the Securities Act of 1933; or

                  (3)[ ]     pursuant to and in compliance with Regulation S
                             under the Securities Act of 1933; or

                  (4)[ ]     pursuant to an exemption from registration under
                             the Securities Act of 1933 provided by Rule 144
                             thereunder.

                  Unless one of the boxes is checked, the Registrar will refuse
                  to register any of the Securities evidenced by this
                  certificate in the name of any person other than the
                  registered holder thereof; provided, however, that if box (3)
                  or (4) is checked, the Trustee may require, prior to
                  registering any such transfer of the Securities, such
                  certifications and other information, and if box (4) is
                  checked such legal opinions,

                                     A-1-17

                  as the Company has reasonably requested in writing, by
                  delivery to the Trustee of a standing letter of instruction,
                  to confirm that such transfer is being made pursuant to an
                  exemption from, or in a transaction not subject to, the
                  registration requirements of the Securities Act of 1933;
                  provided further, however, that this paragraph shall not be
                  applicable to any Securities which are not "restricted
                  securities" (as defined in Rule 144 (or any successor thereto)
                  under the Securities Act).

                  Your Signature: ______________________________________________
                                    (Sign exactly as your name appears on the
                                            other side of this Security)

Date:__________________________

Medallion Signature Guarantee:

                                     A-1-18

                                   SCHEDULE I

             SCHEDULE OF INCREASES AND DECREASES OF GLOBAL SECURITY

The Initial Principal Amount of Global Security is: ____________($___________).
Such Principal Amount has been increased or decreased by the adjustments set
forth below by or on behalf of the Depository in accordance with the Applicable
Procedures.



                                                                        Principal Amount of
                 Amount of Increase           Amount of Decrease          Global Security           Notation by
                 in Principal Amount        in Principal Amount of       After Increase or         Registrar or
Date             of Global Security           Global Security                 Decrease          Security Custodian
                                                                                    


                                     A-1-19

                                   EXHIBIT A-2

                     {FORM OF FACE OF CERTIFICATED SECURITY}

         THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE, BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THE DEBENTURE EVIDENCED HEREBY UNDER
RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR
OTHERWISE TRANSFER THIS DEBENTURE OR THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS DEBENTURE EXCEPT (A) TO PACIFICARE, OR ANY SUBSIDIARY THEREOF, (B)
INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), )3) OR
(7) UNDER THE SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") THAT, PRIOR
TO SUCH TRANSFER, FURNISHES TO STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A., AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE DEBENTURES (OR THE COMMON STOCK, AS THE CASE MAY
BE) (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM TRUSTEE OR A SUCCESSOR
TRUSTEE, AS APPLICABLE), AND IS SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE
PRINCIPAL AMOUNT OF DEBENTURES OF LESS THAN $100,000, AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER
THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3)
PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(F) ABOVE), IF
THE TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OF A NON-U.S. PERSON, IT
WILL FURNISH TO STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., AS
TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS THE TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR INA
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT;
AND (4) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS DEBENTURE IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND
WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OR THIS DEBENTURE PURSUANT TO
CLAUSE 2(F) ABOVE OR UPON ANY TRANSFER OF THIS DEBENTURE UNDER RULE 144(k) UNDER
THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED HEREIN, THE TERMS
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION
S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE
TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THE DEBENTURE IN VIOLATION OF THE
FOREGOING RESTRICTIONS.

                                 Exhibit A-2-1

         The foregoing legend may be removed from this Security on satisfaction
of the conditions specified in the Indenture.

                                     A-2-2

                         PACIFICARE HEALTH SYSTEMS, INC.

                 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

No.                                             Rule 144A CUSIP: _______________
Issue Date:
Issue Price: 100% of principal amount
Interest Payment Dates: April 15 and October 15
Record Dates: April 1 and October 1

         PACIFICARE HEALTH SYSTEMS, INC., a corporation duly organized and
existing under the laws of the State of Delaware, promises to pay to
____________________, or registered assigns, the principal amount of
($__________________) on October 15, 2032.

         This Security shall bear interest at the initial rate of 3% per annum,
subject to the adjustments set forth on the other side of this Security. This
Security is convertible as specified on the other side of this Security.

         Additional provisions of this Security are set forth on the other side
of this Security.

Dated: _______________________                  PACIFICARE HEALTH SYSTEMS, INC.,
                                                a Delaware corporation

                                                By: ____________________________
                                                    Name:
                                                    Title:

TRUSTEE'S CERTIFICATE OF AUTHENTICATION

STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A.,
     as Trustee, certifies that this is one
     of the Securities referred to in the
     within-mentioned Indenture.

By: _________________________________
         Authorized Signatory

Dated: ______________________________

                                     A-2-3

                    {FORM OF REVERSE OF CERTIFICATED SECURITY

                          IS IDENTICAL TO EXHIBIT A-1}

                                     A-2-4

                                    EXHIBIT B

                         PACIFICARE HEALTH SYSTEMS, INC.

                 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

                              TRANSFER CERTIFICATE

         In connection with any transfer of any of the Securities within the
period prior to the expiration of the holding period applicable to the sales
thereof under Rule 144(k) under the Securities Act of 1933, as amended (the
"Securities Act") (or any successor provision), the undersigned registered owner
of this Security hereby certifies with respect to $____________ principal amount
of the above-captioned Securities presented or surrendered on the date hereof
(the "Surrendered Securities") for registration of transfer, or for exchange or
conversion where the securities issuable upon such exchange or conversion are to
be registered in a name other than that of the undersigned registered owner
(each such transaction being a "transfer"), the undersigned confirms that such
Securities are being transferred:

         CHECK ONE BOX BELOW

                  (1)[ ]     to the Company; or

                  (2)[ ]     pursuant to and in compliance with Rule 144A under
                             the Securities Act of 1933; or

                  (3)[ ]     pursuant to and in compliance with Regulation S
                             under the Securities Act of 1933; or

                  (4)[ ]     pursuant to an exemption from registration under
                             the Securities Act of 1933 provided by Rule 144
                             thereunder.

         Unless one of the boxes is checked, the Registrar will refuse to
register any of the Securities evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however, that if box
(3) or (4) is checked, the Trustee may require, prior to registering any such
transfer of the Securities, such certifications and other information, and if
box (4) is checked such legal opinions, as the Company has reasonably requested
in writing, by delivery to the Trustee of a standing letter of instruction, to
confirm that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
of 1933; provided further, however, that this paragraph shall not be applicable
to any Securities which are not "restricted securities" (as defined in Rule 144
(or any successor thereto) under the Securities Act).

         Your Signature: ______________________________________________
                           (Sign exactly as your name appears on the
                                  other side of this Security)

         Date: __________________________

         Medallion Signature Guarantee: _________________________________

                                  Exhibit B-1

                                    EXHIBIT C

                     FORM OF RESTRICTED COMMON STOCK LEGEND

"THE SECURITY EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT UNTIL THE
EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY EVIDENCED
HEREBY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION),
(1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY
EXCEPT (A) TO PACIFICARE. OR TO ANY SUBSIDIARY THEREOF, OR (B) INSIDE THE UNITED
STATES TO A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN COMPLIANCE WITH RULE 144A, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR
(7) UNDER THE SECURITIES ACT) THAT PRIOR TO SUCH TRANSFER, FURNISHES TO
CONTINENTAL TRANSFER COMPANY, AS TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT,
AS APPLICABLE), A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE COMMON STOCK
EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRANSFER
AGENT OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), (D) OUTSIDE THE UNITED
STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE), OR (F) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE
TIME OF SUCH TRANSFER); (2) PRIOR TO SUCH TRANSFER (OTHER THAN A TRANSFER
PURSUANT TO CLAUSE 1 (F) ABOVE), IT WILL FURNISH TO CONTINENTAL TRANSFER
COMPANY, AS TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE
TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND (3) IT WILL DELIVER TO EACH PERSON TO WHOM THE COMMON STOCK EVIDENCED
HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(F) ABOVE) A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFEREE IS
AN INSTITUTIONAL ACCREDITED INVESTOR OR IS A PURCHASER WHO IS NOT A U.S. PERSON,
THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO CONTINENTAL TRANSFER COMPANY
(OR SUCCESSOR TRANSFER AGENT, AS APPLICABLE) SUCH CERTIFICATIONS, LEGAL OPINIONS
OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER
IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED
UPON THE EARLIER OF THE TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY PURSUANT
TO CLAUSE 1(F) ABOVE OR UPON ANY TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY
AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE SECURITY
EVIDENCED HEREBY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION). AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANING GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT."

                                  Exhibit C-1

         The foregoing legend may be removed from this Security on satisfaction
of the conditions specified in the Indenture.

                                  Exhibit C-2

                                    EXHIBIT D
                    FORM OF TRANSFER CERTIFICATE FOR TRANSFER
                           OF RESTRICTED COMMON STOCK

            (TRANSFERS PURSUANT TO SECTION 10.21(B) OF THE INDENTURE)

{NAME AND ADDRESS OF COMMON STOCK TRANSFER AGENT}

         Re: PacifiCare Health Systems, Inc. 3% Convertible Subordinated
Debentures due 2032 (the "Securities")

         Reference is hereby made to the Indenture dated as of November __, 2002
(the "Indenture") between PacifiCare Health Systems, Inc. and State Street Bank
and Trust Company of California, N.A., as Trustee. Capitalized terms used but
not defined herein shall have the meanings given to them in the Indenture.

         This letter relates to _________ shares of Common Stock represented by
the accompanying certificate(s) that were issued upon conversion of Securities
and which are held in the name of {name of transferor} (the "Transferor") to
effect the transfer of such Common Stock.

         In connection with the transfer of such shares of Common Stock, the
undersigned confirms that such shares of Common Stock are being transferred:

         CHECK ONE BOX BELOW

                  (1)[ ]     to the Company; or

                  (2)[ ]     pursuant to and in compliance with Rule 144A under
                             the Securities Act of 1933; or

                  (3)[ ]     pursuant to and in compliance with Regulation S
                             under the Securities Act of 1933; or

                  (4)[ ]     pursuant to an exemption from registration under
                             the Securities Act of 1933 provided by Rule 144
                             thereunder.

         Unless one of the boxes is checked, the transfer agent will refuse to
register any of the Common Stock evidenced by this certificate in the name of
any person other than the registered holder thereof; provided, however, that if
box (3) or (4) is checked, the transfer agent may require, prior to registering
any such transfer of the Common Stock such certifications and other information,
and if box (4) is checked such legal opinions, as the Company has reasonably
requested in writing, by delivery to the transfer agent of a standing letter of
instruction, to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.

                                  {Name of Transferor},

                                  By     _______________________________________
                                  Name:  _______________________________________
                                  Title: _______________________________________
Dated:

                                   EXHIBIT D-1

EX-4.5

                                                                     EXHIBIT 4.5


                        {FORM OF FACE OF GLOBAL SECURITY}

      UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

      TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS TO
NOMINEES OF THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
ARTICLE TWO OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.

                         PACIFICARE HEALTH SYSTEMS, INC.

                 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

No.                                                            CUSIP:  _________
Issue Date:
Issue Price:  100% of principal amount
Interest Payment Dates:  April 15 and October 15
Record Dates:            April 1 and October 1

      PACIFICARE HEALTH SYSTEMS, INC., a corporation duly organized and existing
under the laws of the State of Delaware, promises to pay to Cede & Co. or
registered assigns, the principal amount set forth on Schedule I hereto (which
amount may from time to time be increased or decreased by adjustments made on
Schedule I hereto by or on behalf of the Depositary in accordance with the
Applicable Procedures) on October 15, 2032.

      This Security shall bear interest at the initial rate of 3% per annum,
subject to the adjustments set forth on the other side of this Security. This
Security is convertible as specified on the other side of this Security.

      Additional provisions of this Security are set forth on the other side of
this Security.

Dated:                                PACIFICARE HEALTH SYSTEMS, INC.,
      ----------------------          a Delaware corporation

                                      By:
                                         ------------------------------------
                                         Name:
                                         Title:

TRUSTEE'S CERTIFICATE OF AUTHENTICATION

U.S. Bank National Association,
   as Trustee, certifies that this is one
   of the Securities referred to in the
   within-mentioned Indenture.


By:
    -----------------------------
      Authorized Signatory

Dated:
      ---------------------------

                      {FORM OF REVERSE OF GLOBAL SECURITY}

                 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032

1.    Interest.

      This Security shall bear interest at an initial rate of 3% per year on the
principal amount hereof, from November 22, 2002 or from the most recent Interest
Payment Date (as defined below) to which payment has been paid or duly provided
for, payable semiannually in arrears on April 15 and October 15 of each year
(each, an "Interest Payment Date") to the persons in whose names the Securities
are registered at the close of business on April 1 and October 1 (each, a
"Regular Record Date") (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Interest shall be computed on the basis of
a 360-day year comprised of twelve 30-day months.

      Interest on Securities converted during the period after a Regular Record
Date, but prior to the corresponding Interest Payment Date, (i) will not be
required to be paid on the Interest Payment Date if the Security has been called
for redemption on a redemption date that occurs during the period; (ii) will not
be required to be paid if the Security is to be redeemed in connection with a
fundamental change on a redemption date that occurs during this period; or (iii)
if the Security is not called for redemption during this period, will be paid to
the Holder of the Securities on the Regular Record Date but, upon conversion,
the Holder must pay the Company the interest which has accrued and will be paid
on such Interest Payment Date unless at the time of conversion there is a
default in the payment of interest on the Securities.

      If the principal amount of a Security, premium, if any, plus accrued and
unpaid interest, or any portion thereof, is not paid when due (whether upon
acceleration pursuant to Section 6.2 of the Indenture, upon the date set for
payment of the Redemption Price pursuant to Paragraph 5 hereof, upon the date
set for payment of the Purchase Price or the Fundamental Change Purchase Price
pursuant to Paragraph 7 hereof, or upon the Stated Maturity of this Security),
then, in each such case, the overdue amount shall, to the extent permitted by
law, bear interest at the annual rate of 1% above the applicable interest rate
on the Securities, compounded semi-annually, which interest shall accrue from
the date such overdue amount was originally due to the date of payment of such
amount, including interest thereon, has been made or duly provided for. All such
interest shall be payable on demand and shall be based on a 360-day year
comprised of twelve 30-day months.

      Except as provided below, interest and Liquidated Damages Amounts, if any,
will be paid (i) on the Global Securities to the Depositary by wire transfer in
immediately available funds, (ii) on the definitive Securities having an
aggregate principal amount of $2,000,000 or less, by check mailed to the Holders
of such Securities, and (iii) on the definitive Securities having an aggregate
principal amount of more than $2,000,000, by wire transfer in immediately
available funds at the written election of the Holders of these Securities.



                                       1.

2.    Method of Payment.

      Subject to the terms and conditions of the Indenture, the Company will
make payments in cash in respect of Redemption Prices, Purchase Prices,
Fundamental Change Purchase Prices and at Stated Maturity to Holders who
surrender Securities to the Paying Agent to collect such payments in respect of
the Securities. The Company will pay cash amounts in money of the United States
that at the time of payment is legal tender for payment of public and private
debts. However, the Company may make such cash payments by wire transfer of
immediately available funds or check payable in such money.

3.    Paying Agent, Conversion Agent and Registrar.

      Initially, U.S. Bank National Association (the "Trustee") will act as
Paying Agent, Conversion Agent and Registrar. The Company may appoint and change
any Paying Agent, Conversion Agent or Registrar without notice, other than
notice to the Trustee; provided, however, that the Company will maintain at
least one Paying Agent in the State of New York, City of New York, Borough of
Manhattan, which shall initially be an office or agency of the Trustee. The
Company or any of its Subsidiaries or any of their Affiliates may act as Paying
Agent, Conversion Agent or Registrar.

4.    Indenture.

      The Company issued the Securities under an Indenture dated as of November
22, 2002 (the "Indenture"), between the Company and the Trustee. The terms of
the Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as in effect from
time to time (the "TIA"). Capitalized terms used herein and not defined herein
have the meanings ascribed thereto in the Indenture. The Securities are subject
to all such terms, and Securityholders are referred to the Indenture and the TIA
for a statement of those terms. To the extent any provisions of this Security
and the Indenture conflict, the provisions of the Indenture shall control.

      The Securities are subordinated unsecured obligations of the Company
limited to $135,000,000 aggregate principal amount.

      The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture which has in it the text of this Security in
larger type. Requests may be made to:

            PacifiCare Health Systems, Inc.
            5995 Plaza Drive
            Cypress, California 90630
            Attn:  General Counsel



                                       2.

5.    Redemption at the Option of the Company.

      No sinking fund is provided for the Securities. The Securities are
redeemable at the option of the Company in whole or in part, on or after October
18, 2007 upon not less than 30 nor more than 60 days' notice by mail for a
redemption price equal to 100.0% of the principal amount thereof plus accrued
and unpaid interest, if any, to, but excluding, the Redemption Date (the
"Redemption Price"). The redemption price shall be paid in cash.

6.    Notice of Redemption.

      Notice of redemption pursuant to Paragraph 5 of this Security will be
mailed at least 30 days but not more than 60 days before the Redemption Date to
each Holder of Securities to be redeemed at the Holder's registered address. If
money sufficient to pay the Redemption Price of all Securities or portions
thereof to be redeemed on the Redemption Date is deposited with the Paying Agent
prior to or on the Redemption Date, interest ceases to accrue on such Securities
or portions thereof immediately after such Redemption Date. Securities in
denominations larger than $1,000 of principal amount may be redeemed in part but
only in integral multiples of $1,000 of principal amount, if less than all of
the Securities are being redeemed.

7.    Purchase by the Company at the Option of the Holder.

      (a) Subject to the terms and conditions of the Indenture, the Company
shall become obligated to purchase, at the option of the Holder, all or any
portion of the Securities held by such Holder on any Purchase Date in integral
multiples of $1,000, if less than all of the Securities are being purchased, at
a purchase price equal to 100.0% of the principal amount thereof plus accrued
and unpaid interest, if any, to, but excluding, the Purchase Date. To exercise
such right, a Holder shall deliver to the Company a Purchase Notice containing
the information set forth in the Indenture at any time from the opening of
business on the date that is 20 Business Days prior to such Purchase Date until
the close of business on such Purchase Date, and shall deliver the Securities to
the Paying Agent as set forth in the Indenture.

      The Purchase Price shall be paid in cash.

      (b) At the option of the Holder and subject to the terms and conditions of
the Indenture, the Company shall become obligated to offer to purchase the
Securities held by such Holder as of a date that is 30 days after the date of
notice of a Fundamental Change delivered by the Company (or, if such 30th day is
not a Business Day, the next succeeding Business Day) for a purchase price equal
to 100.0% of the principal amount thereof plus accrued and unpaid interest, if
any, to, but excluding, the Fundamental Change Purchase Date. The Company shall
mail a written notice of a Fundamental Change by first class mail to the Trustee
and the Holders no later than 10 days after the occurrence of the Fundamental
Change. Such notice shall describe the purchase right arising as a result of
such Fundamental Change. To exercise such purchase right, a Holder shall deliver
to the Company a Fundamental Change Purchase Notice containing


                                       3.

the information set forth in the Indenture at any time prior to the 30th day
after the date of the delivery of the Fundamental Change Notice and shall
deliver the Securities to the Paying Agent as set forth in the Indenture.

      The Fundamental Change Purchase Price shall be paid in cash.

      (c) Holders have the right to withdraw any Purchase Notice or Fundamental
Change Purchase Notice, as the case may be, by delivering to the Paying Agent a
written notice of withdrawal in accordance with the provisions of the Indenture.

      If cash sufficient to pay the Purchase Price or Fundamental Change
Purchase Price, as the case may be, of all Securities or portions thereof to be
purchased on the Purchase Date or the Fundamental Change Purchase Date, as the
case may be, is deposited with the Paying Agent on the Purchase Date or the
Fundamental Change Purchase Date, interest ceases to accrue on such Securities
or portions thereof immediately after such Purchase Date or Fundamental Change
Purchase Date, and the Holder thereof shall have no other rights as such other
than the right to receive the Purchase Price or Fundamental Change Purchase
Price upon surrender of such Security.

8.    Conversion.

      (a) The Securities may be converted into shares of common stock on the
terms and subject to the conditions of the Indenture and this Security.

      (b) Holders may surrender Securities or portions thereof for conversion
into shares of Common Stock during any calendar quarter if the Sale Price of the
Common Stock for at least 20 trading days in the period of 30 consecutive
trading days ending on the last trading day of the previous calendar quarter
exceeds 110% of the applicable Conversion Price per share of Common Stock on
such last trading day.

      (c) During the five Business Day period after any ten consecutive trading
day period in which the Trading Price per $1,000 principal amount of the
Debentures for each day of such ten day period was less than 95% of the product
of the Sale Price and the number of shares of Common Stock issuable upon
conversion of $1,000 principal amount of the Debentures; PROVIDED that if on the
date of any conversion pursuant to this clause (c) the Sale Price of the Common
Stock is greater than the Conversion Price, a holder shall receive, in lieu of
Common Stock based on the Conversion Price, cash or Common Stock or a
combination of cash and Common Stock, at the Company's option, with a value
equal to the principal amount of the holder's Debentures plus accrued interest
as of the Conversion Date. Any Common Stock delivered pursuant to the foregoing
proviso will be valued at the greater of (i) the Conversion Price on the
conversion date and (ii) the Sale Price on the third trading day after the
conversion date.

      (d) A Holder also may surrender for conversion a Security or portion of a
Security which has been called for redemption pursuant to Paragraph 5 hereof,
even if the Security would not otherwise be eligible for conversion, until the
close of business on the Business Day immediately preceding the Redemption Date,
unless the Company defaults in making the payment due on the Redemption Date, in
which case the conversion right


                                       4.

shall terminate at the close of business on the date such default is cured and
such payment is made.

      (e) If the Company (1) distributes any rights or warrants to all holders
of shares of its Common Stock entitling them (for a period expiring within 45
days of such distribution) to purchase shares of Common Stock at less than the
average of the Sales Prices of a share of the Common Stock for the 10
consecutive trading days ending on the trading day immediately preceding the
date of such distribution or (2) distributes to all holders of shares of its
Common Stock any of its debt securities or assets or any rights, warrants or
options to purchase securities of the Company, which distribution has a per
share value exceeding 10% of the Sales Price on the trading day immediately
preceding the declaration date for such distribution, unless the Holder may
participate in this distribution without conversion, the Securities may be
surrendered for conversion beginning on the date the Company gives notice to the
Holders of such right, which shall be not less than 20 days prior to the
Ex-Dividend Time for such dividend or distribution, and the Securities may be
surrendered for conversion at any time thereafter until the close of business on
the Business Day immediately preceding the Ex-Dividend Time or until the Company
announces that such distribution will not take place.

      (f) A Security in respect of which a Holder has delivered a Purchase
Notice or Fundamental Change Purchase Notice exercising the option of such
Holder to require the Company to purchase such Security may be converted only if
such notice of exercise is withdrawn in accordance with the terms of the
Indenture.

      The initial Conversion Rate is 23.8095 shares of Common Stock per $1,000
principal amount of Securities, subject to adjustment in certain events
described in the Indenture. A Holder that surrenders Securities for conversion
will receive cash or a check, or, at the Company's option, a whole share of
Common Stock, in lieu of any fractional shares of Common Stock.

      To surrender a Security for conversion, a Holder must (1) complete and
manually sign the irrevocable conversion notice below (or complete and manually
sign a facsimile of such notice) and deliver such notice to the Conversion
Agent, (2) surrender the Security to the Conversion Agent, (3) furnish
appropriate endorsements and transfer documents and (4) pay any transfer or
similar tax, if required.

      A Holder may convert a portion of a Security if the principal amount of
such portion is $1,000 or an integral multiple of $1,000. No payment or
adjustment will be made for dividends on the shares of Common Stock except as
provided in the Indenture. Except as provided in Paragraph 1 hereof, on
conversion of a Security, the Holder will not receive any cash payment
representing accrued interest with respect to the converted Securities. Instead,
upon conversion the Company will deliver to the Holder a fixed number of shares
of Common Stock and any cash payment to account for fractional shares. Accrued
interest will be deemed paid in full rather than canceled, extinguished or
forfeited. The Company will not adjust the Conversion Rate to account for
accrued interest.



                                       5.

      The Conversion Rate will be adjusted as provided in Article X of the
Indenture. The Company may increase the Conversion Rate for any period of at
least 20 days, upon at least 15 days' notice so long as the increase is
irrevocable during such period. In addition, the Company may increase the
Conversion Rate if the Board of Directors deems it advisable to avoid or
diminish any income tax to holders of Common Stock resulting from any stock or
rights distribution.

      In addition, if the Company is a party to a consolidation, merger, binding
share exchange or sale of all or substantially all of the Company's assets, in
each case pursuant to which the Company's common stock would be converted into
cash, securities or other property, the Holder may surrender its debentures for
conversion at any time from and after the date which is 15 days prior to the
anticipated effective date of the transaction until and including the date which
is 15 days after the actual date of such transaction. If the Company is a party
to a consolidation, merger, binding share exchange or sale of all or
substantially all of the Company's assets, in each case pursuant to which the
Company's common stock is converted into cash, securities, or other property,
then at the effective time of the transaction, the Holder's right to convert a
debenture into the Company's common stock will be changed into a right to
convert it into the kind and amount of cash securities and other property which
the Holder would have received if the Holder had converted the its debenture
immediately prior to the transaction.

9.    Conversion Arrangement on Call for Redemption.

      Any Securities called for redemption, unless surrendered for conversion
before the close of business on the Business Day immediately preceding the
Redemption Date, may be deemed to be purchased from the Holders of such
Securities at an amount not less than the Redemption Price, by one or more
investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders, to convert them into shares of Common
Stock and to make payment for such Securities to the Trustee in trust for such
Holders.

10.   Subordination.

      The Securities are subordinated to Senior Debt as provided in the
Indenture. To the extent provided in the Indenture, Senior Debt must be paid
before the Securities may be paid. The Company agrees, and each Securityholder
by accepting a Security agrees, to the subordination and authorizes the Trustee
to give it effect.

11.   Denominations; Transfer; Exchange.

      The Securities are in fully registered form, without coupons, in minimum
denominations of $1,000 of principal amount and integral multiples of $1,000. A
Holder may transfer or exchange the Securities in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not transfer or exchange
any Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the


                                       6.

Security not to be redeemed) or any Securities in respect of which a Purchase
Notice or Fundamental Change Purchase Notice has been given and not withdrawn
(except, in the case of a Security to be purchased in part, the portion of the
Security not to be purchased) or any Securities for a period of 15 days before
the mailing of a notice of redemption of Securities to be redeemed.

12.   Persons Deemed Owners.

      The registered Holder of this Security may be treated as the owner of this
Security for all purposes.

13.   Unclaimed Money or Securities.

      The Trustee and the Paying Agent shall return to the Company any money
held by them for the payment of any amount with respect to the Securities that
remains unclaimed for two years, subject to applicable unclaimed property law.
After return to the Company, Holders entitled to the money or securities must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another person.

14.   Amendment; Waiver.

      Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate principal amount of the Securities
at the time outstanding and (ii) certain Defaults may be waived with the written
consent of the Holders of a majority in aggregate principal amount of the
Securities at the time outstanding. Subject to certain exceptions set forth in
the Indenture, without the consent of any Holder, the Company and the Trustee
may amend the Indenture or the Securities among other things, (i) to cure any
ambiguity, omission, defect or inconsistency, provided that such modification or
amendment does not adversely affect the interests of the Holders of the
Securities in any material respect; (ii) to modify the restrictions on, and
procedures for, resale and other transfers of Securities pursuant to any change
in applicable law or regulation (or the interpretation thereof) or in practice
relating to the resale or transfer of "restricted securities" under the
Securities Act generally; (iii) to comply with Article V or Section 10.16 of the
Indenture; (iv) to secure the Company's obligations or to add any guarantee
under the Securities and the Indenture; (v) to add events of default with
respect to the Securities; (vi) to add to the covenants of the Company for the
benefit of the Holders or to surrender any right or power conferred upon the
Company; (vii) to make any change necessary for the registration of the
Securities under the Securities Act or to comply with the TIA, or any amendment
thereto, or to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA, provided that such modification or
amendment does not materially and adversely affect the interests of the Holders
of the Securities; (viii) to provide for uncertificated Securities in addition
to or in place of certificated Securities or to provide for bearer Securities;
(ix) to increase the Conversion Price in accordance with Paragraph 8 of the
Securities; (x) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to


                                       7.

Section 7.8 of the Indenture; or (xi) to add or modify other provisions herein
with respect to matters or questions arising hereunder that the Company and the
Trustee may deem necessary or desirable and that will not materially adversely
affect the interests of the Holders.

15.   Defaults and Remedies.

      Under the Indenture, Events of Default include (i) default in payment of
the principal amount or premium, if any, on any Security when the same becomes
due and payable upon redemption or otherwise, whether or not the payment is
prohibited by the provisions of Article XI of the Indenture; (ii) default in the
payment of any interest or Liquidated Damages Amounts, if any, when due and
payable, and the continuance of such default for a period of 30 days, whether or
not the payment is prohibited by the provisions of Article XI of the Indenture;
(iii) failure by the Company to comply in any material respect with other
agreements or covenants in the Indenture or the Securities, for sixty (60) days
after notice; and (iv) certain events of bankruptcy, insolvency and
reorganization of the Company or its Subsidiaries.

      Holders may not enforce the Indenture or the Securities except as provided
in the Indenture. The Trustee may refuse to enforce the Indenture or the
Securities unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in aggregate principal amount of the
Securities at the time outstanding may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from the Holders notice of any
continuing Default (except a Default in payment of amounts specified in clause
(i) or (ii) above) if it determines that withholding notice is in their
interests.

16.   Trustee Dealings with the Company.

      Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with the Company or its Affiliates
with the same rights it would have if it were not Trustee.

17.   Calculations in Respect of Securities.

      The Company or its agents will be responsible for making all calculations
called for under the Securities. These calculations include, but are not limited
to, determination of the Sales Prices for the Common Stock, the rate of interest
payable on the Securities and the Conversion Rate of the Securities. Any
calculations made in good faith and without manifest error will be final and
binding on Holders of the Securities. The Company or its agents will be required
to deliver to the Trustee a schedule of its calculations and each of the Trustee
and the Trustee will be entitled to rely upon the accuracy of such calculations
without independent verification. The Trustee will forward the Company's
calculations to any Holder of the Securities upon the request of such Holder.



                                       8.

18.   Successor Persons.

      When a successor person or other entity assumes all the obligations of its
predecessor under the Securities and the Indenture, the predecessor person will
be released from those obligations.

19.   No Recourse Against Others.

      A director, officer, employee or stockholder, as such, of the Company or
the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Holder waives and releases all such liability. The waiver and release are
part of the consideration for the issue of the Securities.

20.   Authentication.

      This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.

21.   Abbreviations.

      Customary abbreviations may be used in the name of a Holder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).

22.   GOVERNING LAW.

      THE INDENTURE AND THIS SECURITY WILL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD AS TO CONFLICT
OF LAW PRINCIPLES.

23.   Registration Rights.

      The Holders of the Securities are entitled to the benefits of a
Registration Rights Agreement, dated as of November 22, 2002, by and among the
Company and the Initial Purchasers, including the receipt of Liquidated Damages
Amounts in respect of Events (each as defined in such agreement).


                                       9.

                            FORM OF CONVERSION NOTICE

               {NOTICE PURSUANT TO SECTION 10.2 OF THE INDENTURE}

{Name and Address of Conversion Agent}

                  Re:   PacifiCare Health Systems, Inc. 3% Convertible
                        Subordinated Debentures due October 15, 2032 (the
                        "Securities")

      Reference is hereby made to the Indenture, dated as of November 22, 2002
(the "Indenture"), between PacifiCare Health Systems, Inc., as Issuer, and U.S.
Bank National Association, as Trustee. Capitalized terms used but not defined
herein shall have the meanings given to them in the Indenture.

      This letter relates to the Securities specified below, which are
registered in the name of the undersigned (the "Holder"). The Holder hereby
irrevocably exercises its right to convert such Securities, or the portion
thereof, if any, specified below, into Common Stock and, except to the extent
specified or required as described below, directs that certificates representing
such Common Stock, together with any check in payment for a fractional share and
any Security representing any unconverted principal amount, be issued and
delivered through the facilities of the Depositary, for credit to the account(s)
of the person(s) indicated below.

      The Holder acknowledges and agrees that no Common Stock will be delivered
on conversion until any amount payable by the Holder on account of interest is
paid, any certificates evidencing specified Securities not held in book-entry
form are duly endorsed or assigned to the Company or in blank and surrendered
and any taxes or other charges or documents required in connection with a
transfer on conversion, and any other required items, are delivered to the
Conversion Agent.

      The Holder acknowledges and agrees that, notwithstanding this request for
conversion, the Company may require that the Common Stock delivered on
conversion of the specified Securities be delivered in certificated form subject
to a restrictive legend, or that additional certifications be delivered on
behalf of the relevant beneficial owner(s), if it determines that doing so is
necessary to comply with the requirements of the Securities Act or otherwise, as
provided in the Indenture.

      Conversion of the specified Securities is subject to the requirements
established by the Company as well as to the procedures of the Depositary, all
as in effect from time to time. The specified Securities will be deemed to have
been converted as of the close of business on the Business Day on which this
conversion notice and all other required items have been delivered to the
Conversion Agent as provided above and, upon such conversion, shall cease to
accrue interest or be outstanding (subject to the Holder's right to receive the
Common Stock as provided in the Indenture). Prior to such conversion, the Holder
will have no rights in the Common Stock.

      Please provide the information requested below, as applicable.



                                       1.

1.    PLEASE SPECIFY THE SECURITIES HELD AND THE PORTION THEREOF TO BE
      CONVERTED:

      Principal amount held:  U.S.  $
                                      -------------------------------------
      CUSIP number(s):
                        ---------------------------------------------------
      Depositary (DTC) account where held:
                                            -------------------------------

            Principal amount being converted (if less than all):
                  U.S.  $
                         -------------------------------------------------

2.    UNLESS AND TO THE EXTENT OTHERWISE SPECIFIED BELOW, all Securities
      (together with any unconverted Securities) will be delivered in book-entry
      form to the DTC account specified in Item 1 above.

3.    IF OTHER ARRANGEMENTS ARE DESIRED, please (a) specify the type, number and
      form of securities to be delivered on conversion and the name(s) of the
      account holder(s) or registered owner(s), by checking the appropriate
      boxes and providing the information requested and (b) complete Item (4)
      below:

      [ ]   Common Stock

      [ ]   Book-Entry

      [ ]   Number of shares of Common Stock:
                                              ----------------------------------

            DTC Account:
                         -------------------------------------------------------

      [ ]   Certificates

            Number of shares of Common Stock:
                                              ----------------------------------

            Registered Owner:
                              --------------------------------------------------

      [ ]   Unconverted Securities

            [ ]   Certificates

                  Principal Amount:  U.S.  $
                                             -----------------------------------

                  Registered Owner:
                                     -----------------------------

            [ ]   Book-Entry

                  Principal Amount:  U.S.  $
                                             -----------------------------------

            DTC Account:
                         -------------------------------------------------------



                                       2.

4.    {TO BE COMPLETED ONLY IF UNCONVERTED SECURITIES OR SHARES OF COMMON STOCK
      ARE TO BE ISSUED OTHER THAN TO THE HOLDER PURSUANT TO ITEM (3) ABOVE.} The
      undersigned confirms that such unconverted Securities or shares of Common
      Stock are being transferred:

      CHECK ONE BOX BELOW

            (a)[ ]  to the Company; or

            (b)[ ]  pursuant to and in compliance with Rule 144A under the
                    Securities Act of 1933; or

            (c)[ ]  pursuant to and in compliance with Regulation S under the
                    Securities Act of 1933; or

            (d)[ ]  pursuant to an exemption from registration under the
                    Securities Act of 1933 provided by Rule 144 thereunder.

      Unless one of the boxes is checked, the transfer agent will refuse to
      register any of the Common Stock evidenced by this certificate in the name
      of any person other than the registered holder thereof; provided, however,
      that if box (c) or (d) is checked, the transfer agent may require, prior
      to registering any such transfer of the Common Stock such certifications
      and other information, and if box (d) is checked such legal opinions, as
      the Company has reasonably requested in writing, by delivery to the
      transfer agent of a standing letter of instruction, to confirm that such
      transfer is being made pursuant to an exemption from, or in a transaction
      not subject to, the registration requirements of the Securities Act of
      1933.

- ----------

*     Aggregate principal amount of each certificate must equal U.S. $1,000 or
      any amount in excess thereof in integral multiples of U.S. $1,000.

      Please sign and date this notice in the space provided below.

      DATE:

                                    ------------------------------------
                                              Name of Holder

                                    ------------------------------------
                                              Signature(s) of Holder
                                              Title(s):

                           (If the Holder is a corporation, partnership or
                           fiduciary, the title of the person signing on behalf
                           of the Holder must be stated.)



                                       3.

Notice: Signature(s) must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Trustee, which requirements will include
membership or participation in the Securities Transfer Agents Medallion Program
(STAMP), the Stock Exchange Medallion Program (SEMP) and the New York Stock
Exchange Medallion Signature Program (MSP) or such other "signature guarantee
program" as may be determined by the Trustee in addition to, or in substitution
for, STAMP, SEMP or MSP, all in accordance with the Securities Exchange Act of
1934.


                                    ------------------------------------
                                             Signature Guarantee





                                       4.

                                 ASSIGNMENT FORM

      To assign this Security, fill in the form below:

      (I) or (we) assign and transfer this Security to


- --------------------------------------------------------------------------------
               (Insert assignee's social security or tax I.D. no.)

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
             (Print or type assignee's name, address and zip code)

and irrevocably appoint                                      agent to transfer
this Security on the books of the Company. The agent may substitute another to
act for him.

      Your Signature:
                     -----------------------------------------------------------
                     (Sign exactly as your name appears on the other side of
                     this Security)

      Date:
             --------------------------

      Medallion Signature Guarantee:
                                      ---------------------------------





                                   SCHEDULE I

             SCHEDULE OF INCREASES AND DECREASES OF GLOBAL SECURITY

The Initial Principal Amount of Global Security is:             ($           ).
Such Principal Amount has been increased or decreased by the adjustments set
forth below by or on behalf of the Depository in accordance with the Applicable
Procedures.




                                                      Principal Amount
        Amount of Increase    Amount of Decrease     of Global Security       Notation by
       in Principal Amount    in Principal Amount     After Increase or       Registrar or
Date    of Global Security    of Global Security          Decrease         Security Custodian
                                                               

EX-4.6

                                                                     EXHIBIT 4.6

                          REGISTRATION RIGHTS AGREEMENT

                             Dated November 22, 2002

                                      among

                        PACIFICARE HEALTH SYSTEMS, INC.,

                                       and

                        MORGAN STANLEY & CO. INCORPORATED
                              GOLDMAN, SACHS & CO.


                          REGISTRATION RIGHTS AGREEMENT

                  THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of November 22, 2002, among PACIFICARE HEALTH SYSTEMS, INC.,
a Delaware corporation (the "Company") and MORGAN STANLEY & CO. INCORPORATED and
GOLDMAN, SACHS & CO. (the "Initial Purchasers").

                  This Agreement is made pursuant to the Purchase Agreement
dated November 18, 2002, among the Company and the Initial Purchasers (the
"Purchase Agreement"), which provides for the sale by the Company to the Initial
Purchasers of an aggregate of $125,000,000 principal amount of the Company's 3%
Convertible Subordinated Debentures due 2032 (the "Securities"), plus up to an
additional $25,000,000 principal amount available for purchase by the Initial
Purchasers. In order to induce the Initial Purchasers to enter into the Purchase
Agreement, the Company has agreed to provide to the Initial Purchasers and their
direct and indirect transferees the registration rights set forth in this
Agreement. The execution of this Agreement is a condition to the closing under
the Purchase Agreement.

                  In consideration of the foregoing, the parties hereto agree as
         follows:

                  1.       Definitions.

                  As used in this Agreement, the following capitalized defined
terms shall have the following meanings:

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

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

                  "Business Day" shall mean each Monday, Tuesday, Wednesday,
         Thursday and Friday that is not a day on which banking institutions in
         The City of New York are authorized or obligated by law or executive
         order to close.

                  "Closing Date" shall mean the Closing Date as defined in the
         Purchase Agreement.

                  "Common Stock" shall mean the Company's common stock, $0.01
         per share.

                  "Company" shall have the meaning set forth in the preamble and
         shall also include the Company's successors.

                  "Conversion Rate" has the meaning assigned to such term in the
         Indenture.

                  "Damages Payment Date" means each interest payment date under
         the Indenture in the case of the Securities, and each April 15 and
         October 15 in the case of the Underlying Common Stock.

Registration Rights Agreement


                  "Deferral Notice" has the meaning set forth in Section 3(i)
         hereof.

                  "Deferral Period" has the meaning set forth in Section 3(i)
         hereof.

                  "Effective Time" shall mean the date on which the SEC declares
         the Shelf Registration Statement effective or on which the Shelf
         Registration Statement otherwise becomes effective.

                  "Electing Holder" shall mean any Holder of Registrable
         Securities that has returned a completed and signed Notice and
         Questionnaire to the Company in accordance with Section 2(a) and 2(f)
         hereof.

                  "Holder" shall mean the Initial Purchasers, for so long as
         they own any Registrable Securities, and each of their successors,
         assigns and direct and indirect transferees who become registered
         owners of Registrable Securities under the Indenture.

                  "Indenture" shall mean the Indenture relating to the
         Securities dated as of November 22, 2002 between the Company and State
         Street Bank and Trust Company of California, N.A., as trustee, and as
         the same may be amended from time to time in accordance with the terms
         thereof.

                  "Initial Purchasers" shall have the meaning set forth in the
         preamble.

                  "Majority Holders" shall mean the Holders of a majority of the
         aggregate principal amount of outstanding Registrable Securities;
         provided that whenever the consent or approval of Holders of a
         specified percentage of Registrable Securities is required hereunder,
         Registrable Securities held by the Company or any of its affiliates (as
         such term is defined in Rule 405 under the 1933 Act) (other than the
         Initial Purchasers or subsequent Holders of Registrable Securities if
         such subsequent holders are deemed to be such affiliates solely by
         reason of their holding of such Registrable Securities) shall not be
         counted in determining whether such consent or approval was given by
         the Holders of such required percentage or amount.

                  "NASD Rules" shall mean the rules of the National Association
         of Securities Dealers, Inc., as amended from time to time.

                  "Notice and Questionnaire" shall mean a written notice
         delivered to the Company or its outside counsel containing
         substantially the information called for by the Selling Securityholder
         Notice and Questionnaire attached as Annex A to the Offering Memorandum
         of the Company dated November 18, 2002 relating to the Securities.

                  "Person" shall mean an individual, partnership, limited
         liability company, corporation, trust or unincorporated organization,
         or a government or agency or political subdivision thereof.

                  "Prospectus" shall mean the prospectus included in a
         Registration Statement, including any preliminary prospectus, and any
         such prospectus as amended or supplemented by any prospectus
         supplement, including a prospectus supplement with

                                       2

Registration Rights Agreement


         respect to the terms of the offering of any portion of the Registrable
         Securities covered by a Shelf Registration Statement, and by all other
         amendments and supplements to such prospectus, and in each case
         including all material incorporated by reference therein.

                  "Purchase Agreement" shall have the meaning set forth in the
         preamble.

                  "Record Holder" shall mean (i) with respect to any Damages
         Payment Date relating to any Securities as to which any Liquidated
         Damages Amount has accrued, the holder of record of such Security on
         the record date with respect to the interest payment date under the
         Indenture on which Damages Payment Date shall occur and (ii) with
         respect to any Damages Payment Date relating to the Underlying Common
         Stock as to which any Liquidated Damages Amount has accrued, the
         registered holder of such Underlying Common Stock fifteen (15) days
         prior to such Damages Payment Date.

                  "Registrable Securities" shall mean all or any portion of the
         Securities issued from time to time under the Indenture and the shares
         of Common Stock issuable upon conversion of such Securities; provided,
         however, that a security ceases to be a Registrable Security when it is
         no longer a Restricted Security.

                  "Registration Expenses" shall mean any and all expenses
         incident to performance of or compliance by the Company with this
         Agreement, including without limitation: (i) all SEC, stock exchange or
         National Association of Securities Dealers, Inc. registration and
         filing fees, (ii) all fees and expenses incurred in connection with
         compliance with state securities or blue sky laws (including reasonable
         fees and disbursements of counsel for any underwriters or Holders in
         connection with blue sky qualification of any of the Registrable
         Securities), (iii) all expenses of any Persons in preparing or
         assisting in preparing, word processing, printing and distributing any
         Registration Statement, any Prospectus, any amendments or supplements
         thereto, any underwriting agreements, securities sales agreements and
         other documents relating to the performance of and compliance with this
         Agreement, (iv) all fees and disbursements relating to the
         qualification of the Indenture under applicable securities laws, (v)
         the fees and disbursements of the Trustee and its counsel, (vi) the
         fees and disbursements of counsel for the Company and the reasonable
         fees and disbursements of one counsel for the Holders and (vii) the
         fees and disbursements of the independent public accountants of the
         Company, including the expenses of any special audits or "cold comfort"
         letters required by or incident to such performance and compliance, but
         excluding fees and expenses of counsel to the underwriters (other than
         fees and expenses set forth in clause (ii) above) or the Holders (other
         than fees and expenses set forth in clause (vi) above) and underwriting
         discounts and commissions and transfer taxes, if any, relating to the
         sale or disposition of Registrable Securities by a Holder.

                  "Restricted Security" shall mean any Security or share of
         Common Stock issuable upon conversion thereof except any such Security
         or share of Common Stock that (i) has been registered pursuant to an
         effective registration statement under the 1933 Act and sold in a
         manner contemplated by the Shelf Registration Statement, (ii) has been
         transferred in compliance with Rule 144 under the 1933 Act (or any
         successor provision thereto) or is transferable pursuant to paragraph
         (k) of such Rule 144 (or any successor

                                      3

Registration Rights Agreement


          provision thereto) or (iii) has otherwise been transferred and a new
          Security or share of Common Stock not subject to transfer restrictions
          under the 1933 Act has been delivered by or on behalf of the Company
          in accordance with Section 2.6 of the Indenture.

                  "Rules and Regulations" shall mean the published rules and
         regulations of the SEC promulgated under the 1933 Act or 1934 Act, as
         in effect at any relevant time.

                  "SEC" shall mean the Securities and Exchange Commission.

                  "Shelf Registration" shall mean a registration effected
         pursuant to Section 2(a) hereof.

                  "Shelf Registration Statement" shall mean a "shelf"
         registration statement of the Company pursuant to the provisions of
         Section 2 of this Agreement providing for the registration of, and the
         sale on a continuous or delayed basis by the holders of, all of the
         Registrable Securities pursuant to Rule 415 under the 1933 Act, or any
         similar rule that may be adopted by the SEC, and all amendments and
         supplements to such registration statement, including post-effective
         amendments, in each case including the Prospectus contained therein,
         all exhibits thereto and all material incorporated by reference
         therein. As the context may require, "Shelf Registration Statement"
         shall include any Subsequent Shelf Registration Statement.

                  "Subsequent Shelf Registration Statement" shall have the
         meaning set forth in Section 2(b) hereof.

                  "Trustee" shall mean the trustee with respect to the
         Securities under the Indenture.

                  "Underlying Common Stock" shall mean the Common Stock into
         which the Securities are convertible or issued upon any such
         conversion.

                  "Underwriter" shall mean the investment banker or investment
         bankers or manager or managers that shall administer an Underwritten
         Offering, if any, conducted pursuant to this Agreement.

                  "Underwritten Registration" or "Underwritten Offering" shall
         mean a registration in which Registrable Securities are sold to an
         Underwriter for reoffering to the public.

                  2.       Shelf Registration.

                  (a)      The Company shall, on or prior to 90 calendar days
after the Closing Date (the "Filing Deadline Date"), file with the SEC a Shelf
Registration Statement providing for the sale by the Holders of all of the
Registrable Securities and, thereafter, shall use its reasonable best efforts to
have such Shelf Registration Statement declared effective by the SEC on or prior
to 180 calendar days after the Closing Date (the "Effectiveness Deadline Date").
The Company agrees to use its reasonable best efforts to keep the Shelf
Registration Statement continuously effective until the expiration of the period
referred to in Rule 144(k) with respect to the Registrable Securities or such
shorter period that will terminate when all of the Registrable Securities
covered by the Shelf Registration Statement have been sold pursuant to the Shelf

                                      4

Registration Rights Agreement


Registration Statement (such period being referred to herein as the
"Effectiveness Period"). At the time the Shelf Registration Statement is
initially declared effective, each Holder that became a Electing Holder on or
prior to the date ten (10) Business Days prior to such time of effectiveness
shall be named as a selling securityholder in the Shelf Registration Statement
and the related Prospectus in such a manner as to comply with Item 507 of
Regulation S-K and any other disclosure laws or regulations applicable to
selling securityholders under the 1933 Act. None of the Company's security
holders (other than the Holders of Registrable Securities) shall have the right
to include any of the Company's securities in the Shelf Registration Statement.

                  (b)      If (i) the Shelf Registration Statement or any
Subsequent Shelf Registration Statement ceases to be effective for any reason at
any time during the Effectiveness Period (other than because all Registrable
Securities registered thereunder shall have been resold pursuant thereto or
shall have otherwise ceased to be Registrable Securities) or (ii) sales of some
or all of a Holder's Registrable Securities may not be made pursuant to the
Shelf Registration Statement or any Subsequent Shelf Registration Statement for
any other reason during the Effectiveness Period (other than on Business Days on
which financial markets are generally closed, because of a Deferral Period or
because of such Holder's failure to comply with the terms of this Agreement),
the Company shall use its reasonable best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof or to permit such
sales, including by (A) amending, within thirty (30) days of such cessation of
effectiveness, the Shelf Registration Statement in a manner reasonably expected
to obtain the withdrawal of the order suspending the effectiveness thereof or to
permit such sales, or (B) by filing an additional Shelf Registration Statement
pursuant to Rule 415 covering all of the securities that as of the date of such
filing are Registrable Securities (a "Subsequent Shelf Registration Statement").
If a Subsequent Shelf Registration Statement is filed, the Company shall use its
reasonable best efforts to cause the Subsequent Shelf Registration Statement to
become effective as promptly as is practicable after such filing and to keep
such Registration Statement (or any subsequent Shelf Registration Statement)
continuously effective until the end of the Effectiveness Period.

                  (c)      Subject to Section 3(i) hereof, the Company further
agrees to, after the Effective Time, supplement or amend the Shelf Registration
Statement if required by the rules, regulations or instructions applicable to
the registration form used by the Company for such Shelf Registration Statement
or by the 1933 Act or by any other rules and regulations thereunder for shelf
registration or if reasonably requested by a Holder with respect to information
relating to such Holder, including without limitation any action necessary to
identify such Holder as a selling securityholder in the Shelf Registration
Statement, and to use its reasonable best efforts to cause any such supplement
to be filed or amendment to become effective and such Shelf Registration
Statement to become usable as soon as thereafter practicable; provided, however,
that nothing in this subparagraph shall relieve such Holder of the obligation to
return a completed and signed Notice and Questionnaire to the Company in
accordance with the terms of this Agreement. The Company agrees to furnish to
the Holders of Registrable Securities copies of any such supplement or amendment
promptly after its being used or filed with the SEC.

                  (d)      If at any time the Securities are convertible into
securities other than the Common Stock pursuant to the definition of "Common
Stock" in the Indenture, the Company shall, or shall cause any successor under
the Indenture to, cause such securities to be included in

                                      5

Registration Rights Agreement


the Shelf Registration Statement no later than the date on which the Securities
may then be convertible into such securities.

                  (e)      The Company shall pay all Registration Expenses in
connection with the registration pursuant to this Section 2. Each Holder shall
pay all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder's Registrable Securities.

                  (f)      Each Holder of Registrable Securities agrees that if
such Holder wishes to sell Registrable Securities pursuant to a Shelf
Registration Statement and related Prospectus, it will do so only in accordance
with this Section 2(f) and Section 3(i). Each Holder of Registrable Securities
wishing to sell Registrable Securities pursuant to a Shelf Registration
Statement and related Prospectus agrees to deliver a completed and signed Notice
and Questionnaire to the Company at least three (3) Business Days prior to any
intended distribution of Registrable Securities under the Shelf Registration
Statement. From and after the Effective Time, the Company shall, as promptly as
practicable after the date a Notice and Questionnaire is delivered, and in any
event on or prior to the later of (x) 15 Business Days after such date or (y) 15
Business Days after the expiration of any Deferral Period in effect when the
Notice and Questionnaire is delivered or put into effect within ten (10)
Business Days of such delivery date, (i) if required by applicable law, file
with the SEC a post-effective amendment to the Shelf Registration Statement or a
Subsequent Shelf Registration Statement or prepare and, if required by
applicable law, file a supplement to the related Prospectus or a supplement or
amendment to any document incorporated therein by reference or file any other
required document so that the Holder delivering such Notice and Questionnaire is
named as a selling securityholder in the Shelf Registration Statement (or such
Subsequent Shelf Registration Statement) and the related Prospectus in such a
manner as to comply with Item 507 of Regulation S-K and any other disclosure
laws or regulations applicable to selling securityholders under the 1933 Act
and, if the Company shall file a post-effective amendment to the Shelf
Registration Statement or a Subsequent Shelf Registration Statement, use its
reasonable best efforts to cause such post-effective amendment (or such
Subsequent Shelf Registration Statement) to be declared effective under the 1933
Act as promptly as is practicable, but in any event by the date (the "Amendment
Effectiveness Deadline Date") that is forty-five (45) days after the date such
post-effective amendment (or such Subsequent Shelf Registration Statement) is
required by this clause to be filed; (ii) provide such Holder copies of any
documents filed pursuant to Section 2(f)(i) upon written request; and (iii)
notify such Holder as promptly as practicable after the effectiveness under the
1933 Act of any post-effective amendment or a Subsequent Shelf Registration
Statement filed pursuant to Section 2(f)(i); provided, that if such Notice and
Questionnaire is delivered during a Deferral Period or a Deferral Period is put
into effect within ten (10) Business Days after such delivery date, the Company
shall so inform the Holder delivering such Notice and Questionnaire and shall
take the actions set forth in clauses (i), (ii) and (iii) above within fifteen
(15) Business Days of the expiration of the Deferral Period in accordance with
Section 3(i). Notwithstanding anything contained herein to the contrary, (i) the
Company shall be under no obligation to name any Holder that is not an Electing
Holder as a selling securityholder in any Registration Statement or related
Prospectus and (ii) the Amendment Effectiveness Deadline shall be extended by up
to ten (10) Business Days from the expiration of a Deferral Period (and the
Company shall incur no obligation to pay Liquidated Damages during such
extension) if such Deferral Period shall be in effect on the Amendment
Effectiveness Deadline Date.

                                      6

Registration Rights Agreement


                  (g)      The parties hereto agree that the Holders of
Registrable Securities will suffer damages, and that it would not be feasible to
ascertain the extent of such damages with precision, if (i) the Shelf
Registration Statement has not been filed on or prior to the Filing Deadline
Date, (ii) the Shelf Registration Statement has not been declared effective
under the 1933 Act on or prior to the Effectiveness Deadline Date, (iii) the
Company has failed to perform any of its obligations set forth in Section 2(f)
within the time periods required therein, (iv) the aggregate duration of
Deferral Periods in any period exceeds the number of days permitted in respect
of such period pursuant to Section 3(i) hereof or (v) the number of Deferral
Periods in any period exceeds the number permitted in respect of such period
pursuant to Section 3(i) hereof (each of the events of a type described in any
of the foregoing clauses (i) through (v) is individually referred to herein as
an "Event," and the "Event Date" for purposes hereof shall be the Filing
Deadline Date in the case of clause (i), the Effectiveness Deadline Date in the
case of clause (ii), the date by which the Company is required to perform its
obligations set forth in Section 2(f) in the case of clause (iii) (including the
filing of any post-effective amendment or Subsequent Shelf Registration
Statement prior to the Amendment Effectiveness Deadline Date), the date on which
the aggregate duration of Deferral Periods in any period exceeds the number of
days permitted by Section 3(i) hereof in the case of clause (iv), and the date
of the commencement of a Deferral Period that causes the limit on the number of
Deferral Periods in any period under Section 3(i) hereof to be exceeded in the
case of clause (v). Events shall be deemed to continue until the "Event
Termination Date," which shall be the following dates with respect to the
respective types of Events: the date the Shelf Registration Statement is filed
in the case of an Event of the type described in clause (i), the date the Shelf
Registration Statement is declared effective under the 1933 Act in the case of
an Event of the type described in clause (ii), the date the Company performs its
obligations set forth in Section 2(f) in the case of an Event of the type
described in clause (iii) (including, without limitation, the date the relevant
post-effective amendment to the Shelf Registration Statement or a Subsequent
Shelf Registration Statement is declared effective under the 1933 Act),
termination of the Deferral Period that caused the limit on the aggregate
duration of Deferral Periods in a period set forth in Section 3(i) to be
exceeded in the case of the commencement of an Event of the type described in
clause (iv), and termination of the Deferral Period the commencement of which
caused the number of Deferral Periods in a period permitted by Section 3(i) to
be exceeded in the case of an Event of the type described in clause (v).

                  Accordingly, commencing on (and including) any Event Date and
ending on (but excluding) the next date on which there are no Events that have
occurred and are continuing (a "Damages Accrual Period"), the Company agrees to
pay, as liquidated damages and not as a penalty, an amount (the "Liquidated
Damages Amount"), payable on the Damages Payment Dates to Record Holders of
Securities that are Registrable Securities and of shares of Underlying Common
Stock issued upon conversion of Securities that are Registrable Securities, as
the case may be, accruing, for each portion of such Damages Accrual Period
beginning on and including a Damages Payment Date (or, in respect of the first
time that the Liquidated Damages Amount is to be paid to Holders on a Damages
Payment Date as a result of the occurrence of any particular Event, from the
Event Date) and ending on but excluding the first to occur of (A) the date of
the end of the Damages Accrual Period or (B) the next Damages Payment Date, at a
rate per annum equal to one-half of one percent (0.5%) of the aggregate
principal amount of such Securities or, in the case of Securities that have been
converted into or exchanged for Underlying Common Stock, at a rate per annum of
one-half of one percent (0.5%) of an amount equal to the number of

                                      7

Registration Rights Agreement


shares of Underlying Common Stock multiplied by the quotient of $1,000 divided
by the Conversion Rate during such periods, as the case may be, in each case
determined as of the Business Day immediately preceding the next Damages Payment
Date; provided, that in the case of a Damages Accrual Period that is in effect
solely as a result of an Event of the type described in clause (iii) of the
immediately preceding paragraph, such Liquidated Damages Amount shall be paid
only to the Holders that have delivered Notice and Questionnaires that caused
the Company to incur the obligations set forth in Section 2(f) the
non-performance of which is the basis of such Event, provided further, that any
Liquidated Damages Amount accrued with respect to any Security or portion
thereof called for redemption on a redemption date or converted into Underlying
Common Stock on a conversion date prior to the Damages Payment Date, shall, in
any such event, be paid instead to the Holder who submitted such Security or
portion thereof for redemption or conversion on the applicable redemption date
or conversion date, as the case may be, on such date (or promptly following the
conversion date, in the case of conversion). Notwithstanding the foregoing, no
Liquidated Damages Amounts shall accrue as to any Registrable Security from and
after the earlier of (x) the date such security is no longer a Registrable
Security and (y) expiration of the Effectiveness Period. The rate of accrual of
the Liquidated Damages Amount with respect to any period shall not exceed the
rate provided for in this paragraph notwithstanding the occurrence of multiple
concurrent Events. Following the cure of all Events requiring the payment by the
Company of Liquidated Damages Amounts to the Holders of Registrable Securities
pursuant to this Section, the accrual of Liquidated Damages Amounts will cease
(without in any way limiting the effect of any subsequent Event requiring the
payment of any Liquidated Damages Amount by the Company).

                  The Trustee shall be entitled, on behalf of Holders of
Securities or Underlying Common Stock, to seek any available remedy for the
enforcement of this Agreement, including for the payment of any Liquidated
Damages Amount. Notwithstanding the foregoing, the parties agree that the sole
damages payable for a violation of the terms of this Agreement with respect to
which liquidated damages are expressly provided shall be such liquidated
damages. Nothing shall preclude an Electing Holder or Holder of Registrable
Securities from pursuing or obtaining specific performance or other equitable
relief with respect to this Agreement.

                  All of the Company's obligations set forth in this Section
2(g) that are outstanding with respect to any Registrable Security at the time
such security ceases to be a Registrable Security shall survive until such time
as all such obligations with respect to such security have been satisfied in
full.

                  The parties hereto agree that the liquidated damages provided
for in this Section 2(g) constitute a reasonable estimate of the damages that
may be incurred by Holders of Registrable Securities by reason of the failure of
the Shelf Registration Statement or Subsequent Shelf Registration Statement to
be filed or declared effective or available for effecting resales of Registrable
Securities in accordance with the provisions hereof.

                  3.       Registration Procedures.

                  (a)      In connection with the obligations of the Company
with respect to the Shelf Registration Statement pursuant to Section 2 hereof,
the following provisions shall apply:

                                      8

Registration Rights Agreement


                  (i)      The Company shall prepare and file with the SEC a
         Registration Statement or Registration Statements on any appropriate
         form under the 1933 Act available for the sale of the Registrable
         Securities by the Holders thereof in accordance with the intended
         method or methods of distribution thereof, and use its reasonable best
         efforts to cause each such Registration Statement to become effective
         and remain effective as provided herein; provided, that before filing
         any Registration Statement or Prospectus or any amendments or
         supplements thereto with the SEC (other than amendments or supplements
         prepared by the Company in performance of its obligations under Section
         2(f)), the Company shall furnish to the Initial Purchasers and counsel
         to the Majority Holders of such offering, if any, copies of all such
         documents proposed to be filed and use its reasonable best efforts to
         reflect in each such document when so filed with the SEC such comments
         as counsel to the Majority Holders reasonably shall propose within five
         (5) Business Days of the delivery of such copies to the Initial
         Purchasers and such counsel. The provisions of this Section shall not
         apply to filings by the Company under the 1934 Act that are
         incorporated by reference in such Registration Statement or Prospectus.

                  (ii)     After the Effective Time, the Company shall, upon the
         request of any Holder of Registrable Securities that is not then an
         Electing Holder, promptly send a Notice and Questionnaire to such
         Holder. The Company shall not be required to take any action to name
         such Holder as a selling securityholder in the Shelf Registration
         Statement or to enable such Holder to use the Prospectus for resales of
         Registrable Securities until such Holder has returned a completed and
         signed Notice and Questionnaire to the Company.

                  (b)      From the date hereof until the end of the Effective
Period, the Company shall (subject to paragraph (i) below) promptly take such
action as may be necessary so that (i) each of the Shelf Registration Statement
and any amendment thereto and the Prospectus and any amendment or supplement
thereto (and each report or other document incorporated by reference therein in
each case) complies in all material respects with the 1933 Act and the 1934 Act
and the respective rules and regulations thereunder, (ii) each of the Shelf
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (iii) each of the Prospectus and any amendment or supplement to
the Prospectus does not at any time during the Effectiveness Period include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.

                  (c)      Prior to any offering of Registrable Securities
pursuant to the Shelf Registration Statement, the Company shall use its
reasonable best efforts to (i) register or qualify the Registrable Securities
under all applicable state securities or "blue sky" laws of such jurisdictions
as any Holder of Registrable Securities covered by a Registration Statement
shall reasonably request in writing by the time the applicable Registration
Statement is declared effective by the SEC, (ii) cooperate with the Electing
Holders and a single counsel for the Electing Holders in connection with any
filings required to be made with the National Association of Securities Dealers,
Inc. and (iii) do any and all other acts and things which may

                                      9

Registration Rights Agreement


be reasonably necessary or advisable to enable such Holder to consummate the
disposition in each such jurisdiction of such Registrable Securities owned by
such Holder in the manner set forth in the related Registration Statement and
Prospectus; provided, however, that the Company shall not be required to (A)
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) file any general consent to service of process or (C) subject
itself to taxation in any such jurisdiction if it is not so subject.

                  (d)      The Company shall promptly notify each Electing
Holder, counsel for the Majority Holders and counsel for the Initial Purchasers
promptly and, if requested by any such Holder or counsel, confirm such advice in
writing (i) when a Shelf Registration Statement has become effective and when
any post-effective amendment thereto has been filed and becomes effective, (ii)
of any request by the SEC or any state securities authority for amendments and
supplements to a Registration Statement and Prospectus or for additional
information after the Registration Statement has become effective, (iii) of the
issuance by the SEC or any state securities authority of any stop order
suspending the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose, (iv) if, between the effective date of a
Registration Statement and the closing of any sale of Registrable Securities
covered thereby, the representations and warranties of the Company contained in
any underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to the offering cease to be true and correct in all
material respects or if the Company receives any notification with respect to
the suspension of the qualification of the Registrable Securities for sale in
any jurisdiction or the initiation of any proceeding for such purpose, (v) of
the happening of any event during the period a Shelf Registration Statement is
effective which makes, results in or causes such Registration Statement or the
related Prospectus to include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements, in light of the
circumstances under which they were made, not misleading and (vi) of any
determination by the Company that a post-effective amendment to a Registration
Statement would be appropriate, which notice may state that it constitutes a
Deferral Notice, in which event the provisions of 3(i) shall apply.

                  (e)      The Company shall make every reasonable effort to
prevent the issuance, and if issued to obtain the withdrawal, of any order
suspending the effectiveness of a Registration Statement as promptly as
practicable and provide prompt notice to each Holder of the withdrawal of any
such order.

                  (f)      The Company shall furnish to each Electing Holder,
without charge, at least one conformed copy of each Registration Statement and
any post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested).

                  (g)      The Company shall furnish to each Electing Holder, to
counsel for the Initial Purchasers, to counsel for the Majority Holders, if any,
and to each Underwriter of an Underwritten Offering of Registrable Securities,
if any, without charge, as many copies of each Prospectus, including each
preliminary Prospectus, and any amendment or supplement thereto and such other
documents as such Holder or Underwriter may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable Securities;
and subject to Section

                                      10

Registration Rights Agreement


3(i) hereof, the Company consents to the use of such Prospectus and any
amendment or supplement thereto in accordance with applicable law by each of the
selling Holders of Registrable Securities and any such Underwriters in
connection with the offering and sale of the Registrable Securities covered by
and in the manner described in such Prospectus or any amendment or supplement
thereto in accordance with applicable law.

                  (h)      The Company shall cooperate with the Electing Holders
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends and
enable such Registrable Securities to be in such denominations (consistent with
the provisions of the Indenture) and registered in such names as Electing
Holders may reasonably request at least one business day prior to the closing
of any sale of Registrable Securities.

                  (i)      Upon (A) the issuance by the SEC of a stop order
suspending the effectiveness of a Shelf Registration Statement or the initiation
of proceedings with respect to a Shelf Registration Statement under Section 8(d)
or 8(e) of the 1933 Act, (B) the occurrence of any event or the existence of any
fact (a "Material Event") as a result of which any Registration Statement shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or any Prospectus shall contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or (C) the occurrence or existence
of any pending corporate development that, in the reasonable discretion of the
Company, makes it appropriate to suspend the availability of a Shelf
Registration Statement and the related Prospectus for a discrete period of time,
(i) in the case of clause (B) above, subject to the second succeeding sentence,
as promptly as practicable prepare and file, if necessary pursuant to applicable
law, a post-effective amendment to such Registration Statement or a supplement
to the related Prospectus or any document incorporated therein by reference or
file any other required document that would be incorporated by reference into
such Registration Statement and Prospectus so that such Registration Statement
does not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and such Prospectus does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
and, in the case of a post-effective amendment to a Registration Statement,
subject to the second succeeding sentence, use its reasonable best efforts to
cause it to be declared effective as promptly as is practicable, and (ii) give
notice to the Electing Holders, counsel to the Majority Holders and the
Underwriters, if any, that the availability of such Registration Statement is
suspended (a "Deferral Notice") and, upon receipt of any Deferral Notice, each
Electing Holder agrees not to sell any Registrable Securities pursuant to such
Registration Statement until such Electing Holder's receipt of copies of the
supplemented or amended Prospectus provided for in clause (i) above, or until it
is advised in writing by the Company that the Prospectus may be used, and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus. Subject to the next
sentence, the Company will use its reasonable best efforts to ensure that the
use of the Prospectus may be resumed (x) in the case of clause (A) above, as
promptly as is practicable, (y) in the case of

                                      11

Registration Rights Agreement


clause (B) above, as soon as, in the sole judgment of the Company, public
disclosure of such Material Event would not be prejudicial to or contrary to the
interests of the Company and (z) in the case of clause (C) above, as soon as in
the reasonable discretion of the Company, such suspension is no longer
appropriate. The Company shall be entitled to exercise its right under this
Section 3(i) to suspend the availability of the Shelf Registration Statement or
any Prospectus, without incurring or accruing any obligation to pay liquidated
damages pursuant to Section 2(g), no more than one (1) time in any three month
period or three (3) times in any twelve month period, and any such period during
which the availability of the Registration Statement and any Prospectus is
suspended (the "Deferral Period") shall, without incurring any obligation to pay
liquidated damages pursuant to Section 2(g), not exceed 30 days; provided, that
the aggregate duration of any Deferral Periods shall not exceed 30 days in any
three month period (or 60 days in any three month period in the event of a
Material Event pursuant to which the Company has delivered a second notice as
required below) or 90 days in any twelve (12) month period; provided, however,
that in the case of a Material Event relating to an acquisition or a probable
acquisition or financing, recapitalization, disposition, business combination or
other similar transaction, the Company may, without incurring any obligation to
pay liquidated damages pursuant to Section 2(g), deliver to Electing Holders a
second notice to the effect set forth above, which shall have the effect of
extending the Deferral Period by up to an additional 30 days, or such shorter
period of time as is specified in such second notice.

                  (j)      The Company shall obtain a CUSIP number for all
Registrable Securities that are debt securities not later than the Effective
Time.

                  (k)      The Company shall use its reasonable best efforts to
comply with all applicable Rules and Regulations, and to make generally
available to its securityholders as soon as practicable, but in any event not
later than eighteen months after (i) the effective date (as defined in Rule
158(c) under the 1933 Act) of the Shelf Registration Statement and (ii) the
effective date of each post-effective amendment to the Shelf Registration
Statement, while Registrable Securities continue to be registered under the
Shelf Registration Statement or any Subsequent Shelf Registration Statement, an
earnings statement of the Company and its subsidiaries complying with Section
11(a) of the 1933 Act and the Rules and Regulations of the SEC thereunder
(including, at the option of the Company, Rule 158).

                  (l)      The Company shall cause the Indenture to be qualified
under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection
with the registration of the Registrable Securities, as the case may be,
cooperate with the Trustee and the Holders to effect such changes to the
Indenture as may be required for the Indenture to be so qualified in accordance
with the terms of the TIA and execute, and use its reasonable best efforts to
cause the Trustee to execute, all documents as may be required to effect such
changes and all other forms and documents required to be filed with the SEC to
enable the Indenture to be so qualified in a timely manner.

                  (m)      Upon execution of a confidentiality agreement in a
form customarily used in connection with underwritten public offerings, the
Company shall make available for inspection by a representative of the Majority
Holders, any Underwriter participating in any disposition pursuant to such Shelf
Registration Statement, and attorneys and accountants designated by the Majority
Holders, at reasonable times and in a reasonable manner, all financial

                                      12

Registration Rights Agreement


and other records, pertinent documents and properties of the Company, and cause
the respective officers, directors and employees of the Company to supply all
information reasonably requested by any such representative, Underwriter,
attorney or accountant in connection with a Shelf Registration Statement in
order to enable such persons to conduct a reasonable investigation within the
meaning of Section 11 of the 1933 Act.

                  (n)      The Company will use its reasonable best efforts to
cause the Common Stock issuable upon conversion of the Securities to be listed
for quotation on the Nasdaq National Market or other stock exchange or trading
system, if any, on which the Common Stock primarily trades on or prior to the
Effective Time.

                  (o)      Upon (i) the filing of any Shelf Registration
Statement and (ii) the effectiveness of any Shelf Registration Statement,
announce the same, in each case by release to Reuters Economic Services and
Bloomberg Business News.

                  (p)      The Company shall enter into such customary
agreements and take all such other actions in connection therewith (including
those reasonably requested by the Majority Holders) in order to expedite or
facilitate the disposition of such Registrable Securities including, but not
limited to, an Underwritten Offering and in connection with any Underwritten
Offering, (i) to the extent possible, make such representations and warranties
to the Holders and any Underwriters of such Registrable Securities with respect
to the business of the Company and its subsidiaries, the Registration Statement,
Prospectus and documents incorporated by reference or deemed incorporated by
reference, if any, in each case, in form, substance and scope as are customarily
made by issuers to underwriters in underwritten offerings and confirm the same
if and when requested, (ii) obtain opinions of counsel to the Company (which
counsel and opinions, in form, scope and substance, shall be reasonably
satisfactory to the Majority Holders and such Underwriters and their respective
counsel) addressed to each selling Holder and Underwriter of Registrable
Securities, covering the matters customarily covered in opinions requested in
underwritten offerings, (iii) obtain "cold comfort" letters from the independent
certified public accountants of the Company (and, if necessary, any other
certified public accountant of any subsidiary of the Company, or of any business
acquired by the Company for which financial statements and financial data are or
are required to be included in the Registration Statement) addressed to each
selling Holder and Underwriter of Registrable Securities, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings, and (iv) deliver
such documents and certificates as may be reasonably requested by the Holders of
a majority in principal amount of the Registrable Securities being sold or the
Underwriters, and which are customarily delivered in underwritten offerings, to
evidence the continued validity of the representations and warranties of the
Company made pursuant to clause (i) above and to evidence compliance with any
customary conditions contained in an underwriting agreement.

                  The Holders of Registrable Securities covered by a Shelf
Registration Statement who desire to do so may sell such Registrable Securities
in an Underwritten Offering. In any such Underwritten Offering, the investment
banker or investment bankers and manager or managers (the "Underwriters") that
will administer the offering will be selected by the Majority Holders of the
Registrable Securities included in such offering, subject to the Company's
consent, which consent shall not be unreasonably withheld or delayed.

                                      13

Registration Rights Agreement


                  4.       Holder's Obligations.

                           Each Holder agrees, by acquisition of the Registrable
Securities, that no Holder of Registrable Securities shall be entitled to sell
any of such Registrable Securities pursuant to Registration Statement or to
receive a Prospectus relating thereto, unless such Holder has furnished the
Company with a Notice and Questionnaire as required pursuant to Section 2(d)
hereof (including the information required to be included in such Notice and
Questionnaire) and the information set forth in the next sentence. Each Electing
Holder agrees promptly to furnish to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Electing Holder not misleading (including changes to its holdings of
Registrable Securities) and any other information regarding such Electing Holder
and the distribution of such Registrable Securities as the Company may from time
to time reasonably request. Any sale of any Registrable Securities by any Holder
shall constitute a representation and warranty by such Holder that the
information relating to such Holder and its plan of distribution is as set forth
in the Prospectus delivered by such Holder in connection with such disposition,
that such Prospectus does not as of the time of such sale contain any untrue
statement of a material fact relating to or provided by such Holder or its plan
of distribution and that such Prospectus does not as of the time of such sale
omit to state any material fact relating to or provided by such Holder or its
plan of distribution necessary to make the statements in such Prospectus, in the
light of the circumstances under which they were made, not misleading. Upon
receipt of any Deferral Notice, each Electing Holder agrees not to sell any
Registrable Securities pursuant to such Registration Statement until such
Electing Holder's receipt of copies of the supplemented or amended Prospectus
provided for in Section 3(i), or until it is advised in writing by the Company
that the Prospectus may be used, and has received copies of any additional or
supplemental filings that are incorporated or deemed incorporated by reference
in such Prospectus. Each Electing Holder agrees to comply with the provisions of
the 1933 Act relating to prospectus delivery in connection with any offering of
Registrable Securities pursuant to the Shelf Registration Statement.

                  5.       Indemnification and Contribution.

                  (a)      The Company agrees to indemnify and hold harmless
the Initial Purchasers, each Holder and each Person, if any, who controls any
Initial Purchaser or any Holder within the meaning of either Section 15 of the
1933 Act or Section 20 of the 1934 Act, or is under common control with, or is
controlled by, any Initial Purchaser, from and against all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by the Initial Purchasers, any Holder or any such
controlling or affiliated Person in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement (or any
amendment thereto) pursuant to which Registrable Securities were registered
under the 1933 Act, including all documents incorporated therein by reference,
or caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or caused by any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in light of the circumstances under which they
were made not misleading,

                                      14

Registration Rights Agreement


except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to the Initial Purchasers or any Holder furnished to
the Company in writing through Morgan Stanley & Co. Incorporated or any selling
Holder expressly for use therein; provided, however, that the foregoing
indemnity with respect to any preliminary Prospectus shall not inure to the
benefit of any Initial Purchaser or any Holder, or any Person controlling such
Initial Purchaser or Holder or any Person under common control with, or
controlled by, any Initial Purchaser, to the extent it is established that any
such losses, claims, damages or liabilities result from the fact that such
Initial Purchasers or Holder, or Person controlling such Initial Purchaser or
Holder, or Person under common control with, or controlled by, any Initial
Purchaser, sold Registrable Securities to a person to whom there was not sent or
given, by or on behalf of such Initial Purchaser or Holder a copy of the
Prospectus (as then amended or supplemented, if the Company shall have furnished
any amendments or supplements thereto) at or prior to the written confirmation
of the sale of the Registrable Securities to such person, and if such losses,
claims, damages or liabilities result from an untrue statement or alleged untrue
statement or an omission or alleged omission contained in such preliminary
Prospectus that was corrected in the Prospectus (as so amended or supplemented),
unless such failure is the result of noncompliance by the Company with its
obligations to deliver copies of the Prospectus to the Initial Purchasers or
such Holder; nor shall this indemnity inure to the benefit of any Initial
Purchaser or Holder, or any Person controlling such Initial Purchasers or
Holder, or any Person under common control with, or controlled by, such Initial
Purchasers, from whom the person asserting any such losses, claims, damages or
liabilities purchased the Registrable Securities concerned to the extent it is
established that, at the time of such purchase, such Initial Purchaser or Holder
had received written notice from the Company that the use of such Prospectus was
suspended as provided in Section 3(i) hereof. In connection with any
Underwritten Offering permitted by Section 3, the Company will also indemnify
the Underwriters, if any, their officers and directors and each Person who
controls such Persons (within the meaning of the 1933 Act and the 1934 Act) to
the same extent as provided above with respect to the indemnification of the
Holders, if requested in connection with any Registration Statement.

                  (b)      Each Holder agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Initial Purchasers and the other
selling Holders, and each of their respective directors, officers who sign the
Registration Statement and each Person, if any, who controls the Company, any
Initial Purchaser and any other selling Holder within the meaning of either
Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as
the foregoing indemnity from the Company to the Initial Purchasers and the
Holders, but only with reference to information relating to such Holder
furnished to the Company in writing by such Holder expressly for use in any
Registration Statement (or any amendment thereto) or any Prospectus (or any
amendment or supplement thereto).

                  (c)      In case any proceeding (including any governmental
investigation) shall be instituted involving any Person in respect of which
indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above,
such Person (the "indemnified party") shall promptly notify the Person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the reasonable

                                      15

Registration Rights Agreement


fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the reasonable fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel or
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (a) the reasonable fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Initial Purchasers and all Persons, if any, who control any Initial
Purchaser within the meaning of either Section 15 of the 1933 Act or Section 20
of the 1934 Act or any Person under common control with, or controlled by, any
Initial Purchaser, (b) the reasonable fees and expenses of more than one
separate firm (in addition to any local counsel) for the Company, its directors,
its officers who sign the Registration Statement and each Person, if any, who
controls the Company within the meaning of either such Section and (c) the
reasonable fees and expenses of more than one separate firm (in addition to any
local counsel) for all Holders and all Persons, if any, who control any Holders
within the meaning of either such Section, and that all such reasonable fees and
expenses shall be reimbursed as they are incurred. In such case involving the
Initial Purchasers and Persons who control the Initial Purchasers or any Person
under common control with, or controlled by, any Initial Purchaser such firm
shall be designated in writing by Morgan Stanley & Co. Incorporated. In such
case involving the Holders and such Persons who control Holders, such firm shall
be designated in writing by the Majority Holders. In all other cases, such firm
shall be designated by the Company. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but,
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which such indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.

                  (d)      If the indemnification provided for in paragraph (a)
or paragraph (b) of this Section 5 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
Company and the Holders shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Holders' respective obligations to contribute
pursuant to this Section

                                      16

Registration Rights Agreement


5(d) are several in proportion to the respective principal amount of Registrable
Securities of such Holder that were registered pursuant to a Registration
Statement.

                  (e)      The Company and each Holder agree that it would not
be just or equitable if contribution pursuant to this Section 5 were determined
by pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in paragraph (d) above. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5, no Holder shall be required to indemnify or
contribute any amount in excess of the amount by which the total price at which
Registrable Securities were sold by such Holder exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11 (f) of
the 1933 Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 5 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.

                  The indemnity and contribution provisions contained in this
Section 5 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of the Initial Purchasers, any Holder or any Person controlling any Initial
Purchaser or any Holder, or any Person under common control with, or controlled
by, any Initial Purchaser or by or on behalf of the Company, its officers or
directors or any Person controlling the Company and (iii) any sale of
Registrable Securities pursuant to a Shelf Registration Statement.

                  6.       Miscellaneous.

                  (a)      No Inconsistent Agreements. The Company has not
entered into, and on or after the date of this Agreement will not enter into,
any agreement which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the Company's other issued and outstanding securities under any such agreements.

                  (b)      Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given unless the Company has obtained the written
consent of Holders of at least a majority in aggregate principal amount of the
outstanding Registrable Securities affected by such amendment, modification,
supplement, waiver or consent; provided, however, that no amendment,
modification, supplement, waiver or consent to any departure from the provisions
of Section 5 hereof shall be effective as against any Holder of Registrable
Securities unless consented to in writing by such Holder.

                                      17

Registration Rights Agreement


                  (c)      Counsel for the Majority Holders. Any reference
herein to counsel for the Majority Holders or the Initial Purchasers shall be to
Latham & Watkins unless and until the Majority Holders or Initial Purchasers
name other counsel.

                  (d)      Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, telecopier, or any courier guaranteeing
overnight delivery (i) if to a Holder, at the most current address given by such
Holder to the Company by means of a notice given in accordance with the
provisions of this Section 6(d), which address initially is, with respect to the
Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if
to the Company, initially at the Company's address set forth in the Purchase
Agreement and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 6(d).

                  All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next business day if timely delivered to an air courier guaranteeing
overnight delivery.

                  Copies of all such notices, demands, or other communications
shall be concurrently delivered by the Person giving the same to the Trustee, at
the address specified in the Indenture.

                  (e)      Successors and Assigns. This Agreement shall inure to
the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; provided that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Registrable
Securities in violation of the terms of the Purchase Agreement. If any
transferee of any Holder shall acquire Registrable Securities, in any manner,
whether by operation of law or otherwise, such Registrable Securities shall be
held subject to all of the terms of this Agreement, and by taking and holding
such Registrable Securities such Person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of this
Agreement and such Person shall be entitled to receive the benefits hereof. The
Initial Purchasers (in their capacity as Initial Purchasers) shall have no
liability or obligation to the Company with respect to any failure by a Holder
to comply with, or any breach by any Holder of, any of the obligations of such
Holder under this Agreement.

                  (f)      Purchases and Sales of Securities. The Company shall
not, and shall use its best efforts to cause its affiliates (as defined in Rule
405 under the 1933 Act) not to, purchase and then resell or otherwise transfer
any Securities.

                  (g)      Third Party Beneficiary. The Holders shall be third
party beneficiaries to the agreements made hereunder between the Company, on the
one hand, and the Initial Purchasers, on the other hand, and shall have the
right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.

                                      18

Registration Rights Agreement


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

                  (i)      Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

                  (j)      Governing Law. This Agreement shall be governed by
the laws of the State of New York.

                  (k)      Severability. In the event that any one or more of
the provisions contained herein, or the application thereof in any circumstance,
is held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.

                            [Signature page follows]

                                      19
Registration Rights Agreement


                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.

                                          PACIFICARE HEALTH SYSTEMS, INC.

                                          By    /s/ Gregory W. Scott
                                             -----------------------------------
                                             Name:  Gregory W. Scott
                                             Title: Executive Vice President and
                                                    Chief Financial Officer

                                      S - 1

Registration Rights Agreement


Confirmed and accepted as of
the date first above written:

MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.

By: MORGAN STANLEY & CO. INCORPORATED

         By /s/ Bryan Andrzejewski
            -------------------------
         Name:  Bryan Andrzejewski
         Title: Executive Director

                                     S - 2

Registration Rights Agreement

EX-5.1

                                                                     Exhibit 5.1


                        [COOLEY GODWARD LLP LETTERHEAD]


January 31, 2003


PACIFICARE HEALTH SYSTEMS, INC.
3120 Lake Center Drive
Santa Ana, California 92704

Ladies and Gentlemen:

You have requested our opinion with respect to certain matters in connection
with the filing by PACIFICARE HEALTH SYSTEMS, INC., a Delaware corporation (the
"Company") of a Registration Statement on Form S-3 (the "Registration
Statement") with the Securities and Exchange Commission, pursuant to which the
Company is registering for resale under the Securities Act of 1933, as amended,
an aggregate of $135,000,000 principal amount of the Company's 3% Convertible
Subordinated Debentures due 2032 (the "Debentures") and up to 3,214,283 shares
of common stock issuable upon conversion thereof (the "Shares"), on behalf of
the holders of the Debentures. The Debentures were issued pursuant to the
Indenture dated November 22, 2002 between the Company and U.S. Bank National
Association (formerly State Street Bank and Trust Company, N.A.).

In connection with this opinion, we have examined copies of the Indenture, the
Debentures and such other documents and have made such other inquiries and
investigations of law as we have deemed necessary or appropriate to enable us to
render the opinion expressed below. We have assumed the genuineness and
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents where due execution and delivery are a prerequisite
to the effectiveness thereof.

Except with respect to our opinion as to the Debentures constituting valid and
binding obligations, which is provided solely with respect to the laws of the
State of New York, our opinion is expressed only with respect to the federal
laws of the United States of America and the General Corporation Law of the
State of Delaware. We express no opinion as to whether the laws of any
particular jurisdiction other than those identified above are applicable to the
subject matter hereof. We are not rendering any opinion as to compliance with
any federal or state law, rule or regulation relating to securities, or to the
sale or issuance thereof.

On the basis of the foregoing and in reliance thereon, we are of the opinion
that (i) the Debentures constitute valid and binding obligations of the Company,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and other similar laws affecting creditors'
rights generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law), and (ii)
following the issuance upon conversion of the Debentures in accordance with
their terms, the Shares will be validly issued, fully paid and nonassessable.

We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.

Very truly yours,

Cooley Godward LLP



By: /s/ Barbara L. Borden
   ___________________________
      Barbara L. Borden

EX-12.1

                                                                    EXHIBIT 12.1


     STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES




                                                                                                   Nine Months Ended
                                                     Year Ended December 31,                         September 30,
                                      --------------------------------------------------------    --------------------
                                        1997        1998        1999        2000        2001        2001        2002
                                      --------    --------    --------    --------    --------    --------    --------
                                                                                         

Earnings:
Income before income taxes            $ 60,124    $385,574    $481,909    $288,086    $ 56,502    $ 91,665    $162,976
Pretax charges (credits)               154,507      11,020      (2,233)      8,766      61,157       1,714       5,485
Fixed charges:
  Interest expense                      64,536      60,923      43,001      79,636      70,282      54,802      55,351
  Interest portion of rental expense    13,963      17,080      16,023      17,917      16,554      12,444      15,699
                                      --------    --------    --------    --------    --------    --------    --------
                                      $293,130    $474,597    $538,700    $394,405    $204,495    $160,625    $239,511
                                      ========    ========    ========    ========    ========    ========    ========

Fixed Charges:
Interest expense                      $ 64,536    $ 60,923    $ 43,001    $ 79,636    $ 70,282    $ 54,802    $ 55,351
Interest portion of rental expense      13,963      17,080      16,023      17,917      16,554      12,444      15,699
                                      --------    --------    --------    --------    --------    --------    --------
                                      $ 78,499    $ 78,003    $ 59,024    $ 97,553    $ 86,836    $ 67,246    $ 71,050
                                      ========    ========    ========    ========    ========    ========    ========

Ratio of Earnings to Fixed Charges         3.7         6.1         9.1         4.0         2.4         2.4         3.4
                                      ========    ========    ========    ========    ========    ========    ========




PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES



                                                                         Nine Months
                                          Year Ended                        Ended
                                         December 31,                   September 30,
                                             2001                           2002
                                         ------------                   -------------
                                                                  

Earnings:
Income before income taxes                   $ 56,502                        $162,976
Pretax charges (credits)                       61,157                           5,485
Fixed charges:
  Interest expense                             70,237                          56,106
  Interest portion of rental expense           16,554                          15,699
                                         ------------                   -------------
                                             $204,450                        $240,266
                                         ============                   =============

Fixed Charges:
  Interest expense                           $ 70,237                        $ 56,106
  Interest portion of rental expense           16,554                          15,699
                                         ------------                   -------------
                                             $ 86,791                        $ 71,805
                                         ============                   =============

Ratio of earnings to fixed charges                2.4                             3.3
                                         ============                   =============

EX-15.1

                                                                    EXHIBIT 15.1


               LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION



The Board of Directors
PacifiCare Health Systems, Inc.

We are aware of the incorporation by reference in the Registration Statement
(Form S-3) of PacifiCare Health Systems, Inc. for the registration of
$135,000,000 of convertible subordinated debentures of our reports dated April
24, 2002, July 25, 2002 and October 23, 2002 relating to the unaudited condensed
consolidated interim financial statements of PacifiCare Health Systems, Inc.
that are included in its Form 10-Q for the quarters ended March 31, 2002, June
30, 2002 and September 30, 2002.


                                            ERNST & YOUNG LLP
Irvine, California
January 29, 2003

EX-23.1

                                                                    EXHIBIT 23.1




               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of PacifiCare Health
Systems, Inc. for the registration of $135,000,000 of convertible subordinated
debentures and to the incorporation by reference therein of our report dated
January 31, 2002 (except for Note 10, as to which the date is March 12, 2002),
with respect to the consolidated financial statements and schedule of PacifiCare
Health Systems, Inc. included in its Annual Report (Form 10-K) for the year
ended December 31, 2001, filed with the Securities and Exchange Commission.


                                           ERNST & YOUNG LLP
Irvine, California
January 29, 2003

EX-25.1

                                                                    Exhibit 25.1
===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           --------------------------

                                    FORM T-1

                         STATEMENT OF ELIGIBILITY UNDER
                      THE TRUST INDENTURE ACT OF 1939 OF A
                    CORPORATION DESIGNATED TO ACT AS TRUSTEE
               Check if an Application to Determine Eligibility of
                     a Trustee Pursuant to Section 305(b)(2)
             -------------------------------------------------------

                         U.S. BANK NATIONAL ASSOCIATION
               (Exact name of Trustee as specified in its charter)

                                   31-0841368
                       I.R.S. Employer Identification No.

           180 East Fifth Street
            St. Paul, Minnesota                             55101
  (Address of principal executive offices)               (Zip Code)

                                  Frank Leslie
                         U.S. Bank National Association
                              180 East Fifth Street
                               St. Paul, MN 55101
                                 (651) 244-8677
            (Name, address and telephone number of agent for service)

                         PACIFICARE HEALTH SYSTEMS, INC.
                     (Issuer with respect to the Securities)

                  Delaware                               95-4591529

      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
       incorporation or organization)

  5995 Plaza Drive, Cypress, CA                             90630
  (Address of Principal Executive Offices)               (Zip Code)


                 3% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2032
                       (TITLE OF THE INDENTURE SECURITIES)


================================================================================

                                    FORM T-1

ITEM 1.     GENERAL INFORMATION. Furnish the following information as to the
            Trustee.

            a)    Name and address of each examining or supervising authority to
                  which it is subject.

                        Comptroller of the Currency
                        Washington, D.C.

            b)    Whether it is authorized to exercise corporate trust powers.

                        Yes

ITEM 2.     AFFILIATIONS WITH OBLIGOR.  If the obligor is an affiliate of the
            Trustee, describe each such affiliation.

                  None

ITEMS 3-15  Items 3-15 are not applicable because to the best of the Trustee's
            knowledge, the obligor is not in default under any Indenture for
            which the Trustee acts as Trustee.

ITEM 16.    LIST OF EXHIBITS:  List below all exhibits filed as a part of this
            statement of eligibility and qualification.

            1.    A copy of the Articles of Association of the Trustee.*

            2.    A copy of the certificate of authority of the Trustee to
                  commence business.*

            3.    A copy of the certificate of authority of the Trustee to
                  exercise corporate trust powers.*

            4.    A copy of the existing bylaws of the Trustee.*

            5.    A copy of each Indenture referred to in Item 4. Not
                  applicable.

            6.    The consent of the Trustee required by Section 321(b) of the
                  Trust Indenture Act of 1939, attached as Exhibit 6.

            7.    A copy of the latest report of condition of the trustee
                  published pursuant to law or the requirements of its
                  supervising or examining authority.



      *     Incorporated by reference to Registration Number 333-67188.


                                       2

                                      NOTE

      The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.



                                    SIGNATURE

      Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility and qualification to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
City of Los Angeles, State of California on the 31st day of January, 2003.


                              U.S. BANK NATIONAL ASSOCIATION

                              By:   /s/ Paula Oswald
                                    ______________________________
                                        Paula Oswald
                                        Vice President


                                       3

                                    EXHIBIT 6

                                     CONSENT


      In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.


Dated: January 31, 2003


                              U.S. BANK NATIONAL ASSOCIATION


                              By:   /s/ Paula Oswald
                                    ______________________________
                                        Paula Oswald
                                        Vice President


                                       4

                                    EXHIBIT 7
                         U.S. BANK NATIONAL ASSOCIATION
                        STATEMENT OF FINANCIAL CONDITION
                                 AS OF 9/30/2002

                                    ($000'S)



                                                                       9/30/2002
                                                                    ------------
                                                                 
ASSETS
   Cash and Due From Depository Institutions                        $  8,809,794
   Federal Reserve Stock                                                       0
   Securities                                                         28,156,313
   Federal Funds                                                         975,986
   Loans & Lease Financing Receivables                               111,491,144
   Fixed Assets                                                        1,357,049
   Intangible Assets                                                   8,242,263
   Other Assets                                                        7,510,862
                                                                    ------------
      TOTAL ASSETS                                                  $166,543,411

LIABILITIES
   Deposits                                                         $112,901,360
   Fed Funds                                                           2,319,887
   Treasury Demand Notes                                                       0
   Trading Liabilities                                                   285,504
   Other Borrowed Money                                               20,829,386
   Acceptances                                                           137,242
   Subordinated Notes and Debentures                                   5,696,195
   Other Liabilities                                                   5,198,418
                                                                    ------------
   TOTAL LIABILITIES                                                $147,367,992

EQUITY
   Minority Interest in Subsidiaries                                $    990,010
   Common and Preferred Stock                                             18,200
   Surplus                                                            11,312,077
   Undivided Profits                                                   6,855,132
                                                                    ------------
      TOTAL EQUITY CAPITAL                                          $ 19,175,419

TOTAL LIABILITIES AND EQUITY CAPITAL                                $166,543,411


To the best of the undersigned's determination, as of the date hereof, the above
financial information is true and correct.

U.S. BANK NATIONAL ASSOCIATION

By:   /s/ Paula Oswald
   ___________________________
          Vice President

Date: January 31, 2003


                                       5