10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2007

or

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

For the transition period from                      to                    

Commission File Number: 1-12718

HEALTH NET, INC.

(Exact name of registrant as specified in its charter)

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

(818) 676-6000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

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

x  Large accelerated filer ¨  Accelerated filer ¨  Non-accelerated filer

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

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

The number of shares outstanding of the registrant’s Common Stock as of May 4, 2007 was 112,251,557 (excluding 29,849,987 shares held as treasury stock).

HEALTH NET, INC.

INDEX TO FORM 10-Q

	Page
Part I—FINANCIAL INFORMATION
Item 1—Financial Statements (Unaudited)	3
Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	3
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	4
Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2007 and 2006	5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	6
Condensed Notes to Consolidated Financial Statements	7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3—Quantitative And Qualitative Disclosures About Market Risk	36
Item 4—Controls and Procedures	36
Part II—OTHER INFORMATION
Item 1—Legal Proceedings	38
Item 1A —Risk Factors	38
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3—Defaults Upon Senior Securities	39
Item 4—Submission of Matters to a Vote of Security Holders	40
Item 5—Other Information	40
Item 6—Exhibits	40
Signatures	41

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2007		2006
REVENUES
Health plan services premiums	$	2,777,259	$	2,524,374
Government contracts		607,995		624,637
Net investment income		31,364		23,359
Administrative services fees and other income		12,294		14,260
Total revenues		3,428,912		3,186,630
EXPENSES
Health plan services (excluding depreciation and amortization)		2,341,074		2,105,214
Government contracts		567,099		595,126
General and administrative		291,285		287,253
Selling		69,129		56,538
Depreciation and amortization		7,633		5,344
Interest		9,560		12,226
Total expenses		3,285,780		3,061,701
Income from operations before income taxes		143,132		124,929
Income tax provision		54,547		48,336
Net income	$	88,585	$	76,593
Net income per share:
Basic	$	0.79	$	0.67
Diluted	$	0.77	$	0.65
Weighted average shares outstanding:
Basic		111,970		114,594
Diluted		114,759		118,398

See accompanying condensed notes to consolidated financial statements.

3

HEALTH NET, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

	March 31, 2007			December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	949,171		$	704,806
Investments—available for sale (amortized cost: 2007—$1,408,443; 2006—$1,430,792)		1,393,161			1,416,038
Premiums receivable, net of allowance for doubtful accounts (2007—$7,304; 2006—$7,526)		234,795			177,625
Amounts receivable under government contracts		190,259			199,569
Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract		291,862			272,961
Other receivables		196,029			230,865
Deferred taxes		72,107			54,702
Other assets		175,270			161,280
Total current assets		3,502,654			3,217,846
Property and equipment, net		157,464			151,184
Goodwill		751,949			751,949
Other intangible assets, net		41,486			42,835
Deferred taxes		90,953			33,137
Other noncurrent assets		176,158			100,071
Total Assets	$	4,720,664		$	4,297,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Reserves for claims and other settlements	$	1,097,953		$	1,048,796
Health care and other costs payable under government contracts		41,952			52,384
IBNR health care costs payable under TRICARE North contract		291,862			272,961
Unearned premiums		402,613			164,099
Bridge loan		—			200,000
Accounts payable and other liabilities		378,233			371,263
Total current liabilities		2,212,613			2,109,503
Loans payable		400,000			300,000
Other noncurrent liabilities		245,477			108,554
Total Liabilities		2,858,090			2,518,057
Commitments and contingencies
Stockholders’ Equity:
Preferred stock ($0.001 par value, 10,000 shares authorized, none issued and outstanding)		—			—
Common stock ($0.001 par value, 350,000 shares authorized; issued 2007—142,045 shares; 2006—140,690 shares)		141			140
Additional paid-in capital		1,077,069			1,027,878
Treasury common stock, at cost (2007—29,849 shares of common stock; 2006—28,815 shares of common stock)		(947,187	)		(891,294	)
Retained earnings		1,743,985			1,653,478
Accumulated other comprehensive loss		(11,434	)		(11,237	)
Total Stockholders’ Equity		1,862,574			1,778,965
Total Liabilities and Stockholders’ Equity	$	4,720,664		$	4,297,022

See accompanying condensed notes to consolidated financial statements.

4

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

	Common Stock				Restricted Common Stock			Unearned Compensation			Additional Paid-In Capital			Common Stock Held in Treasury					Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Total
	Shares		Amount											Shares		Amount
Balance as of January 1, 2006	137,898		$	137	$	6,883		$	(2,137	)	$	906,789		(23,182	)	$	(633,375	)	$	1,324,165	$	(13,387	)	$	1,589,075
Comprehensive income:
Net income																				76,593					76,593
Change in unrealized depreciation on investments, net of tax benefit of $4,190																						(6,550	)		(6,550	)
Total comprehensive income																									70,043
Exercise of stock options including related tax benefit	444			1								14,449													14,450
Repurchases of common stock												1,160		(58	)		(2,877	)							(1,717	)
Issuance of restricted stock																									—
Forfeiture of restricted stock																									—
Amortization of restricted stock grants												537													537
Lapse of restrictions of restricted stock grants																									—
Share-based compensation expense including related tax benefit												4,435													4,435
Reclassification in connection with adopting SFAS No. 123(R)						(6,883	)		2,137			4,746													—
Balance as of March 31, 2006	138,342		$	138	$	—		$	—		$	932,116		(23,240	)	$	(636,252	)	$	1,400,758	$	(19,937	)	$	1,676,823
Balance as of January 1, 2007	140,690		$	140	$	—		$	—		$	1,027,878		(28,815	)	$	(891,294	)	$	1,653,478	$	(11,237	)	$	1,778,965
Implementation of FIN 48																				1,922					1,922
Adjusted balance as of January 1, 2007	140,690			140		—			—			1,027,878		(28,815	)		(891,294	)		1,655,400		(11,237	)		1,780,887
Comprehensive income:
Net income																				88,585					88,585
Change in unrealized depreciation on investments, net of tax benefit of $244																						(284	)		(284	)
Defined benefit pension plans:
Prior service cost and net loss																						87			87
Total comprehensive income																									88,388
Exercise of stock options including related tax benefit	1,225			1								44,075													44,076
Repurchases of common stock and accelerated stock repurchase settlement	133											(125	)	(1,034	)		(55,893	)							(56,018	)
Forfeiture of restricted stock	(3	)										(88	)												(88	)
Amortization of restricted stock grants												80													80
Share-based compensation expense including related tax benefit												5,249													5,249
Balance as of March 31, 2007	142,045		$	141	$	—		$	—		$	1,077,069		(29,849	)	$	(947,187	)	$	1,743,985	$	(11,434	)	$	1,862,574

See accompanying condensed notes to consolidated financial statements.

5

HEALTH NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Three Months Ended March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	88,585		$	76,593
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation		7,633			5,344
Share-based compensation expense		5,240			4,435
Other changes		(1,510	)		4,349
Changes in assets and liabilities, net of effects of dispositions or acquisitions:
Premiums receivable and unearned premiums		181,344			186,259
Other current assets, receivables and noncurrent assets		(16,980	)		(41,899	)
Amounts receivable/payable under government contracts		(1,122	)		(29,168	)
Reserves for claims and other settlements		49,157			(54,055	)
Accounts payable and other liabilities		31,680			70,191
Net cash provided by operating activities		344,027			222,049
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments		383,857			228,995
Maturities of investments		60,004			15,770
Purchases of investments		(419,172	)		(252,973	)
Sales of property and equipment		83,870			—
Purchases of property and equipment		(19,629	)		(15,730	)
Cash (paid) received related to the (acquisition) sale of businesses and properties		—			(73,100	)
Restricted cash held in escrow and other costs related to pending purchase of a business		(69,780	)		—
Purchases of restricted investments and other		(3,970	)		(9,027	)
Net cash provided by (used in) investing activities		15,180			(106,065	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases		30,652			10,380
Excess tax benefit on share-based compensation		10,399			3,099
Repurchases of common stock		(55,893	)		(1,724	)
Borrowings under revolving credit facility		100,000			—
Repayment of debt		(200,000	)		—
Net cash (used in) provided by financing activities		(114,842	)		11,755
Net increase in cash and cash equivalents		244,365			127,739
Cash and cash equivalents, beginning of year		704,806			742,485
Cash and cash equivalents, end of period	$	949,171		$	870,224
SUPPLEMENTAL CASH FLOWS DISCLOSURE:
Interest paid	$	12,703		$	1,134
Income taxes paid		7,938			30,540
Securities reinvested from restricted available for sale investments to restricted cash		7,347			3,467
Securities reinvested from restricted cash to restricted available for sale investments		1,576			658

See accompanying condensed notes to consolidated financial statements.

6

HEALTH NET, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Health Net, Inc. (referred to herein as the Company, we, us or our) prepared the accompanying unaudited consolidated financial statements following the rules and regulations of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain notes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

We are responsible for the accompanying unaudited consolidated financial statements. These consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results in accordance with GAAP. In accordance with GAAP, we make certain estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates and assumptions.

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

Certain amounts in the 2006 financial statements have been reclassified to conform to the current presentation. Certain items presented in the consolidated statements of cash flows, amounting to $36.1 million for the three months ended March 31, 2006, have been reclassified between financing activities and operating activities. This reclassification had no impact on our net earnings or balance sheet as previously reported.

2. SIGNIFICANT ACCOUNTING POLICIES

Income Taxes

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

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

7

benefit amounts meeting or exceeding this standard will be reflected in tax provision expense and deferred tax asset balances. The interpretation also requires that any differences between the amounts of tax benefits reported on tax returns and tax benefits reported in the financial statements be recorded in a liability for unrecognized tax benefits. The liability for unrecognized tax benefits is reported separately from deferred tax assets and liabilities and classified as current or noncurrent based upon the expected period of payment.

At January 1, 2007 upon adoption of FIN 48, we increased the liability for unrecognized tax benefits by $77 million to a total of $112 million. Approximately $66 million of this increase also increased deferred tax assets, as the amount relates to tax benefits that we expect will be recognized, but for which there exists uncertainty as to the timing of the benefits. Also included in the $77 million increase was a reclassification of $13 million from federal and state taxes payable to the liability for unrecognized tax benefits. The reclassification was necessary to properly encompass the potential impact of all uncertain tax positions within the liability for unrecognized tax benefits. The remaining impact of adopting FIN 48 was a $2 million increase to retained earnings, recorded as a cumulative-effect adjustment as of January 1, 2007.

Of the $112 million total liability for unrecognized tax benefits, approximately $33 million will, if recognized, impact the company’s effective tax rate. Approximately $13 million of the total benefits will, if recognized, impact goodwill from prior acquisitions of subsidiaries, and the remaining $66 million would impact deferred tax assets.

We recognize interest and any applicable penalties which could be assessed related to unrecognized tax benefits in income tax provision expense. The liability for unrecognized tax benefits includes approximately $7 million of accrued interest and an immaterial amount of penalties as of January 1, 2007.

We file tax returns in the federal as well as several state tax jurisdictions. As of January 1, 2007, tax years open to examination by the Internal Revenue Service are 2003 and forward. The most significant state tax jurisdiction for the company is California, and tax years open to examination by that jurisdiction are 2000 and forward. As of January 1, 2007, the company was in the process of closing the examination by California of tax years 2000 and 2001. Presently we are under examination by the Internal Revenue Services as well as various other taxing authorities. As a result of our current examination by the Internal Revenue Service for tax years 2003 – 2005, we believe the liability for unrecognized tax benefits could decrease by approximately $3 - $17 million over the next 12 months, representing possible payments of proposed assessments to deny a portion of a deduction for a 2004 bad debt and a 2003 addition to a workers’ compensation reserve as well to change a method of accounting for deferred revenue. Any payments for these proposed assessments will be funded by operating cash flows. These proposed adjustments will reverse over time. Management is considering acceptance of the proposed assessments.

Comprehensive Income

Our comprehensive income is as follows:

	Three Months Ended March 31,
	2007			2006
	(Dollars in millions)
Net income	$	88.6		$	76.6
Other comprehensive loss, net of tax:
Net change in unrealized depreciation on investments available for sale		(0.3	)		(6.6	)
Defined benefit pension plans: Prior service cost and net loss amortization		0.1			—
Comprehensive income	$	88.4		$	70.0

8

Earnings Per Share

Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock outstanding during the periods presented. Diluted earnings per share is based upon the weighted average shares of common stock and dilutive common stock equivalents outstanding during the periods presented. Common stock equivalents include stock options, restricted stock and restricted stock units (RSUs). Dilutive common stock equivalents reflect the potential dilution that could occur if stock options were exercised and restricted stock and RSUs were vested. Performance share awards are included in the calculation of dilutive common stock equivalents when all performance contingencies have been met or are probable of being met.

Common stock equivalents arising from dilutive stock options, restricted common stock, RSUs and performance shares are computed using the treasury stock method. For the three months ended March 31, 2007 and 2006, this amounted to 2,789,000 and 3,804,000 shares, respectively and includes 167,000 and 152,000 common stock equivalents from dilutive RSUs and restricted common stock, respectively.

During the three months ended March 31, 2007 and 2006, weighted average shares related to certain equity awards of 1,209,000 and 708,000, respectively, were excluded from the denominator for diluted earnings per share because they were anti-dilutive. These options expire through March 2017.

We are authorized to repurchase our common stock under our stock repurchase program authorized by our Board of Directors. See Note 5 for further information on our stock repurchase program.

Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill by reporting unit is as follows:

	Health Plan Services		Total
	(Dollars in millions)
Balance as of March 31, 2007 and December 31, 2006	$	752.0	$	752.0

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

	Gross Carrying Amount		Accumulated Amortization			Net Balance		Weighted Average Life (in years)
			(Dollars in millions)
As of March 31, 2007:
Provider networks	$	40.5	$	(25.7	)	$	14.8	19.4
Customer relationships and other (Note 4)		29.5		(2.8	)		26.7	11.1
	$	70.0	$	(28.5	)	$	41.5
As of December 31, 2006:
Provider networks	$	40.5	$	(25.1	)	$	15.4	19.4
Customer relationships and other (Note 4)		29.5		(2.1	)		27.4	11.1
	$	70.0	$	(27.2	)	$	42.8

We performed our annual impairment test on our goodwill and other intangible assets as of June 30, 2006 for our health plans reporting unit and also re-evaluated the useful lives of our other intangible assets. No goodwill impairment was identified in our health plans reporting unit. We also determined that the estimated useful lives of our other intangible assets properly reflected the current estimated useful lives.

9

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

2007	$	4.4
2008		4.4
2009		4.4
2010		4.4
2011		4.0

Restricted Assets

We and our consolidated subsidiaries are required to set aside certain funds which may only be used for certain purposes pursuant to state regulatory requirements. We have discretion as to whether we invest such funds in cash and cash equivalents or other investments. As of March 31, 2007 and December 31, 2006, the restricted cash and cash equivalents balances totaled $15.4 million and $6.7 million, respectively, and are included in other noncurrent assets. Investment securities held by trustees or agencies were $104.9 million and $111.6 million as of March 31, 2007 and December 31, 2006, respectively, and are included in investments available for sale.

CMS Risk Factor Adjustments

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

We recognized $26.5 million of favorable Medicare risk factor estimates in our health plan services premium revenues in the three months ended March 31, 2007. Of this amount, $9.9 million was for the 2006 and prior payment years. We also recognized $8.6 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs in the three months ended March 31, 2007. Of this amount, $3.4 million was for the 2006 and prior payment years.

We recognized $25.1 million of favorable Medicare risk factor estimates in our health plan services premium revenues in the three months ended March 31, 2006. Of this amount, $19.1 million was for the 2005 and prior payment years. We also recognized $9.2 million of capitation expense related to the Medicare risk factor estimates in our health plan services costs in the three months ended March 31, 2006. Of this amount, $7.0 million was for the 2005 and prior payment years.

Government Contracts

Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs which is negotiated annually during the term of the contract, with underruns and overruns of our target cost borne 80% by the government and 20% by us. We recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable and the collectibility is reasonably assured. During the three months ended March 31, 2007, we recognized a decrease in the revenue estimate of $44 million and a decrease in the cost estimate of $54 million. Such changes in revenue and cost estimates for the three months ended March 31, 2006 were not material.

Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement

10

No. 115” (SFAS No. 159). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated financial statements.

In 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS No. 157 does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial statements.

3. SEGMENT INFORMATION

We operate within two reportable segments: Health Plan Services and Government Contracts. Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. Our Government Contracts reportable segment includes government-sponsored managed care plans through the TRICARE program and other health care-related government contracts. Our Government Contracts segment administers one large, multi-year managed health care government contract and other health care related government contracts.

We evaluate performance and allocate resources based on segment pretax income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006, except that intersegment transactions are not eliminated. We include investment income, administrative services fees and other income and expenses associated with our corporate shared services and other costs in determining our Health Plan Services segment’s pretax income to reflect the fact that these revenues and expenses are primarily used to support our Health Plan Services reportable segment.

Our segment information is as follows:

	Health Plan Services		Government Contracts		Eliminations		Total
	(Dollars in millions)
Three Months Ended March 31, 2007
Revenues from external sources	$	2,777.3	$	608.0	—		$	3,385.3
Intersegment revenues		2.1		—	(2.1	)		—
Segment pretax income		102.2		40.9	—			143.1
Three Months Ended March 31, 2006
Revenues from external sources	$	2,524.4	$	624.6	—		$	3,149.0
Intersegment revenues		2.6		—	(2.6	)		—
Segment pretax income		95.4		29.5	—			124.9

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Our health plan services premium revenue by line of business is as follows:

	Three Months Ended March 31,
	2007		2006
	(Dollars in millions)
Commercial premium revenue	$	1,777.5	$	1,669.1
Medicare premium revenue		704.8		575.9
Medicaid premium revenue		295.0		279.4
Total Health Plan Services premiums	$	2,777.3	$	2,524.4

4. ACQUISITIONS AND SALES

Purchase of Guardian Joint Venture

On February 27, 2007, we announced that we had entered into an agreement with The Guardian Life Insurance Company of America (Guardian) to purchase Guardian’s 50% stake in the Health Care Solutions (HCS) joint venture (Guardian Transaction). We have approximately $69.1 million on deposit in an escrow account pursuant to the terms of our agreement with Guardian, which amount will be released to Guardian upon receipt of required regulatory approvals and satisfaction of all closing conditions. The escrow deposit amount is included as a restricted asset in other noncurrent assets in our balance sheet as of March 31, 2007. The amount of the purchase price is subject to adjustment based on HCS membership at the closing date.

Sale-Leaseback of Shelton, Connecticut Property

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

Acquisition of Universal Care Business

On March 31, 2006, we completed the acquisition of certain health plan businesses of Universal Care, Inc. (Universal Care), a California-based health care company, and paid $74.0 million, including transaction-related costs.

The purchase price was allocated to the fair value of Universal Care assets acquired, including identifiable intangible assets, deferred tax asset, and the excess of purchase price over the fair value of net assets acquired resulted in goodwill, which is deductible for tax purposes. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

	As of March 31, 2006
	(Dollars in millions)
Intangible assets	$	29.5
Goodwill		28.4
Deferred tax asset		16.1
Total assets acquired		74.0
Accrued transaction costs		(0.9	)
Net assets acquired	$	73.1

All of the net assets acquired were assigned to our Health Plan Services reportable segment.

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The on-going financial results of the Universal Care transaction are included in our Health Plan Services reportable segment effective April 1, 2006 and are not material to our consolidated results of operations.

5. STOCK REPURCHASE PROGRAM

Our Board of Directors has authorized a stock repurchase program pursuant to which we are authorized to repurchase up to $450 million of our common stock. Additional amounts may be added to the program based on exercise proceeds and tax benefits received from the exercise of employee stock options if approved by the Board.

The remaining authorization under our stock repurchase program as of March 31, 2007 was $178 million. During the three months ended March 31, 2007, we repurchased 1,000,000 shares of our common stock for aggregate consideration of approximately $54.1 million. We used net free cash available to fund the share repurchases.

On December 14, 2006, we entered into an accelerated share repurchase (ASR) agreement with JP Morgan and repurchased 2,689,538 shares at an initial purchase price of $47.22 per share, or $127 million. Under the ASR agreement, JP Morgan purchased an equivalent number of shares in the open market. The repurchased shares were subject to a price adjustment based on JP Morgan’s volume-weighted average purchase price for the shares. If JP Morgan’s volume-weighted average purchase price for the shares was greater than $47.22 per share, we were required to pay JP Morgan an amount equal to the difference between the volume-weighted average purchase price and $47.22 (True-Up). Under the ASR agreement, we could elect to settle the True-Up in shares of Health Net common stock or cash. On March 15, 2007, we settled the True-Up of approximately $7.1 million by delivering 132,806 shares of our common stock to JP Morgan. The settlement is recorded in our statement of stockholders’ equity.

6. FINANCING ARRANGEMENTS

Term Loan Credit Agreement

We have a $300 million Term Loan Credit Agreement (the “Term Loan Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent and lender, and Citicorp USA, Inc., as syndication agent and lender. As of March 31, 2007 and December 31, 2006, $300 million was outstanding under the Term Loan Agreement. As of March 31, 2007, the applicable margin was 1.175% over LIBOR, and the interest rate on the term loan borrowings was 6.535%. This interest rate is effective until June 27, 2007, at which time the interest rate will be reset for the next period. Borrowings under the Term Loan Agreement have a final maturity date of June 23, 2011.

Revolving Credit Facility

We have a $700 million revolving credit facility under a five-year revolving credit agreement with Bank of America, N.A., as a lender, and, as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto. As of March 31, 2007, $100 million was outstanding under our revolving credit facility, which must be repaid by June 30, 2009 unless the maturity date under the revolving credit facility is extended. Combined with outstanding letters of credit totaling $124.7 million, the maximum amount available for borrowing under the revolving credit facility was $475.3 million. As of March 31, 2007, we were in compliance with all covenants under our revolving credit facility.

Bridge Loan Agreement

On June 23, 2006, we entered into a $200 million Bridge Loan Agreement (the “Bridge Loan Agreement”) with The Bank of Nova Scotia, as administrative agent and lender. We repaid the Bridge Loan in full on the final maturity date of March 22, 2007, partially funded by a $100 million draw on our revolving credit facility.

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7. LEGAL PROCEEDINGS

Class Action Lawsuits

McCoy v. Health Net, Inc. et al, and Wachtel v. Guardian Life Insurance Co.

These two lawsuits are styled as nationwide class actions and are pending in the United States District Court for the District of New Jersey on behalf of a class of subscribers in a number of our large and small employer group plans. The Wachtel complaint initially was filed as a single plaintiff case in New Jersey State court on July 23, 2001. Subsequently, we removed the Wachtel complaint to federal court, and plaintiffs amended their complaint to assert claims on behalf of a class of subscribers in small employer group plans in New Jersey on December 4, 2001. The McCoy complaint was filed on April 23, 2003 and asserts claims on behalf of a nationwide class of Health Net subscribers. These two cases have been consolidated for purposes of trial. Plaintiffs allege that Health Net, Inc., Health Net of the Northeast, Inc. and Health Net of New Jersey, Inc. violated ERISA in connection with various practices related to the reimbursement of claims for services provided by out-of-network providers. Plaintiffs seek relief in the form of payment of additional benefits, injunctive and other equitable relief, and attorneys’ fees.

On April 23, 2003, plaintiffs filed a motion for class certification seeking to certify nationwide classes of Health Net subscribers. The District Court granted plaintiffs’ motion for class certification on August 5, 2004, and issued an order (the “Class Certification Order”) certifying two nationwide classes of Health Net subscribers who received medical services or supplies from an out-of-network provider and to whom the defendants paid less than the providers’ billed charge during the period from 1995 to August 31, 2004. Health Net appealed the Class Certification Order to the Court of Appeals for the Third Circuit. On June 30, 2006, the Third Circuit ruled in Health Net’s favor on the appeal. The Third Circuit held that the District Court’s class certification opinion failed to properly define the claims, issues and defenses to be treated on a class basis. The Third Circuit thus vacated the certification order and remanded the case to the District Court for further proceedings. In September 2006, the District Court certified the same classes but limited them to the resolution of 19 legal issues. The District Court has ordered that the notice to the classes be mailed forthwith and that Health Net pay the cost of such notice.

On January 13, 2005, counsel for the plaintiffs in the McCoy/Wachtel actions filed a separate class action against Health Net, Inc., Health Net of the Northeast, Inc., Health Net of New York, Inc., Health Net Life Insurance Co., and Health Net of California, Inc. captioned Scharfman v. Health Net, Inc., 05-CV-00301 (FSH)(PS) (United States District Court for the District of New Jersey) on behalf of the same parties who would have been added to the McCoy/Wachtel action as additional class representatives had the District Court granted the plaintiffs’ motion for leave to amend their complaint in that action. On March 12, 2007, plaintiffs amended the Scharfman complaint by adding the Wachtels and Ms. McCoy as named plaintiffs, dropping Health Net of California, Inc. as a party, and alleging both ERISA and RICO claims based on conduct similar to that alleged in McCoy/Wachtel. The alleged Scharfman claims run from September 1, 2004 until the present. On April 10, 2007, we filed a motion to dismiss all counts of that complaint, which is pending.

On August 9, 2005, plaintiffs filed a motion with the District Court seeking sanctions against us for a variety of alleged misconduct, discovery abuses and fraud on the District Court. The District Court held twelve days of hearings on plaintiffs’ sanctions motion between October 2005 and March 2006. During the course of the hearings, and in their post-hearings submissions, plaintiffs also alleged that some of Health Net’s witnesses engaged in perjury and obstruction of justice. Health Net denied all such allegations. On December 6, 2006, the District Court issued an opinion and order finding that Health Net’s conduct was sanctionable. The District Court ordered a number of sanctions against Health Net, including, but not limited to: striking a number of Health Net’s trial exhibits and witnesses; deeming a number of facts to be established against Health Net; requiring Health Net to pay for a discovery monitor to oversee the completion of discovery in these cases; ordering that a monetary sanction be imposed upon Health Net once the District Court reviews Health Net’s financial records; ordering Health Net to pay plaintiffs’ counsel’s fees and expenses associated with the sanctions motion and motions to

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enforce the District Court’s discovery orders and redeposing Health Net witnesses. The District Court also ordered that Health Net produce a large number of privileged documents that were first discovered and revealed by Health Net as a result of the email backup tape restoration effort discussed below. Pursuant to the December 6 Order, the District Court appointed a Special Master to determine if we have complied with all discovery orders. Hearings are continuing and the Special Master’s report to the Court is due May 15, 2007.

While the sanctions proceedings were progressing, the District Court and the Magistrate Judge overseeing discovery entered a number of orders relating, inter alia, to production of documents. In an Order dated May 5, 2006 (the “May 5 Order”), the District Court ordered the restoration, search and review of backed-up emails of 59 current and former Health Net associates. The May 5 Order set an initial deadline of July 15, 2006, to complete the restoration, search and production of emails.

Health Net located 5,034 back-up tapes and had to restore all of them to identify and extract those emails and attachments belonging to the 59 associates identified in the May 5 Order. This restoration process was complex, time consuming and expensive as it involved dealing with over 14 billion pages of documents. During the course of this project, Health Net discovered that completion of the project was technologically impossible using commercially available means by the July 15, 2006 deadline. As a result, Health Net requested additional time to complete the project. The District Court granted an extension and ordered that the restoration and production of emails be completed by September 30, 2006. Health Net was unable to complete the project by the September 30, 2006 deadline and again requested additional time to complete the project. The District Court denied this request and stated that there would be a per diem penalty for every day past September 30, 2006 that the production was not completed. Health Net substantially completed the restoration project on November 30, 2006. The District Court has not yet announced what, if any, penalty will be imposed for failing to meet the September 30, 2006 deadline.

The May 5 Order also set forth certain findings regarding plaintiffs’ argument that the “crime-fraud” exception to the attorney-client privilege should be applied to certain documents for which Health Net claimed a privilege. In this ruling, the District Court made preliminary findings that a showing of a possible crime or fraud was made with respect to Health Net’s interactions with New Jersey Department of Banking & Insurance and the payment of a second restitution in New Jersey. The review of privileged documents under the “crime-fraud” exception was assigned by the District Court to the Magistrate Judge, who was to review the documents and make a recommendation to the court. On January 22, 2007, the Magistrate Judge made a recommendation that the assertion of privilege for a number of the documents was vitiated by the crime-fraud exception. Health Net has appealed this ruling to the District Court.

On May 11, 2006, the District Court issued another opinion and order regarding the privileged documents, ruling that there was a “fiduciary” exception to the attorney-client privilege and that the fiduciary exception to the attorney-client privilege should apply to this litigation. The District Court found that functions Health Net performs relating to medical reimbursement determinations are fiduciary functions, therefore making Health Net potentially liable to plaintiffs as a fiduciary under ERISA. On June 12, 2006, Health Net appealed this ruling to the Third Circuit. Health Net has also appealed the District Court’s December 6, 2006 order that it had waived the attorney-client privilege by not claiming the privilege prior to the documents being found in the backup email tapes. On April 2, 2007, the Third Circuit ruled that the fiduciary exception does not vitiate our claim of attorney-client privilege and vacated the District Court’s May 11, 2006 order.

We intend to continue to defend ourselves vigorously in this litigation. These proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period. Due to the developments in these two cases during the fourth quarter of 2006, we recorded a litigation charge of $37.1 million representing our legal defense costs.

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In Re Managed Care Litigation

Various class action lawsuits brought on behalf of health care providers against managed care companies, including us, were transferred by the Judicial Panel on Multidistrict Litigation (“JPML”) to the United States District Court for the Southern District of Florida for coordinated or consolidated pretrial proceedings in In re Managed Care Litigation, MDL 1334. The first of such cases was filed against us on May 25, 2000. These provider track actions generally alleged that the defendants, including us, systematically underpaid physicians and other health care providers for medical services to members, have delayed payments to providers, imposed unfair contracting terms on providers, and negotiated capitation payments inadequate to cover the costs of the health care services provided and assert claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), ERISA, and several state common law doctrines and statutes. The lead physician provider track action asserted claims on behalf of physicians and sought certification of a nationwide class.

On May 3, 2005, we and the representatives of approximately 900,000 physicians and state and other medical societies announced that we had signed an agreement settling the lead physician provider track action. The settlement agreement requires us to pay $40 million to general settlement funds and $20 million for plaintiffs’ legal fees and to commit to several business practice changes. During the three months ended March 31, 2005, we recorded a pretax charge of approximately $65.6 million in connection with the settlement agreement, legal expenses and other expenses related to the MDL 1334 litigation. On July 6, 2006, we made payments, including accrued interest, totaling approximately $61.9 million.

On September 26, 2005, the District Court issued an order granting its final approval of the settlement agreement and directing the entry of final judgment. Four physicians appealed the order approving the settlement, but each of the physicians moved to dismiss their appeals, and all of the appeals were dismissed by the Eleventh Circuit by June 20, 2006. On July 19, 2006, joint motions to dismiss were filed in the District Court with respect to all of the remaining tag-along actions in MDL 1334 filed on behalf of physicians. As a result of the physician settlement agreement, the dismissals of the various appeals, and the filing of the agreed motions to dismiss the tag along actions involving physician providers, all cases and proceedings relating to the physician provider track actions against us have been resolved.

Other cases in MDL 1334 are brought on behalf of non-physician health care providers against us and other managed care companies and seek certification of a nationwide class of similarly situated non-physician health care providers. These cases are still pending but have been stayed in the multi-district proceeding. On September 12, 2006, Judge Moreno dismissed one of those cases on grounds that the plaintiffs failed to file a status report. The plaintiffs in that case subsequently filed a motion to vacate the dismissal in which they contend that they did file a status report. We intend to defend ourselves vigorously in the remaining non-physician cases. These proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of these proceedings should not have a material adverse effect on our financial condition and liquidity.

Lawsuits Related to the Sale of Businesses

AmCareco Litigation

We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health Corporation (FHC). In 1999, FHC sold its interest in these plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and AmCare of Texas (AmCare-TX). In 2002,

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three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the AmCare plans later filed suit against certain of AmCareco’s officers, directors and investors, AmCareco’s independent auditors and its outside counsel in connection with the failure of the three plans. The three receivers also filed suit against us contending that, among other things, we were responsible as a “controlling shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and ultimately be placed into receivership.

The action brought against us by the receiver for AmCare-LA action originally was filed in Louisiana on June 30, 2003. That original action sought only to enforce a parental guarantee that FHC had issued in 1996. The AmCare-LA receiver alleged that the parental guarantee obligated FHC to contribute sufficient capital to the Louisiana health plan to enable the plan to maintain statutory minimum capital requirements. The original action also alleged that the parental guarantee was not terminated by virtue of the 1999 sale of the Louisiana plan. The actions brought against us by AmCare-TX and AmCare-OK originally were filed in Texas state court on June 7, 2004 and included allegations that after the sale to AmCareco we were nevertheless responsible for the mismanagement of the three plans by AmCareco and that the three plans were insolvent at the time of the sale to AmCareco. On September 30, 2004 and October 15, 2004, respectively, the AmCare-TX receiver and the AmCare-OK receiver intervened in the pending AmCare-LA litigation in Louisiana. Thereafter, all three receivers amended their complaints to assert essentially the same claims against us and successfully moved to consolidate their three actions in the Louisiana state court proceeding. The Texas state court ultimately stayed the Texas action and ordered that the parties submit quarterly reports to the Texas court regarding the status of the consolidated Louisiana litigation.

On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million and $45.5 million, respectively and entered judgments in those amounts on November 3, 2005. We thereafter filed a motion for suspensive appeal and posted the required security as required by law.

The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims that awarded $9.5 million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK, respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We thereafter filed motions for suspensive appeals in connection with both judgments and posted the required security as required by law, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying them attorneys’ fees and punitive damages. Our appeals of the judgments in all three cases have been consolidated in the Louisiana Court of Appeal but no briefing schedule has been set. On January 17, 2007, the Court of Appeal vacated on procedural grounds the trial court’s judgments denying the AmCare-LA and AmCare-OK claims for attorney fees and punitive damages, and referred those issues instead to be considered with the merits of the main appeal pending before it. The Court of Appeal also has considered and ruled on various other preliminary procedural issues related to the main appeal.

On November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking to nullify the three judgments that were rendered against us on the grounds of fraud and/or ill practice. We have alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible ex parté contacts between the receivers’ litigation counsel and the trial court during the course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal Magistrate, after

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considering the briefs of the parties, found that Health Net had a reasonable basis to infer possible impropriety based on the facts alleged, but also found that the federal court lacked jurisdiction to hear the nullity action. The Magistrate has recommended that the federal judge dismiss Health Net’s federal complaint and has proposed that Health Net pay the attorney fees of the Receivers for filing the action in a court that lacked jurisdiction. Health Net has objected to the Magistrate’s recommendation. The objection is pending. The Receivers’ exceptions pending in the state court nullity action have been continued pending resolution of the federal jurisdictional issues.

We have vigorously contested all of the claims asserted against us by the plaintiffs in the consolidated Louisiana actions since they were first filed. We intend to vigorously pursue all avenues of redress in these cases, including the actions for nullification, post-trial motions and appeals, and the prosecution of our pending but stayed cross-claims against other parties. During the three months ended June 30, 2005, we recorded a pretax charge of $15.9 million representing the estimated legal defense costs for this litigation.

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

Superior National and Capital Z Financial Services

On April 28, 2000, we and our former wholly-owned subsidiary, Foundation Health Corporation (FHC), which merged into Health Net, Inc., in January 2001, were sued by Superior National Insurance Group, Inc. (Superior) in an action filed in the United States Bankruptcy Court for the Central District of California, which was then transferred to the United States District Court for the Central District of California. The lawsuit (Superior Lawsuit) related to the 1998 sale by FHC to Superior of the stock of Business Insurance Group, Inc. (BIG), a holding company of workers’ compensation insurance companies operating primarily in California. In the Superior Lawsuit, Superior alleged that FHC made certain misrepresentations and/or omissions in connection with the sale of BIG and breached the stock purchase agreement governing the sale. In October 2003, we entered into a settlement agreement with the SNTL Litigation Trust, successor-in-interest to Superior, of the claims alleged in the Superior Lawsuit. As part of the settlement, we ultimately agreed to pay the SNTL Litigation Trust $132 million and received a release of the SNTL Litigation Trust’s claims against us.

Shortly after announcing the settlement on October 28, 2003, Capital Z Financial Services Fund II, L.P., and certain of its affiliates (collectively, Cap Z) sued us (Cap Z Action) in New York state court asserting claims arising out of the same BIG transaction that is the subject of the settlement agreement with the SNTL Litigation Trust. Cap Z had previously participated as a creditor in the Superior Lawsuit and is a beneficiary of the SNTL Litigation Trust. In its complaint, Cap Z alleges that we made certain misrepresentations and/or omissions that caused Cap Z to vote its shares of Superior in favor of the acquisition of BIG and to provide approximately $100 million in financing to Superior for that transaction. Cap Z’s complaint primarily alleges that we misrepresented and/or concealed material facts relating to the sufficiency of the BIG companies’ reserves and about the BIG companies’ internal financial condition, including accounts receivables and the status of certain “captive” insurance programs. Cap Z alleges that it seeks compensatory damages in excess of $100 million, unspecified punitive damages, costs, and attorneys’ fees.

After removal of the case to federal court and remand back to New York state court, on December 21, 2005, we filed a motion to dismiss all of Cap Z’s claims. On May 5, 2006, the court issued its decision on our motion and dismissed all of Cap Z’s claims, including claims for fraud and claim for punitive damages, except for Cap Z’s claim for indemnification based on the assertion that FHC breached express warranties and covenants under the stock purchase agreement. On June 7, 2006, Cap Z filed an appeal from the Court’s dismissal of its claims for

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breach of the implied covenant and fraud and dismissal of its punitive damage claim. On June 13, 2006, we filed a cross-appeal from the Court’s refusal to dismiss all of Cap Z’s claims. Oral argument on the appeals was held on November 17, 2006. No decision on the appeals has yet been issued.

Notwithstanding these appeals, the litigation continued in the trial court. On June 2, 2006, we filed an answer to Cap Z’s remaining claim for indemnification. On June 23, 2006, the Court signed a scheduling order setting a deadline of February 28, 2007 for completion of all fact discovery and April 30, 2007 for completion of expert discovery. On October 3, 2006, we filed a motion for summary judgment in the trial court seeking dismissal of Cap Z’s remaining claim for indemnification. On February 23, 2007, the trial court granted our motion for summary judgment and directed that judgment be entered in our favor. That order terminates the proceedings in the trial court. On March 27, 2007, Cap Z filed an appeal from the trial court’s dismissal of its remaining claim. That appeal as well as Cap Z’s appeal on the three previously dismissed claims and our cross-appeal remain pending.

We intend to defend ourselves vigorously against Cap Z’s claims. This case is subject to many uncertainties, and, given its complexity and scope, its final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of the Cap Z Action depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of the Cap Z Action should not have a material adverse effect on our financial condition and liquidity.

Miscellaneous Proceedings

On October 6, 2006 we entered into a Consent Agreement with the California Department of Managed Health Care (DMHC) with respect to certain claims editing practices which we formerly utilized for certain contracted hospital claims. Under the terms of the Consent Agreement, we will provide contracted hospitals that have not previously settled or otherwise resolved these claims with us the ability to resubmit their claims, for dates of service of January 1, 2004 and later, for readjudication by the Company without the use of these editing practices. We do not expect the readjudication of the affected claims to have a material impact on our financial condition or results of operations.

We are the subject of a regulatory investigation in New Jersey that relates principally to the timeliness and accuracy of our claim payments for services rendered by out-of-network providers. The regulatory investigation includes an audit of our claims payment practices for services rendered by out-of-network providers for 1996 through 2005 in New Jersey. Based on the results of the audit, the New Jersey Department of Banking and Insurance may require remediation of certain claims payments for this period and/or assess a regulatory fine or penalty on us. We are engaged in on-going discussions with the New Jersey Department of Banking and Insurance to address these issues.

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

These other legal proceedings are subject to many uncertainties, and, given their complexity and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period our

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results of operations and cash flow could be materially affected by an ultimate unfavorable resolution of any or all of these other legal proceedings depending, in part, upon the results of operations or cash flow for such period. However, at this time, management believes that the ultimate outcome of all of these other legal proceedings that are pending, after consideration of applicable reserves and potentially available insurance coverage benefits, should not have a material adverse effect on our financial condition and liquidity.

Potential Settlements

We regularly evaluate litigation matters pending against us, including those described in this Note 7, to determine if settlement of such matters would be in the best interests of the Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain cases, could result in an earnings charge in any particular quarter in which we enter into a settlement agreement. Although we recorded reserves and accrued costs for certain future legal costs that represent our best estimate of probable losses and related future legal costs, both known and incurred but not reported, our recorded amounts might prove not to be adequate to cover an adverse result or settlement for extraordinary matters such as the matters described in this Note 7. Therefore, the costs associated with the various litigation matters to which we are subject and any earnings charge recorded in connection with a settlement agreement could have a material adverse effect on our financial condition or results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS

The following discussion and other portions of this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, regarding our business, financial condition and results of operations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. These forward-looking statements involve risks and uncertainties. All statements other than statements of historical information provided or incorporated by reference herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate” and “intend” and other similar expressions are intended to identify forward-looking statements. Managed health care companies operate in a highly competitive, constantly changing environment that is significantly influenced by, among other things, aggressive marketing and pricing practices of competitors and regulatory oversight. Factors that could cause our actual results to differ materially from those reflected in forward-looking statements include, but are not limited to, the factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006 and the risks discussed in our other filings from time to time with the SEC.

Any or all forward-looking statements in this Form 10-Q and in any other public filings or statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many of the factors discussed in our filings with the SEC will be important in determining future results. These factors should be considered in conjunction with any discussion of operations or results by us or our representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors or other communications by us. You should not place undue reliance on any forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date thereof. Except as may be required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that arise after the date of this report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in its entirety since it contains detailed information that is important to understanding Health Net, Inc. and its subsidiaries’ results of operations and financial condition.

OVERVIEW

General

We are an integrated managed care organization that delivers managed health care services through health plans and government sponsored managed care plans. We are among the nation’s largest publicly traded managed health care companies. Our mission is to help people be healthy, secure and comfortable. We provide health benefits to approximately 6.6 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, TRICARE and Veterans Affairs programs. Our behavioral health services subsidiary, Managed Health Network, provides behavioral health, substance abuse and employee assistance programs (EAPs) to approximately 7.1 million individuals, including our own health plan members. Our subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

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How We Report Our Results

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

Our Health Plan Services reportable segment includes the operations of our commercial, Medicare (including Part D) and Medicaid health plans, the operations of our health and life insurance companies and our behavioral health and pharmaceutical services subsidiaries. We have approximately 3.7 million members, including Medicare Part D members and 96,000 administrative services only (ASO) members, in our Health Plan Services segment.

Our Government Contracts segment includes our government-sponsored managed care federal contract with the U.S. Department of Defense (the Department of Defense) under the TRICARE program in the North Region and other health care related government contracts that we administer for the Department of Defense. Under the TRICARE contract for the North Region, we provide health care services to approximately 2.9 million Military Health System (MHS) eligible beneficiaries (active duty personnel and TRICARE/Medicare dual eligible beneficiaries), including 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.1 million other MHS-eligible beneficiaries for whom we provide ASO.

How We Measure Our Profitability

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

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

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

General and administrative expenses include those costs related to employees and benefits, consulting and professional fees, marketing, premium taxes and assessments and occupancy costs. Such costs are driven by

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membership levels, introduction of new products, system consolidations and compliance requirements for changing regulations. These expenses also include expenses associated with corporate shared services and other costs to reflect the fact that such expenses are incurred primarily to support our Health Plan Services segment. Selling expenses consist of external broker commission expenses and generally vary with premium volume.

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

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

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RESULTS OF OPERATIONS

Table of Summary Financial Information

The table below and the discussion that follows summarize our results of operations for the three months ended March 31, 2007 and 2006.

	Three Months Ended March 31,
	2007			2006
	(Dollars in thousands, except per share and PMPM data)
REVENUES
Health plan services premiums	$	2,777,259		$	2,524,374
Government contracts		607,995			624,637
Net investment income		31,364			23,359
Administrative services fees and other income		12,294			14,260
Total revenues		3,428,912			3,186,630
EXPENSES
Health plan services (excluding depreciation and amortization)		2,341,074			2,105,214
Government contracts		567,099			595,126
General and administrative		291,285			287,253
Selling		69,129			56,538
Depreciation		6,541			4,753
Amortization		1,092			591
Interest		9,560			12,226
Total expenses		3,285,780			3,061,701
Income from operations before income taxes		143,132			124,929
Income tax provision		54,547			48,336
Net income	$	88,585		$	76,593
Net income per share:
Basic	$	0.79		$	0.67
Diluted	$	0.77		$	0.65
Pretax margin		4.2	%		3.9	%
Health plan services medical care ratio (MCR) (a)		84.3	%		83.4	%
Government contracts cost ratio (b)		93.3	%		95.3	%
Administrative expense ratio (c)		10.7	%		11.5	%
Selling costs ratio (d)		2.5	%		2.2	%
Health plan services premiums per member per month (PMPM) (e)	$	259.35		$	244.78
Health plan services costs PMPM (e)	$	218.62		$	204.14

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

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

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

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

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

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Summary of Operating Results

A summary of our overall operating performance in the three months ended March 31, 2007 is as follows:

• Pretax margin increased to 4.2% for the three months ended March 31, 2007 from 3.9% for the same period in 2006;

• MCR increased to 84.3% in the three months ended March 31, 2007 from 83.4% in the same period in 2006;

• Government contracts cost ratio improved to 93.3% for the three months ended March 31, 2007 compared to 95.3% for the same period in 2006;

• Administrative expense ratio improved to 10.7% for the three months ended March 31, 2007 from 11.5% for the same period in 2006;

• Total health plan enrollment, including Medicare Part D, slightly increased to 3,662,000 members at March 31, 2007 from 3,650,000 members at March 31, 2006; and

• Cash flows from operating activities improved to $344.0 million for the three months ended March 31, 2007 from $222.0 million for the same period in 2006.

Consolidated Segment Results

The following table summarizes the operating results of our reportable segments for the three months ended March 31, 2007 and 2006:

	Three Months Ended March 31,
	2007		2006
	(Dollars in millions)
Pretax income:
Health plan services segment	$	102.2	$	95.4
Government contracts segment		40.9		29.5
Income from operations before income taxes	$	143.1	$	124.9

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Health Plan Services Segment Membership

The following table below summarizes our health plan membership information by program and by state at March 31, 2007 and 2006:

	Commercial		ASO		Medicare		Medicaid		Health Plan Total
	2007	2006	2007	2006	2007	2006	2007	2006	2007	2006
	(Membership in thousands)
Arizona	130	118	—	—	45	33	—	—	175	151
California	1,422	1,477	5	6	108	103	694	713	2,229	2,299
Connecticut	172	189	57	70	40	29	85	87	354	375
New Jersey	97	110	19	20	—	—	46	45	162	175
New York	225	215	15	17	8	7	—	—	248	239
Oregon	131	138	—	—	20	18	—	—	151	156
Other states	—	—	—	—	2	—	—	—	2	—
	2,177	2,247	96	113	223	190	825	845	3,321	3,395
Medicare PDP Stand-alone (effective January 1, 2006)	—	—	—	—	341	255	—	—	341	255
Total	2,177	2,247	96	113	564	445	825	845	3,662	3,650

Our total health plan membership increased slightly by 12,000, or 0.3%, from March 31, 2006 to March 31, 2007. The increase in membership was primarily driven by the addition of 86,000 Medicare Part D members and 45,000 members, or a 3% increase, from our individual, small group and mid-market accounts, partially offset by declines in our large group enrollment of 115,000 members, or 13%, from March 31, 2006 to March 31, 2007.

Membership in our commercial health plans decreased by 3% at March 31, 2007 compared to March 31, 2006. This decrease was primarily attributable to the continued impact of premium pricing discipline, particularly on our large group accounts. Our Northeast and California plans had lapse rates of approximately 19% and 12%, respectively, in the three months ended March 31, 2007. The decline in our large group enrollment was primarily driven by our California plan, which experienced a net decline of 102,000 members. The loss in the California large group market was partially due to the loss of approximately 34,000 members from one large account. The Northeast plans experienced net declines of 19,000 and 11,000 members in the mid and large group markets, respectively, which were offset by a net gain of 11,000 members in our New York small group market.

Membership in our Medicare Advantage program increased by 33,000 members, or 17%, at March 31, 2007 compared to March 31, 2006, due to membership growth primarily in Arizona of 12,000 members and Connecticut of 11,000 members. Under Medicare Part D, membership increased by 86,000 members, or 34%, at March 31, 2007 compared to March 31, 2006.

We participate in state Medicaid programs in California, Connecticut and New Jersey. California membership, where the program is known as Medi-Cal, comprised the majority of our Medicaid membership at 84%. Membership in our Medicaid programs decreased by 20,000 members at March 31, 2007 compared to March 31, 2006, primarily due to an enrollment decline in Los Angeles County, which was partially offset by enrollment increases in Healthy Families and Healthy Kids programs in California.

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Health Plan Services Segment Results

The following table summarizes the operating results for our health plan services segment for the three months ended March 31, 2007 and 2006:

	Three Months Ended March 31,
	2007			2006
	(Dollars in millions, except PMPM data)
Health plan services segment:
Commercial premium revenue	$	1,777.5		$	1,669.1
Medicare premium revenue		704.8			575.9
Medicaid premium revenue		295.0			279.4
Health plan services premium revenues	$	2,777.3		$	2,524.4
Health plan services costs		(2,341.1	)		(2,105.2	)
Net investment income		31.3			23.3
Administrative services fees and other income		12.3			14.3
G&A		(291.3	)		(287.3	)
Selling		(69.1	)		(56.5	)
Amortization and depreciation		(7.6	)		(5.4	)
Interest		(9.6	)		(12.2	)
Pretax income	$	102.2		$	95.4
MCR:		84.3	%		83.4	%
Commercial		83.2	%		83.0	%
Medicare		87.7	%		85.3	%
Medicaid		83.3	%		82.1	%
Health plan services premium PMPM	$	259.35		$	244.78
Health plan services costs PMPM	$	218.62		$	204.14
Administrative expense ratio		10.7	%		11.5	%
Selling costs ratio		2.5	%		2.2	%

Health Plan Services Premiums

Total health plan services premiums increased by $252.9 million, or 10%, for the three months ended March 31, 2007 as compared to the same period in 2006. On a PMPM basis, premiums increased by 6% in the three months ended March 31, 2007 as compared to the same period in 2006.

Commercial premium revenues increased by $108.4 million, or 6%, for the three months ended March 31, 2007 as compared to the same period in 2006. The increase was attributable to our ongoing pricing discipline and premium rate increases, partially offset by decrease in membership levels. The increase in the commercial premium PMPM was 6.2% for the three months ended March 31, 2007 over the same period in 2006.

Medicare premiums increased by $128.9 million, or 22%, for the three months ended March 31, 2007 as compared to the same period in 2006. This increase was primarily due to an increase in members participating in the Medicare Advantage and Medicare Part D prescription drug program, which resulted in an increase in the premiums we received from CMS, and new private-fee-for-service Medicare plans effective January 1, 2007. Included in the premium increase is favorable Medicare risk factor adjustments totaling $26.5 million (see “—Health Plan Services Costs” for the related increase in capitation expense). Of these adjustments, $9.9 million represented the impact of the 2006 and prior payment years.

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Medicaid premiums increased by $15.6 million, or 6%, for the three months ended March 31, 2007 as compared to the same period in 2006. The increase is primarily due to the increase in the Medicaid premium PMPM, which was 5% for the three months ended March 31, 2007 over the same period in 2006.

Health Plan Services Costs

Health plan services costs increased by $235.9 million, or 11%, for the three months ended March 31, 2007 as compared to the same period in 2006. Health plan MCR was 84.3% for the three months ended March 31, 2007 as compared to 83.4% for the same period in 2006. On a PMPM basis, health care costs increased by 7% for the three months ended March 31, 2007 as compared to the same period in 2006.

Our commercial MCR was 83.2% and 83.0% for the three months ended March 31, 2007 and 2006, respectively. The 20 basis point increase reflects a percentage increase in our health care costs on a PMPM basis that slightly outpaced the percentage increase in our commercial premiums on a PMPM basis. The increase in the commercial health care cost trend on a PMPM basis was 6.4% for the three months ended March 31, 2007 over the same period in 2006. Physician and hospital costs rose 6.7% and 8.5% on a PMPM basis, respectively, and pharmacy costs rose 2.1% on a PMPM basis for the three months ended March 31, 2007 over the same period in 2006.

Our Medicare MCR, including Medicare Advantage and Part D, was 87.7% and 85.3% for the three months ended March 31, 2007 and 2006, respectively. This increase is primarily driven by a higher Medicare Advantage MCR of 86.4% for the three months ended March 31, 2007, compared to 84.0% for the same period in 2006. Included in the Medicare health care costs is increased capitation expense from Medicare risk factor adjustments totaling $8.6 million (see “—Health Plan Services Premiums” for the related increase in premium revenue). Approximately $3.4 million of these adjustments represented the impact of the 2006 and prior payment years.

Our Medicaid MCR was 83.3% and 82.1% for the three months ended March 31, 2007 and 2006, respectively. The increase in the Medicaid health care cost PMPM was 6% for the three months ended March 31, 2007 and over the same period in 2006 primarily driven by higher inpatient and outpatient hospital costs.

Administrative Services Fees and Other Income

Administrative services fees and other income decreased by $2.0 million, or 14%, for the three months ended March 31, 2007 as compared to the same period in 2006. The decrease in administrative services fees is primarily due to a decrease in enrollment. The enrollment decline of 17,000 members, or 15%, was primarily in our Connecticut health plan.

Net Investment Income

Net investment income increased by $8.0 million, or 34%, for the three months ended March 31, 2007 as compared to the same period in 2006. The increase was primarily due to higher interest rates on higher cash balances for the quarter and net realized gain of $3.7 million.

General, Administrative and Other Costs

G&A costs increased by $4.0 million, or 1%, for the three months ended March 31, 2007 as compared to the same period in 2006. Our administrative expense ratio decreased to 10.7% for the three months ended March 31, 2007 from 11.5% for the same period in 2006 primarily driven by our focus on expense management.

The selling costs ratio increased to 2.5% from 2.2% for the three months ended March 31, 2007 and March 31, 2006, respectively. This increase is consistent with a 20% increase in commercial new sales and higher rate of broker commissions.

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Amortization and depreciation expense increased by $2.2 million for the three months ended March 31, 2007 as compared to the same period in 2006. The increase was primarily due to the addition of new assets placed in production related to various information technology system projects.

Interest expense decreased by $2.6 million, or 21%, for the three months ended March 31, 2007 as compared to the same period in 2006. The decrease was primarily due to the redemption of our Senior Notes in the third quarter of 2006, which had a higher interest rate than our Term Loan and Bridge Loan.

Government Contracts Segment Membership

Under our TRICARE contract for the North Region, we provided health care services to approximately 2.9 million eligible beneficiaries in the Military Health System (MHS) as of March 31, 2007 and March 31, 2006. Included in the 2.9 million eligibles as of March 31, 2007 were 1.8 million TRICARE eligibles for whom we provide health care and administrative services and 1.1 million other MHS-eligible beneficiaries for whom we provide administrative services only. As of March 31, 2007, there were approximately 1.4 million TRICARE eligibles enrolled in TRICARE Prime under our North Region contract.

In addition to the 2.9 million eligible beneficiaries that we service under the TRICARE contract for the North Region, we administer 15 contracts with the U.S. Department of Veterans Affairs to manage community based outpatient clinics in 11 states covering approximately 32,000 enrollees.

Government Contracts Segment Results

The following table summarizes the operating results for Government Contracts for the three months ended March 31, 2007 and 2006:

	Three Months Ended March 31,
	2007			2006
	(Dollars in millions)
Government Contracts segment:
Revenues	$	608.0		$	624.6
Costs		567.1			595.1
Pretax income	$	40.9		$	29.5
Government Contracts Ratio		93.3	%		95.3	%

Government Contracts revenues decreased by $16.6 million, or 3%, for the three months ended March 31, 2007 as compared to the same period in 2006. Government Contracts costs decreased by $28.0 million, or 5%, for the three months ended March 31, 2007 as compared to the same period in 2006. These decreases are primarily due to the return of payment responsibility, effective beginning in the third quarter of 2006, for health care expenditures for active duty personnel costs in the civilian sector to the government and due to continued improvement in the health care costs in the third option period, which ended on March 31, 2007. These decreases were partially offset by increases in revenues and costs from a behavioral health contract with the Department of Defense for counseling services provided to active military personnel.

Our TRICARE contract for the North Region includes a target cost and price for reimbursed health care costs which is negotiated annually during the term of the contract, with underruns and overruns of our target cost borne 80% by the government and 20% by us. We recognize changes in our estimate for the target cost underruns and overruns when the amounts become determinable, supportable and the collectibility is reasonably assured. During the three months ended March 31, 2007, we recognized a decrease in the revenue estimate of $44 million and a decrease in the cost estimate of $54 million.

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The Government Contracts ratio improved by 200 basis points for the three months ended March 31, 2007 as compared to the same period in 2006 primarily due to moderating health care cost trends and improved health care performance in each successive option period of the TRICARE contract for the North Region particularly in the option period 3 which began on April 1, 2006.

Income Tax Provision

Our income tax expense and the effective income tax rate for the three months ended March 31, 2007 and 2006 are as follows:

	Three Months Ended March 31,
	2007			2006
	(Dollars in millions)
Income tax expense	$	54.5		$	48.3
Effective income tax rate		38.1	%		38.7	%

The effective income tax rate differs from the statutory federal tax rate of 35.0% in each period due primarily to state income taxes and tax-exempt investment income. The effective income tax rate for the three months ended March 31, 2007, is lower compared to the same period in 2006 due primarily to changes in the tax reserves.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We believe that cash flow from operating activities, existing working capital, lines of credit and cash reserves are adequate to allow us to fund existing obligations, introduce new products and services, and continue to develop health care-related businesses. We regularly evaluate cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. We may elect to raise additional funds for these purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate.

Our cash flow from operating activities is impacted by, among other things, the timing of collections on our amounts receivable from our TRICARE contract for the North Region. Health care receivables related to TRICARE are best estimates of payments that are ultimately collectible or payable. The timing of collection of such receivables is impacted by government audit and negotiation and can extend for periods beyond a year. Amounts receivable under government contracts were $190.3 million and $199.6 million as of March 31, 2007 and December 31, 2006, respectively. Our cash flow from operating activities is also impacted by the timing of collections on our amounts receivable from CMS. Our receivable related to our Medicare business was $164.0 million and $171.1 million as of March 31, 2007 and December 31, 2006, respectively.

Operating Cash Flows

Our operating cash flows for the three months ended March 31, 2007 compared to the same period in 2006 are as follows:

	March 31, 2007		March 31, 2006		Change 2007 over 2006
	(Dollars in millions)
Net cash provided by operating activities	$	344.0	$	222.0	$	122.0

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Net cash from operating activities increased primarily due to the following:

• Increase in cash flows from increase in prepayments received from CMS for Medicare Advantage and Part D programs of $76.0 million;

• Increase in cash flows from our TRICARE contracts of $28.0 million, and

• Increase in net income of $12.0 million.

Investing Activities

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

We completed the sale of our Shelton, Connecticut campus on March 29, 2007, and received net cash proceeds of $83.9 million. See Note 4 to the consolidated financial statements for additional information regarding the sale-leaseback transaction.

As of March 31, 2007, we had approximately $69.1 million deposited in an escrow account pursuant to the terms of our purchase agreement with the Guardian. See Note 4 to the consolidated financial statements for additional information regarding this transaction.

On March 31, 2006, we acquired certain health plan businesses of Universal Care, a California-based health care company and paid $73.1 million in cash. See Note 4 to the consolidated financial statements for additional information.

Our cash flows from investing activities for the three months ended March 31, 2007 compared to the same period in 2006 are as follows:

	March 31, 2007		March 31, 2006			Change 2007 over 2006
	(Dollars in millions)
Net cash provided by (used in) investing activities	$	15.2	$	(106.1	)	$	121.3

Net cash provided by investing activities increased primarily due to the following:

• Proceeds from the sale of our Shelton campus of $83.9 million,

• Increase in net sales and maturities of investments of $32.9 million, and

• Decrease in cash paid of $73.1 million for the Universal Care Acquisition on March 31, 2006, partially offset by

• Increase in restricted cash of $69.1 million for amounts held in escrow related to the Guardian transaction.

Financing Activities

Our cash flows from financing activities for the three months ended March 31, 2007 compared to the same period in 2006 are as follows:

	March 31, 2007			March 31, 2006		Change 2007 over 2006
	(Dollars in millions)
Net cash (used in) provided by financing activities	$	(114.8	)	$	11.8	$	(126.6	)

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Net cash used in financing activities increased during the three months ended March 31, 2007 primarily due the repayment of our $200.0 million Bridge Loan, partially offset by a draw on the revolving credit facility of $100.0 million. Net cash used in financing activities also increased due to an increase of $54.2 million in repurchases of our common stock, partially offset by a $20.3 million increase in proceeds from exercise of employee stock options and stock purchases. See “—Capital Structure” below for additional information regarding the Bridge Loan, our stock repurchase program and our revolving credit facility.

Capital Structure

Stock Repurchase Program. Our Board of Directors has authorized a stock repurchase program pursuant to which we are authorized to repurchase up to $450 million of our common stock. Additional amounts may be added to the program based on exercise proceeds and tax benefits received from the exercise of employee stock options if approved by the Board. During the three months ended March 31, 2007, we repurchased 1 million shares for aggregate consideration of approximately $54.1 million. We used net free cash available to fund these repurchases. The remaining authorization under our stock repurchase program as of March 31, 2007 was $178 million.

On December 14, 2006, we entered into an accelerated share repurchase (ASR) agreement with JP Morgan and repurchased 2,689,538 shares at an initial purchase price of $47.22 per share, or $127 million. Under the ASR agreement, JP Morgan purchased an equivalent number of shares in the open market. The repurchased shares were subject to a price adjustment based on JP Morgan’s volume-weighted average purchase price for the shares. If JP Morgan’s volume-weighted average purchase price for the shares was greater than $47.22 per share, we were required to pay JP Morgan an amount equal to the difference between the volume-weighted average purchase price and $47.22 (True-Up). Under the ASR agreement, we could elect to settle the True-Up in shares of Health Net common stock or cash. On March 15, 2007, we settled the True-Up of approximately $7.1 million by delivering 132,806 shares of our common stock to JP Morgan.

The following table presents by month information related to repurchases of our common stock under our stock repurchase program in 2007 as of March 31, 2007:

Period	Total Number of Shares Purchased (a)	Average Price Paid per Share		Total Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) (c)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (c) (d)
January 1—January 31	—		—		—	—	$	199,786,363
February 1—February 28	—		—		—	—	$	199,786,363
March 1—March 31	1,000,000	$	54.06	$	54,060,000	1,000,000	$	177,569,548
Total	1,000,000	$	54.06	$	54,060,000	1,000,000

(a) We did not repurchase any shares of our common stock during the three months ended March 31, 2007 outside our publicly announced stock repurchase program, except shares withheld in connection with our various stock option and long-term incentive plans.

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

(c) A total of $450 million of our common stock may be repurchased under our stock repurchase program. Additional amounts may be added to the program based on exercise proceeds and tax benefits the Company receives from the exercise of employee stock options, but only upon further approval by the Board of

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Directors. The remaining authority under our repurchase program includes proceeds received from option exercises and tax benefits the Company received from the exercise of employee stock options through January 31, 2007.

(d) Our stock repurchase program does not have an expiration date. During the three months ended March 31, 2007, we did not have any repurchase program that expired, and we did not terminate any repurchase program prior to its expiration date.

Revolving Credit Facility. We have a $700 million revolving credit facility under a five-year revolving credit agreement with Bank of America, N.A., as a lender, and, as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto. As of March 31, 2007, $100 million was outstanding under our revolving credit facility, which must be repaid by June 30, 2009 unless the maturity date under the revolving credit facility is extended.

As of March 31, 2007, we were in compliance with all covenants under our revolving credit facility.

We can obtain letters of credit in an aggregate amount of $300 million under our revolving credit facility. The maximum amount available for borrowing under our revolving credit facility is reduced by the dollar amount of any outstanding letters of credit. No amounts have been drawn on any of these letters of credit. As of April 30, 2007, the maximum amount available for borrowing under the revolving credit facility was $479.2 million.

Term Loan Credit Agreement. We have a $300 million Term Loan Credit Agreement (the “Term Loan Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent and lender, and Citicorp USA, Inc., as syndication agent and lender. As of March 31, 2007 and December 31, 2006, $300 million was outstanding under the Term Loan Agreement. As of March 31, 2007, the applicable margin was 1.175% over LIBOR, and the interest rate on the term loan borrowings was 6.535%. This interest rate is effective until June 27, 2007, at which time the interest rate will be reset for the next period. Borrowings under the Term Loan Agreement have a final maturity date of June 23, 2011.

Bridge Loan Agreement. On June 23, 2006, we entered into a $200 million Bridge Loan Agreement (the “Bridge Loan Agreement”) with The Bank of Nova Scotia, as administrative agent and lender. Borrowings under the Bridge Loan Agreement initially had a final maturity date of September 22, 2006. On September 21, 2006, we amended the Bridge Loan Agreement to, among other things, extend the final maturity date to March 22, 2007. On March 22, 2007, we paid the Bridge Loan in full, partially funded by a $100 million draw on our revolving credit facility.

Statutory Capital Requirements

Certain of our subsidiaries must comply with minimum capital and surplus requirements under applicable state laws and regulations, and must have adequate reserves for claims. Management believes that as of March 31, 2007, all of our health plans and insurance subsidiaries met their respective regulatory requirements.

By law, regulation and governmental policy, our health plan and insurance subsidiaries, which we refer to as our regulated subsidiaries, are required to maintain minimum levels of statutory net worth. The minimum statutory net worth requirements differ by state and are generally based on balances established by statute, a percentage of annualized premium revenue, a percentage of annualized health care costs, or risk based capital (RBC) requirements. The RBC requirements are based on guidelines established by the National Association of Insurance Commissioners. The RBC formula, which calculates asset risk, underwriting risk, credit risk, business risk and other factors, generates the authorized control level (ACL), which represents the minimum amount of net worth believed to be required to support the regulated entity’s business. For states in which the RBC requirements have been adopted, the regulated entity typically must maintain the greater of the Company Action Level RBC, calculated as 200% of the ACL, or the minimum statutory net worth requirement calculated pursuant to pre-RBC guidelines. Because our regulated subsidiaries are also subject to their state regulators’ overall

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oversight authority, some of our subsidiaries are required to maintain minimum capital and surplus in excess of the RBC requirement, even though RBC has been adopted in their states of domicile. We generally manage our aggregate regulated subsidiary capital above 300% of ACL, although RBC standards are not yet applicable to all of our regulated subsidiaries. At March 31, 2007, we had sufficient capital to exceed this level. In addition to the foregoing requirements, our regulated subsidiaries are subject to restrictions on their ability to make dividend payments, loans and other transfers of cash or other assets to the parent company.

As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations. Health Net, Inc. did not make any capital contributions to its subsidiaries to meet RBC or other statutory capital requirements under state laws and regulations during the three months ended March 31, 2007 or thereafter through May 4, 2007.

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

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

CONTRACTUAL OBLIGATIONS

Pursuant to Item 303(a)(5) of Regulation S-K, we identified our known contractual obligations as of December 31, 2006 in our Annual Report on Form 10-K for the year ended December 31, 2006. Significant changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K are as follows:

	Between April 1, 2007 and December 31, 2007		2008		2009		2010		2011		Thereafter		Total
	(Amounts in millions)
Revolver payable (1)	$	—	$	—	$	100.0	$	—	$	—	$	—	$	100.0
Interest on revolver		4.8		5.9		2.8		—		—		—		13.5
FIN 48 liabilities (2)		24.0		—		—		—		—		—		24.0
Shelton campus lease (3)		5.1		6.9		7.6		8.0		8.2		46.4		82.2

(1) See Note 6 to the consolidated financial statements.

(2) We can make reasonably reliable estimates of cash settlement or other resolution for those that we anticipate will occur in 2007. See Note 2 to the consolidated financial statements.

(3) See Note 4 to the consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2007, we did not have any off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.

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CRITICAL ACCOUNTING ESTIMATES

In our Annual Report on Form 10-K for the year ended December 31, 2006, we identified the critical accounting policies which affect the more significant estimates and assumptions used in preparing our consolidated financial statements. Those policies include revenue recognition, health plan services, reserves for contingent liabilities, government contracts, goodwill and recoverability of long-lived assets and investments. We have not changed these policies from those previously disclosed in our Annual Report on Form 10-K. Our critical accounting policy on estimating reserves for claims and other settlements and the quantification of the sensitivity of financial results to reasonably possible changes in the underlying assumptions used in such estimation as of March 31, 2007 is discussed below. There were no other significant changes to the critical accounting estimates as disclosed in our 2006 Annual Report on Form 10-K.

Reserves for claims and other settlements include reserves for claims (incurred but not reported (IBNR) claims and received but unprocessed claims), and other liabilities including capitation payable, shared risk settlements, provider disputes, provider incentives and other reserves for our Health Plan Services reporting segment.

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

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

The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by these factors:

Completion Factor (a) Percentage-point Increase (Decrease) in Factor	Health Plan Services Increase (Decrease) in Reserves for Claims
2%	$(49.0) million
1%	$(24.9) million
(1)%	$  25.8 million
(2)%	$  52.6 million

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Medical Cost Trend (b) Percentage-point Increase (Decrease) in Factor	Health Plan Services Increase (Decrease) in Reserves for Claims
2%	$  27.2 million
1%	$  13.6 million
(1)%	$(13.6) million
(2)%	$(27.2) million

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

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

Other relevant factors include exceptional situations that might require judgmental adjustments in setting the reserves for claims, such as system conversions, processing interruptions or changes, environmental changes or other factors. All of these factors are used in estimating reserves for claims and are important to our reserve methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent months. In developing our best estimate of reserves for claims, we consistently apply the principles and methodology described above from year to year, while also giving due consideration to the potential variability of these factors. Because reserves for claims include various actuarially developed estimates, our actual health care services expense may be more or less than our previously developed estimates. Claim processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed, with any adjustments reflected in current operations.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are exposed to interest rate and market risk primarily due to our investing and borrowing activities. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and in equity prices. Interest rate risk is a consequence of maintaining variable interest rate earning investments and fixed rate liabilities or fixed income investments and variable rate liabilities. We are exposed to interest rate risks arising from changes in the level or volatility of interest rates, prepayment speeds and/or the shape and slope of the yield curve. In addition, we are exposed to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuer’s credit rating or credit perception may affect the value of financial instruments. No material changes to any of these risks have occurred since December 31, 2006.

For a more detailed discussion of our market risks relating to these activities, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, included in our 2006 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 7 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

The risk factors set forth below update, and should be read together with, the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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

We currently have outstanding a $300 million term loan agreement, which matures in June 2011. In addition, to provide liquidity, we have a $700 million five-year revolving credit facility that expires in June 2009. As of March 31, 2007, $100 million in borrowings were outstanding under our revolving credit facility. The funds drawn on the revolving credit facility were utilized to repay our $200 million bridge loan which matured in March 2007.

We may incur additional debt in the future. Our existing indebtedness and any additional debt we incur in the future through drawings on our revolving credit facility or otherwise could have an adverse effect on our business and future operations. For example, it could:

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

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

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

We are considering a variety of options to refinance our outstanding indebtedness, including, without limitation, potential structured financing arrangements and the issuance of new debt securities. Our ability to obtain any financing, whether through the issuance of new debt securities or otherwise, and the terms of any such financing are dependent on, among other things, our financial condition, financial market conditions within our industry and generally, credit ratings and numerous other factors. There can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. If we are unable to obtain financing on terms and within a time acceptable to us it could, in addition to other negative effects, have a material adverse effect on our operations, financial condition, ability to compete or ability to comply with regulatory requirements.

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

Our revolving credit facility and term loan agreement require us to comply with various covenants that impose restrictions on our operations, including our ability to incur additional indebtedness, pay dividends, make investments or other restricted payments, sell or otherwise dispose of assets and engage in other activities. In addition, we are required to comply with certain financial covenants, including a maximum leverage ratio, a minimum borrower cash flow fixed charge coverage ratio or, depending on our debt rating by Moody’s and/or S&P, a minimum fixed charge coverage ratio and a minimum consolidated net worth requirement.

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The restrictive covenants under our revolving credit facility and term loan agreement could limit our ability to pursue our business strategies. In addition, any failure by us to comply with the restrictive covenants under our revolving credit facility or term loan agreement could result in an event of default under those borrowing arrangements, in which case the lenders could elect to declare all amounts outstanding thereunder to be immediately due and payable, which could have a material adverse effect on our financial condition.

If we are required to publicly disclose information regarding our reimbursement rates and other proprietary and trade secret information for our Connecticut Medicaid program, it could have a material adverse effect on our Connecticut Medicaid business.

In 2006, a petition was submitted to the Connecticut Freedom of Information Commission (the “CT FOIC”) seeking, among other things, information regarding provider reimbursement rates and maintenance of other proprietary and trade secret information used by managed care organizations contracting with the Connecticut Department of Social Services in connection with the Connecticut Medicaid program. In response to the petition, the CT FOIC ruled that the Connecticut Department of Social Services must furnish the information requested and had to amend its existing contracts with managed care organizations participating in the Connecticut Medicaid program making them subject to the Connecticut Freedom of Information Act. Health Net of Connecticut and two other managed care organizations appealed the CT FOIC decision to the Connecticut Superior Court, which upheld the CT FOIC’s decision. Health Net of Connecticut has appealed the court’s decision to the Connecticut Appellate Court. In addition, there are several legislative proposals before the Connecticut General Assembly, which, if passed, could subject Health Net of Connecticut to the Connecticut Freedom of Information Act. If Health Net of Connecticut loses this appeal, or if legislation is passed that requires Health Net of Connecticut to publicly disclose information regarding its reimbursement rates and other proprietary and trade secret information, it could have a material adverse effect on Health Net of Connecticut’s ability to contract with providers in Connecticut and compete effectively in the Connecticut Medicaid program and could result in a decision to discontinue our participation in the Connecticut Medicaid program.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

A description of the Company’s stock repurchase program and tabular disclosure of the information required under this Item 2 is contained under the caption “Stock Repurchase Program” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I of this Quarterly Report on Form 10-Q.

Under the Company’s various stock option and long term incentive plans (the “Plans”), employees and non-employee directors may elect for the Company to withhold shares to satisfy minimum statutory federal, state and local tax withholding and exercise price obligations arising from the vesting and/or exercise of stock options and other equity awards. The following table provides information with respect to the shares withheld by the Company to satisfy these obligations to the extent employees or non-employee directors elected for the Company to withhold such shares. These repurchases were not part of our publicly announced stock repurchase program, which is described elsewhere in this Quarterly Report on Form 10-Q.

Period	Total Number of Shares Purchased	Average Price Paid per Share
January 1—January 31	—		—
February 1—February 28	33,110	$	54.16
March 1—March 31	538	$	55.42
Total	33,648	$	54.18

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Exhibit Number	Description
10.1	Absolute Net Lease dated as of March 29, 2007 by and between HN Property Owner LLC and Health Net of the Northeast.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HEALTH NET, INC. (REGISTRANT)
Date: May 8, 2007	By:	/s/    JAMES E. WOYS
		James E. Woys
		Interim Chief Financial Officer
Date: May 8, 2007	By:	/s/    BRET A. MORRIS
		Bret A. Morris
		Senior Vice President and Corporate Controller
		(Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Absolute Net Lease dated as of March 29, 2007 by and between HN Property Owner LLC and Health Net of the Northeast.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1

Exhibit 10.1

ABSOLUTE NET LEASE

(One Far Mill Crossing, Shelton, Connecticut)

THIS ABSOLUTE NET LEASE (“Lease), dated solely for reference purposes as of the 29^th day of March 2007, is entered into by and between HN PROPERTY OWNER LLC, a Delaware limited liability company (the “Landlord”) and HEALTH NET OF THE NORTHEAST, INC., a Delaware corporation (the “Tenant”).

Recitals:

A. DACOURT GROUP, INC., a North Carolina corporation (“Buyer”) is the buyer under that certain Purchase and Sale Agreement, dated as the 21st day of February, 2007, under which Health Net of California Real Estate Holdings, Inc., a California corporation (the “Seller”), is the “Seller” (the “Sale Contract”);

B. Pursuant to the Sale Contract, Buyer assigned its rights thereunder to Landlord, and Landlord has purchased the following property from Seller:

(i) that certain real property located in the City of Shelton, County of Fairfield, State of Connecticut, commonly known as One Far Mill Crossing, and more particularly described in Exhibit A attached hereto and made part hereof (the “Land”);

(ii) the building comprised of approximately three hundred twenty-seven thousand three hundred twenty-seven (327,327) square feet of gross leasable area (the “Building”), plus the structures, improvements and fixtures erected now or hereafter located on the Land (collectively, the “Improvements,”) and together with the Land, collectively, the “Property”;

(iii) all of Seller’s right, title and interest, if any, in and to any rights and appurtenances pertaining to the Land, including minerals, oil and gas rights, air, water and development rights, roads, alleys, hereditaments, benefits, privileges, tenements easements, streets and ways adjacent to the Land, rights of ingress and egress thereto, any strips, gaps and gores within or bounding the Land and in profits or rights or appurtenances pertaining to the Land, and any insurance proceeds owing to Seller for the loss of such rights or appurtenances;

(iv) all of Seller’s right, title and interest, if any, in the land laying in the bed of any street, highway, road or avenue, opened or proposed, public or private, in front of or adjoining the Land, to the center line thereof; and

(v) all of Seller’s right, title and interest, if any, in any award or payment made or to be made in lieu of any of the foregoing or any portion thereof and any unpaid award for damage to the Land or any of the Improvements by reason of change of grade or closing of any street, road or avenue (the property described in this clause (v), together with the property described in clauses (iii) and (iv) above, are collectively referred to in this Lease as the “Appurtenant Rights”).

(The Property and the Appurtenant Rights so acquired by Landlord from Seller are hereinafter collectively referred to as the “Premises”.)

C. Landlord and Tenant desire to set forth their understanding with respect to the use and operation of the Premises, and their respective rights, duties and obligations pertaining thereto, all upon the terms and subject to the conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration paid by each of the parties hereto to the other, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby covenant and agree as follows:

Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises in accordance with the provisions of this Lease; and

SUBJECT ONLY TO all those certain conditions and other matters affecting the title of the Premises as set forth in Exhibit B attached hereto and made part hereof (the “Permitted Encumbrances”) (provided, however, that nothing in this paragraph shall (i) be deemed to constitute a covenant or representation by Landlord with respect to the condition of title, or (ii) modify the terms of Section 7.3 below or (iii) affect Tenant’s or Landlord’s rights and obligations hereunder).

IT IS MUTUALLY COVENANTED AND AGREED between Landlord and Tenant as follows:

ARTICLE 1

Term

1.1 Primary Term. The term of this Lease (the “Primary Term”) shall commence on March 29, 2007 (the “Commencement Date”), and shall expire at 11:59 PM on the date (the “Expiration Date”) which is the day immediately preceding the date that is ten (10) years after the termination of the Stub Period (defined below), unless extended or earlier terminated pursuant to the terms of this Lease. The date that is the eleventh (11th) day of a calendar month first occurring after the Commencement Date is hereinafter referred to as the “Start Date,” and the period of time commencing on the Commencement Date and ending at 11:59 PM on the day immediately preceding the Start Date is hereinafter referred to as the “Stub Period.” (By way of example only, if the Commencement Date were to occur on March 25, 2007, as contemplated by the Sale Contract, the Start Date would be April 11, 2007, the Stub Period would be March 25, 2007 through April 10, 2007 (inclusive of both dates), and the Expiration Date would be April 10, 2017.) Tenant acknowledges that except as specifically set forth in this Lease, no work was or is required to be performed by Landlord, no contributions were or are required to be made by Landlord to Tenant and all conditions precedant to Tenant’s obligations hereunder have been satisfied.

1.2 Extended Terms. Tenant shall have the right to extend this Lease for two (2) consecutive extended terms of ten (10) years each (collectively, the “Extended Terms” and individually, an “Extended Term”, and together with the Primary Term, called the “Term”) upon the expiration of the Primary Term or the preceding Extended Term, as the case may be, unless this Lease shall be sooner terminated pursuant to the terms of this Lease. If no Event of Default shall exist on such commencement date, each Extended Term shall commence on the day immediately succeeding the expiration date of the Primary Term or the preceding Extended Term, as the case may be, and shall end at midnight Eastern Time on the day immediately preceding the tenth (10th) anniversary of the first day of such Extended Term. Provided there is no Event of Default at the time of exercise of such option, Tenant may exercise each said option to extend this Lease for an Extended Term by giving written notice to that effect at least eighteen (18) months prior to the expiration of the then-existing Term. If Tenant does not exercise any such option in a timely manner, then all rights to extend the Lease automatically shall terminate, Landlord shall have the right during the remainder of the Term of this Lease to advertise the availability of the Premises for sale or reletting and to erect upon the Premises signs appropriate for the purpose of indicating such availability. The phrase “Term of this Lease” or “term hereof” means the Primary Term, plus any Extended Term with respect to which the right has been exercised. Except as otherwise expressly provided herein, all of the provisions of this Lease shall be applicable during each Extended Term.

1.3 Base Rent During Extended Terms.

(a) If Tenant’s option to extend the term of this Lease is exercised, the Base Rent for each Extended Term shall be equal to the ninety-five percent (95%) of the Fair Market Rent for the Premises, as determined pursuant to this Section 1.3.

(b) Within thirty (30) days after Tenant exercises its option to extend, Landlord will advise Tenant of its determination of Fair Market Rent for the Extended Term in question. If Landlord and Tenant agree on the Fair Market Value for the Extended Term, they shall execute a written confirmation of such extension reflecting thereon the agreed upon Base Rent. If Landlord and Tenant cannot agree on the Base Rent for the Extended Term within thirty (30) days of the date that Landlord provides Tenant with Landlord’s determination of the new rent, then within thirty (30) days after such failure to reach agreement, Landlord shall furnish to

Tenant a notice in writing (the “Landlord’s Notice”) stating what Landlord perceives to be the Fair Market Rent projected to the commencement date of the Extended Term. Landlord’s Notice shall be accompanied by a statement from a qualified real estate appraiser stating the appraiser’s opinion of Fair Market and that it has been determined in accordance with this Section 1.3. If Tenant disagrees with the estimate of Fair Market Rent submitted by Landlord with Landlord’s Notice, then within thirty (30) days after receipt of Landlord’s Notice, Tenant shall have the right to submit to Landlord an appraisal by a qualified real estate appraiser of Fair Market Rent effective as of the commencement date of the Extended Term. If the higher estimate is not more than one hundred five percent (105%) of the lower estimate, the new Base Rent shall be established as the average of the two appraisals. If not, the two appraisers acting on behalf of Landlord and Tenant, shall, within fifteen (15) days after Tenant’s appraisal has been submitted, jointly appoint a third qualified real estate appraiser (the “Referee”). If the two appraisers are unable to agree upon the selection of a Referee, then the Referee shall be selected within fifteen (15) days thereafter by an arbitrator pursuant to the rules of the American Arbitration Association. The Referee shall, within thirty (30) days after appointment, render his or her decision which decision shall be strictly limited to choosing one of the two determinations made by the two appraisers chosen by Landlord and Tenant with respect to Fair Market Rent. The decision of the Referee shall be binding upon Landlord and Tenant and shall constitute the Base Rent for the applicable Extended Term. Landlord and Tenant shall each pay for their own appraisal, and the cost of the Referee shall be shared equally by Landlord and Tenant.

(c) In determining the “Fair Market Rent,” the highest and best use for the Premises, the Improvements, or the Land, will not be considered, but rather only the then-prevailing rent for premises comparable in size and use to the Premises, leased for a period equal to the Extended Term by a major creditworthy tenant occupying more than 100,000 rentable square feet of comparable space in similar commercial buildings located within five (5) miles of the Premises, taking into consideration the lease term, age of the Premises, all allowances for tenant improvements (including architectural and engineering fees), moving allowances, landlord expenses, operating expense pass throughs, rent abatement, brokerage expenses, tenant benefits or any other market concessions which may be commonly available at the commencement of such Extended Term. Under no circumstances shall this determination take into account any value attributable to the rental value of the Parking Structure, the use of which shall be free to Tenant during any Extended Term hereunder. All such relevant inducements available in the market shall be credited against Fair Market Rent to the extent not received by Tenant. In no event shall Tenant, or its employees or visitors, be charged for parking. Notwithstanding any contrary provision of this Section 1.3:

(i) in no event shall the Base Rent, for the first twelve months of the first Extended Term, be less than $8,114,436.00 per year, nor shall it be more than $8,510,502.00 per year;

(ii) in no event shall the Base Rent, for the first twelve months of the second Extended Term, be less than the Base Rent in effect as of the last day of the first Extended Term, nor shall it be more than an amount that is equal to one hundred and four and 88/100ths percent (104.88%) of the Base Rent in effect as of the last day of the first Extended Term; and

(iii) as of the first anniversary of the beginning of each Extended Term, and each anniversary thereafter during such Extended Term, the Base Rent shall be increased by three percent (3%).

(d) Notwithstanding anything in this Section 1.3 to the contrary, if the Referee selects Landlord’s appraisal, Tenant may rescind the exercise of its option to extend by so notifying Landlord within ten (10) days after Tenant’s receipt of the Referee’s determination (the notice so given is hereinafter referred to as a “Rescission Notice”); in such event, (i) Tenant shall promptly reimburse Landlord for the cost of Landlord’s appraisal and shall pay for the full cost of the Referee, and (ii) the Term of the Lease shall, at Landlord’s option (which option must be exercised by a notice given to Tenant within ten (10) days after receipt of the Rescission Notice), be extended for six (6) months past the Expiration Date, on all the same terms and conditions as the Term then in effect, except Tenant shall have no further option to extend the Term.

(e) The Premises shall be leased during the Extended Terms “AS-IS” in their then-current condition, and in no event shall Landlord have any obligation to pay to Tenant any refurbishing or tenant improvement allowance, or any obligation to pay any leasing commissions to any broker representing Tenant in connection therewith.

ARTICLE 2

Rent

2.1 Base Rent; No Offset. Tenant covenants and agrees to pay to Landlord, promptly when due, without notice or demand and without deduction or set-off of any amount for any reason whatsoever, annual rent base rent (the “Base Rent”) for the Premises during the Term according to the following schedule:

Period*	Annual Base Rent*		Monthly Base Rent*
Stub Period	$	18,639.21 per day		N/A
Start Date through Month 12 thereafter	$	6,803,313.00	$	566,942.75
Months 13-24	$	6,989,889.00	$	582,490.75
Months 25-36	$	7,809,839.00	$	650,819.92
Months 37-48	$	8,007,778.00	$	667,314.83
Months 49-60	$	8,211,655.00	$	684,304.58
Months 61-72	$	8,421,648.00	$	701,804.00
Months 73-84	$	8,637,942.00	$	719,828.50
Months 85-96	$	8,860,724.00	$	738,393.67
Months 97-108	$	9,090,189.00	$	757,515.75
Months 109-120	$	9,326,538.00	$	777,211.50

* The periods (other than the Stub Period) refer to the time commencing on and after the Start Date. The parties acknowledge that any statement of gross leasable area of the Building, or of the square footage of the Land, set forth in this Lease or in any materials provided by any representative of Tenant or Tenant’s affiliated companies, or by any brokers or other parties, is merely an approximation, and if it is ultimately determined that the actual gross leasable area of the Building, or the actual area of the Land, is more or less than as stated in this Lease or in other materials, such discrepancy shall not result in any modification in the monthly and annual Base Rent amounts to be paid under this Lease.

2.2 Partial Months; Due Date. Notwithstanding the foregoing, i) the Base Rent payable for Stub Period shall be payable in advance on the Commencement Date, and ii) once the Commencement Date has occurred, the parties shall enter into a written amendment to this Lease that memorializes the parties’ agreement on the Start Date, the Stub Period, the Expiration Date, and the calendar dates for each increase in Base Rent pursuant to Section 2.1 above. Base Rent shall be payable in installments, in advance, on the tenth (10th) day of each month during the Term (“Due Dates”).

2.3 Good Funds. The Base Rent shall be paid monthly, in advance, in good United States funds on the Due Dates. The Base Rent must be paid by wire transfer of funds, per instructions to be provided by Landlord prior to the Commencement Date.

2.4 Full Net Lease. It is intended that the Base Rent shall be an absolutely net return to Landlord throughout the Term of this Lease, free of any expense, charge, or other deduction whatsoever with respect to the Premises or Landlord’s interest therein, or the ownership, leasing, operation, management, maintenance, repair, use or occupation thereof. This Lease is an “absolute lease” and Tenant’s obligations arising or accruing during the Term to pay

all Base Rent, additional rent and all other payments hereunder required to be made by Tenant shall be absolute and unconditional and Tenant shall pay all such amounts without notice, demand, counterclaim, set-off, deduction or defense and without abatement, suspension, deferment, diminution or reduction (except as otherwise expressly provided in this Lease), free from any charges, assessments, impositions, expenses or deductions of any and every kind or nature whatsoever. All costs, expenses and obligations of every kind and nature whatsoever relating to the Property and the appurtenances thereto and the use, maintenance and occupancy thereof which may arise or become due and payable with respect to the Term (whether or not the same shall become payable during such Term or thereafter) or for any period prior to the expiration of the Term shall be paid by Tenant (except as otherwise expressly provided in this Lease). Tenant assumes the sole responsibility for the condition, use, operation, maintenance, underletting and management of the Premises, and Landlord shall have no responsibility in respect thereof and shall have no liability for damage to Tenant’s personality or any subtenant of Tenant on any account or for any reason whatsoever. Except as otherwise expressly provided in Article 10 or Article 11, this Lease shall not terminate, nor shall Tenant have any right to terminate, rescind or void this Lease or to be released or discharged from any obligations or liabilities hereunder for any reason, including, without limitation: (i) any damage to or destruction of the Premises; (ii) any restriction, deprivation (including eviction) or prevention of, or any interference with, any use or the occupancy of the Premises; (iii) any condemnation, requisition or other taking or sale of the use, occupancy or title of or to the Premises; (iv) any action, omission or breach on the part of Landlord under this Lease or under any other agreement between Landlord and Tenant; or (v) the inadequacy or failure of the description of the Premises to demise and let to Tenant the property intended to be leased hereby. Tenant will remain obligated under this Lease in accordance with its terms, and will not take any action to terminate, rescind or void this Lease as a result of any bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding affecting Landlord or any assignee of Landlord, or any action with respect to this Lease which may be taken by any receiver, trustee or liquidator or by any court.

2.5 Interest on Delinquent Rent. Any Base Rent or other sums due to Landlord under this Lease and not paid on or before the due date therefor shall bear interest at the Interest Rate from the due date until paid. The “Interest Rate” shall equal the lesser of (i) the highest rate allowable by law, or (ii) the greater of (a) the rate publicly announced from time to time, by Citibank N.A. or its successor as its Prime Rate or its Reference Rate or other similar benchmark, plus five percent (5%), and (b) thirteen percent (13%) per annum, or (iii) the default rate charged by the Mortgagee (as defined below) on delinquent loan payments (and taking into account any grace or cure periods permitted by such Mortgagee). Payment of such interest shall not excuse or cure any default by Tenant under this Lease. As used in this Lease, the term “Mortgagee” shall mean any lender whose loan constitutes a first lien on the Premises and mezzanine debt lender which acquired a lien on the membership interests in Landlord in connection with Landlord’s acquisition of the Premises and the foregoing entities’ successors and assigns.

2.6 Late Charge. Tenant hereby acknowledges that late payment by Tenant of Base Rent, and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of Base Rent or any other sum due from Tenant shall not be received by Landlord on or before the due date thereof, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount or such lesser amount charged by the Mortgagee on delinquent loan payments (taking into account any grace or cure periods permitted by such Mortgagee). It is agreed that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of any Tenant default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder, including but not limited to the collection of interest on such late payment.

ARTICLE 3

Expenses, Taxes

3.1 Tenant to Pay All Expenses and Taxes. Tenant shall pay and discharge, punctually as and when the same shall become due and payable, each and every item of expense,

of every kind and nature whatsoever relating to the ownership, use, maintenance, operation, or occupancy of the Property, or for the payment of which Landlord is, or shall or may be or become, liable by reason of any rights or interest of Landlord in or under this Lease, including all real estate taxes, personal property taxes, privilege taxes, excise taxes, business and occupation taxes, gross sales taxes, including any sales tax imposed on the rental payments hereunder or under a sublease, occupational license taxes, water charges, sewer charges, assessments of any nature and all other governmental impositions and charges of every kind and nature whatsoever (collectively, the “Taxes,” and individually, a “Tax”), when the same shall be due and payable without penalty or interest. It is the intention of the parties hereto that, insofar as the same may lawfully be done, Landlord shall be, except as specifically provided for herein, free from all expenses in any way related to the Premises and the use, maintenance, or occupancy thereof.

3.2 Proration. Any Tax relating to a fiscal period of any taxing authority falling partially within and partially outside the Term of this Lease, shall be apportioned and adjusted between Landlord and Tenant.

3.3 Proof of Payment. Tenant shall furnish to Landlord, not later than fifteen (15) days prior to the last date when any Tax must be paid by Tenant as provided in this Article without premium, interest or penalty, official receipts of the appropriate taxing authority or if not available, a copy of Tenant’s cancelled check for payment with receipts to follow evidencing the payment thereof.

3.4 Right to Contest. Provided that an Event of Default has not occurred and is then continuing, Tenant may defer payment of a Tax so long as the validity or the amount thereof is contested by Tenant with diligence and in good faith, provided, however, that (a) Landlord determines that such contest suspends the obligation to pay the tax or assessment and such nonpayment will not permit or result in the sale, loss or forfeiture of any part of the Property and (b) Tenant shall furnish to Landlord cash or a bond in an amount and on terms satisfactory to Landlord and shall pay the Tax and a reasonable additional sum to cover possible interest, costs and penalties in sufficient time to such that nonpayment will not subject the Premises or any part thereof to sale, loss, forfeiture or other liability by reason of such nonpayment nor subject any party to any potential criminal liability. Such contest shall be at Tenant’s sole cost and expense. Tenant covenants to indemnify and save harmless Landlord from any costs or expenses incurred by Landlord as a result of such contest and, in all events pay such taxes and other amount prior to the issuance of an order under which the Property may be sold.

3.5 Exclusions. Notwithstanding anything to the contrary in this Article 3, “Taxes” shall not include, and in no event shall Tenant be required to pay i) any inheritance, estate, succession, partnership, corporate, capital stock, gift, income or profits tax imposed upon Landlord, provided that such exclusion shall not apply to any such tax based on Landlord’s gross receipts or does not provide an expense for Landlord’s interest costs or a depreciation allowance, or ii) any penalties resulting from Landlord’s failure to timely file any tax or informational returns when due (unless Tenant, and not Landlord, is expressly required by law to pay such tax), or iii) any cost directly attributable to Landlord’s transfer of its interest in the Premises or any portion thereof (including, without limitation, any transfer or conveyance taxes).

3.6 Impounds. In the event that (i) Lease Guarantor is not liable under the Guaranty of Lease, (ii) insurance premiums have not been paid when due or Taxes have not been paid at least 15 days prior to the due date therefore, (iii) Tenant failed to provide proof to Landlord and Mortgagee of such payment as required by the terms of Section 3.3 above, or (iv) Lease Guarantor is downgraded to a rating below BB- (by S&P) or below Ba3 (by Moody’s) or (v) there has been an Event of Default under this Lease or the Guaranty of Lease, then upon demand therefore, in addition to monthly Base Rent payments, as such payments are due, Landlord shall have the right to require Tenant to thereafter make monthly payments to Landlord (or at Landlord’s direction) in amounts sufficient to pay, in advance, one-twelfth (1/12th) of the amount reasonably estimated by Landlord to equal annual Taxes and insurance premiums (the “Impound Funds”) each as reasonably determined by Landlord. So long as no Event of Default hereunder has occurred and is continuing, all Impound Funds shall be held by Landlord’s Mortgagee in an account (the “Impound Account”) to pay said taxes, assessments and insurance premiums in one installment before the same become delinquent. Tenant shall be responsible for ensuring the receipt by Landlord and Mortgagee, at least thirty (30) days prior to the respective due date for payment thereof, of all bills, invoices and statements for all taxes, assessments and insurance premiums to be paid from the Impound Account, and so long as no Event of Default

hereunder or under this Lease has occurred and is continuing, Landlord shall cause Mortgagee to pay the governmental authority or other party entitled thereto directly to the extent funds are available for such purpose in the Impound Account. In making any payment from the Impound Account, Landlord and its Mortgagee shall be entitled to rely on any bill, statement or estimate procured from the appropriate public office or insurance company or agent without any inquiry into the accuracy of such bill, statement or estimate and without any inquiry into the accuracy, validity, enforceability or contestability of any tax, assessment, valuation, sale, forfeiture, tax lien or title or claim thereof. No interest on funds contained in the Impound Account shall be paid. If the total funds in the Impound Account shall exceed the amount of payments actually applied by Landlord for the purposes of the Impound Account, such excess may be credited by Landlord on subsequent payments to be made hereunder or, at the option of Landlord, refunded to Tenant. If however, the Impound Account shall not contain sufficient funds to pay the sums required when the same shall become due and payable, Tenant shall, within five (5) days after receipt of written notice thereof, deposit the full amount of any such deficiency.

ARTICLE 4

Use and Compliance with Laws, Etc.; Tenant’s Environmental Covenants

4.1 Use. Tenant agrees that, unless and to the extent that it shall obtain Landlord’s prior approval (which may be withheld in Landlord’s absolute discretion), it will not use the Premises, nor will it suffer or permit the same to be used, for any purpose that (i) is not permitted under applicable zoning regulations, or (ii) would void insurance policies required to be carried by Tenant pursuant to the terms of this Lease, or (iii) would cause material, permanent damage to the structural components of the Building, or (iv) would violate the Permitted Encumbrances, or (v) would violate Tenant’s obligations regarding the storage of Hazardous Materials pursuant to Section 4.3 below, or (vi) would involve the storage or sale of gasoline (in no event, however, shall the terms of this Section 4.1 or any other provision of this Lease prohibit Tenant from installing, maintaining, or operating one or more stand-by emergency generators or gas-operated maintenance equipment on the Property, provided that such activities are conducted in compliance with all applicable Legal Requirements, as defined below, Hazardous Materials Laws (as defined in Section 4.2 below) and only reasonably necessary amounts of fuel are stored at the Property). Tenant shall not seek, make, consent to or acquiesce in any change in the zoning of the Property.

4.2 Compliance with Laws. Tenant shall, throughout the Term hereof, promptly comply or cause compliance with all laws and ordinances and the orders, rules, regulations, and requirements (“Legal Requirements”) of all federal, state, county and municipal governments which may be applicable to the Premises, foreseen or unforeseen, ordinary as well as extraordinary, even if the same shall require structural or extraordinary repairs, alterations or additions. Tenant accepts the Premises in the actual condition in which the same are as of the Commencement Date. If the use of the Property becomes a non-conforming use, Tenant shall not permit such use to be discontinued or abandoned. Tenant shall comply and have sole responsibility for complying with the provisions of the Americans with Disabilities Act as now promulgated or as amended after the date hereof and any similar type of legislation, federal, state or local or other legislation hereinafter promulgated or hereinafter amended by any governmental authority applicable to the Premises. Tenant and Guarantor each is (i) not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) and/or on any other similar list and is in compliance with OFAC, (ii) not an entity with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States, (iii) not an “Embargoed Person”, (iv) in compliance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and the rules and regulations promulgated thereunder. None of the funds or assets of Tenant or Guarantor constitute property of, or are beneficially owned, directly or indirectly, by any person, entity or government that is an Embargoed Person and no Embargoed Person has any interest in Tenant.

4.3 Tenant’s Environmental Covenants.

(a) Tenant shall not use or permit the use of the Premises in any manner which would permit or cause any Hazardous Materials (as defined below) to be stored upon or used in connection with the Premises in violation of applicable Hazardous Material Laws (as

defined below). Tenant shall not permit any condition to exist in violation of applicable law which is or may be categorized by any federal, state or local government or agency having jurisdiction over the Premises as an actual or potential threat or danger to the environment.

(b) Landlord shall have no obligation whatsoever, and Tenant shall be obligated, to keep the Premises in compliance with the Hazardous Material Laws, it being agreed that such and, obligation (including the obligation to cure any violation of Hazardous Material Laws that occurred as a result of any act or omission arising prior to, after the Commencement Date or which violation occurred prior to, after or is ongoing as of, the Commencement Date) shall be entirely Tenant’s.

(c) Tenant shall protect, indemnify and hold harmless Landlord, Mortgagee, and all Landlord-Related Parties (as defined in Section 6.1 below) from and against any and all claim, loss, damage, cost, expense, liability, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, enforcement actions of any kind (including, without limitation, reasonable attorneys’ fees and disbursements of any indemnified party) to the extent directly or indirectly arising out of or attributable to the breach of any of the covenants, representations and warranties of this Article 4 or the presence, use, generation, manufacture, production, handling, treatment, removal, storage, release, threatened release, discharge, disposal, decontamination, clean-up or transport of Hazardous Materials on, under, from or about the Premises, or any other activity carried on or undertaken on the Premises, whether prior to or during the Term (but in no event shall Tenant have any liability as to any of the foregoing events that arise solely as a result of an act or omission occurring after the later to occur of the expiration of the Term and Tenant’s vacation of the Property) and whether by Tenant or any predecessor in title or any employees, agents, contractors or subcontractors of Tenant or any predecessor in title, or any third persons at any time, whether occupying or present on the Premises or any other premises, whether contiguous, adjacent or located proximate to the Premises, including, without limitation: (a) the costs of any required or necessary repair, cleanup or detoxification of the Premises and the preparation and implementation of any closure, remedial or other required plans including, without limitation, (i) the costs of removal or remedial action incurred by the United States Government or the state in which the Premises is located, or response costs incurred by any other person, or damages from injury to, destruction of, or loss of natural resources, including the costs of assessing such injury, destruction on loss, incurred pursuant to any Hazardous Materials Laws; (ii) the clean-up costs, fines, damages or penalties incurred pursuant to the provisions of applicable state law; and (iii) the cost and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any other statute, state or federal; and (b) liability for personal injury or premises damage, including damages assessed for the maintenance of the public or private nuisance, response costs or for the carrying on of an abnormally dangerous activity.

(d) As used herein, “Hazardous Materials” means any material, substance or waste designated as hazardous, toxic, radioactive, injurious or potentially injurious to human health or the environment, or as a pollutant or contaminant, or words of similar import, under any Hazardous Materials Law (as defined below), including, but not limited to, petroleum and petroleum products, asbestos, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which may cause cancer or reproductive toxicity. As used herein, “Hazardous Materials Law” means any federal, state or local law, statute, regulation or ordinance now or hereafter in force, as amended from time to time, pertaining to materials, substances or wastes which are injurious or potentially injurious to human health or the environment or the release, disposal or transportation of which is otherwise regulated by any agency of the federal, state or any local government with jurisdiction over the Premises or any such material, substance or waste removed therefrom, or in any way pertaining to pollution or contamination of the air, soil, surface water or groundwater, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 300f et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.), the Toxic Substance Control Act (15 U.S.C. Section 2601 et seq.).

(e) Tenant shall not install or use any underground storage tanks and shall prohibit the use, generation, handling, storage and disposal of Hazardous Substance by all

parties, including invitees and trespasses, and without limiting the generality of the foregoing, during the term of this Lease, shall not install on the Property or permit to be installed in the Improvements asbestos or any substance containing asbestos. If required by Landlord (including if recommended in any third-party environmental report delivered to Landlord) or under any Environmental Law, Tenant shall maintain an Operations and Maintenance Program (“O&M Program”) for the management of asbestos, lead-based paint, radon or any other Hazardous Substances at the Property.

(f) Tenant shall promptly notify Landlord if Tenant shall become aware of (i) any Hazardous Substances at, on, under, affecting or threatening to affect the Property, (ii) any lien, action or notice affecting or threatening to affect the Property or Tenant resulting from any violation or alleged violation of Environmental Law, (iii) any investigation, inquiry or proceeding concerning Tenant or the Property pursuant to any Environmental Law or otherwise relating to Hazardous Substances, or (iv) any occurrence, condition or state of facts which would render any representation or warranty in this Section incorrect in any respect if mad at the time of such discovery. Further, immediately upon receipt of the same, Tenant shall deliver to Landlord copies of any and all orders, notices, permits, applications, reports, potential non-compliance with any Environmental Laws in connection with the Property or presence or existence of any Hazardous Substances at, on, about, under, within, near or in connection with the Property. Tenant shall, promptly and when and as required, at Tenant’s sole cost and expense, take all actions as shall be necessary or advisable for compliance with the terms of this Section or for the remediation of any and all portions of the Property or other affected property, including, without limitation, all investigative, monitoring, removal, containment, remedial and response actions in accordance with all applicable Environmental Laws (and in all events in a manner satisfactory to Landlord), and shall further pay or cause to be paid, at no expense to Landlord, all remediation, response, administrative and enforcement costs of applicable governmental agencies which may be asserted against the Property. In the event Tenant fails to do so (i) Landlord may, but shall not be obligated to undertake remediation at the Property or other affected property necessary to bring the Property into conformance with the terms of Environmental Laws and (ii) Tenant hereby grants to Landlord and its agents and employees access to the Property and a license to do all things Landlord shall deem necessary to bring the Property into conformance with Environmental Laws. Any and all out-of-pocket costs and reasonable expenses reasonably incurred by Landlord in connection therewith, together with interest thereon at the Interest Rate, shall be immediately paid on demand. Tenant covenants and agrees, at Tenant’s sole cost and expense, to indemnify, defend (at trial and appellate levels, and with attorneys, consultants and experts acceptable to Landlord and hold Landlord harmless from and against any and all liens, damages, losses, liabilities, obligations, settlement payments, penalties, assessments, citations, directives, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind or of any nature whatsoever (including, without limitation, reasonable attorneys’ consultants’ and experts’ fees and disbursements actually incurred in investigation, defending, settling or prosecuting any action, litigation or proceeding) which may at any time be imposed upon, incurred by or asserted or awarded against Landlord or the Property, and arising directly or indirectly from or out of: (i) the presence, release or threat of release of any Hazardous Substances on, in, under, affecting or threatening to affect all or any portion of the Property or any surrounding areas, regardless of whether or not caused by or within the control of Tenant, (ii) the violation of any Environmental Laws related to, affecting or threatening to affect the Property, whether or not caused by or within the control of Tenant, (iii) the failure by Tenant to comply fully with the terms and conditions of this Section (iv) the breach of any representation or warranty contained in this Section or (v) the enforcement of this Section including, without limitation, the cost of assessment, containment and/or removal of any and all Hazardous Substances on and /or from all or any portion of the Property or any surrounding areas, the cost of any actions taken in response to the presence, release or threat of release of any Hazardous Substances on, in, under or affecting any portion of the Property or any surrounding areas to prevent or minimize such release or threat of release so that it does not migrate or otherwise cause or threaten danger to present or future public health, safety, welfare or the environment, and costs incurred to comply with the Environmental Laws in connection with all or any portion of the Property or any surrounding areas. This indemnity shall also include any of Landlord’s diminution in the value of the Property or any future Landlord’s reduction in the sales price of the Property by reason of any matter set forth in this Section. Landlord’s rights under this Section shall survive the Lease.

(g) Upon Landlord’s request, at any time after the occurrence and continuance of an Event of Default under the Lease or at such other time as Landlord has reasonable grounds to believe that Hazardous Substances are or have been handled, generated, stored, processed, transported to or from, or released or discharged from or disposed of on or around the Property, Tenant shall provide, at Tenant’s sole cost and expense, an inspection or audit of the Property prepared by a hydrogeologist or environmental engineer or other appropriate consultant approved by Landlord indicating the presence or absence of Hazardous Substances on the Property (including asbestos-containing material or lead-based paint). If Tenant fails to provide such inspection or audit within twenty (20) days after such request, Landlord may order the same, and Tenant hereby grants to Landlord and its employees and agents access to the Property and a license thereon to undertake such inspection or audit. The cost of such inspection or audit, together with interest thereon at the Interest Rate from the date paid by Landlord until actually paid by Tenant, shall be immediately paid by Tenant on demand and shall constitute additional rent hereunder.

(h) Without limiting the foregoing, Landlord, its Mortgagee and their authorized representatives may, during normal business hours and at their own expense, inspect the Property and Tenant’s records related thereto for the purpose of determining compliance with Environmental Laws and the terms and conditions of this Section.

(i) As used herein, the term “release” shall include, without limitation, any intentional or unintentional placing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, discarding or abandoning of any Hazardous Substance, other than in the normal course of business or activities or its tenants, and in compliance with all Environmental Laws.

(j) Tenant represents and warrants that, from and after the commencement of this Lease, Tenant covenants and agrees that it shall provide all legally required notices with respect to the discovery or release of any Hazardous Substances at the Property and shall perform each of the continuing obligations of a bona fide prospective purchase pursuant to 42U.S.C 9601(4). Tenant shall inform Landlord by notice given or action taken pursuant to this Section 4.3.

ARTICLE 5

Utility Charges

Tenant shall pay or cause to be paid, as and when the same are due and payable, all charges for gas, water, sewer, electricity, lights, heat, power, telephone or other communication service and all other utility services used, rendered or supplied to, upon or in connection with the Premises.

ARTICLE 6

Indemnification and Non-Liability of Landlord

6.1 Indemnification. Tenant covenants and agrees, at its sole cost and expense, to indemnify and save harmless the Landlord-Related Parties (as defined in this Section 6.1 below) and Mortgagee against and from any and all loss, cost, damage, or claims by or on behalf of any person, firm, or corporation (a) from the conduct or from management of or from any work or thing whatsoever done in or about the Premises during the Term hereof, (b) from the operation, management, maintenance, repair, use, or occupation of the Premises, and the condition of any building or other Improvements on the Premises, (c) from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed, pursuant to the terms of this Lease, and (d) from any act, whether or not negligent, by Tenant, or any of its agents, contractors, servants, employees or licensees, or arising from any accident, injury or damage whatsoever occurring during the Term hereof in or about the Premises. In case any action or proceeding be brought against the Landlord-Related Parties by reason of any such claim Tenant, upon notice from the Landlord-Related Parties, covenants to resist or defend such action or proceedings by counsel chosen by Tenant, but reasonably satisfactory to Landlord. As used in this Lease, the term “Landlord-Related Parties” shall mean, collectively, Landlord and the Landlord’s shareholders, directors, officers, partners, members, employees, representatives, agents, and their successors and assigns.

6.2 Attorneys’ Fees. In the event of any arbitration, administrative or judicial proceeding commenced by Landlord or Tenant against the other under this Lease, the reasonable costs and expenses (including reasonable attorneys’ fees at trial and on appeal) of the prevailing party shall be paid by the other party.

6.3 Waiver of Claims for Defects. Tenant further covenants and agrees that Landlord shall not be liable to Tenant, or any one claiming by, through or under Tenant, for any defect in the Premises, or any buildings, building components, fixtures, apparatuses and personal property located thereon latent or otherwise for any injury, loss or damage to any persons or to the Premises, or to any property of Tenant, or of any other person, contained in or upon the Premises, caused by or arising or resulting from such defect.

ARTICLE 7

Maintenance and Repairs, Covenant Against Waste and Right of Inspection

7.1 Maintenance and Repair. Tenant shall, throughout the Term hereof and at no expense whatsoever to Landlord, take good care of the Premises and the Building and other Improvements and structural components thereof now or hereafter erected thereon and shall not do or suffer any waste with respect thereto, and Tenant shall promptly make all repairs, interior and exterior, structural and non-structural, ordinary as well as extraordinary, foreseen as well as unforeseen, necessary to keep the Building and other Improvements (including, without limitation, the roof, mechanical, plumbing, electrical, and other Building systems) in good and lawful order and in at least as good condition as such premises are in on the Commencement Date but subject to reasonable wear and tear. When used in this Article, the term “repairs” shall include replacements, capital improvements or renewals when necessary. Tenant shall keep and maintain all portions of the Premises, in a clean and orderly condition, free of accumulation of water, dirt, rubbish, snow and ice, and Tenant shall not permit or suffer any overloading of the floors of the Building. Landlord shall not be responsible for the cost of any alterations of or repairs to the Premises of any nature whatsoever, structural or otherwise, whether or not now in the contemplation of the parties. To the extent not prohibited by law, Tenant hereby waives and releases all rights now or hereinafter conferred by statute or otherwise which would have the effect of limiting or modifying any of the provisions of this Section 7.1. In addition, the provisions of this Section 7.1 are subject to the limitations imposed by Articles 8 and 9 below.

7.2 Landlord’s Inspection Rights. Tenant shall permit Landlord and the authorized representatives of Landlord, after reasonable written notice, to enter the Premises during Tenant’s usual business hours for the purpose of inspecting the same and of making any necessary repair to the Premises and performing any work therein that may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority, or that may be necessary to prevent waste or deterioration in connection with the Premises, which Tenant is obligated, but has failed, to make, perform, or prevent, as the case may be. Nothing in this Lease shall impose any duty upon the part of Landlord to do any such work or to make any alterations, repairs (including, but not limited to, repairs and other restoration work made necessary due to any fire or other casualty and irrespective of the sufficiency or availability of any fire or other insurance proceeds which may be payable in respect thereof), additions or improvements to the Premises, of any kind whatsoever. The performance thereof by Landlord shall not constitute a waiver of Tenant’s default in failing to perform the same and the reasonable cost of such performance incurred by Landlord, plus interest at the Interest Rate, shall become due and payable forthwith by Tenant to Landlord.

7.3 Premises Accepted “As Is.” Tenant acknowledges and agrees that (i) Tenant has had an opportunity to inspect the Premises (including the Building and all other Improvements), including the title thereto, (ii) Tenant has accepted the Premises in their “AS IS” condition as of the Commencement Date, (iii) Tenant is not relying on any representation or warranty by Landlord in entering into this Lease, and (iv) Tenant’s obligations under this Lease are not conditioned upon any particular condition of title to the Premises or any particular condition of the Premises. Tenant shall not be relieved of any obligation under this Lease by virtue of any provision of the Sale Contract.

7.4 Parking Structure. (a) Tenant shall have the obligation to construct a parking structure within two (2) years of the date hereof (such end date being the “Outside Completion Date”) in accordance with the terms of this Section 7.4 (the “Parking Structure”). All contracts and budgets for the design and construction of the Parking Structure shall be entered into by Tenant (and shall be subject to Landlord’s approval) but the Parking Structure, when constructed, shall be the sole property of Landlord and shall be a part of the Premises (and as

such shall, during the Term, be reserved solely for the use of Tenant and Tenant’s employees and visitors). Costs for construction of the Parking Structure will be paid by draws from sums held by Mortgagee in a reserve account established on the date hereof (the “Parking Structure Reserve”). No construction shall commence until Landlord has reviewed and approved the plans and specifications for the Parking Structure and reviewed and approved evidence that Tenant has obtained (at its cost and expense) all required building and zoning approvals. All draws from such escrow shall be made in a manner consistent with the procedures and requirements as set forth on Exhibit K. Notwithstanding the right of Landlord to approve the plans for the Parking Structure, it will be deemed to be unreasonable for the Landlord or Mortgagee to require that Tenant construct a Parking Structure that (i) is estimated to cost more than the amount of Parking Structure Reserve account to design, permit, and construct, or (ii) which creates more parking spaces than Tenant requires (Tenant currently estimates its requirement to be approximately one hundred eighty (180) additional spaces) provided that such number satisfies all applicable Legal Requirements. To the extent Tenant is unable to build the Parking Structure within the Outside Completion Date, Landlord may use funds in the Parking Structure Reserve to complete the Parking Structure, provided, however, Landlord shall be under no obligation to complete the Parking Structure upon Tenant’s failure to do so. To the extent the funds in the Parking Structure Reserve are insufficient to pay for the completion of the Parking Structure (whether by Tenant or Landlord), Tenant shall nonetheless be obligated to complete the Parking Structure at its cost and expense and if Landlord uses its own funds to complete the Parking Structure, Tenant shall be obligated to reimburse Landlord for any costs incurred by Landlord to complete the Parking Structure in accordance with the term of this Lease plus interest on any such costs at the Interest Rate until paid. Disputes regarding draw requests shall be resolved in accordance with the arbitration procedures set forth in Article 33 of this Lease. If the amount of funds reserved for any line item in an approved budget shall not be sufficient to complete the cost of work set forth in such line item, the Tenant shall be responsible for paying such additional costs (or, at Tenant’s election, contributing such additional funds into the escrow) so that the unadvanced portion of the escrow reserved to pay such line item costs, together with the funds contributed by Tenant, are sufficient to pay the costs to complete all work described in such line item (it being understood that Landlord shall not be required to pay any costs of construction of the Parking Structure and that Tenant shall be responsible for paying all costs of constructing the Parking Structure whether or not funds in the escrow are sufficient to pay in full all such costs). No changes to any previously approved construction contract involving a net increase in costs greater that Fifty Thousand Dollars ($50,000), or which change would have the effect of increasing total construction costs by more than Two Hundred Thousand Dollars ($200,000) of that previously approved by Landlord, and no material changes in the design of the Parking Structure shall be made, without Landlord’s written approval. To the extent the Parking Structure is completed in accordance with the terms of this Lease and there are funds remaining in the Parking Structure Reserve, any undisbursed funds shall be delivered to Tenant in accordance with the provisions set forth in Exhibit K. Landlord shall use commercially reasonable efforts to cause the Mortgagee to disburse funds to Tenant from the Parking Structure Reserve, provided that Tenant has complied with the requirements of this Section 7.4. Tenant hereby agrees to indemnify and hold harmless Landlord and Mortgagee from and against all claims, costs, actions, proceedings, investigations, fines, penalties and liabilities arising out of the construction of the Parking Structure and the provisions of this Section. This obligation shall survive the termination of this Lease.

(b) The provisions set forth in Exhibit K of this Lease supplement the terms of this Section 7.4 and are incorporated herein. To the extent that there is any inconsistency or conflict between the terms thereof and the terms of this Section 7.4, the terms of Exhibit K shall control.

(c) All requests, notices and deliveries to be made by Tenant to Landlord in connection with the provisions of this Section 7.4 and with the provisions of Exhibit K shall be simultaneously made to Mortgagee. If Tenant fails to do so, Landlord’s obligation to cause Mortgagee to release such funds shall be suspended until Tenant does so.

7.5 Conversion of Parking Area into Office Space. Tenant agrees to cause the conversion (the “Conversion”) of the parking area located under “Building A,” consisting currently of sixty-seven (67) spaces (the “Conversion Area”), to be converted into office space, on the terms set forth in this Section 7.5. The Conversion shall (i) be performed at Tenant’s sole cost and expense, (ii) be performed in accordance with the requirements of Article 8 and Article 9 (excluding Section 9.2 thereof) of this Lease, (iii) be commenced on or before the date that is

seventeen (17) months prior to the Expiration Date (provided, however, this requirements shall be waived if Tenant has then exercised its option to extend the Primary Term, and if the new Base Rent for the extended term has been agreed to Tenant or if not yet agreed to, the Recission Right has been waived by Tenant to the reasonable satisfaction of Landlord), (iv) if completion is anticipated to occur on or after the date that is six (6) months prior to the Expiration Date, then Tenant agrees to post with Landlord or its Mortgagee no later than six months prior to the Expiration Date, an amount equal to one hundred twenty-five percent (125%) of the estimate of an architect chosen by Landlord of the cost to complete the Conversion, which proceeds shall be used to complete the Conversion, (v) not commence the Conversion until plans and specifications for the work to be performed in accordance with this Section 7.5 have been submitted to, reviewed and approved by Landlord, (vi) provide Landlord with an estimate from its architect of the total anticipated cost to complete the Conversion together with a budget setting forth the anticipated cash thereafter, (vii) be completed in accordance with the terms of Articles 8 and 9, and (viii) result in the creation of space that is lawfully usable as office space, free and clear of all liens and in conformity with all governmental and other legal requirements relating to the Premises, such as zoning, use permit requirements and building codes, including obtaining any necessary certificates of occupancy. Once the construction phase of the Conversion has commenced, Tenant shall thereafter diligently and continuously prosecute same to completion. Tenant hereby agrees to indemnify and hold harmless Landlord and Mortgagee from and against all claims, costs, actions, proceedings, investigations, fines, penalties and liabilities arising out of the conversion of the parking lot area into office space. This obligation shall survive the termination of this Lease. To the extent that Tenant fails to convert the Conversion Area into office space in accordance with this Section 7.5, Tenant shall nonetheless remain liable for the completion and cost of such conversion and the obligations of this Section 7.5 shall survive the termination of this Lease.

7.6 Completion Guarantee. In connection with the construction of the Parking Structure and the Conversion, Tenant hereby guarantees to Landlord and Mortgagee, the completion of the Parking Structure and the Conversion in accordance with the terms of this Lease.

ARTICLE 8

Mechanics’ Liens

8.1 Covenant Against Liens. Tenant shall not suffer or permit any liens to stand against the Premises or any part thereof by reason of any work, labor, services or materials done for, or supplied to, or claimed to have been done for, or supplied to, Tenant or anyone holding the Premises or any part thereof by, through or under Tenant. If any such lien shall at any time be filed against the Premises, Tenant shall cause the same to be discharged of record within thirty (30) days after the date of filing the same, by either payment, deposit or bond. If Tenant shall fail to discharge any such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, procure the discharge of the same. Any amount reasonably paid or deposited by Landlord for any of the aforesaid purposes, including all legal and other expenses of Landlord, including counsel fees, in defending or commencing any such action or in or about procuring the discharge of such lien, with all necessary disbursements in connection therewith, together with interest thereon at the Interest Rate, shall become due and payable forthwith by Tenant to Landlord.

8.2 Notices. Nothing in this Lease shall be construed as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer, materialman, architect, surveyor or engineer for the performance of any labor or the furnishing of any materials or services for or in connection with the Premises. Notice is hereby given that Landlord shall not be liable for any labor or material or services furnished or to be furnished to Tenant upon credit, and that no mechanic’s or other lien for such labor, materials or services shall attach to or affect the fee or reversionary or other estate or interest of Landlord in the Premises or this Lease. Tenant shall post and keep posted at the Premises during the course of any Alterations such written notices as are necessary to effect the terms of this Section 8.2 or are otherwise necessary in Landlord’s reasonable opinion to prevent any claim from attaching to the fee or reversionary or other estate or interest of Landlord in the Premises or in this Lease pursuant to Connecticut General Statutes Section 49-33.

ARTICLE 9

Alterations

9.1 Limitations on Alterations. Except as otherwise expressly provided herein, including under Section 9.2 below, Tenant may, at its own expense, and without Landlord’s prior consent, make changes, alterations, additions or improvements to the Premises (“Alterations”) and install personal property, furniture, signs, telecommunications equipment and trade fixtures (“Tenant’s Property”) in the Premises as will, in the judgment of Tenant, better adapt the Premises for its needs, provided that Tenant complies with the following provisions:

(a) The Alterations shall not result in a violation of any certificate of occupancy for the Premises, and must be performed in compliance with all applicable laws.

(b) Such Alterations shall not weaken or impair the structure of the Improvements, or materially lessen the value of the Premises.

(c) At Landlord’s request: (i) Tenant prior to the commencement of any Alteration that requires Landlord’s consent shall submit to Landlord three (3) copies of final plans and specifications of the Alterations and (ii) upon completion of any Alterations (other than decorations) Tenant shall deliver to Landlord three (3) copies of “as built” plans for such Alterations.

(d) Throughout the making of all Alterations (other than mere decorations), Tenant, at its expense, shall carry or cause its contractors to carry (i) workers’ compensation insurance in statutory limits covering all persons employed in connection with such Alterations, and (ii) commercial general liability insurance covering any occurrence in or about the Premises in connection with such Alterations which complies with the requirements of Section 10.3 below.

9.2 Landlord’s Consent. With respect to any Alterations that do not comply with Section 9.1 above, or which exceed the Threshold Amount (as defined in this Section 9.2 below) Tenant must obtain Landlord’s prior written consent which shall not be unreasonably withheld, delayed, or qualified. The “Threshold Amount” shall mean an amount equal to Five Hundred Thousand Dollars ($500,000.00) during the Primary Term, shall mean Seven Hundred Fifty Thousand Dollars ($750,000.00) during the first Extended Term, and shall mean One Million Dollars ($1,000,000.00) during the second Extended Term. In all events, Landlord must respond to Tenant’s request for consent under this Article 9 within ten (10) days, and should Landlord fail, within said 10-day-period, to either grant such approval, or state a specific, reasonable basis for withholding such consent, Tenant shall have the right to send a second notice (which notice shall specifically reference this Section 9.2 and shall attach a copy of this Section 9.2), and if Landlord fails, within five (5) business days after such second notice, to grant such approval or state a specific reasonable basis for withholding such consent, such consent shall be deemed to have been given. Tenant’s request for consent shall be sent to Landlord as provided in Section 21 together with an additional copy thereof to Mortgagee at c/o Nomura Credit & Capital, Inc., 2 World Financial Center, Building B, New York, NY 10281, attn: Dante LaRocca

9.3 Surrender of Alterations; Removal of Tenant’s Property. All Alterations made by Tenant shall immediately be and become part of the realty and the sole and absolute property of Landlord and shall remain upon and be surrendered with the Premises in the event of a termination of this Lease. All of Tenant’s Property, including moveable furniture, trade fixtures, and equipment not permanently attached to the Improvements or the Premises, may be removed by Tenant prior to the expiration of the Term, provided, however, that Tenant shall repair all damage caused by such removal prior to the expiration of the Term, and provided further, that any of the Tenant’s Property not so removed shall, at the option of Landlord, upon ten (10) business days’ notice to Tenant (unless Tenant effectuates the removal within such ten (10)-business-day period) automatically become the property of Landlord upon the expiration or termination of this Lease, and thereafter, Landlord may retain or dispose of in any manner the Tenant’s Property not so removed, without any liability whatsoever to Tenant.

9.4 No Liens. Tenant’s obligations pursuant to the terms of Section 8.1 above to keep the Premises free of liens shall apply to all Alterations, whether or not Landlord’s consent is required for such Alterations.

ARTICLE 10

Insurance and Damage

10.1 Property Insurance. Throughout the Term, Tenant shall cause the Improvements, and all building equipment and fixtures appurtenant thereto, to be insured by insurance companies reasonably satisfactory to Landlord and licensed to do business in the State of Connecticut in such respective amounts as shall be sufficient to prevent Landlord or Tenant from becoming a co-insurer of any loss, which shall name Landlord, the Mortgagee and the Lender Parties as loss payees (on the terms set forth in Section 10.10 below) and which shall insure the full replacement value of any Improvements:

(a) against loss or damage by fire and against such other risks, of similar or dissimilar nature, including wind, as shall typically be insurable against under present or future standard forms of fire and extended coverage policies (such policies are currently known as “Special Form Causes of Loss” property insurance), and

(b) “Ordinance or Law Coverage” in amounts required by Landlord or Mortgagee if any of the Improvements or the use of the Property shall at any time constitute legal non-conforming structures or uses.

(c) If, and so long as, the Premises shall be equipped with any boiler or boilers, other than low pressure boilers, or so long as the maintenance of such insurance shall be required by law, against loss and liability resulting from property damage, personal injury or death caused by explosion of boilers, heating apparatus or other pressure vessels on the Premises, and

(d) Business income/interruption insurance to include loss of rents at limits sufficient to cover one hundred percent (100%) of the annual Base Rent and additional rent (including Taxes and all other payments required to be made by Tenant hereunder) payable to Landlord with a period of indemnity not less than eighteen (18) months from time of loss and contain an extended period of indemnity endorsement which provides that after the physical loss to the Improvements and Personal Property has been repaired, the continued loss of income will be insured until such income either returns to the same level it was at prior to the loss, or the expiration of twelve (12) months from the date that the Property is repaired or replaced and operations are resumed, whichever first occurs, and notwithstanding that the policy may expire prior to the end of such period. Such insurance shall name Landlord and Mortgagees as additional insureds and the Mortgagee which holds a first mortgage lien on the Premises as loss payee with respect to Base Rent payable to or for the benefit of Landlord under this Lease.

(e) During any period in which Alterations costing in excess of Fifty Thousand Dollars ($50,000) at the Property are being undertaken, builder’s risk insurance covering the total completed value including any “soft costs” with respect to the Improvements being altered or repaired (on a completed value, non-reporting basis), replacement costs of work performed and equipment, supplies and materials furnished in connection with such construction or repair of Improvements, together with such “soft cost” endorsements and such other endorsements as Landlord may reasonably require and general liability, worker’s compensation (to be carried by the contractor, it being understood that any worker’s compensation insurance carried by Tenant provides coverage only for Tenant’s employees), and automobile liability insurance with respect to the Improvements being constructed, altered, or repaired.

(f) To the extent that, and for so long as, the following coverages are (i) typically carried by owners or tenants of properties similar to the Premises (taking into account the creditworthiness of Tenant and the creditworthiness of any Lease Guarantor, as defined in Article 31 below) or (ii) required by the Mortgagees, Tenant shall also carry such other insurance as may from time to time be required by Landlord or Mortgagee against other insurable hazards or casualties which at the time are commonly insured against in similarly situated property including without limitations, sinkhole, mine subsidence, environmental, terrorism insurance, flood insurance (but not more than in such amount equal to the maximum amount available under the National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the National Flood Insurance Reform Act of 1994, as each may be amended), earthquake and windstorm insurance, due regard being given to the height and type of buildings, their construction, location, use and occupancy.

It is the intention of the parties hereto that Tenant shall procure, maintain in force at all times, pay for and deliver to Landlord all of the insurance hereinabove referred to at such times and in such manner that Landlord’s interest in the Premises shall at all times during the Term hereof be protected and evidenced by, and Landlord shall be in possession of, valid and binding insurance as herein required. All renewal binders or policies shall be delivered to Landlord ten (10) days prior to the expiration of the policy or policies to be renewed.

(g) Tenant shall at Landlord’s request execute such reasonable and customary documents, and take such other actions as may be reasonably required by Landlord, in order for Landlord to obtain condemnation insurance, provided, however, that in no event shall Tenant be obligated to incur any out-of-pocket expense or potential liability in connection therewith.

10.2 Claims Adjustment. Unless and to the extent otherwise required by Landlord at the time of any loss, the loss, if any, under any or all of the policies provided for under Section 10.1 hereof, shall be adjusted with the insurance company or companies by and at the cost of Tenant, but if the loss shall be in excess of Two Hundred Thousand Dollars ($200,000.00), no final adjustment shall be made with the insurance company or companies without the written approval of Landlord and Mortgagee of the amount of the adjustment (which approval shall not be unreasonably withheld, conditioned, or delayed). The proceeds of any insurance policy shall belong to the party expending funds for restoration with any excess being payable to the named insured

10.3 Liability Insurance. Tenant further agrees to maintain or cause to be maintained throughout the Term hereof, with insurance companies reasonably satisfactory to Landlord and licensed to do business in the State of Connecticut, and pay the costs of, commercial general liability insurance protecting against claims of any and all persons, firms and corporations for personal injury, death or property damage occurring upon, in or about the Premises, such insurance to afford protection with a general aggregate limit of not less than $2,000,000 and a per occurrence limit of not less than $1,000,000 (with an additional requirement that there shall be an umbrella policy with a limit of not less than Twenty-Five Million Dollars ($25,000,0000.00 per occurrence), and shall name Landlord and Mortgagee as an additional insured, provided that such amount may be increased during the Initial Term only in the event of a use of the Property other then as office space in which case the amount can be increased to reflect the increased risk of such use. Tenant shall provide Landlord with certificates evidencing that the insurance required to be obtained pursuant to this Section 10.3 is in effect. So long as Tenant complies with the provisions of this Article 10, the requirements of this Section 10.3 shall not apply to any permitted sublessee of the Property.

10.4 Worker’s compensation. Tenant further agrees to maintain, throughout the Term hereof, with insurance companies reasonably satisfactory to Landlord and licensed to do business in the State of Connecticut, and pay the costs of, worker’s compensation insurance, such insurance to afford protection to the limit of not less than the minimum amount required by law. Tenant shall provide Landlord with certificates evidencing that the insurance required to be obtained pursuant to this Section 10.4 is in effect.

10.5 Effect of Casualty. No loss or damage by fire or other cause required to be insured against hereunder resulting in either partial or total destruction of any building, structure, or other Improvement on the Premises, shall operate to terminate this Lease, or to relieve or discharge Tenant from the payment of Base Rent and other amounts payable by Tenant hereunder as they become due and payable, or from the performance and observance of any of the agreements, covenants and conditions herein contained on the part of Tenant to be performed and observed.

10.6 Cooperation. Landlord and Tenant each agrees that it will cooperate with the other, to such extent as such other party may reasonably require, in connection with the prosecution or defense of any action or proceeding arising out of, or for the collection of any insurance moneys that may be due in the event of, any loss or damage, and that it will execute and deliver to such other party such instruments as may be required to facilitate the recovery of any insurance moneys.

10.7 Notice of Casualty. Tenant shall give prompt notice to Landlord with respect to all fires or other casualties occurring upon the Premises.

10.8 Waiver of Claims and Subrogation Rights. Neither party shall, to the extent that such party is compensated by insurance proceeds, be liable to the other party for loss or damage, caused by fire or any other peril even though the loss or damage is caused by the party’s negligence. Each property insurance policy carried by Landlord and Tenant shall contain a provision by which the insurance company shall waive all rights of recovery by subrogation against the other party for loss or damage to the insured property. Nothing herein shall be deemed to create or imply any obligation by Landlord to carry any insurance policy with respect to the Premises or otherwise under this Lease.

10.9 Blanket Insurance; Self-Insurance. Notwithstanding the foregoing, all of the insurance requirements set forth herein on the part of Tenant to be observed shall be deemed satisfied if the Premises are covered by a blanket insurance policy insuring all or most of Tenant’s facilities in Connecticut, so long as such blanket policies provide for a minimum coverages applicable to the Premises and otherwise comply with all other requirements of this Article X. In addition, Tenant shall have the right to self-insure the risks set forth in Section 10.3 above, so long as the net worth of Tenant (combined with that of Lease Guarantor) exceeds One Hundred Million Dollars ($100,000,000.00), and the Mortgagee has consented thereto (without conditioning such consent by requiring that Landlord carry such insurance).

10.10 Requirements for Policies. Whenever under the terms of this Lease Tenant is required to maintain insurance for the benefit of Landlord, Landlord and, the Mortgagee (and any loan trustee or servicer having an insurable interest in the Premises or through Mortgagee; collectively, such parties are referred to as the “Lender Parties”) shall be (a) an additional insured in all such liability insurance policies (b) Mortgagee shall be named the sole loss payee in all such property policies. The commercial general liability insurance shall name the Mortgagee and the Lender Parties as additional insureds and all other insurance provided hereunder shall name the Mortgagee as Mortgagee and Loss Payee under a standard “non-contributory mortgagee” endorsement or its equivalent. All policies of insurance shall provide that such coverage shall be primary and that any insurance maintained separately by Landlord or the Mortgagee and the Lender Parties shall be excess insurance only. The original certificates for property insurance and an original paid endorsement or binder in respect of liability insurance naming Landlord, the Mortgagee and the Lender Parties as named insured or additional insured, as applicable, shall be delivered to Landlord not later than thirty (30) days prior to the expiration date of the applicable policy, and, Landlord and any Mortgagee, may, upon prior written notice to Tenant, review the original policies at the office of the Tenant’s Risk Manager. All of the above-mentioned insurance certificates shall be obtained by Tenant and delivered to Landlord on or prior to the date hereof, and thereafter as provided for herein, and the policies shall be obtained under valid and enforceable policies (the “Policies” or in the singular, the “Policy”), and shall be subject to the approval of Landlord or Mortgagee as to insurance companies, policy limits and any sub-limits thereof, forms (including exclusions and exceptions), deductibles, loss payees and insureds. The insurance companies must be approved, authorized or licensed to provide insurance in the state in which the Property is located and have a rating of “A” or better for financial strength claims paying ability assigned by Moody’s Investors Service, Inc. (if Moody’s Investors Service, Inc. provides a rating for the insurer) and Standard & Poor’s Rating Group (“S&P”), provided that if any insurance required is provided by a syndicate of insurers, the insurers with respect to such insurance shall be acceptable if: (i) the first layer of coverage under such insurance shall be provided by carriers with a minimum financial strength rating from S&P of “A” or better; (ii) sixty percent (60%) (seventy-five percent (75%) if there four or fewer members in the syndicate) of the aggregate limits under such Policies must be provided by carriers with a minimum financial strength rating from S&P of “A” or better and (iii) the financial strength rating from S&P for each carrier in the syndicate shall have a financial strength rating from S&P of at least “BBB.”

10.11 Tenant’s Reconstruction Obligation. Tenant shall, at Tenant’s sole cost, promptly reconstruct the Premises following any fire or other casualty affecting the Premises to substantially the same value and condition as immediately prior to such casualty, irrespective of whether Tenant’s insurance proceeds are sufficient to cover the cost of reconstruction. Provided that no Event of Default has occurred and is continuing hereunder or under the guaranty of this Lease by Health Net, Inc. Landlord will deposit any casualty insurance proceeds with Mortgagee and shall require the Mortgagee to make insurance proceeds so received to be available for restoration in accordance with the procedures set forth in Exhibit H attached hereto and by this reference are incorporated herein.

10.12 Escrow and Other Tenant Protections. Landlord and Tenant shall deposit any insurance proceeds paid to them with Landlord’s Mortgagee to be disbursed as otherwise provided in this Lease. In the event that Landlord’s Mortgage is in possession of or controls funds to be distributed to Tenant or for Tenant’s benefit under this Lease, Landlord agrees to use commercially reasonable efforts to enforce the obligations of Mortgagee to distribute to, or use such funds for the benefit of Tenant.

ARTICLE 11

Condemnation

11.1 Effect of Taking. If title to the Premises or so much thereof as to render the remainder no longer usable for Tenant’s operations shall be taken or permanently condemned by any competent authority and the Premises cannot, in the reasonable opinion of Landlord and Tenant, be restored to useful condition, this Lease shall cease and terminate, and all Base Rent, additional rent and other charges paid or payable by Tenant hereunder shall be apportioned as of the date of vesting of title in the condemning authority and Tenant shall surrender the Premises as set forth herein. In the event of a permanent partial taking which does not effect a termination of this Lease pursuant to the preceding sentence but does deprive Tenant of the use of seventy-five percent (75%) or more of the rentable area of the Building, Tenant shall have the right, at its option, exercisable by written notice delivered to Landlord by no later than thirty (30) days before the vesting of title in such condemning authority, to terminate this Lease. In the event the Tenant does not exercise its right to terminate the Lease in accordance with this Article 11 and a portion of the rentable area of the Building is permanently taken, the Base Rent thereafter payable hereunder shall be reduced by the lesser of (a) the Base Rent otherwise payable hereunder multiplied by a fraction, the numerator of which is the rentable area of the Building so taken and the denominator of which is 321,321 square feet and (b) the product of (i) the net condemnation proceeds retained by Landlord (after reduction of any proceeds utilized for restoration) and (ii) six and one-tenth percent (6.1%) during the first five years of this Lease and seven and six-tenths percent (7.6%) thereafter. The Lease may not be terminated for a temporary taking. In the event of a temporary taking, Tenant shall remain liable for its Base Rent and other monetary obligations under this Lease without reduction or abatement and any and all payments made for such temporary taking and business interruption insurance proceeds shall be paid over to Tenant.

11.2 Award. Landlord shall be entitled to, and shall receive, the entire award made with respect to the Premises, except such portion thereof, if any, as shall be specifically allowed as damages to Tenant, provided that in no event shall any payment be made to Tenant until Landlord has received sufficient funds to repay all mortgages on the Premises plus Landlord’s remaining cash equity and closing costs incurred in connection with the acquisition of the Premises or, if Landlord is a bona fide third party purchaser from the original Landlord then, to the extent of the purchase price paid by such bona fide third party purchaser. Landlord will (and shall cause the Mortgagee to) make insurance proceeds received by it available for restoration in accordance with the procedures set forth in Exhibit H attached hereto and by this reference incorporated herein.

11.3 Escrow and Other Tenant Protections. In connection with a condemnation, all condemnation proceeds shall be placed in an interest-bearing escrow account with Mortgagee. All such proceeds shall be disbursed in accordance with this Articles 8, 10 and 11 and Exhibit H.

ARTICLE 12

Landlord’s Right To Perform Tenant’s Covenants

12. Without limiting or waiving any other rights and remedies of Landlord hereunder, if Landlord determines that the Tenant is not adequately performing or has failed to perform any of its obligations, covenants or agreements contained in this Lease and such inadequacy or failure is not cured within any applicable grace or cure period, or if any action or proceeding of any kind (including, but not limited to, any bankruptcy, insolvency, arrangement), then Landlord may, at its option, with or without notice to Tenant, make any appearances, disburse or advance any sums and take any actions as may be necessary or desirable to remedy the failure of Tenant to perform its covenants and agreements. Tenant agrees to pay on demand all expenses of Landlord reasonably incurred with respect to the foregoing (including, but not limited to, fees and disbursements of counsel), together with interest thereon at the Interest Rate from and after the date on which Landlord incurs such expenses until reimbursement thereof by

Tenant. Any such expenses so incurred by Landlord, together with interest thereon shall be additional rent hereunder. The necessity for any such actions and of the amounts to be paid shall be determined by Landlord in its reasonable discretion. Landlord is hereby empowered to enter and to authorize others to enter upon the Property or any part thereof for the purpose of performing or observing any such defaulted term, covenant or condition without thereby becoming liable to Tenant or any person in possession holding under Tenant. Tenant hereby acknowledges and agrees that the remedies set forth in this Article 12 shall be exercisable by Landlord, and any payments made or costs or expenses incurred by Landlord in connection therewith shall be, immediately repaid by Tenant with interest thereon at the Interest Rate, notwithstanding the fact that such remedies were exercised and such payments made and costs incurred by Landlord after the filing by Tenant of a voluntary case or the filing against Tenant of an involuntary case pursuant to or within the meaning of the Bankruptcy Reform Act of 1978, as amended (the “Act”), Title 11 U.S.C., or after any similar action. In furtherance and not in limitation of the foregoing, Tenant shall at any time fail to pay any Tax pursuant to the provisions of Article 3 hereof, or to take out, pay for, maintain or deliver any of the insurance provided for in Article 10 hereof, or shall fail to make any other payment or perform under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations of Tenant in this Lease contained, pay any such Tax, effect any such insurance coverage and pay premiums therefor, and make any other payment or perform any other act which Tenant is obligated to perform under this Lease, in such manner and to such extent as Landlord shall, in its sole discretion, deem necessary. In exercising any such rights, Landlord may pay necessary and incidental costs and expenses including reasonable attorneys’ fees. All sums so paid by Landlord and all necessary and incidental costs and expenses in connection with the performance of any such act by Landlord, including Landlord’s reasonably incurred attorney’s fees and disbursements together with interest thereon at the Interest Rate, shall be payable by Tenant to Landlord on demand. Landlord shall have no obligation to perform on Tenant’s behalf and if Landlord does so, Landlord shall not be liable to Tenant for any damage resulting from its actions.

ARTICLE 13

Tenant’s Default

13. 1 Events of Default. This Lease and the Term are subject to the limitation that if, at any time during the Term hereof, any one or more of the following events shall occur, the same shall constitute an “Event of Default”.

(a) If Tenant shall make an assignment for the benefit of its creditors; or

(b) If any petition shall be filed against Tenant in any court, whether or not pursuant to any statute of the United States or of any state, in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, and Tenant shall thereafter be adjudicated bankrupt, or such petition shall be approved by the court, or the court shall assume jurisdiction of the subject matter, or if such proceedings shall not be dismissed within ninety (90) days after the institution of same, or if any such petition shall be so filed by Tenant; or

(c) If, in any proceeding, a receiver or trustee be appointed for all or any portion of Tenant’s property, and such receivership or trusteeship shall not be vacated or set aside within ninety (90) days after the appointment of such receiver or trustee; or

(d) If Tenant shall fail to pay any installment of Base Rent when due; or

(e) If Tenant shall fail to pay any sum of additional rent or any other charge required to be paid by Tenant hereunder when due (other than Base Rent), and such failure is not cured within three (3) business days after Tenant’s receipt of written notice thereof from Landlord; or

(f) If Tenant shall fail to perform or observe any other requirement of this Lease on the part of Tenant to be performed or observed, and such failure is not cured within ten (10) days after Tenant’s receipt of written notice thereof from Landlord; provided however, that: (i) if the nature of Tenant’s default is such that more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default under this Lease if Tenant shall commence the cure of such default so specified within said ten (10) day period and diligently prosecutes the same to completion, and (ii) if with regard to such default, Landlord receives a grace or cure period from its Mortgagee more or less than twenty (20) days, Tenant shall have not less than fifty percent (50%) of such grace or cure period to cure such default; or

(g) If Lease Guarantor shall fail to timely provide a financial statement or an estoppel certificate on the terms set forth in the Lease Guaranty, and such failure is not cured within five (5) business days after Tenant’s receipt of written notice thereof from Landlord.

13.2 Landlord’s Remedies. Upon the happening of any one or more of the aforementioned Events of Default, Landlord may:

(a) Give Tenant a notice (a “Notice of Termination”) of termination of this Lease terminating this Lease and the Term hereof, as well as all of the right, title and interest of Tenant hereunder. In case of any such termination, or in the case of a lawful re-entry or dispossession following an Event of Default, the annual rents and all other charges required to be paid by Tenant hereunder shall thereupon become due and be paid up to the time of such termination, re-entry or dispossession and Tenant shall also pay to Landlord all reasonable expenses which Landlord may then or thereafter incur for legal expenses, attorneys’ fees, or all other reasonable costs paid or incurred by Landlord for restoring the Premises to good order and condition and for preparing the same for reletting. Such termination shall not limit or effect Landlord’s right to simultaneously or at Landlord’s election, otherwise exercise its other rights, including those set forth in Section 13.2(b).

(b) Landlord may declare the entire amount of the Base Rent and an amount equal to Landlord’s estimate of all other charges or rents required to be paid by Tenant which would become due and payable during the remainder of the Term of this Lease, to be due and payable immediately, discounted at the rate of four (4) percent per annum in which event, Tenant agrees to pay the same at once; provided, however, that such payment shall not constitute a penalty or forfeiture or liquidated damages, but shall merely constitute payment in advance of the rent for the remainder of the said Term. Provided that Tenant complies with its obligations under this Section 13.2(b). Landlord shall attempt to relet the Premises so as to mitigate its damages provided that in no event is Landlord required to enter into a lease for less than market rents or which extends beyond the remaining term of this Lease. The acceptance of such payment by Landlord shall not constitute a waiver of any failure of Tenant thereafter occurring to comply with any term, provision, condition or any covenant of this Lease.

(c) To the extent allowed by law, Landlord may enter the Premises as the agent of Tenant and relet the Premises as the agent of Tenant and receive the rent therefor. Tenant shall pay Landlord any deficiency that may arise by reason of such reletting, on demand.

(d) Landlord may maintain this Lease in full force and effect and recover the rent and all other amounts payable hereunder as they become due and payable without terminating Tenant’s right to possession, regardless of whether Tenant shall have abandoned the Premises.

(e) Landlord shall have any and all other remedies available to it at law or in equity. If Tenant defaults hereunder, Tenant shall pay Landlord’s reasonable attorneys’ fees and costs incurred as a result thereof.

ARTICLE 14

Cumulative Remedies – No Waiver – No Oral Change

14.1 Cumulative Remedies. The specified remedies to which Landlord may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may be lawfully entitled in case of any breach or threatened breach by Tenant of any provision of this Lease.

14.2 No Waiver. The failure of Landlord to insist in any one or more cases upon the strict performance of any of the terms, covenants, conditions, provisions or agreements of this Lease or to exercise any option herein contained shall not be construed as a waiver or a relinquishment for the future of any such term, covenant, condition, provision, agreement or option. A receipt and acceptance by Landlord of rent or any other payment, or the acceptance or performance of anything required by this Lease to be performed, with knowledge of the breach of any term, covenant, condition, provision or agreement of this Lease, shall not be deemed a

waiver of such breach, nor shall any such acceptance of rent in a lesser amount than is herein provided for (regardless of any endorsement of any check, or any statement in any letter accompanying any payment of rent) separate or be construed either as an accord and satisfaction or in any manner other than as payment on account of the earliest rent then unpaid by Tenant. No waiver by Landlord of any term, covenant, condition, provision or agreement in this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord.

14.3 No Oral Changes. This Lease may not be changed orally, but only by agreement, in writing, signed by the party against whom enforcement of the change, modification or discharge is sought.

ARTICLE 15

Quiet Enjoyment

Landlord covenants and agrees that Tenant, upon paying the rent herein reserved, and performing and observing the covenants, conditions, and agreements hereof upon the part of Tenant to be performed and observed, shall and may peaceably hold and enjoy the said Premises during the term hereof, without any interruption or disturbance from Landlord or any party claiming through Landlord. This covenant and the other obligations of Landlord hereunder, shall be construed as running with the Land to and against subsequent owners and successors in interest, and are not, nor shall they operate or be construed as, personal covenants of Landlord, except to the extent of Landlord’s interest in the Premises and only so long as such interest shall continue.

ARTICLE 16

Surrender Of Premises; No Right to Hold Over

16.1 Surrender of the Premises. Tenant shall, upon the expiration or termination of this Lease for any reason, surrender to Landlord the buildings, structures and building equipment then upon the Premises, together with all alterations and replacements thereof then on the Premises, in the good order, condition and repair, except for reasonable wear and tear and the effects of any casualty that Tenant is not obligated to repair. Title to all of Tenant’s Property shall remain in Tenant, and upon expiration or other termination of this Lease, the same may and, upon the demand of Landlord, shall be removed and any resultant damage to the Premises shall be repaired, by and at the expense of Tenant.

16.2 No Right to Hold Over. Tenant shall have no right to retain possession of the Premises or any portion thereof following the expiration or earlier termination of this Lease. If Tenant does hold over following the expiration or earlier termination of this Lease without Landlord’s express or implied consent, the Base Rent payable during such holding over shall be as follows: (i) for the first thirty (30) days, one hundred twenty-five percent (125%) of the Base Rent in effect immediately preceding such holding over, (ii) for the next sixty (60) days, one hundred fifty percent (150%) of the Base Rent in effect immediately preceding such holding over, and (iii) thereafter, two hundred percent (200%) of the Base Rent in effect immediately preceding such holding over. The foregoing sentence shall not imply any right to holdover, nor shall it limit Landlord’s right to collect its damages including reasonable legal fees, lost profits and consequential damages, in the event of a holdover.

ARTICLE 17

Assignments, Subletting, and Encumbrances

17.1 Right to Assign and Sublease. Except as permitted by the terms of this Article 17, Tenant may not assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises (each of the foregoing is sometimes referred to in this Lease as a “Transfer”), without obtaining Landlord’s consent. Landlord shall have no right to recapture all or any portion of the Premises in the event of an assignment, encumbrance or sublease. No consent to an assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this Article 17.

17.2 Procedure for Assignment and sublease; Exempt Transfers. (a) If Tenant, at any time or from time to time, during the Term shall desire to assign this Lease or sublet all or part of the Premises and provided that no Event of Default then exists, Tenant shall give notice (a

“Tenant’s Notice”) thereof to Landlord, which Tenant’s Notice shall set forth: (A) with respect to an assignment of this Lease (i) the date Tenant desires the assignment to be effective, (ii) the name of the proposed assignee, and (iii) a current financial statement for the proposed assignee, and (B) with respect to a sublet of all or a part of the Premises (i) the dates upon which Tenant desires the sublease term to commence and expire, (ii) the rental rate and other material business terms upon which Tenant would sublet such premises, (iii) a description of the Premises showing the portion to be sublet, and (iv) the name of the proposed subtenant. Notwithstanding any contrary provision of this Lease, no consent by Landlord, shall be required as to: (i) any sublease or subleases involving less than Fifty Thousand (50,000) square feet of rentable area in the aggregate at any one time, or (ii) any sublease or license agreement pursuant to which Tenant allows any person or company which is a client or customer of Tenant or which is providing service to Tenant or one of Tenant’s clients to occupy portions of the Premises, so long as (x) such relationship was not created as a subterfuge to avoid the obligations set forth in this Article 17, and (y) in the aggregate, no more than Fifty Thousand (50,000) square feet of rentable area in the Premises is occupied pursuant to this clause (ii) at any one time, or (iii) any sublease or occupancy agreement between Tenant and an Affiliate. However, Tenant shall be required to provide Landlord advance written notice of the foregoing in all events.

17.3 Conditions Regarding Consent to Sublease and Assignment; Reasonableness Standard. Notwithstanding any consent given by Landlord hereunder, Tenant shall, following any assignment or sublease, remain directly, primarily and fully responsible and liable for all payments owed by Tenant under the Lease and for compliance with all obligations under the terms, provisions and covenants of the Lease. Landlord shall not be entitled to share in any profit or economic benefit arising in favor of Tenant from any such assignment or sublease and shall not be required to share in any loses or economic detriment arising from any assignment or sublease. Provided that no Event of Default is ongoing, in no event shall any Landlord consent required under this Article 17 be unreasonably withheld, conditioned, or delayed, and Landlord shall, in assessing the financial ability of any proposed subtenant or assignee, consider the ongoing liability of Tenant and Lease Guarantor as well as the value of the Premises in the event that Tenant defaults and such prospective lessee is permitted to continue its occupancy as contemplated under Section 17.5; if an Event of Default is ongoing, Landlord shall have the right to withhold any such consent in its sole discretion. In all events, Landlord must respond to Tenant’s request for Landlord’s consent to a Transfer within fifteen (15) business days after the date that Landlord has received Tenant’s written request therefor (and all related information that Landlord may reasonably request, provided that Landlord promptly requests such information following Landlord’s receipt of Tenant’s initial request), and should Landlord fail, within said 15-business-day period, to either grant such approval, or state a specific, reasonable basis for withholding such consent, Tenant shall have the right to send a second notice (which notice shall specifically reference this Section 17.3 and shall attach a copy of this Section 17.3), and if Landlord fails, within five (5) business days after such second notice, to grant such approval or state a specific reasonable basis for withholding such consent, Tenant shall have the right to send a third notice (which notice shall specifically reference this Section 17.3 and shall attach a copy of this Section 17.3), and if Landlord fails, within three (3) business days after such third notice, to grant such approval or state a specific reasonable basis for withholding such consent, such Transfer shall be deemed to be approved.

17.4 Affiliated Companies/Restructuring of Business Organization. Occupancy of all or part of the Premises by any parent, subsidiary, or affiliated companies of Tenant or of Tenant’s parent or of Tenant’s subsidiary shall not be deemed an assignment or subletting. Furthermore, without limiting the generality of the foregoing, Tenant may assign this Lease at any time, or sublease all or part of the Premises, without receipt of Landlord’s consent, to any entity which acquires all or part of Tenant, or which is acquired in whole or in part by Tenant, or which is controlled directly or indirectly by Tenant, or which entity controls, directly or indirectly, Tenant (“Affiliate”), or which owns or is owned by the Affiliate.

17.5 Recognition Agreement. To the extent that Tenant enters into a sublease for all or any portion of the Premises in excess of seventy-five thousand (75,000) square feet of rentable area, Landlord, if it grants its consent to such sublease, shall also simultaneously execute and deliver a recognition agreement (the “Recognition Agreement”) pursuant to which Landlord shall agree that in the event Tenant defaults under the Lease and the Lease is terminated, the sublease shall be recognized as a direct lease between Landlord and the subtenant on the terms and conditions of the sublease to the extent same are not inconsistent with, or contrary to, the provisions of this Lease and at a rental rate which is the higher of the rental rate

under this Lease or the rental rate under the sublease. In any event, however, Landlord shall not (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any counterclaim, offset or defense, not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one month’s Base Rent or of any additional rent, (iv) be obligated to perform any work in the subleased space or to prepare it for occupancy, or (v) be obligated to sign a Recognition Agreement or otherwise recognize a subtenant unless the following conditions are satisfied: (a) Lease Guarantor affirms in a writing for Landlord’s benefit that the Lease Guaranty, and all of Lease Guarantor’s obligations thereunder, remain in full force and effect, and (b) the most recent bond rating published for Lease Guarantor by a nationally recognized rating agency (currently, such agencies include Moody’s Investor Service, Standard & Poor’s Corporation, and Fitch Ratings) is investment grade (the lowest such grades are currently Baa3 for Moody’s, and BBB- for S&P and Fitch).

17.6 Occupancy by Others. Tenant may allow any person or company which is a client or customer of Tenant or which is providing service to Tenant or one of Tenant’s clients to occupy certain portions of the Premises without such occupancy being deemed an assignment or subleasing as long as such relationship was not created as a subterfuge to avoid the obligations set forth in this Article 17 and provided that such use and occupancy otherwise complies with the terms of this Lease.

17.7 No Effect on Lease Guaranty. No assignment or sublease shall affect any of the obligations of the Lease Guarantor pursuant to the Lease Guaranty.

17.8 Certification Related to the USA Patriot Act. No assignment or sublease shall be effective until such assignee or subtenant has delivered to Landlord the certification in the form attached hereto as Exhibit I.

ARTICLE 18

Choice Of Law

This Lease shall be governed by the laws of the State of Connecticut.

ARTICLE 19

Estoppel Certificates

Each party shall, at any time and from time to time upon request of the other party, within ten (10) business days following notice of such request from the requesting party, execute, acknowledge and deliver to the requesting party a certificate (“Estoppel Certificate”) in writing in the form of the attached Exhibit E or in such other commercially reasonable form as Landlord or Tenant or any of their respective lenders, prospective purchasers, lienholders, assignees or subtenants may deem appropriate; provided, however, if the Estoppel Certificate requests information different than that being requested in the form of the attached as Exhibit E, then the certifying party shall have fifteen (15) business days rather than the ten (10) business days set forth above in order to execute, acknowledge and deliver such Estoppel Certificate. For purposes of this Article 19, an Estoppel Certificate shall not be deemed to be commercially reasonable if it amends or modifies any of the provisions of this Lease and any provision added by an Estoppel Certificate and not clearly labeled an Amendment shall be null and void. If the certifying party fails to deliver the Estoppel Certificate within such ten (10)-business-day or fifteen (15)-business-day period, as the case may be, the requesting party shall so notify the certifying party and, if the certifying party does not deliver the Estoppel Certificate within three (3) business days thereafter: i) the certifying party’s failure to do so shall automatically be deemed to establish conclusively that this Lease is in full force and effect and has not been modified except as may be represented by the requesting party, but shall not be deemed to have cured any default under this Lease by the party failing to provide the Estoppel Certificate, and ii) the certifying party shall owe the requesting party any attorneys’ fees reasonably incurred as the direct result of the certifying party’s failure to timely comply with the requirements of this Article 19.

ARTICLE 20

Force Majeure

Except as otherwise expressly provided in this Lease, any prevention, delay or stoppage caused by fire, earthquake, explosion, flood, hurricane, the elements, or any other similar cause beyond the reasonable control of the party from whom performance is required, or any of their contractors; acts of God or the public enemy; actions, restrictions, limitations or interference of governmental authorities or agents; war, invasion, insurrection, rebellion; riots; strikes or lockouts, or inability to obtain necessary materials, goods, equipment, services, utilities or labor shall excuse the performance of such party for a period equal to the duration of such prevention, delay or stoppage; provided, however that (i) in no event shall financial incapability excuse the performance of either party, (ii) the terms of this Article 20 shall in no event excuse Tenant’s obligation to timely pay Base Rent and the other sums owing under this Lease, and (iii) the terms of this Article 20 shall only apply to the obligations of Tenant that arise under Section 7.4, Section 7.5, Article 10, or Article 11 of this Lease.

ARTICLE 21

Notices and Consents

Any and all notices or other communications required or permitted to be given under this Lease shall be in writing and either (i) personally delivered, in which case notice shall be deemed delivered upon receipt, (ii) sent by facsimile, in which case notice shall be deemed delivered upon the sender’s receipt of confirmation of transmission of such facsimile notice produced by the sender’s facsimile machine, (iii) sent by any nationally recognized overnight courier service with provisions for proof of delivery, in which case notice shall be deemed delivered on the next business day after the sender deposits the same with such delivery service, or (iv) sent by United States Mail, postage prepaid, certified mail, return receipt requested, in which case notice shall be deemed delivered on the date of delivery as shown on the return receipt or the date of the addressee’s refusal to accept delivery as indicated by the United States Postal Service, and in any case such notices or other communication shall be addressed to the following addresses:

Landlord:	HN Property Owner LLC c/o David Pardue P.O. Box 939 Burlington, North Carolina 27216 Telephone: (843) 671-2400 Facsimile: (843) 671-1197
with a copy to:	Meister Seelig & Fein LLP 2 Grand Central Tower 140 East 45th Street New York, NY 10017 Attention: Benjamin D. Fein, Esq. Telephone: 212-655-3500 Telecopy:212-655-3535
Tenant:	c/o Health Net, Inc. Post Office Box 2470 Rancho Cordova, CA 95741-2470 Attention: Director of Real Estate Facsimile: (916) 935-4406 For delivery by courier service: c/o Health Net, Inc. 11971 Foundation Place Rancho Cordova, CA 95670 Attention: Director of Real Estate

Either party may change its address for notice from time to time by notice to the other party in writing to the other in the manner aforesaid, however, any such notice of change of address shall only be effective upon actual receipt by the other party.

ARTICLE 22

Invalidity of Particular Provisions

If any term or provision of this Lease or the application thereof to any person or circumstance, shall to any extent be determined to be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law.

ARTICLE 23

Covenants to Bind and Benefit Respective Parties

Subject to the provisions of Articles 15 and 17 hereof, the terms, conditions, covenants, provisions and agreements herein contained shall be binding upon the inure to the benefit of Landlord, and its successors and assigns, and Tenant, and its successors and assigns.

ARTICLE 24

Captions and Headings

The captions and headings throughout this Lease are for convenience and reference only and the words contained therein shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or the scope or intent of this Lease nor in any way affect this Lease.

ARTICLE 25

Notice of Lease

As contemplated by the terms of the Sale Contract on the Commencement Date, the parties agree that they will execute a short form memorandum of lease substantially in the form attached as Exhibit D which shall be recorded in the Shelton Land Records.

ARTICLE 26

Subordination and Attornment

Landlord shall, as a condition to Tenant’s obligations under this Lease, provide Tenant with the SNDA (as defined below) from the holder of any mortgage, deed of trust, or ground lease that will be in effect as of the Commencement Date (if such mortgage, deed of trust or ground lease will be subordinate to this Lease and the termination or foreclosure thereof would not affect this Lease, no such SNDA shall be required). If requested by Landlord, Tenant agrees to subordinate this Lease to any future mortgage, trust deed or ground lease, provided such lien holder shall not disturb Tenant’s possession and shall assure Tenant’s other rights granted under this Lease in accordance with this Lease’s terms and conditions. Such assurance shall be substantially in the form of Exhibit C (the “SNDA”), and shall be recordable with the Shelton Land Records or other applicable registry or office. Tenant shall, from time-to-time and upon not less than ten (10) business days’ written notice, execute and deliver to Landlord the SNDA if required by any Mortgagee.

ARTICLE 27

Consent/Duty to Act Reasonably

Except for any references to the terms “sole” or “absolute” or words of similar meaning, any other time the consent of Landlord or Tenant is required under this Lease, such consent shall not be unreasonably withheld, conditioned or delayed. Whenever this Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations (other than decisions to exercise expansion, contraction, cancellation, termination, purchase, or renewal options, if any, and excluding the decisions regarding the exercise or election of remedies and unless the terms “sole” or “absolute” are expressly used in connection therewith), Landlord and Tenant shall act reasonably and in good faith.

ARTICLE 28

Entire Agreement

It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. This Lease, and the exhibits and schedules attached hereto, contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises and shall be considered to be the only agreements between the parties hereto and their representatives and agents. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. There are no other representations or warranties between the parties, and all reliance with respect to representations is based totally upon the representations and agreements contained in this Lease.

ARTICLE 29

Waiver of Jury Trial

The parties hereby agree not to elect a trial by jury of any issue triable of right by jury, and waive any right to trial by jury fully to the extent that any such right shall now or hereafter exist with regard to this agreement or any claim, counterclaim or other action arising in connection herewith. This waiver of right to trial by jury is given knowingly and voluntarily by the parties, and is intended to encompass individually each instance and each issue as to which the right to a trial by jury would otherwise accrue. Each party is hereby authorized to file a copy of this section in any proceeding as conclusive evidence of this waiver by each other party, as applicable. The parties hereto acknowledge that each makes this waiver knowingly, willingly and voluntarily and only after consideration of the ramifications of the waiver with each’s attorneys, and further acknowledges that the waiver constitutes a material inducement for the parties to enter into this agreement.

ARTICLE 30

Brokers

Other than Eastdil Secured and Madison Partners (collectively, the “Broker”), each party represents and warrants that it has not dealt with any other real estate broker or agent in connection with this Lease. The costs of the Brokers shall be solely that of Tenant and Tenant indemnifies Landlord therefor. Each party shall indemnify the other and hold it harmless from any cost, expense, or liability (including costs of suit and reasonable attorneys’ fees) for any compensation, commission or fees claimed by any other real estate broker or agent, other than the Broker, in connection with this Lease or its negotiation by reason of any act or statement of the indemnifying party.

ARTICLE 31

Lease Guaranty

The obligations of Tenant under this Lease (including with respect to Extended Terms) shall be guaranteed by Health Net, Inc., a Delaware corporation (the “Lease Guarantor”), pursuant to the terms of the Lease Guaranty attached hereto as Exhibit F attached hereto and by this reference incorporated herein (the “Lease Guaranty”).

ARTICLE 32

Financial Statements; Property Records

32.1 Tenant shall furnish to Landlord, from time to time upon Landlord’s written request, financial statements for Lease Guarantor. The requirements of this Section 32.1 shall be of no force or effect so long as Lease Guarantor is a publicly traded corporation for which financial statements are publicly available on a current basis.

32.2 Tenant shall furnish to Landlord, from time to time upon the written request of Landlord or Mortgagee, financial statements for Tenant. Such financial statements shall be in the form typically prepared in the ordinary course of Tenant’s business, and unless required by the

Securities and Exchange Commission, the Connecticut Department of Insurance or other regulators, will not necessarily be audited; provided, however, that should the “Tenant” under this Lease be a corporation or other entity that is not a subsidiary of, or otherwise an affiliate of, Health Net, Inc., a Delaware corporation, then in such event, Tenant must provide an income and balance sheet on a quarterly basis, and an audited financial statement on an annual basis (such annual statement must be certified by the Tenant’s Chief Financial Officer).

32.3 Tenant shall keep adequate records with respect to the Premises, and shall permit Landlord and Mortgagee by their respective agents, accountants and attorneys, upon reasonable notice to Tenant and no more frequently than one (1) time per calendar year, to visit and inspect the Premises and examine (and make copies of) such records, at such reasonable times as may be requested by Landlord. Upon the request of Mortgagee or Landlord (either telephonically or in writing), Tenant shall provide the requesting party with copies of any information to which such party would be entitled in the course of a personal visit.

ARTICLE 33

Arbitration of Selected Disputes

Any Selected Dispute (as defined below) shall be resolved by neutral binding arbitration before a single arbitrator, to be held in accordance with the arbitrator under the Expedited Procedures provisions of the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment on the award rendered by the arbitrators may be entered in any Court having jurisdiction over the dispute. The arbitrators shall have no authority to make any award of punitive damages, or to in any manner modify the terms of this Lease. The term “Selected Dispute” shall mean a dispute between Landlord and Tenant that arises from or is related to Tenant’s construction obligations pursuant to Section 7.4 or Section 7.5, or Tenant’s reconstruction obligations pursuant to Article 10 or Article 11, and which the parties have been unable to resolve through direct discussions. Notwithstanding any provision of this Lease, Landlord expressly reserves the right to institute an unlawful detainer or other action pursuant to Connecticut law should Tenant fail to pay any Base Rent or other sums owing to Landlord under this Lease, without complying with the procedures of this Article 33, and this Article 33 shall not apply to any claim, counterclaim, dispute, and other matter relating to the payment of Base Rent or any other sum owing from Tenant to Landlord under this Lease.

ARTICLE 34

Landlord’s Liability; Sale of the Premises

34.1 Definition of Landlord. The term “Landlord” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Landlord’s title or interest in the Premises or this Lease, Landlord shall deliver to the transferee or assignee (in cash or by credit) any Tenant funds held by Landlord. Upon such transfer or assignment and delivery of such funds, as aforesaid, the prior Landlord shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Landlord. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Landlord shall be binding only upon the Landlord as hereinabove defined.

34.2 Limitation on Liability. The obligations of Landlord under this Lease shall not constitute personal obligations of Landlord, the individual partners, members, or shareholders of Landlord or its or their partners, members, directors, officers or shareholders, and Tenant shall look to the Premises, and to no other assets of Landlord, for the satisfaction of any liability of Landlord with respect to this Lease, and shall not seek recourse against the individual partners members, or shareholders of Landlord, or its or their partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

34.3 Tax Treatment; Reporting. Landlord and Tenant each acknowledge that each shall treat this Lease as a true lease for state law purposes and shall report this transaction as a lease for Federal income tax purposes. For Federal income tax purposes each shall report this Lease as a true lease with Landlord as the owner of the Premises and equipment and Tenant as the lessee of such Premises and equipment including: (1) treating Landlord as the owner of the property eligible to claim depreciation deductions under Section 167 or 168 of the Internal Revenue Code of 1986 (the “Code”) with respect to the Leased Premises and equipment, (2) Tenant reporting its rent payments as rent expense under Section 162 of the Code, and (3) Landlord reporting the rent payments as rental income.

ARTICLE 35

Initial Repairs

Notwithstanding anything to the contrary contained in the Lease, Tenant agrees to complete the repairs identified on Exhibit J within one (1) year of the date of the Lease in accordance with Exhibit L. Upon completion of the repair of each item identified on Exhibit J, Tenant shall provide Landlord with proof reasonably acceptable to Landlord of the lien free completion of such repairs in compliance with applicable legal requirements. All requests, notices and deliveries to be made by Tenant to Landlord in connection with the provisions of this Section 35 and with the provisions of Exhibit L shall be simultaneously made to Mortgagee.

ARTICLE 36

Waiver of Statute of Limitations

In addition to, and not in limitation of, any other waivers contained herein, to the fullest extent permitted by law, Landlord and Tenant hereby waive and agree not to assert or take advantage of the defense of the statute of limitations in any action hereunder.

IN WITNESS WHEREOF, the parties have executed this Lease as of the date first set forth above, acknowledged that each party has carefully read each and every provision of the Lease, that each party has freely entered into the Lease of its own free will and volition, and that the terms, conditions and provisions of the Lease are commercially reasonable as of the day and year first above written.

TENANT:		LANDLORD:
HEALTH NET OF THE NORTHEAST, INC., a Delaware corporation		HN PROPERTY OWNER LLC, a Delaware limited liability company
By:	/s/ Dennis Bell	By:	/s/ David Pardue
Its:	Vice President Real Estate Management	Its:	President

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Jay M. Gellert, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Health Net, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007	/s/    JAY M. GELLERT
	Jay M. Gellert
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, James E. Woys, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Health Net, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007	/s/    JAMES E. WOYS
	James E. Woys
	Interim Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of CEO and CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Health Net, Inc. (the “Company”) for the quarterly period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jay M. Gellert, as Chief Executive Officer of the Company, and James E. Woys, as Interim Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JAY M. GELLERT        

Jay M. Gellert

Chief Executive Officer

May 8, 2007

/s/    JAMES E. WOYS        

James E. Woys

Interim Chief Financial Officer

May 8, 2007