HEALTH NET,INC.

NOTICE OF2006 ANNUAL

MEETINGAND

PROXYSTATEMENT

April 17, 2006

Dear Stockholders:

It is a pleasure to invite you to attend the2006 Annual Meeting (the “Annual Meeting” or“2006 Annual Meeting”) of Stockholders ofHealth Net, Inc. to be held at 21281 BurbankBoulevard in Woodland Hills, California 91367on Thursday, May 11, 2006, at 10:00 a.m.(Pacific Time). For your convenience, we areoffering a live webcast of the Annual Meetingon our Internet website, www.healthnet.com.

Each item of business described in theaccompanying Notice of Annual Meeting andProxy Statement will be discussed during theAnnual Meeting. In addition, a report on ourbusiness operations will be presented at theAnnual Meeting. Stockholders who attend theAnnual Meeting will have an opportunity to askquestions at the meeting; those who participatein the live webcast may submit questions duringthe meeting via the Internet.

It is important that you vote your shareswhether or not you plan to attend the AnnualMeeting. We urge you to carefully review theproxy statement and to vote your choices eitheron the enclosed proxy card, by telephone or viathe Internet. You may return your proxy card bymail by using the enclosed self-addressed,postage-paid envelope. If you choose thismethod, please sign and date your proxy cardand return it as soon as possible. Alternatively,you may complete a proxy card by telephone bycalling 1-800-560-1965, or over the Internet athttp://www.eproxy.com/hnt. If you do attend theAnnual Meeting in person, your proxy can berevoked at your request.

We look forward to your attendance at theAnnual Meeting.

Sincerely,

Jay M. GellertPresident and Chief ExecutiveOfficer

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

Health Net, Inc. will hold its 2006 Annual Meeting of Stockholders on Thursday, May 11, 2006 at 10:00a.m. (Pacific Time) at 21281 Burbank Boulevard in Woodland Hills, California 91367, for the followingpurposes:

1. To elect eight directors to serve for a term of one year or until the 2007 Annual Meeting ofStockholders.

2. To approve the Health Net, Inc. 2006 Long-Term Incentive Plan.

3. To ratify the selection of Deloitte & Touche LLP as Health Net’s independent registered publicaccountants for 2006.

4. To transact such other business as may be properly brought before the meeting or any adjournment orpostponement thereof.

The Board of Directors has fixed Wednesday, March 22, 2006 as the record date for the determination of thestockholders entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement of theAnnual Meeting.

At the Annual Meeting, each share of Common Stock, $.001 par value per share, of Health Net representedat the Annual Meeting will be entitled to one vote on each matter properly brought before the Annual Meeting.Jay M. Gellert and B. Curtis Westen have been appointed as proxy holders, with full rights of substitution, for theholders of Common Stock.

By Order of the Board of Directors,

B. Curtis Westen, Esq.Senior Vice President, General Counsel andSecretary

April 17, 2006

YOUR VOTE IS IMPORTANT

All stockholders are cordially invited to attend the 2006 Annual Meeting of Stockholders of HealthNet, Inc. in person. However, to ensure your representation at the Annual Meeting, please mark, sign anddate the enclosed proxy card and return it as soon as possible in the enclosed self-addressed, postage-paidenvelope. Alternatively, you may complete a proxy card by telephone by calling 1-800-560-1965, or overthe Internet at http://www.eproxy.com/hnt. If you attend the Annual Meeting in person, you may vote at themeeting even if you have previously returned a proxy.

PROXY STATEMENT

General; Voting of Shares

The accompanying proxy is solicited by the Board of Directors of Health Net, Inc. (the “Company,” “HealthNet,” “we,” “us” or “our”) for use at the Company’s 2006 Annual Meeting of Stockholders (the “AnnualMeeting” or “2006 Annual Meeting”) to be held on Thursday, May 11, 2006 at 10:00 a.m. (Pacific Time) at21281 Burbank Boulevard, Woodland Hills, California 91367, and at any adjournments or postponementsthereof. The Company expects to mail this proxy statement and accompanying proxy card beginning on or aboutApril 17, 2006 to holders of record of the Company’s Common Stock, $.001 par value per share (“CommonStock”), on March 22, 2006 (the “Record Date”).

We are offering a live webcast of the Annual Meeting on our Internet website, www.healthnet.com. Thewebcast of the Annual Meeting will consist of live sound, real-time access to printed material and the ability ofstockholders to submit questions during the question and answer period. To participate in the webcast of theAnnual Meeting, a stockholder should log on to www.healthnet.com on Thursday, May 11, 2006 shortly before10:00 a.m. (Pacific Time) and follow the instructions provided under the “Investor Relations” section of thewebsite. Stockholders will not be permitted to vote over the Internet during the Annual Meeting.

Only holders of record of Common Stock at the close of business on the Record Date are entitled to vote atthe Annual Meeting. Each share of Common Stock represented at the Annual Meeting is entitled to one vote oneach matter properly brought before the Annual Meeting. The Company’s bylaws require that the holders of amajority of the total number of shares entitled to vote be present in person or by proxy in order for the businessof the Annual Meeting to be transacted. Abstentions and broker non-votes will be counted for purposes ofdetermining the presence or absence of a quorum for the transaction of business at the Annual Meeting. “Brokernon-votes” occur when a bank, broker or other nominee holding shares for a beneficial owner does not vote thoseshares on a particular proposal because it does not have discretionary voting power for that particular item andhas not received instructions from the beneficial owner. Participation by a stockholder in the live webcast of theAnnual Meeting will not be counted for purposes of determining the presence or absence of a quorum for thetransaction of business at the Annual Meeting.

In voting, please specify your choices either by marking the appropriate spaces on the enclosed proxy card,signing and dating the card and returning it in the enclosed self-addressed, postage-paid envelope. Alternatively,you may complete a proxy card by telephone by calling 1-800-560-1965, or over the Internet athttp://www.eproxy.com/hnt before 12:00 p.m. (Central Time) on May 10, 2006. Voting over the Internet ortelephone will not be permitted after 12:00 p.m. (Central Time) on Wednesday, May 10, 2006. If nodirections are given and the signed card is returned, then the proxy holders will vote the shares for the election ofall listed director nominees and in accordance with the directors’ recommendations or as stated on the proxy cardfor the other subjects listed on the proxy card, and in their discretion on any other business that may be properlybrought before the Annual Meeting or any adjournment or postponement thereof.

Instructions on how to submit a proxy via the Internet and telephone are located on the attachment to theproxy card included with this proxy statement. The Internet and telephone voting procedures are designed toauthenticate stockholders of the Company by use of a control number located on the attachment to the proxy cardincluded herewith. If you hold your shares through a bank, broker or other holder of record, check theinformation provided by that entity to determine which voting options are available to you. Please be aware thatany costs related to voting over the Internet, such as Internet access charges, will be your responsibility.

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Revocability of Proxies

Any stockholder giving a proxy has the power to revoke it at any time before the proxy is voted. A proxymay be revoked by filing with the Secretary of the Company (at its executive offices at 21650 Oxnard Street,Woodland Hills, California 91367) written notice of revocation bearing a later date than the proxy, by dulyexecuting a subsequently dated proxy relating to the same shares of Common Stock and delivering it to theSecretary of the Company or submitting it by telephone by calling 1-800-560-1965, or electronically via theInternet at http://www.eproxy.com/hnt before 12:00 p.m. (Central Time) on May 10, 2006, or by attending theAnnual Meeting in person and voting such shares during the Annual Meeting.

Shares Outstanding

As of the Record Date, the Company had outstanding 115,074,245 shares of Common Stock. Each share ofCommon Stock is entitled to one vote.

Solicitation

The Company will bear the entire cost of the solicitation of proxies, including preparation, assembly andmailing of this proxy statement, the proxy and any additional materials furnished to stockholders. Proxies may besolicited by directors, officers and a small number of regular employees of the Company personally or by mail,telephone or telegraph, but such persons will not be specially compensated for such service. The Company hasretained Georgeson Shareholder Communications, Inc. to assist in the solicitation of proxies for a fee of $8,500plus reasonable out-of-pocket costs and expenses. Copies of solicitation material will be furnished to brokeragehouses, fiduciaries and custodians that hold shares of Common Stock of record for beneficial owners forforwarding to such beneficial owners. The Company may also reimburse persons representing beneficial ownersfor their costs of forwarding the solicitation material to such owners.

Your vote is important. Please return a proxy card (or fill out the Internet proxy or vote your proxyover the telephone) promptly so your shares can be represented, even if you plan to attend the AnnualMeeting in person. The voting results will be included in the Company’s Quarterly Report on Form 10-Qfor the second quarter ended June 30, 2006.

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INTRODUCTION

We are an integrated managed care organization that delivers managed health care services through healthplans and government sponsored managed care plans. We operate and conduct our businesses throughsubsidiaries of Health Net, Inc., which is among the nation’s largest publicly traded managed health carecompanies. Unless the context otherwise requires, the terms “Company,” “Health Net,” “we,” “us,” and “our”refer to Health Net, Inc. and its subsidiaries.

Our health plans and government contracts subsidiaries provide health benefits through our healthmaintenance organizations (“HMOs”), insured preferred provider organizations (“PPOs”) and point-of-service(“POS”) plans to approximately 6.3 million individuals in 27 states and the District of Columbia through group,individual, Medicare, Medicaid TRICARE and Veterans Affairs programs. Our behavioral health subsidiaryprovides mental health benefits to approximately 7.3 million individuals in all 50 states. Our subsidiaries alsooffer managed health care products related to prescription drugs and offer managed health care productcoordination for multi-region employers and administrative services for medical groups and self-funded benefitsprograms. In addition, we own health and life insurance companies licensed to sell exclusive providerorganization, PPO, POS and indemnity products, as well as auxiliary non-health products such as life andaccidental death and dismemberment, dental, vision, behavioral health and disability insurance, in 46 states andthe District of Columbia.

We were incorporated in 1990. Our current operations are the result of the April 1, 1997 merger transaction(the “FHS Combination”) involving Health Systems International, Inc. (“HSI”) and Foundation HealthCorporation (“FHC”). We changed our name to Health Net, Inc. in November 2000. Prior to the FHSCombination, we were the successor to the business conducted by Health Net of California, Inc., now our HMOsubsidiary in California, and HMO and PPO networks operated by QualMed, Inc. (“QualMed”), which combinedwith the Company in 1994 to create HIS.

The mailing address of our principal executive office is 21650 Oxnard Street, Woodland Hills, CA 91367,and our Internet website address is www.healthnet.com.

PROPOSAL 1—ELECTION OF DIRECTORS

At the Annual Meeting, stockholders will elect eight directors. The nominees are Theodore F. Craver, Jr.,Thomas T. Farley, Gale S. Fitzgerald, Patrick Foley, Jay M. Gellert, Roger F. Greaves, Bruce G. Willison andFrederick C. Yeager. Each director will be elected to hold office for a term of one year or until the 2007 AnnualMeeting of Stockholders. Each elected director will continue in office until such director’s successor is electedand has been qualified, or until such director’s earlier death, resignation or removal.

Health Net’s bylaws provide that the persons receiving a plurality of the votes cast, up to the number ofdirectors to be elected, shall be elected. Abstentions and broker non-votes will not be counted as votes cast andwill have no effect on the vote for directors. Stockholders eligible to vote at the Annual Meeting do not havecumulative voting rights with respect to the election of directors. Since only eight nominees have been named,proxies cannot be voted for a number of persons greater than eight.

It is expected that the nominees named above will stand for election at the 2006 Annual Meeting ofStockholders, but if any of the nominees declines or is unable to do so, the proxies will be voted for anotherperson or persons designated by the Governance Committee of the Board of Directors of the Company.

The Board of Directors recommends a voteFOR each named nominee.

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Director Nominees

The Company’s certificate of incorporation provides for directors to be elected on an annual basis. Thecertificate of incorporation further provides that the Board of Directors will consist of not less than three normore than twenty members, the exact number to be determined in accordance with the Company’s bylaws. Thebylaws provide that the exact number of directors shall be fixed from time to time by the Board of Directors, andthe number of members constituting the Board of Directors has been fixed by the Board of Directors at twelve.

The Board of Directors currently consists of eight members. Assuming the election of each of the directornominees at the Annual Meeting, the Board will continue to consist of eight members. The Company hasengaged a third party search firm to assist the Governance Committee of the Board of Directors of the Companyin the process of identifying and evaluating potential new director candidates.

The Company’s bylaws provide that a director shall be deemed to have retired and resigned from the Boardof Directors effective immediately prior to the first annual meeting of stockholders occurring after such directorattains seventy-two years of age; provided, however, that members of the Board of Directors on February 4, 1999shall be deemed to have retired and resigned from the Board of Directors effective upon the date of the firstannual meeting of stockholders after attaining seventy-five years of age; and provided further that the Board ofDirectors shall have the power to waive the application of such provisions to a given Director on a case-by-casebasis by affirmative vote of two-thirds of the directors after considering all of the applicable facts andcircumstances. Mr. Foley is currently 74 years old, but was a member of the Board on February 4, 1999. None ofthe other director nominees are affected by this mandatory retirement provision.

The Company’s bylaws also provide that a director who has held office for any period of nine consecutiveyears after October 14, 2003 shall not be qualified to be elected as a director at the first annual meeting ofstockholders occurring after the end of such ninth consecutive year and shall be deemed to have retired andresigned from the Board of Directors effective immediately upon the completion of such ninth consecutive yearin office; provided, however, that the Board of Directors shall have the power to waive the application of suchprovisions to a given director on a case-by-case basis by an affirmative vote of two-thirds of the directors afterconsidering all of the applicable facts and circumstances. This provision does not affect any of the directornominees.

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The eight nominees were designated for election, pursuant to the bylaws, by the Governance Committee ofthe Board of Directors of the Company. Each of the nominees has consented to serve as a director if elected. Thefollowing table sets forth certain information with respect to the nominees:

DIRECTOR NOMINEESName Principal Occupation or Employment Age

Theodore F. Craver, Jr. . . . . . . . . . . . . . Chairman and Chief Executive Officer of Edison Mission Energy 54Thomas T. Farley . . . . . . . . . . . . . . . . . Senior Partner of Petersen & Fonda, P.C. 71Gale S. Fitzgerald . . . . . . . . . . . . . . . . . Former Chair and Chief Executive Officer of Computer Task Group, Inc. 55Patrick Foley . . . . . . . . . . . . . . . . . . . . . Former Chairman, President and Chief Executive Officer of DHL Airways, Inc. and

Director of various companies 74Jay M. Gellert . . . . . . . . . . . . . . . . . . . . President and Chief Executive Officer of the Company 52Roger F. Greaves . . . . . . . . . . . . . . . . . Chairman of the Board of the Company, Former Co-President and Co-Chief Executive

Officer of the Company and Director of various companies 68Bruce G. Willison . . . . . . . . . . . . . . . . . Dean Emeritus and Professor in Management, UCLA Anderson School of Management 57Frederick C. Yeager . . . . . . . . . . . . . . . Senior Vice President, Finance of Time Warner, Inc. 64

Information Concerning Current Members of the Board of Directors and Nominees

Mr. Craver has served as a director of the Company since March 2004. Mr. Craver has served in manydifferent capacities at Edison International (“Edison”), an international electric power generator, distributor andstructured finance provider since 1996. Since January 2005, Mr. Craver has served as Chairman and ChiefExecutive Officer of Edison Mission Energy, an Edison company that owns and operates independent powerproduction facilities, and Chief Executive Officer of Edison Capital, an Edison company that is a provider ofcapital and financial services. Mr. Craver served as Executive Vice President, Chief Financial Officer andTreasurer of Edison International from January 2000 to January 2005, and in other financial and executivemanagement positions since 1996. Mr. Craver has served as Executive Vice President, Chief Financial Officerand Treasurer of Edison International, an international electric power generator, distributor and structuredfinance provider since January 2000, and in other financial and executive management positions since 1996.From 1984 to 1996, Mr. Craver held various financial management positions at First Interstate Bancorp,including Executive Vice President and Corporate Treasurer and Executive Vice President and Chief FinancialOfficer of a banking subsidiary. Mr. Craver served in various capital markets trading, underwriting andmarketing positions at Bankers Trust Company of New York from 1980 to 1984 and at Security Pacific NationalBank from 1973 to 1980. Mr. Craver is also currently a director of the Autry National Center, a non-profitorganization.

Mr. Farley has served as a director of the Company since April 1997. Previously, he served as a director ofHSI since January 1994. Mr. Farley served as a director of QualMed from February 1991 until February 1995and is a senior partner in the law firm of Petersen & Fonda, P.C., Pueblo, Colorado. Mr. Farley was formerlyPresident of the governing board of Colorado State University, the University of Southern Colorado andFt. Lewis College and Chairman of the Colorado Wildlife Commission. He served as Minority Leader of theColorado House of Representatives from 1967 to 1975. Mr. Farley was a director of the Public Service Companyof Colorado, a public gas and electric company, from 1983 to 1997 and is a director/advisor of Wells Fargo Bankof Pueblo and Sunset. Mr. Farley is a member of the Board of Regents of Santa Clara University, a Jesuitinstitution, and a former director of Colorado Public Radio.

Ms. Fitzgerald has served as a director of the Company since March 2001. From July 2002 throughOctober 2002, Ms. Fitzgerald served as President and Chief Executive Officer of QP Group, a procurementsolutions company. From October 1994 to June 2000, Ms. Fitzgerald served as Chair and Chief ExecutiveOfficer of Computer Task Group, Inc. (“CTG”), an international information technology services firm.Ms. Fitzgerald also served on the Board of Directors of Kaleida Health System in Buffalo, New York from 1995to 2002, and was Vice Chair from 2000 to 2002, and served on the Advisory Board of the University of Buffalo’sSchool of Management from 1993 to 2001. Ms. Fitzgerald served on the Boards of Directors of the InformationTechnology Services (“ITS”) Division of Information Technology Association of America (“ITAA”) and ofITAA from 1992 to 2002, and was Chair of the ITS Board from 1998 to 2002. Ms. Fitzgerald is a director of

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Diebold, Inc., a company which specializes in providing integrated self-service delivery systems and services.Ms Fitzgerald is also a founding partner and director of TranSpend, Inc. a privately held firm focused on totalspend optimization.

Mr. Foley has served as a director of the Company since April 1997. Mr. Foley served as a director of FHCfrom 1996 until the FHS Combination in April 1997. Mr. Foley served as Chairman and Chief Executive Officerof DHL Airways, Inc. from September 1988 through July 1999. Mr. Foley is also a director of GlenboroughRealty Trust.

Mr. Gellert was elected to the Board of Directors of the Company in February 1999 and has served asPresident and Chief Executive Officer of the Company since August 1998. Previously Mr. Gellert served asPresident and Chief Operating Officer of the Company from May 1997 until August 1998. From April 1997 toMay 1997, Mr. Gellert served as Executive Vice President and Chief Operating Officer of the Company.Mr. Gellert served as President and Chief Operating Officer of HSI from June 1996 until March 1997. He servedon the Board of Directors of HSI from June 1996 to April 1997. Prior to joining HSI, Mr. Gellert directedShattuck Hammond Partners Inc.’s strategic advisory engagements in the area of integrated delivery systemsdevelopment, managed care network formation and physician group practice integration. Prior to joiningShattuck Hammond Partners Inc., Mr. Gellert was an independent consultant, and from 1988 to 1991, he servedas President and Chief Executive Officer of Bay Pacific Health Corporation. From 1985 to 1988, he was SeniorVice President and Chief Operating Officer for California Healthcare System. Mr. Gellert has been a director ofVentas, Inc. since August 2001. Mr. Gellert is currently a director of America’s Health Insurance Plans.

Mr. Greaves has served as a director of the Company since April 1997 and was appointed Chairman of theBoard of Directors in January 2004. Mr. Greaves served as a director of HSI from January 1994 until the FHSCombination in April 1997. Mr. Greaves served as Co-Chairman of the Board of Directors, Co-President andCo-Chief Executive Officer of the Company from January 1994 (upon consummation of the HSI Combination)until March 1995. Prior to January 1994, Mr. Greaves served as Chairman of the Board of Directors, Presidentand Chief Executive Officer of H.N. Management Holdings, Inc. (a predecessor to the Company) since itsincorporation in June 1990. Mr. Greaves currently serves as Chairman of the Board of Directors of Health Net ofCalifornia, Inc. (“HN California”), a subsidiary of the Company. Mr. Greaves also served a prior term asChairman of the Board of Directors of HN California, and concurrently served as President and Chief ExecutiveOfficer of HN California. Prior to joining HN California, Mr. Greaves held various management roles at BlueCross of Southern California, including Vice President of Human Resources and Assistant to the President, andheld various management positions at Allstate Insurance Company from 1962 until 1968. Mr. Greaves serves asan Honorary member of the Board of Trustees of California State University at Long Beach.

Mr. Willison has served as a director of the Company since December 2000. Mr. Willison currently servesas Dean Emeritus and Professor in Management of UCLA Anderson School of Management. Mr. Willisonserved as Dean, UCLA Anderson School of Management from July 1999 to January 2006. From April 1996 toOctober 1998, Mr. Willison served as President and Chief Operating Officer of H.F. Ahmanson, Inc. (HomeSavings of America). Prior thereto, Mr. Willison was Chairman, President and Chief Executive Officer of FirstInterstate Bank of California from February 1991 to April 1996. Mr. Willison is also a director of Home Store,Inc. and Indymac Bancorp, Inc., and is a trustee of SunAmerica Funds.

Mr. Yeager has served as a director of the Company since March 2004. Mr. Yeager has served as SeniorVice President, Finance of Time Warner, Inc., a media and entertainment company, since December 2000 andleads teams responsible for global strategic sourcing, supplier diversity, investment of employee benefits assetsand Time Warner’s Investment Committee. From May 1995 to December 2000, Mr. Yeager was Vice President,Finance and Development for Time Warner and led teams responsible for financial and business planning,mergers and acquisitions, treasury, capital structure planning and capital markets transactions, and for managingTime Warner’s relationships with commercial and investment banks and debt-rating agencies. Prior thereto,Mr. Yeager had a 27-year career with Ford Motor Company where he held executive and management positionsin the Finance Staff, the Treasurer’s Office, the Product Development Group, the Financial Services Group, Fordof Europe, and Ford Motor Credit Company. Mr. Yeager began his career at Ford in 1968 as an OperationsResearch Analyst.

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EXECUTIVE OFFICERS

The following sets forth certain biographical information with respect to the current executive officers of theCompany, and all individuals who served as an executive officer of the Company during 2005.

Name Age Position

Jay M. Gellert . . . . . . . . . . . . . . 52 President and Chief Executive OfficerStephen D. Lynch . . . . . . . . . . . 55 President, Regional Health PlansKarin D. Mayhew . . . . . . . . . . . 55 Senior Vice President of Organization EffectivenessSteven H. Nelson . . . . . . . . . . . 47 President, Health Net of the NortheastDavid Olson . . . . . . . . . . . . . . . 55 Senior Vice President, Corporate CommunicationsAnthony S. Piszel . . . . . . . . . . . 51 Executive Vice President, Chief Financial OfficerB. Curtis Westen, Esq. . . . . . . . 45 Senior Vice President, General Counsel and SecretaryJames E. Woys . . . . . . . . . . . . . 47 President, Government and Specialty ServicesJeffrey M. Folick . . . . . . . . . . . 58 Former Executive Vice President, Regional Health Plans and Specialty

CompaniesMarvin P. Rich . . . . . . . . . . . . . 60 Former Executive Vice President, OperationsChristopher P. Wing . . . . . . . . . 48 Former Executive Vice President, Regional Health Plans and Specialty

Companies

Mr. Gellert has served as President and Chief Executive Officer of the Company since August 1998.Previously, Mr. Gellert served as President and Chief Operating Officer of the Company from May 1997 untilAugust 1998. From April 1997 to May 1997, Mr. Gellert served as Executive Vice President and Chief OperatingOfficer of the Company. Mr. Gellert served as President and Chief Operating Officer of HSI from June 1996until March 1997. He served on the Board of Directors of HSI from June 1996 to April 1997. Mr. Gellert hasbeen a director of the Company since March 1999. Prior to joining HSI, Mr. Gellert directed Shattuck HammondPartners Inc.’s strategic advisory engagements in the area of integrated delivery systems development, managedcare network formation and physician group practice integration. Prior to joining Shattuck Hammond PartnersInc., Mr. Gellert was an independent consultant, and from 1988 to 1991, he served as President and ChiefExecutive Officer of Bay Pacific Health Corporation. From 1985 to 1988, Mr. Gellert was Senior Vice Presidentand Chief Operating Officer for California Healthcare System. Mr. Gellert has been a director of Ventas, Inc.since August 2001. Mr. Gellert is currently a director of America’s Health Insurance Plans.

Mr. Lynch has served as President, Regional Health Plans of the Company since January 2005. Previously,Mr. Lynch served as Chief Operating Officer for the Company’s Western Region since June 2004. Prior thereto,Mr. Lynch served as President, Health Net of Oregon from August 2001 to June 2004. Prior to his service at theCompany, from 1994 to 2001, Mr. Lynch served in a variety of positions at PacifiCare of Oregon, most recentlyas Vice President and General Manager.

Ms. Mayhew has served as Senior Vice President of Organization Effectiveness of the Company sinceApril 1999. Prior to joining the Company, Ms. Mayhew served as Senior Vice President, OrganizationDevelopment of Southern New England Telecommunications Company (“SNET”), a northeast regionalinformation, entertainment and telecommunications company based in Connecticut. Prior thereto, Ms. Mayhewserved in various capacities at SNET, including Vice President, Human Resources, since 1972.

Mr. Nelson has served as President, Health Net of the Northeast since January 2005. From June 2004 toJanuary 2005, Mr. Nelson served as Chief Operating Officer of Health Net of the Northeast. Prior thereto,Mr. Nelson served as Senior Vice President, Senior Products Division, of the Company’s Medicare division fromAugust 2003 to June 2004. Prior to joining the Company, Mr. Nelson was Chief Operating Officer and VicePresident of Network Management of United HealthCare’s Arizona market from 2000 to 2003.

Mr. Olson has served as Senior Vice President, Corporate Communications since May 1999. Mr. Olson waspreviously Vice President, Investor and Public Relations for HSI, one of Health Net’s predecessor companies.Prior to joining HSI in 1994, Mr. Olson was Vice President, Corporate Communications for National MedicalEnterprises, Inc. (“NME”), having joined NME in 1989 as director of Shareholder Communications.

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Mr. Piszel has served as Executive Vice President and Chief Financial Officer of the Company sinceAugust 2004. Prior to joining the Company, Mr. Piszel had a long career with Prudential Financial, Inc.(“Prudential”). From 1998 to August 2004, Mr. Piszel served as Senior Vice President and Controller ofPrudential. Prior to that Mr. Piszel served as Corporate Vice President assigned to special finance projects (1997to 1998), and served as the Chief Financial Officer of Prudential’s Institutional Asset Management Business(1995 to 1997) and Individual Life Insurance Business (1993 to 1995). From 1990 to 1993, Mr. Piszel served indifferent accounting and auditing positions at Deloitte and Touche, including as Audit Partner serving ThePrudential Insurance Company of America and National Office Partner and Assistant to National ManagingDirector of the U.S. Firm’s Accounting and Auditing Function. From 1988 to 1990, Mr. Piszel engaged in atwo-year assignment as a practice fellow with the Financial Accounting Standards Board. Mr. Piszel is a memberof the board of directors Rehabcare Group, Inc.

Mr. Westen has served as Senior Vice President, General Counsel and Secretary of the Company sinceApril 1997. Mr. Westen served as Senior Vice President, General Counsel and Secretary of HSI from April 1995to April 1997. Mr. Westen also serves as a director of certain subsidiaries of the Company. Mr. Westen served asSenior Vice President, General Counsel and Secretary of QualMed from February 1994 to April 1995, and servedas Vice President of Administration of QualMed from June 1993 until February 1994. Mr. Westen served asAssistant General Counsel and Assistant Secretary of QualMed from March 1992 until June 1993. FromSeptember 1986 until March 1992 Mr. Westen was an attorney with the firm of Lord, Bissell & Brook inChicago, Illinois.

Mr. Woys has served as President, Government and Specialty Services since October 2005. Prior thereto,he served as President of Health Net Federal Services from February 2001 to October 2005. Mr. Woys served asChief Operating Officer and President of Health Net Federal Services from November 1999 to February 2001.Mr. Woys served as Chief Operating Officer and Senior Vice President for Foundation Health Federal Servicesfrom February 1998 to November 1999. Mr. Woys served as Senior Vice President of Foundation Health FederalServices from January 1995 to February 1998. From January 1990 to January 1995, Mr. Woys served as VicePresident and Chief Financial Officer of the Government Division of FHC. Mr. Woys served as Director ofCorporate Finance/Tax for FHC from October 1986 to January 1990. Prior to Mr. Woys’ employment with FHC,he was employed by Price Waterhouse from 1982 to 1986 and by Arthur Andersen & Co. from 1980 to 1982.

Mr. Folick served as the Company’s Executive Vice President, Regional Health Plans and SpecialtyCompanies from May 2002 until his resignation on March 6, 2006. Prior to joining the Company, Mr. Folick wasemployed by PacifiCare Health Systems, Inc. (“PacifiCare”) since 1989 in various capacities, includingPresident, Chief Operating Officer, President and CEO of the Health Plans Division and Executive VicePresident. Prior to joining PacifiCare, Mr. Folick held executive positions at Peak of California and CareAmericaHealth Plan of California, and served as chief financial officer of both Valley Presbyterian Hospital andAllegheny County Hospital System.

Mr. Rich served as Executive Vice President of Operations of the Company from August 2004 until hisretirement on July 12, 2005. Mr. Rich served as Executive Vice President of Finance and Operations of theCompany from January 2002 through August 2004. Mr. Rich served as President of WebMD from September2000 to September 2001 and as President, Medical Manager and Chief Executive Officer of CareInsight, Inc.from January 2000 to September 2000. Mr. Rich served as Chief Administrative Officer of Oxford Health Plansfrom March 1998 to December 1999. Mr. Rich also served as Executive Vice President, Finance & Systems ofKmart from 1994 to 1998.

Mr. Wing served as Executive Vice President, Regional Health Plans and Specialty Companies of theCompany and President of the Company’s California operations from April 2002 until his resignation on June 1,2005. Prior to joining the Company, Mr. Wing served for more than eight years with PacifiCare. Most recently,he served as western region president of PacifiCare and president and chief executive officer of PacifiCare ofCalifornia. He previously served as northwestern region vice president and chief executive officer for PacifiCareof Washington, and also served as president and chief executive officer for PacifiCare of Utah; senior vicepresident, health services, for PacifiCare of California and vice president/general manager for PacifiCare of

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California. Before joining PacifiCare in 1994, Mr. Wing held executive positions with several other health carecompanies, including Blue Cross of California, Lincoln National Life Insurance Company, Prudential HealthCare Plan, Inc. and Maxicare Health Plans, Inc.

Certain Relationships and Related Party Transactions

Since January 2005 through the date hereof, there were no transactions between the Company and itsdirectors and executive officers that are required to be disclosed pursuant to Item 404 of Regulation S-K,promulgated under the Securities and Exchange Act of 1934, as amended.

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ACTIVITIES OF THE BOARD OF DIRECTORS AND ITS COMMITTEES

Members of the Board of Directors are elected by the holders of Common Stock of the Company andrepresent the interests of all stockholders. The Board of Directors meets periodically to review significantdevelopments affecting the Company and to act on matters requiring board approval. Although the Board ofDirectors delegates many matters to others, it reserves certain powers and functions to itself.

The Board of Directors has established Corporate Governance Guidelines that it follows in matters ofcorporate governance. In addition, the Board of Directors has adopted a Code of Business Conduct and Ethicsthat applies to all Company employees, officers and directors. The Company’s Corporate Governance Guidelinesand Code of Business Conduct and Ethics are published on our website at www.healthnet.com and are availablein print upon written request, addressed to the Company’s Secretary.

The Company’s Board of Directors met a total of twenty-four times in 2005. Each member of the Board ofDirectors of the Company was present for 75% or more of the aggregate number of meetings of such Board ofDirectors held in 2005 (during the period he/she served as a director) and of all committees of such Board ofDirectors held in 2005 on which he/she served (during the period he/she served). The non-management directorsof the Company meet in executive session without management on a regularly scheduled basis, but not lessfrequently than quarterly. The non-executive Chairman presides at such executive sessions, or in his absence, anon-management director designated by such non-executive Chairman.

The Board of Directors has determined that the following directors of the Company qualify as independentunder New York Stock Exchange (“NYSE”) listing standards: Theodore F. Craver, Jr., Thomas T. Farley, GaleS. Fitzgerald, Patrick Foley, Roger F. Greaves, Bruce G. Willison and Frederick C. Yeager. Under the NYSElisting standards, no director qualifies as independent unless the Board of Directors affirmatively determines thatthe director has no material relationship with the Company, either directly or as a partner, stockholder or officerof an organization that has a relationship with the Company.

Committees of the Board of Directors

The bylaws of the Company establish the following committees of the Board of Directors: the AuditCommittee, the Governance Committee, the Compensation Committee and the Finance Committee. The bylawsfurther provide that additional committees may be established by resolution adopted by a majority of the Board.From time to time, the Board establishes various Ad Hoc Committees by resolution. A majority of the Board ofDirectors selects the directors to serve on the committees of the Board of Directors upon recommendation of theGovernance Committee.

Audit Committee. The Audit Committee of the Board of Directors of the Company currently consists ofMessrs. Craver (Chairman), Farley, Willison, Yeager and Ms. Fitzgerald. Each of the current members of theAudit Committee served on the Audit Committee from January 2005 to December 2005. Mr. Craver wasappointed Chairman of the Audit Committee in February 2005 to replace a retiring director. Each member of theAudit Committee is “independent,” as independence for audit committee members is defined under NYSE listingstandards, and Messrs. Craver and Yeager have each been determined by the Board to be an “audit committeefinancial expert,” as defined by the SEC. In addition to the serving on the Audit Committee of the Board ofDirectors of the Company, Mr. Willison serves on the audit committee of Homestore, Inc. The Company’s AuditCommittee held ten meetings in 2005.

The Audit Committee is governed by a charter, a current copy of which is available on our website atwww.healthnet.com, and is attached to this Proxy Statement as Annex A. A copy of the charter is also available inprint to stockholders upon request, addressed to the Secretary of the Company. Pursuant to the Audit Committeecharter, the Audit Committee is responsible for, among other things:

• appointing, compensating, retaining, terminating and overseeing the work of any independent auditorsengaged to prepare or issue an audit report or perform other audit or non-audit services for theCompany;

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• preapproving all audit services and permitted non-audit services, including the proposed fees relatedthereto, to be performed for the Company by the independent auditors;

• obtaining and reviewing, at least annually, a report from the independent auditors with respect to mattersaffecting the independent auditors’ internal quality-control procedures, independence and other materialissues surrounding the auditing process;

• reviewing and discussing with the independent auditors their annual audit plan (for annual and quarterlyreporting purposes), including the timing and scope of audit activities, and monitoring such plan’sprogress and results during the year;

• reviewing with management and the independent auditors the Company’s practices with respect to,among other things: the Company’s disclosures in its annual audited financial statements and quarterlyfinancial statements; the process surrounding certain accounting estimates; treatment of significanttransactions not a part of the Company’s regular operations; significant adjustments to the Company’sfinancial statements; risk assessment; risk management; and the Company’s critical accounting policies;

• reviewing and resolving all disagreements, problems or difficulties between the Company’s independentauditors and management regarding financial reporting;

• reviewing and reporting to the Board on the performance and the independence of the independentauditors;

• reviewing, on a regular basis, the adequacy and effectiveness of the Company’s accounting and internalcontrol policies and procedures, through inquiry and discussions with management and the independentauditors;

• reviewing the Audit Committee’s involvement and interaction with the Company’s internal auditfunction; the services provided by the Company’s internal audit function; and the controls thatmanagement has established to protect the integrity of the quarterly reporting process;

• reviewing the Company’s policies relating to the ethical handling of conflicts of interest and reviewingtransactions between the Company and members of management;

• monitoring compliance with the Company’s Code of Business Conduct, including discussing withmanagement and the independent auditors established standards of conduct and performance, anddeviations therefrom; and

• reviewing with management, at the request of the Board, significant financial matters affecting theCompany, whether or not related to a review of quarterly or annual financial statements.

Governance Committee. The Governance Committee of the Board of Directors of the Company iscurrently comprised of Messrs. Willison (Chairman), Farley and Foley. Messrs. Farley and Willison served onthe Governance Committee from January 2005 to December 2005. Mr. Foley joined the Governance Committeein September 2005, at which time Mr. Greaves resigned from the Committee and Mr. Willison became Chairmanof the Committee replacing Mr. Greaves. Each of the current members of the Governance Committee is“independent” within the meaning of the NYSE listing standards. The Governance Committee held five meetingsin 2005. The Governance Committee is governed by a charter, a current copy of which is available on ourwebsite at www.healthnet.com. A copy of the charter is also available in print to stockholders upon request,addressed to the Secretary of the Company. Pursuant to the Governance Committee charter, the GovernanceCommittee is responsible for, among other things:

• identifying individuals qualified to serve as directors of the Company, consistent with the criteriaestablished by the Board of Directors;

• selecting individuals qualified to serve as director nominees at each annual meeting of the Companystockholders;

• nominating individuals to fill vacancies on the Board of Directors which occur between annual meetingsof Company stockholders;

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• recommending individual Board members for designation as members of committees on the Board ofDirectors;

• advising the Board of Directors with respect to the Board’s composition, procedures and committees;

• developing and recommending to the Board of Directors a set of corporate governance guidelinesapplicable to the Company and advising the Board of Directors with respect to the corporate governanceguidelines applicable to the Company; and

• overseeing the evaluation of the Board of Directors and the Company’s management.

The Governance Committee selects director nominees on the basis of the nominee’s possession of suchknowledge, experience, skills, expertise and diversity so as to enhance the Board’s ability to manage and directthe affairs and business of the Company, including, when applicable, to enhance the ability of the committees ofthe Board of Directors to fulfill their duties and/or to satisfy any independence requirements imposed by law,regulation, NYSE listing standards and the Company’s bylaws and other corporate governance documents.

The Governance Committee identifies potential director nominees from many sources. The GovernanceCommittee asks current directors and executive officers to notify the Committee if they become aware of personsmeeting the criteria described above who may be available to serve on the Board. From time to time, theGovernance Committee also engages third party search firms that specialize in identifying director candidates.The Governance Committee is currently working with a third party search firm to assist the GovernanceCommittee in the process of identifying and evaluating potential new director candidates. The GovernanceCommittee also considers director candidates recommended by stockholders. In considering candidatessubmitted by stockholders, the Governance Committee will take into consideration the needs of the Board ofDirectors and the qualifications of the candidate. The Governance Committee may also take into considerationthe number of shares held by the recommending stockholder and the length of time that such shares have beenheld. To have a candidate considered by the Governance Committee, a stockholder must submit therecommendation in writing and include certain information. See “Requirements and Procedures for Submissionof Director Candidate Recommendations by Stockholders, Nominations of Director Candidates by Stockholdersand Stockholder Proposals” for further information regarding the procedures for recommending a directornominee for consideration by the Governance Committee.

Once a person has been identified by the Governance Committee as a potential candidate, the GovernanceCommittee may collect and review publicly available information regarding the person to assess whether theperson should be considered further. If the Governance Committee determines that the candidate warrants furtherconsideration, the Chairman of the Governance Committee or another member of the Governance Committeecontacts the candidate. Generally, if the person expresses a willingness to be considered and to serve on theBoard of Directors, the Governance Committee requests information from the candidate, reviews the person’saccomplishments and qualifications, including in light of any other candidates that the Governance Committeemight be considering, and conducts one or more interviews with the candidate. In certain instances, GovernanceCommittee members may contact one or more references provided by the candidate or may contact othermembers of the business community or other persons that may have greater first-hand knowledge of thecandidate’s accomplishments. The Governance Committee’s evaluation process does not vary based on whetheror not a candidate is recommended by a stockholder, although, as stated above, the Board may take intoconsideration the number of shares held by the recommending stockholder and the length of time that such shareshave been held.

In connection with this Annual Meeting and in accordance with the above guidelines, the GovernanceCommittee nominated for re-election each of the following eight nominees: Ms. Fitzgerald and Messrs. Craver,Farley, Foley, Gellert, Greaves, Willison and Yeager.

Compensation Committee. The Compensation Committee currently consists of Ms. Fitzgerald (Chair) andMessrs. Farley, Foley and Yeager. Each of the current members of the Compensation Committee served on theCompensation Committee from January 2005 through December 2005. Each of the current members of theCompensation Committee is an “outside director” for Section 162(m) purposes and “independent” within themeaning of NYSE listing standards. In 2005, the Company’s Compensation Committee held seven meetings. The

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Compensation Committee is governed by a charter, a current copy of which is available on our website atwww.healthnet.com. A copy of the charter is also available in print to stockholders upon request, addressed to theSecretary of the Company. Pursuant to the Compensation Committee charter, the Compensation Committee isresponsible for, among other things:

• evaluating annually the performance of the Chief Executive Officer (the “CEO”) and the second mosthighly compensated officer of the Company (for 2005, the Chief Financial Officer) and recommendingto the Board of Directors each such officer’s compensation levels based on this evaluation, whichrecommendations are subject to ratification, modification or rejection by the Board of Directors;

• evaluating annually the CEO’s evaluation of the performance of up to 35 senior officers (the “SeniorOfficers”) of the Company, including the “Named Executive Officers” listed below in the SummaryCompensation Table, and approving each such officer’s compensation level;

• reviewing and approving, on a general and policy level basis only, the compensation and benefits ofofficers, managers and employees other than the Chief Executive Officer and the Senior Officers andadvising the Board of Directors of actions taken;

• approving the Executive Officer Incentive Plan and Management Incentive Plan goals at the beginningof each year and at the end of each year, verifying achievement of the goals and authorizing payment ofany incentives earned under such arrangements;

• reviewing and administering the Company’s stock option and other stock-based and equity based plans;

• reviewing and approving any severance or termination arrangements to be made with any Senior Officerof the Company;

• reviewing perquisites or other personal benefits to the Company’s Senior Officers and recommendingany changes to the Board of Directors; and

• performing such duties and responsibilities as may be assigned to the Board of Directors or theCompensation Committee under the terms of any compensation or other employee benefit plan,including any incentive-compensation or equity-based plan.

Finance Committee. The Finance Committee of the Board of Directors currently consists of Messrs. Foley(Chairman), Craver and Willison. Each of the current members of the Finance Committee served on the FinanceCommittee from January 2005 through December 2005. In 2005, the Company’s Finance Committee held 6meetings. The Finance Committee is responsible for, among other things:

• reviewing the Company’s investment policies and guidelines;

• monitoring the performance of the Company’s investment portfolio;

• reviewing, in coordination with the Audit Committee, the Company’s financial structure and operationsin light of the Company’s long-term objectives;

• reviewing and recommending to the Board of Directors appropriate action on proposed acquisitions anddivestitures;

• reviewing and consulting with Company’s management regarding the Company’s various technologyand infrastructure plans and activities;

• establishing appropriate authority levels for various officials of the Company with respect to mergersand acquisitions transactions, divestiture transactions and capital expenditures;

• reviewing and recommending appropriate action with respect to the Company’s short- and long-termdebt structure; and

• reviewing and consulting with management regarding the Company’s various technology andinfrastructure plans and activities.

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REPORT OF THE COMPENSATION COMMITTEE ONEXECUTIVE COMPENSATION FOR FISCAL YEAR 2005

Introduction and Background

The following report is provided by the Compensation Committee of the Board of Directors of the Company(the “Compensation Committee”) in accordance with the rules of the Securities and Exchange Commission andcovers compensation policies applicable to the executive officers of Health Net, Inc. (“Health Net” or the“Company”) during 2005.

The Compensation Committee held seven meetings during the year ended December 31, 2005 and met inexecutive session at each meeting. During 2005, each member of the Compensation Committee was an “outsidedirector” (within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the“Code”)) and “independent” within the meaning of New York Stock Exchange listing standards. Ms. Fitzgeraldserved as Chair and Messrs. Farley, Foley and Yeager served as members of the Compensation Committee fromJanuary 2005 through December 2005. Mr. Tom Bouchard and Mr. Richard Hanselman served on theCompensation Committee from January 2005 until May 2005 when each resigned from the CompensationCommittee concurrently with his retirement from the Board of Directors. Mr. Greaves, in his capacity asChairman of the Board, regularly attends Compensation Committee meetings but, since he is not a member of theCompensation Committee, he does not vote on any Compensation Committee actions.

Pursuant to the Compensation Committee’s charter, a copy of which is posted on the Company’s website,the Compensation Committee is responsible for, among other things:

• Evaluating annually the performance of the Chief Executive Officer (the “CEO”) and the second mosthighly compensated officer of the Company and recommending to the Board of Directors each suchofficer’s compensation levels based on this evaluation, which recommendations are subject toratification, modification or rejection by the Board of Directors;

• Reviewing annually the CEO’s evaluation of the performance of up to 35 senior officers of theCompany, including the “Named Executive Officers” listed in the Summary Compensation Table, andapproving each such officer’s compensation level;

• Approving the Executive Officer Incentive Plan and Management Incentive Plan goals at the beginningof each year and at the end of each year, verifying achievement of the goals and authorizing payment ofany incentives earned under such arrangements; and

• reviewing and administering the Company’s stock option and other equity-based plans.

Our report covers the following topics:

• Role of the Compensation Committee

• Executive Compensation Guiding Principles

• Guiding Principles in Practice

• Compensation of the Chief Executive Officer

• Tax-Deductible Compensation

• Leadership Development and Succession Planning

Role of the Compensation Committee

The Compensation Committee is responsible for developing and administering guiding principles withrespect to executive compensation, including equity-based programs. Specific accountabilities include:

• Developing the Company’s Executive Compensation Guiding Principles that provide the framework formaking program design and compensation decisions;

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• Ensuring executive compensation is driven by the Company’s financial and operational performanceand is consistent with the Company’s business strategy and with the compensation practices ofcomparable organizations;

• Approving (or recommending to the Board for approval) compensation levels for the Company’s mostsenior executives identified by the Compensation Committee from time to time;

• Evaluating the Chief Executive Officer’s performance and recommending his compensation in light ofperformance; and

• Administering the Company’s equity-based compensation programs.

The Compensation Committee makes every effort to maintain independence and objectivity. TheCompensation Committee meets regularly in executive session (excluding the CEO and other employees) wherediscussions and decisions regarding CEO performance and compensation take place. The CompensationCommittee is committed to staying apprised of current issues and emerging trends, and ensuring that HealthNet’s executive compensation program remains aligned with best practice. To this end, the CompensationCommittee retains an independent advisor and regularly reviews compensation levels, including equity-basedcompensation, best practices and emerging issues. The advisor reports directly to the Chair and the Chairapproves the advisor’s fees.

Executive Compensation Guiding Principles

To provide a framework for executive compensation decision-making, the Compensation Committeedeveloped Guiding Principles that are intended to serve as touchstones for design and administration decisionsmade by the Board, the Compensation Committee and management. Health Net’s Executive CompensationGuiding Principles are as follows:

Principle #1—Compensation must be directly aligned with performance

Executive compensation levels should be commensurate with corporate performance and stockholder return.Growth and profitability are the foundation for stockholder returns over the long-term. Accordingly, Health Net’smanagement incentive plan incorporates growth and profitability measures. In addition, Health Net believes thatits success depends in large part on its employees. The Company conducts an annual employee satisfactionsurvey to assess the Company’s performance as an employer. A portion of the management annual incentive istied to improving employee satisfaction as measured by select survey items. The Compensation Committee iscommitted to a strong link between pay for performance and if performance does not meet expectations,payments are reduced or not made at all.

Principle #2—Compensation levels and program design features must be competitive with market practice

Understanding competitive market compensation levels is instrumental in hiring and retaining qualifiedexecutives. Moreover, it is important to understand how best practices change and how comparable organizationsdeliver compensation. The Compensation Committee retains an independent advisor. At the Committee’sdirection, the advisor assists the Compensation Committee with its annual review of Company compensationlevels relative to market and to Company performance and provides information and advice regarding emergingtrends and issues affecting executive compensation.

Principle #3—Share ownership must be promoted

The personal financial interests of the Company’s executives should be directly aligned with those ofstockholders, and the Company’s compensation and retirement savings programs take this into consideration. In2002, the Compensation Committee introduced share ownership guidelines for executives. The guidelines call forthe CEO to own shares equal in value to five times annual base salary. Other executives depending on their levelare required to hold between one and three times annual base salary in shares. Participants have four years tomeet the share ownership guidelines.

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Of the Named Executive Officers, Messrs. Gellert, Woys and Westen have met their ownershiprequirements. Mr. Piszel has until August 2008, to meet his ownership requirement. Mr. Folick resigned from theCompany effective March 6, 2006.

Principle #4—Plan affordability and the Company’s capacity to pay must always be considered

The Company’s business plan and financial condition are taken into consideration when compensation andbenefit plan decisions are made. Salary increases, annual incentive payments and long-term incentive awards willbe made only when the Company can afford to do so. Retirement and savings plans funding decisions areconsidered likewise.

Guiding Principles in Practice

The Compensation Committee seeks to have a significant portion of annual compensation at risk. Equity isused to directly align executives’ long-term financial interests with those of the stockholders and to advance theinterests of the Company by attracting and retaining talented executives.

In making decisions about compensation, the Compensation Committee focuses first and foremost onCompany performance. The Company had strong performance in 2005. Annual net income growth was over439%. Earnings per share growth year-over-year was 424%. Share price appreciation reflected the strongfinancial performance with total shareholder return exceeding 78%. In each case, the result was a top quartileperformance when compared to comparable companies. The following discussion addresses how theCompensation Committee applied the guiding principles in the context of strong performance.

Base Salaries

Competitiveness, affordability, internal equity and individual performance drive base salary decisions. In2005, no changes were made to the salaries of the Named Executive Officers from their 2004 levels except forMr. Woys. For 2006, the Compensation Committee has approved the following salaries for the Named ExecutiveOfficers: Mr. Gellert—$1,100,000, Mr.Piszel—$575,000, Mr. Woys—$550,000, and Mr. Westen—$550,000.Mr. Folick resigned effective March 6, 2006. No change was made to Mr. Folick’s salary prior to his resignation.

Annual Incentive Compensation

Health Net’s annual incentive program is a key component of the Company’s pay for performance approachto compensation. The plan is funded based on the Company attaining its earnings per share goals as approved bythe Compensation Committee. Actual incentives are paid on performance against pre-established corporate, unitand individual performance goals. Corporate goals for 2005 were (a) earnings per share, (b) membership, and(c) employee satisfaction improvement. Unit goals vary but are based on financial and operational performanceand employee satisfaction improvement. The goal setting process takes into consideration internal budgets, pastperformance, market expectations and competitors’ absolute and relative performances. If goals are not fully met,incentive payments are reduced or not paid at all. Regardless of goal achievement at the corporate and unit levels,if threshold earnings per share goals are not met, incentive awards are not paid to senior executives. For 2005, theCompany achieved 85% of its financial goals. The incentive plan payments to the Named Executive Officers(other than Mr. Piszel), as shown in the Summary Compensation Table, reflect this corporate performance aswell as individual achievement against goals. Mr. Piszel’s reported incentive payment of $400,000 was providedfor under his employment contract. For the year ended December 31, 2006, Mr. Piszel will participate in theannual incentive plan on the same terms as other senior executives. For a more detailed description of thematerial terms of Mr. Piszel’s and all other Named Executive Officers’ employment agreements, see the sectionentitled “Employment Contracts, Termination of Employment and Change in Control Arrangements” set forthelsewhere in this Proxy Statement.

Long-Term Incentives

At Health Net, executives’ interests are aligned with those of the stockholders. The Company has primarilyused stock options, but has also utilized restricted stock and restricted stock units, to motivate key talent and

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promote ownership. In managing the equity program, the Compensation Committee closely monitors usage ratesand dilution levels. In 2005, Mr. Woys and Mr. Westen were the only Named Executive Officers to receiveequity awards. In 2006, stock option and restricted stock unit grants have been made to the following NamedExecutive Officers: Jay M. Gellert, Anthony S. Piszel and James E. Woys. In 2006, the Company also used stockoptions and restricted stock units for other employees receiving equity grants. The options have an exercise priceequal to the fair market value of Health Net’s common stock on the grant date, vest 50% on the second andfourth anniversary of the grant date, subject to continued employment, and expire on the tenth anniversary of thegrant date. The restricted stock units vest 100% on the fourth anniversary of the grant date provided the executiveis still employed with the Company. Earlier vesting of the options and restricted stock units occurs under certainchange of control and retirement provisions, which are detailed in the individual equity agreements reflecting thegrants.

The Company actively manages its use of equity. In 2005, the Company granted 2,126,484 options and30,000 shares of restricted stock to employees and members of the Board of Directors. This constituted a usagerate of 1.88% of the total 114,716,000 common shares outstanding (“CSO”) at the end of 2005. The Companyhas budgeted a 2.0% usage rate for 2006.

The total number of options granted and outstanding at the end of 2005 was 11,812,650 and the totalnumber of shares reserved for future grants under all equity plans is 1,702,382. Thus, at the end of 2005, the totaloverhang (outstanding options and future reserves for options) was 13,515,032 or 11.8% of CSO. The Companyis requesting stockholder approval of a new equity plan to provide competitive long-term incentive compensationto executives. See “Proposal 2—Approval of 2006 Long-Term Incentive Plan,” for additional information on thisplan.

Benefits/Perquisites

The Company’s benefits and perquisites for senior executives include life insurance, a deferred savingsprogram, car allowance, and financial planning as noted in the footnotes to the Summary Compensation Table.Mr. Gellert receives additional benefits described below in “Compensation of the Chief Executive Officer.” TheCompany maintains a supplemental executive retirement program in which Mr. Gellert and Mr. Westen are theonly Named Executive Officers who participate. It also covers two other active management team members andnumerous inactive associates. Benefits under the plan are not funded; they remain subject to the claims ofcreditors of the Company. The Named Executive Officers and other management employees are also eligible todefer salary and annual incentive payments under a non-qualified Deferred Compensation Plan to facilitate taxplanning and personal savings goals. The return on the deferred amounts is linked to the performance ofinvestment choices made available by the Company. For a detailed description of the material terms of theNamed Executive Officers’ employment agreements, see the section entitled “Employment Contracts,Termination of Employment and Change in Control Arrangements” set forth elsewhere in this Proxy Statement.

Severance

Executive officers, other than Mr. Gellert, are entitled to receive a lump sum payment equal to between oneand two times their base salary in effect on a termination of employment without cause. Continued health andwelfare benefit coverage is provided for a comparable period. Under the Company’s standard Severance PaymentAgreement, terminated executives are precluded from competing with the Company for a period of up toone-year post-termination, depending on the applicable circumstances.

In addition, the Company provides benefits for the senior executives in the event of a change in control.Executive Officers, other than Mr. Gellert, are entitled to receive a lump sum payment equal to between one andthree times their base salary in effect upon consummation of a change of control. Vesting of certain stock optionsheld by senior executives, including Mr. Gellert (as discussed below), accelerates upon a change in control. Therestricted stock units granted in 2006 vest upon involuntary termination (including constructive termination)within two years following a change in control. If the benefits provided under the Severance Payment Agreementconstitute parachute payments under Section 280G of the Internal Revenue Code and are subject to the excise tax

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imposed by Section 4999 of the Internal Revenue Code, the Named Executive Officers would receive (i) apayment sufficient to pay such excise taxes and (ii) an additional payment sufficient to pay the taxes arising as aresult of such payments.

Compensation of the Chief Executive Officer

The Compensation Committee is responsible for evaluating annually the CEO’s performance andcompensation. All decisions relating to the CEO’s pay are made in the context of his performance. The CEO’sperformance evaluation includes key leadership competencies and skills in addition to financial and operationalmeasures. The evaluation is a formal process, conducted under the auspices of the Governance Committee, withall board members having the opportunity to provide input. The Compensation Committee discusses the CEO’scompensation in an executive session at which no members of management are present.

The Compensation Committee decided for 2005 to maintain Mr. Gellert’s base salary at $900,000. Takinginto account Mr. Gellert’s performance as well as relevant market data, the Compensation Committee hasincreased Mr. Gellert’s salary to $1,100,000 for 2006.

Mr. Gellert’s target incentive for 2005 was 125% of base salary. Mr. Gellert had the opportunity to earn upto twice his annual base salary if performance significantly exceeded expectations. Incentive plan objectivesinclude earnings per share and pre-tax income. Regardless of goal achievement, no incentive is paid if theCompany does not meet its earnings per share goals. The Company achieved 85% of its goals for 2005. TheCompensation Committee determined Mr. Gellert’s incentive payment for 2005 to be $815,000, or 72% of target.The Compensation Committee made no changes to Mr. Gellert’s target and maximum incentive opportunities for2006.

Mr. Gellert did not receive an equity award in 2005. On April 11, 2006 the Compensation Committeeapproved a grant of 250,000 stock options and 125,000 restricted stock units to Mr. Gellert pursuant to theCompany’s 2005 Long-Term Incentive Plan and the form stock option agreement and form restricted stock unitagreement as approved by the Compensation Committee.

Mr. Gellert’s ownership of Company stock exceeds the Company’s stock ownership guidelines requiringthat he own shares worth five times his salary. As of December 31, 2005, Mr. Gellert held 538,072 shares ofCompany stock with a value of $21,148,005.

Mr. Gellert participates in the Company’s supplemental retirement benefit program. The benefit is equal to50% of his salary for each year of his Health Net service offset by other Company retirement benefits and aportion of Social Security. In order to receive a full benefit under the plan, Mr. Gellert would need to earn 17.5years of service at Health Net. Accordingly, based on his service as of December 31, 2005, Mr. Gellert’s currentaccrued benefit payable at 62 is $299,976 per year for his life. Mr. Gellert is 80% vested in this benefit.Mr. Gellert does not participate in the Company’s deferred compensation plan.

Like other Named Executive Officers, Mr. Gellert is eligible for financial planning. The Company providesMr. Gellert with the use of a car and reports his personal use as a taxable benefit. In addition, the Companyprovides Mr. Gellert with housing in Woodland Hills, California at a reasonable monthly cost and pays forMr. Gellert’s weekend trips to his residence in Northern California. The Company reimburses Mr. Gellert’s taxeson these benefits pursuant to his employment agreement.

In the event of Mr. Gellert’s involuntary termination other than for cause or his involuntary (or constructive)termination within two years following a change in control, he would receive a $6 million severance benefit. Achange of control would also provide accelerated vesting for all historical equity grants prior to March 2, 2006.Equity grants made after March 6, 2006 would require that a change of control occur and of Mr. Gellert’semployment be terminated by the acquiror or by Mr. Gellert for “good reason.” The Compensation Committeehas received independent advice on this severance benefit and believes the value is competitive with marketpractice. Mr. Gellert is precluded from competing with the Company for a period of up to one year post-termination under his severance arrangement with the Company. For a detailed description of the material termsof Mr. Gellert’s employment agreement, see the section entitled “Employment Contracts, Termination ofEmployment and Change in Control Arrangements” set forth elsewhere in this proxy statement.

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Deductible Compensation

The Compensation Committee’s policy with respect to the tax deductibility of compensation is to complywith the requirements of Section 162(m) of the Code to the extent such compliance is practicable and in the bestinterest of the Company and its stockholders. The Company’s Executive Officer Incentive Plan and the 2005Long-Term Incentive Plan meet the requirements of Section 162(m) and therefore annual incentive payments,stock options and performance-based equity awards under these plans may be made in a manner which allows forthe payments to be deductible in full. However, the Committee reserves the discretion to make awards that arenot deductible if it determines such an approach is appropriate under the circumstances.

Leadership Development and Succession Planning

An ongoing leadership development and succession-planning program is an integral component of theCompany’s strategic plan. The Governance Committee of the Board of Directors has responsibility for theoversight of leadership development and succession planning at Health Net. In that regard, the GovernanceCommittee works closely with the Compensation Committee.

Conclusion

Overall, the Compensation Committee believes that the Guiding Principles of the Company’s executivecompensation program will allow the Company to attract, motivate and retain executives who are highly capableand well-positioned to create stockholder value. Our emphasis has always been on aligning compensation withperformance. While specific program features may evolve to remain competitive, we will continue to govern ourdecisions based on principles of performance, market competitiveness, ownership and affordability.

Gale S. Fitzgerald (Chair)Thomas T. FarleyPatrick FoleyFrederick C. Yeager

March 23, 2006

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Stock Performance Graph

The following graph compares the performance of the Company’s Common Stock with the performance ofthe Standard & Poor’s 500 Composite Stock Price Index (the “S&P 500 Index”), and our industry Peer GroupIndex from December 31, 2000 (the last trading day of 2000) to December 31, 2001, 2002, 2003, 2004 and 2005.The graph assumes that $100 was invested on December 31, 2000 in each of the Common Stock, the S&P 500Index and the Peer Group Index, and that all dividends were reinvested.

The Company’s Peer Group Index includes the following companies: Aetna, Inc., Amerigroup Corporation,Cigna Corporation, Coventry Health Care, Humana, Inc., PacifiCare Health Systems, Inc., Sierra HealthSystems, UnitedHealth Group Inc., WellChoice, Inc. and Wellpoint, Inc. The Peer Group Index weighs theconstituent companies’ stock performance on the basis of market capitalization at the beginning of the period,unless otherwise noted in the footnotes below.

1 WellPoint data reflects Anthem historical data. Anthem acquired WellPoint in November 2004 and changed itsname to WellPoint. WellPoint data is only included for the period from December 31, 2001 to December 31,2005 since it did not become a public company until October 2001.

2 Amerigroup data is only included for the period from December 31, 2001 through December 31, 2005 since itdid not become a public company until November 2001.

3 WellChoice data is only included for the period from December 31, 2002 through December 31, 2005 since itdid not become a public company until November 2002.

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COMPARISON OF CUMULATIVE TOTAL RETURN AMONG HEALTH NET, INC.,S&P 500 INDEX AND CURRENT PEER GROUP INDEXFROM DECEMBER 31, 2000 TO DECEMBER 31, 2005

Health Net, Inc.S&P 500

IndexIndustry

Peer Group

December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $100.00 $100.00December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83.17 $ 88.12 $ 90.39December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.81 $ 68.66 $ 90.35December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $124.87 $ 88.34 $133.33December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110.24 $ 97.94 $205.60December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $196.85 $102.75 $296.14

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EXECUTIVE COMPENSATION AND OTHER INFORMATION

The following tables and descriptive information set forth separately, for the fiscal years indicated, eachcomponent of compensation paid or awarded to, or earned by, (i) Mr. Gellert, the Chief Executive Officer of theCompany during 2005, and (ii) each of the four other most highly compensated executive officers of theCompany serving as of the end of the 2005 calendar year (all such persons, collectively, the “Named ExecutiveOfficers”).

SUMMARY COMPENSATION TABLELong-Term Compensation

Annual Compensation Awards Payouts

Name andPrincipal Positionwith the Company

in 2005 YearSalary($)

(1)Bonus

($)Other

Annual($)

RestrictedStock

Awards$(2)

SecuritiesUnderlying

Options/SARs(#)

LTIPPayouts

($)

All OtherCompensation

($)

Jay M. Gellert . . . . . . . . .President & Chief

Executive Officer

200520042003

900,000934,615891,731

815,000000

55,863(3)79,732(3)69,565(3)

00

3,127,800(6)

00

325,000

000

16,819(4)16,529(5)6,941(7)

Jeffrey M. Folick . . . . . .Former EVP, Regional

Health Plans &Specialty Companies

200520042003

540,105560,769520,865

399,60000

24,296(3)12,000(9)12,000(9)

000

00

150,000

000

15,882(8)6,863(10)

10,981(11)

Anthony S. Piszel . . . . . .EVP & Chief Financial

Officer

200520042003

500,004163,463(14)

0

400,000900,000(15)

0

141,138(12)27,815(12)

0

01,540,800(16)

0

0500,000

0

000

1,245(13)165(13)

0James E. Woys . . . . . . . .President Government &

Specialty Services

200520042003

490,388481,739391,735

364,56000

12,000(9)12,000(9)12,000(9)

0562,000(17)

0

100,000192,000100,000

000

7,092(18)6,894(19)6,617(20)

B. Curtis Westen, . . . . . .Esq. Senior VP, General

Counsel & Secretary

200520042003

500,004515,598472,850

297,50000

12,000(9)12,000(9)12,000(9)

000

100,000160,000100,000

000

15,759(21)9,480(22)

11,733(23)

(1) Includes amounts deferred pursuant to the Company’s Deferred Compensation Plan and Profit Sharing and 401(k)Plans.

(2) This column shows the market value of the shares of restricted stock granted to each of the Named Executive Officersas of the date of grant. The aggregate holdings and market value of shares of restricted stock held on December 31,2005 by the Named Executive Officers listed in this table is as set forth in the individualized footnotes for this columnas set forth below. The restrictions on these shares lapse as set forth in the individualized footnotes for this column setforth below. Dividends will be paid on the shares of restricted stock to the same extent (if any) dividends are paid onthe Common Stock generally, provided, that the Company will hold in escrow any such dividends until all restrictionson such shares have lapsed.

(3) Represents housing, travel and automobile benefits, including the tax gross up on such items.

(4) Represents matching contributions under the Company’s 401(k) Plan of $5,950, financial counseling expenses of$8,523 and premiums paid by the Company on a life insurance policy of $2,346.

(5) Represents matching contributions under the Company’s 401(k) Plan of $6,500, financial counseling expenses of$8,841 and premiums paid by the Company on a life insurance policy of $1,188.

(6) Represents restricted stock award of 130,000 shares granted on February 20, 2003. The market value of such shares asof the date of grant was $3,127,800. The market value of such shares as of December 31, 2005 was $6,701,500. The130,000 shares vest as follows: 65,000 vested on February 20, 2006 and 65,000 will vest on February 20, 2007. The65,000 unvested shares are the only shares of restricted stock held by Mr. Gellert.

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(7) Represents matching contributions under the Company’s 401(k) Plan of $6,000 and premiums paid by the Company ona life insurance policy of $941.

(8) Represents matching contributions under the Company’s 401(k) Plan of $6,300, premiums paid by the Company on alife insurance policy of $2,528, and financial counseling expenses of $7,054.

(9) Represents amounts paid as an automobile allowance.

(10) Represents matching contributions under the Company’s 401(k) Plan of $6,150 and premiums paid by the Company ona life insurance policy of $713.

(11) Represents matching contributions under the Company’s 401(k) Plan of $6,000, financial counseling expenses of$4,418 and premiums paid by the Company on a life insurance policy of $563.

(12) Represents amounts paid for relocation benefits.

(13) Represents premiums paid by the Company for a life insurance policy.

(14) Mr. Piszel joined the Company in August 2004. Accordingly, the amount reported for 2004 does not represent a fullyear of salary.

(15) Includes a one-time signing bonus of $500,000.

(16) Represents a restricted stock award of 60,000 shares granted on August 30, 2004. The market value of such shares asof the date of grant was $1,540,800. The market value of such shares as of December 31, 2005 was $3,093,000. Therestricted shares will vest 100% on August 30, 2007. These are the only shares of restricted stock held by Mr. Piszel.

(17) Represents a restricted stock award of 25,000 shares granted on October 21, 2004. The market value of such shares asof the date of grant was $562,000. Of such shares, 12,500 vested on October 21, 2005. The remaining 12,500 shareswill vest on October 21, 2006. The market value of the unvested shares as of December 31, 2005 was $644,375. The12,500 unvested shares are the only shares of restricted stock held by Mr. Woys.

(18) Represents matching contributions under the Company’s 401(k) Plan of $6,300, and premiums paid by the Companyon a life insurance policy of $792.

(19) Represents matching contributions under the Company’s 401(k) Plan of $6,150 and premiums paid by the Company ona life insurance policy of $744.

(20) Represents matching contributions under the Company’s 401(k) Plan of $6,000 and premiums paid by the Company ona life insurance policy of $617.

(21) Represents matching contributions under the Company’s 401(k) Plan of $6,300, financial counseling expenses of$2,131, club membership fees of $6,516 and premiums paid by the Company on a life insurance policy of $812.

(22) Represents matching contributions under the Company’s 401(k) Plan of $6,150, financial counseling expenses of $327,club membership fees of $2,467, and premiums paid by the Company on a life insurance policy of $536.

(23) Represents matching contributions under the Company’s 401(k) Plan of $6,000, financial counseling expenses of$1,704, club membership fees of $3,522, and premiums paid by the Company on a life insurance policy of $507.

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Option Grants in 2005

The following table summarizes option grants made in 2005 to the Named Executive Officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Name

Number of SecuritiesUnderlying options/SARs

Granted(#)(a)

% of Total Options/SARsGranted to Employees

in Fiscal Year

Exercise orBase Price(a)

($/share)Expiration

Date

Potential RealizableValue at AssumedAnnual Rates of

Stock PriceAppreciation forOption Term(b)

5%($) 10%($)

Jay M. Gellert . . . . . . . . 0 — — — $ — $ —Jeffrey M. Folick . . . . . . 0 — — — $ — $ —Anthony S. Piszel . . . . . 0 — — — $ — $ —James E. Woys . . . . . . . 100,000 4.7% $32.59 5/13/2015 $2,049,570 $5,194,000B. Curtis Westen . . . . . . 100,000 4.7% $32.59 5/13/2015 $2,049,570 $5,194,000

(a) The options were non-qualified stock options granted pursuant to the Company’s 2005 Long-Term Incentive Plan at anexercise price equal to the closing sales price of the Common Stock on the NYSE on the date on which such grants weremade. The grants provide for vesting of 25% of the option shares on each of the first four yearly anniversaries of the dateof grant, subject to accelerated vesting in certain change in control situations. The options have a ten-year term.

(b) The potential gains shown are net of the option exercise price and do not include the effect of any taxes associated withthe exercise. The amounts shown are the assumed rates of appreciation only, do not constitute projections of future stockprice performance and may not necessarily be realized. Actual gains, if any, on stock option exercises depend on thefuture performance of the Common Stock, continued employment of the optionee through the term of the option andother factors.

Option Exercises in 2005

The following table summarizes the number and value of options exercised during 2005, as well as thenumber and value of unexercised options as of December 31, 2005, held by the Named Executive Officers.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR ANDFISCAL YEAR-END OPTION/SAR VALUES

Name

SharesAcquired onExercise(#)

ValueRealized($)

Number of Securities UnderlyingUnexercised Options/SARs as of

December 31, 2004(a)

Value of UnexercisedIn-the-Money Options/SARsas of December 31, 2004(b)

Exercisable(#) Unexercisable(#) Exercisable Unexercisable

Jay M. Gellert . . . . . . . . 500,000 $9,852,152 1,512,500 487,500 $36,852,375 $13,632,125Jeffrey M. Folick . . . . . — — 425,000 225,000 $10,183,000 $ 5,920,500Anthony S. Piszel . . . . . — — 0 500,000 $ 0 $12,935,000James E. Woys . . . . . . . — — 243,750 306,500 $ 7,312,353 $ 7,493,715B. Curtis Westen . . . . . — — 525,000 295,000 $12,965,200 $ 7,342,450

(a) The exercise price of outstanding options held at December 31, 2005 ranges from $9.00 to $35.25 per share.All options held by the Named Executive Officers have exercise prices equal to the fair market value of theunderlying shares on the date of grant.

(b) Based on the difference between the closing price of $51.55 of Common Stock on the NYSE onDecember 31, 2005 and the option exercise price.

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Supplemental Executive Retirement Programs

The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for executives of theCompany and its affiliates who have been selected for participation by the Company’s President and ChiefExecutive Officer and approved by the Compensation Committee.

The following table shows the estimated annual pension benefits payable to a covered participant at normalretirement age (62 years) under the Company’s SERP, before deducting the amounts attributable to the participant’ssocial security benefit and employer-provided benefits under the Company’s qualified and nonqualified plans,which amounts are subtracted from the payments made to each such participant as set forth below:

PENSION PLAN TABLE

Base Pay Plus Bonus 5(a) 10

Years of Service

2515 20

400,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 134,000 200,000 200,000 200,000525,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 175,000 263,000 263,000 263,000650,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 217,000 325,000 325,000 325,000775,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 259,000 388,000 388,000 388,000900,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 300,000 450,000 450,000 450,000

1,025,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 342,000 513,000 513,000 513,0001,150,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 384,000 575,000 575,000 575,0001,275,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 425,000 638,000 638,000 638,0001,400,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 467,000 700,000 700,000 700,0001,525,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000 509,000 763,000 763,000 763,000

(a) Reflects 10% vesting after five years of service.

Upon termination of employment, other than termination of employment for cause or death, a SERP planparticipant will receive his or her vested benefit under the SERP. A participant becomes 10% vested in his or herbenefit after 5 years of service, 20% after 6 years, 40% after 7 years, 60% after 8 years, 80% after 9 years and 100%after 10 years. The amount of the benefit is also subject to adjustment based on the number of service years theparticipant has with the Company compared to the maximum number of service years the participant could servethrough normal retirement age. Generally, in the case of a participant who has attained age 62 while working at theCompany and has at least 15 years of service, the participant’s benefit is equal to 50% times the participant’saverage base salary (and annual bonus, unless at the time of the bonus award the Compensation Committeedetermines that the bonus is not to be includible compensation for purposes of the SERP) during the 60-monthperiod preceding the participant’s date of employment termination, minus an amount attributable to the participant’ssocial security benefit and employer-provided benefits under the Company’s qualified and nonqualified plans. Thecompensation considered in determining the pensions payable to the participating named officers is thecompensation shown in the “Salary” and “Bonus” columns of the Summary Compensation Table set forth herein.Participants must accrue at least 5 years of service to receive a partial benefit and participants with less than 15years of service at age 62 will receive a reduced benefit. If a married participant terminates employment because ofthe participant’s death, then the participant’s surviving spouse will receive a death benefit generally equal to whatthe participant’s benefit would have been had he or she retired on the date of his or her death.

Monthly accrued benefits payable at age 62 and accrued through December 31, 2005 under this SERPprogram for Mr. Gellert are $24,998. Mr. Gellert has thus far served 9 of the required 17.5 maximum serviceyears for him to receive a full benefit under the terms of the SERP (See “Report of the Compensation Committeeon Executive Compensation for Fiscal Year 2005” for additional information on Mr. Gellert’s participation in theSERP program). Mr. Westen also participates in the Company’s SERP program. The benefit is equal to 50% ofhis salary for retirement at age 62 or later with at least 15 years of service at Health Net, offset by otherretirement benefits and a portion of Social Security. In order to receive a full benefit under the plan, Mr. Westenwould need to earn 30 2/3 years of service at Health Net. Accordingly, based on his 13 3/4 years of service as ofDecember 31, 2005, Mr. Westen’s current accrued benefit payable at 62 is $86,446 per year for his life.Mr. Westen is 100% vested in this benefit. No other Named Executive Officers are participants in the SERP.

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Employment Contracts, Termination of Employment and Change-in-Control Arrangements

Employment Agreements with Named Executive Officers

The Company has entered into employment agreements with each of its Named Executive Officers(collectively, the “NEO Agreements”). The NEO Agreements provide for each Named Executive Officer toreceive a base salary, which is to be reviewed annually and is subject to the Company’s right to change from timeto time. Pursuant to the NEO Agreements, each Named Executive Officer is eligible to participate in theCompany’s Executive Officer Incentive Plan (the “EIP”), which provides such officer the opportunity to earneach plan year up to a specified percentage of his annual base salary as additional compensation.

The NEO Agreements provide for each Named Executive Officer to participate in various employee benefitplans, including paid time off, holidays, insurance and Health Net’s 401(k), deferred compensation and tuitionreimbursement plans, if the applicable participation requirements are met. Each of the NEO Agreements providesfor reimbursement of up to $5,000 per year of costs incurred for personal financial counseling services and theCompany makes an additional tax gross-up payment to the NEOs in connection with the payment of this benefit,and, except in the case of Mr. Piszel’s agreement, for a monthly car allowance of $1,000. The Company providesMr. Gellert with use of a Company-owned car and imputes income to Mr. Gellert on a monthly basis for suchuse. In addition, each of the NEO Agreements provides that, in the event that any change-in-control payments ordistributions by the Company to or for the benefit of the Named Executive Officer would be subject to the excisetax imposed under Section 4999 of the Internal Revenue Code and there are, in respect of those payments anddistributions in excess of $50,000 in the aggregate, any excess parachute payments within the meaning ofSection 280G of the Internal Revenue Code, then the Named Executive Officer will receive an additional, taxgross-up payment so that the net amount received, taking into account taxes payable on the tax gross-up payment,is equal to the amount the officer would have received if no excise tax were due. Under the NEO Agreements,Named Executive Officers are precluded from competing with the Company for a period of up to one-year post-termination, depending on the applicable circumstances. Below is a brief summary of additional material termscontained in each Named Executive Officer’s employment agreement with the Company.

Employment Agreement with Mr. Gellert. Mr. Gellert has an Employment Letter Agreement with theCompany dated August 22, 1997, which was amended as of March 2, 2000 and as of October 13, 2002 (as soamended, the “Gellert Agreement”). Mr. Gellert’s annual base salary under the Gellert Agreement is currently$1,100,000. The Gellert Agreement provides that Mr. Gellert is eligible to participate in the Company’s EIP,which provides him the opportunity to earn each plan year a certain percentage of his base salary as additionalcompensation according to the terms of the actual EIP documents. The Gellert Agreement provides Mr. Gellertwith housing in Woodland Hills, California at a reasonable monthly cost and reimbursement for Mr. Gellert’sweekend trips to his residence in Northern California. In addition, if Mr. Gellert decides to relocate to SouthernCalifornia, Mr. Gellert is entitled to certain relocation benefits from the Company. Mr. Gellert also is entitled toreimbursement for reasonable business expenses. The Company provides Mr. Gellert with the use of a car andreports his personal use as a taxable benefit.

The Gellert Agreement provides that Mr. Gellert’s employment with the Company may be terminated byhim or the Company at any time, for any reason and with or without notice of any kind. The Gellert Agreementprovides Mr. Gellert with two potential severance arrangements. If during a two-year period following a“change-of-control” transaction (as defined in the Gellert Agreement), the Company terminates Mr. Gellert or hevoluntarily resigns for “good reason” (as defined in the Gellert Agreement), he will be entitled to a $6,000,000severance payment. If the Company terminates the employment of Mr. Gellert other than during a two-yearperiod following a change-of-control and other than for cause, Mr. Gellert will be entitled to receive a $6,000,000severance payment.

Employment Agreement with Mr. Folick. Mr. Folick resigned from his position with the Companyeffective March 6, 2006 (the “Termination Date”). In connection with such resignation, Mr. Folick entered into aWaiver and Release of Claims dated March 6, 2006 with the Company (the “Severance Agreement”). In addition,Mr. Folick is a party to an Employment Letter Agreement with the Company dated as of May 22, 2002, whichwas amended as of July 2, 2004, as of January 27, 2005 and as of October 10, 2005 (as so amended, the “FolickAgreement”).

26

The Folick Agreement provided Mr. Folick with the option, exercisable by notifying the Company inwriting no earlier than October 10, 2005, but no later than March 31, 2006, to terminate his employment with theCompany effective thirty days following the date of such notice, provided that certain conditions were met, andreceive, in lieu of any other severance benefits and participation in the Company’s EIP for 2005 and 2006, thefollowing incentive package (the “Incentive Package”): (i) a lump-sum payment equal to two times Mr. Folick’sthen-current base salary, (ii) benefit continuation for an initial six-month period and payment of COBRApremiums for up to an additional eighteen-month period, and (iii) the opportunity to earn two bonus awards, eachequal to 50% of his 2005 EIP target opportunity, provided that Mr. Folick satisfied specified performance-relatedconditions as set forth in the Folick Agreement. Mr. Folick timely elected the Incentive Package and terminatedhis employment with the Company effective March 6, 2006. Pursuant to the Severance Agreement, Mr. Folickreceived a lump sum payment in the amount of $1,479,600. In addition, the Company will continue to pay forMr. Folick’s and his dependents’ medical, dental and vision benefits until September 6, 2006, and thereafter payMr. Folick’s and his dependents’ COBRA premiums until March 6, 2008.

The Severance Agreement also provides that Mr. Folick’s resignation shall be treated as a termination bythe Company without cause for purposes of his May 24, 2002 and February 20, 2003 stock option agreementswith the Company (the “Stock Option Agreements”), as a result of which, among other things, Mr. Folick willhave until June 6, 2006 to exercise any outstanding stock options under the Option Agreements that had vested asof his Termination Date.

The Severance Agreement provides for the release by Mr. Folick of specified types of claims against theCompany and various other released parties and includes provisions regarding, among other things,confidentiality, non-solicitation of employees and customers and non-competition.

Mr. Folick’s annual base salary under the Folick Agreement at the time of his resignation was $540,000. IfMr. Folick did not elect the Incentive Package, the Folick Agreement provided that Mr. Folick was eligible toparticipate in the Company’s EIP, which provided him the opportunity to earn each plan year a certain percentage ofhis base salary as additional compensation according to the terms of the actual EIP documents. The FolickAgreement provided that Mr. Folick’s employment with the Company could be terminated by him or the Companyat any time, with or without notice and with or without “cause” (as defined in the Folick Agreement). The FolickAgreement provided Mr. Folick with the following severance arrangements in the event of a termination of hisemployment other than for cause or due to his death or “disability” (as defined in the Folick Agreement):

• If, at any time within two years after a “change in control” (as defined in the Folick Agreement) of theCompany, Mr. Folick’s employment was terminated by the Company without cause or Mr. Folickterminated his employment for “good reason” (as defined in the Folick Agreement) and he signed aprescribed waiver and release of claims, Mr. Folick would have been entitled to receive a lump-sumpayment equal to 36 months of his then-current base salary, benefit continuation for an initial 18-monthperiod and payment of COBRA premiums for an additional 18- month period thereafter. This severanceallowance would have been be forfeited in the case of such a termination by Mr. Folick for good reasonif the Company requested in writing, prior to the termination. In the event the Company requested inwriting prior to a voluntary termination by Mr. Folick for good reason that he continue in the employ ofthe Company for up to an additional three months, Mr. Folick would have been required to remain soemployed during the requested extension in order to receive these severance benefits.

• If at any time that is not within two years after a change in control Mr. Folick’s employment wasterminated by the Company without cause, Mr. Folick would have been entitled to receive, if he signeda prescribed waiver and release of claims, a lump-sum payment equal to 24 months of his then-currentbase salary and benefit continuation for an initial six-month period and payment of COBRA premiumsfor an additional 18-month period.

Because of Mr. Folick’s resignation and timely election of the Incentive Package, Mr. Folick is no longer eligibleto receive any of the severance benefits described in this paragraph.

Employment Agreement with Mr. Piszel. Mr. Piszel has an Employment Letter Agreement with theCompany dated August 26, 2004 (the “Piszel Agreement”). Mr. Piszel’s annual base salary under the Piszel

27

Agreement currently is $585,000. The Piszel Agreement provides that Mr. Piszel is eligible to participate in theCompany’s EIP, which provides him the opportunity to earn each plan year a certain percentage of his basesalary as additional compensation according to the terms of the actual EIP documents, provided, however, thatMr. Piszel’s annual bonus opportunity for the 2004 and 2005 calendar years was guaranteed at target.

In connection with entering into the Piszel Agreement, Mr. Piszel received an engagement bonus of$500,000 in anticipation of his remaining employed by the Company for at least three years. If, within the firstthree years of employment, Mr. Piszel voluntarily terminates his employment or the Company terminates him for“cause” (as defined in the Piszel Agreement), Mr. Piszel will be required to repay the Company a proratedportion of the engagement bonus. The Piszel Agreement also entitles Mr. Piszel to relocation benefits, includinga special benefit reimbursement of up to $150,000 (inclusive of gross up for applicable federal and state taxes) ofthe federal and state taxes due on the sale of his principal residence.

The Piszel Agreement provides that Mr. Piszel’s employment with the Company may be terminated by himor the Company at any time, with or without advance notice and with or without cause. The Piszel Agreementprovides Mr. Piszel with the following severance arrangements in the event of a termination of his employmentother than for cause or due to his death or “disability” (as defined in the Piszel Agreement):

• If, at any time within two years after a “change in control” (as defined in the Piszel Agreement) of theCompany, Mr. Piszel’s employment is terminated by the Company without cause or Mr. Piszelterminates his employment for “good reason” (as defined in the Piszel Agreement) and he signs aprescribed waiver and release of claims, Mr. Piszel will be entitled to receive a lump-sum paymentequal to 36 months of his then-current base salary, benefit continuation for an initial 18-month periodand payment of COBRA premiums for an additional 18-month period thereafter. This severanceallowance will be forfeited in the case of a termination by Mr. Piszel for good reason if the Companyrequests in writing, prior to the termination, that Mr. Piszel continue in the employ of the Company for aperiod of up to 90 days following the change in control, and Mr. Piszel voluntarily leaves the employ ofthe Company prior to the expiration of that period.

• If at any time that is not within two years after a change in control of the Company Mr. Piszel’semployment is terminated by the Company without cause, Mr. Piszel will be entitled to receive, if hesigns a prescribed waiver and release of claims, (i) a lump-sum payment equal to 12 months of his then-current base salary and payment of COBRA premiums for Mr. Piszel and his covered dependents for a12-month period, if the termination is within the first 24 months of Mr. Piszel’s employment, or (ii) alump-sum payment equal to 24 months of his then-current base salary, medical, dental and visionbenefit continuation for Mr. Piszel and his covered dependents for an initial six-month period andpayment of COBRA premiums for Mr. Piszel and his covered dependents for an additional 18-monthperiod thereafter, if the termination is after 24 months of Mr. Piszel’s employment.

In the event that Mr. Piszel voluntarily terminates his employment at any time (other than for good reasonwithin two years after a change in control of the Company), the Piszel Agreement provides that he would not beeligible to receive any of the severance benefits under the Piszel Agreement. In the event that Mr. Piszel’semployment is terminated due to death or disability, he or his beneficiaries or estate would be entitled tocontinuation of medical and dental insurance for a period of 12 months and a lump-sum payment equal to 12months of his then-current base salary, provided, in the case of termination due to disability, that Mr. Piszel signsa prescribed waiver and release of claims.

Employment Agreement with Mr. Woys. Mr. Woys has an Employment Letter Agreement with theCompany dated January 30, 2006 (the “Woys Agreement”). Mr. Woys’ annual base salary under the WoysAgreement currently is $550,000. The Woys Agreement provides that Mr. Woys is eligible to participate in theCompany’s EIP, which provides him the opportunity to earn each plan year a certain percentage of his basesalary as additional compensation according to the terms of the actual EIP documents.

The Woys Agreement provides that Mr. Woys’ employment with the Company may be terminated by himor the Company at any time, with or without advance notice and with or without cause. The Woys Agreement

28

provides Mr. Woys with the following severance arrangements in the event of a termination of his employmentother than for cause or due to his death or “disability” (as defined in the Woys Agreement):

• If, at any time within two years after a “change in control” (as defined in the Woys Agreement) of theCompany, Mr. Woys’ employment is terminated by the Company without cause or Mr. Woys terminateshis employment for “good reason” (as defined in the Woys Agreement) and signs a prescribed waiverand release of claims, Mr. Woys will be entitled to receive a lump-sum payment equal to two years ofhis then-current base salary and benefit continuation for two years after the date of termination. Thisseverance allowance will be forfeited in the case of a termination by Mr. Woys for good reason if theCompany requests in writing, prior to the termination, that Mr. Woys continue in the employ of theCompany for a period of up to 90 days following the change in control, and Mr. Woys voluntarily leavesthe employ of the Company prior to the expiration of that period.

• If at any time that is not within two years after a change in control Mr. Woys’ employment is terminatedby the Company without cause, Mr. Woys will be entitled to receive, if he signs a prescribed waiver andrelease of claims, a lump-sum payment equal to one year of his then-current base salary and benefitcontinuation for a period of one year after the effective date of the termination.

In the event that Mr. Woys voluntarily terminates his employment at any time (other than for good reasonwithin two years after a change in control of the Company), the Woys Agreement provides that he would not beeligible to receive any of the severance benefits under the Woys Agreement. In the event that Mr. Woys’employment is terminated due to death or disability, he or his beneficiaries or estate would be entitled tocontinuation of benefits for a period of six months from the date of termination and a lump-sum payment equal toone-half of his then-current base salary, provided, in the case of termination due to disability, that Mr. Woyssigns a prescribed waiver and release of claims.

Employment Agreement with Mr. Westen. Mr. Westen has the following employment related agreementswith the Company: an Employment Letter Agreement dated June 25, 1998, a Severance Payment Agreementdated December 4, 1998 and an Agreement dated January 1, 2001 (collectively, the “Westen Agreement”).Mr. Westen’s annual base salary under the Westen Agreement currently is $550,000. The Westen Agreementprovides that Mr. Westen is eligible to participate in the Company’s EIP, which provides him the opportunity toearn each plan year a certain percentage of his base salary as additional compensation according to the terms ofthe actual EIP documents.

The Westen Agreement provides that Mr. Westen’s employment with the Company may be terminated byhim or the Company at any time, with or without advance notice and with or without cause. The WestenAgreement provides Mr. Westen with the following severance arrangements in the event of a termination of hisemployment other than for cause or due to his death or “disability” (as defined in the Westen Agreement):

• If, at any time within two years after a “change in control” (as defined in the Westen Agreement) of theCompany, Mr. Westen’s employment is terminated by the Company without cause or Mr. Westenterminates his employment for “good reason” (as defined in the Westen Agreement) and signs aprescribed waiver and release of claims , Mr. Westen will be entitled to receive a lump-sum paymentequal to three years of his then-current base salary and benefit continuation for a three year period. Thisseverance allowance will be forfeited in the case of a termination by Mr. Westen if the Companyrequests in writing, prior to the termination, that Mr. Westen continue in the employ of the Company fora period of up to 90 days following the change in control, and Mr. Westen voluntarily leaves the employof the Company prior to the expiration of that period.

• If at any time that is not within two years after a change in control Mr. Westen’s employment isterminated by the Company without cause, Mr. Westen will be entitled to receive, if he signs aprescribed waiver and release of claims, a lump-sum payment equal to two years of his then-currentbase salary and benefit continuation for a two-year period.

In the event that Mr. Westen voluntarily terminates his employment at any time (other than for good reasonwithin two years after a change in control of the Company), the Westen Agreement provides that he would not be

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eligible to receive any of the severance benefits under the Westen Agreement. In the event that Mr. Westen’semployment is terminated due to death or disability, he or his beneficiaries or estate would be entitled tocontinuation of benefits for a period of one year and a lump-sum payment equal to one year of his then-currentbase salary, provided, that Mr. Westen signs a prescribed waiver and release of claims.

Employment Agreements with Other Executive Officers. The Company has also entered into employmentagreements with the other executive officers listed on the “Executive Officers” table set forth elsewhere in thisProxy Statement. In general, the executive officers’ employment agreements with the Company entitle theexecutive officer to a base salary, and the ability to participate in various insurance, stock option, pension,incentive compensation and various employee benefit plans, including paid time off, holidays, insurance andHealth Net’s 401(k), deferred compensation and tuition reimbursement plans, if the executive officer meets theapplicable participation requirements. In addition, several of the executive officers are entitled to an autoallowance and reimbursement of certain costs incurred for personal financial counseling services and relocationbenefits.

Severance Agreements with Executive Officers The Company has entered into a severance paymentagreement (a “Severance Payment Agreement”) with each of its executive officers, including the NamedExecutive Officers, either in the form of a separate document or as part of the officer’s Employment LetterAgreement. The terms of the Severance Payment Agreement for each of the Named Executive Officers aredescribed above under “Employment Agreements with Named Executive Officers.” In the case of each otherexecutive officer, under his or her Severance Payment Agreement, such executive will receive a one-time lumpsum payment ranging from one to three times base salary plus, for a period of one to three years, continuedhealth and welfare benefit coverage if involuntarily terminated (or constructively terminated) within two yearsafter a change in control (as defined therein). If the Company terminates the employment of the executive otherthan following a change in control and other than for cause (as defined in the applicable Severance PaymentAgreement), the executive would be entitled to receive a severance payment ranging from one to two times basesalary plus, for a period of one to two years, continued health and welfare benefit coverage. For each suchexecutive officer (other than Messrs. Lynch and Nelson ), if the change in control benefits provided under theSeverance Payment Agreement constitute parachute payments under Section 280G of the Code and are subject tothe excise tax imposed by Section 4999 of the Code, the covered executives will receive (i) a payment sufficientto pay such excise taxes and (ii) an additional payment sufficient to pay the taxes arising as a result of suchpayments. Under his or her Severance Payment Agreement, a terminated executive is precluded from competingwith the Company for a period of up to one year post-termination, depending on the applicable circumstances,and must enter into a prescribed waiver and release of claims in order to receive severance payments.

Compensation Committee Interlocks

During 2005, the Compensation Committee consisted of Ms. Fitzgerald (Chair), Messrs. Farley, Foley andYeager, and, from January 2005 to May 2005 only, Messrs. Bouchard and Hanselman. For additionalinformation on the Compensation Committee, see “Activities of the Board of Directors and its Committees—Committees of the Board of Directors—Compensation Committee.”

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DIRECTORS’ COMPENSATION FOR 2005

From January 1, 2005 through June 2005, the annual retainer payable to non-employee directors of theCompany was $30,000 per year. Effective July 1, 2005, the annual retainer was increased to $45,000 per year.From January 1, 2005 through June 2005, each non-employee director who chaired the CompensationCommittee, Governance Committee and Finance Committee received an additional annual retainer of $5,000,and effective July 1, 2005 such retainers were increased to $10,000 per year. The non-employee director whochaired the Audit Committee received an additional annual retainer of $15,000. Each non-employee director alsoreceived a $2,000 fee for each meeting of the Board of Directors attended, and a $1,000 fee for each committeemeeting attended, other than the Audit Committee. Non-employee directors received a $2,000 fee for each AuditCommittee meeting attended. In lieu of these retainer and meeting fees, Mr. Greaves received $16,666.67 permonth from January 2005 through December 2005, for his services as Chairman of the Board of Directors. Nofees are paid to employees of the Company for service as a director.

The Company maintains a Third Amended and Restated Non-Employee Director Stock Option Plan (the“Director Plan”). Under the Director Plan, 500,000 shares of Common Stock are reserved for initial grants ofnonqualified stock options to directors when they join the Company’s Board and automatic annual grants ofnonqualified stock options on each year such director is re-elected to the Company’s Board. Each non-employeedirector grant entitles the optionee to purchase the granted number of shares of Common Stock (which number isdetermined pursuant to grant formula provisions in the Director Plan) at an exercise price equal to the fair marketvalue of Common Stock on the date of such grant. Each grant vests as to 33 1/3% of the shares each year on theanniversary of the date of the grant, provided that the options become immediately exercisable in the event of a“change in control” of the Company, as defined in the Director Plan.

In 2005, non-employee directors of the Company participated in the Company’s Amended and Restated1998 Stock Option Plan (the “1998 Plan”). In May 2005, it was determined that there were not enough sharesavailable for grant under the Director Plan to make the annual stock option grant to directors. As such, annualgrants were made to directors under the 1998 Plan using the annual grant formula provisions of the Director Plan.On May 15, 2005, options to purchase 7,500 shares at an exercise price of $32.59 per share were granted to eachof Messrs. Craver, Farley, Foley, Greaves, Willison, Yeager and Ms. Fitzgerald, under the 1998 Plan. The termsand conditions of the annual grants made to non-employee directors under the 1998 Plan are substantially thesame as previous grants made under the Director Plan except that the definition of “change in control” isdifferent in the 1998 Plan.

During 2005, the Company maintained a non-employee deferred compensation plan pursuant to whichnon-employee directors were eligible to defer up to 100% of their compensation (the “Company Deferred CompPlan”). The compensation deferred under such plan is credited with earnings or losses measured by the rate ofreturn on investments elected by plan participants. Each plan participant is fully vested in all deferredcompensation and earnings credited to his or her account. Mr. Willison and Ms. Fitzgerald participated in thenon-employee director deferred compensation plan in 2005.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT

Security Ownership of Certain Beneficial Owners

Set forth below is a tabulation indicating those persons or groups that are known to the Company to be thebeneficial owners of more than five percent of the outstanding shares of the Company’s Common Stock as ofMarch 22, 2006. The information in the table and the related notes is based on statements filed by the respectivebeneficial owners with the Securities and Exchange Commission pursuant to Sections 13(d) and 13(g) under theSecurities Exchange Act of 1934, as amended.

Name and Address of Beneficial Owner

Amount andNature of Beneficial

Ownership(1)Percent ofClass(2)

Legg Mason Funds Management, Inc. and related entities . . . . . . . . . . . . . . . . . . . .100 Light StreetBaltimore, MD 21202

20,526,188(3) 17.93%

FMR Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82 Devonshire StreetBoston, MA 02109

10,726,133(4) 9.367%

Wellington Management Company, LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 State StreetBoston, Massachusetts 02109

8,608,726(5) 7.52%

(1) Unless otherwise indicated, beneficial ownership consists of sole power to vote or direct the vote and solepower to dispose or direct the disposition of the shares listed, subject to community property laws whereapplicable.

(2) Represents the percentage of outstanding shares of Common Stock beneficially owned as set forth in thestatements on Schedule 13G filed by the respective beneficial owners with the Securities and ExchangeCommission.

(3) Based on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2006 (the“Legg Mason Schedule 13G”), by a group consisting of Legg Mason Funds Management, Inc. (“LeggMason Funds”), an investment advisor, and Legg Mason Capital Management, Inc., an investment advisor(“Legg Mason Capital”). The Legg Mason Schedule 13G reports that, of the 20,526,188 shares beneficiallyowned by the group, Legg Mason Funds has shared power to vote or direct the vote and to dispose or directthe disposition of 3,836,400 shares, and Legg Mason Capital has shared power to vote or direct the vote andto dispose or direct the disposition of 16,689,788 shares. The Legg Mason Schedule 13G indicates thatvarious accounts managed by Legg Mason Funds and Legg Mason Capital have the right to receive or thepower to direct the receipt of dividends from, or the proceeds from the sale of, the shares beneficially ownedby the group, and that the interest of one account, Legg Mason Value Trust, Inc. (“Legg Mason Trust”), aninvestment company managed by Legg Mason Funds, amounted to 10,095,363 shares, or 8.82% of the totalshares outstanding. The Legg Mason Schedule 13G states that Legg Mason Trust has shared power to voteor direct the vote and to dispose or direct the disposition of those 10,095,3630 shares.

(4) Based on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2006 byFMR Corp. FMR Corp. reported sole voting power with respect to 1,933,200 shares and sole investmentpower with respect to 10,726,133 shares. The filing identified Edward C. Johnson as having beneficialownership of shares reported in the table through his controlling interest in FMR Corp.

(5) Based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2006,Wellington Management Company, LLP (“WMC”) is an investment adviser. WMC, in its capacity asinvestment adviser, may be deemed to beneficially own the shares, all of which are held of record by clientsof WMC.

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Security Ownership of Management

The following table sets forth the number of shares of Common Stock beneficially owned by each directorof the Company serving on the Board on March 22, 2006, by each Named Executive Officer on March 22, 2006and by all directors and executive officers as a group as of March 22, 2006, and the percentage that these sharesbear to the total number of shares of Common Stock outstanding as of such date:

Name of Beneficial Owner

Amount and Natureof Beneficial

Ownership(**)Percentof Class

Theodore F. Craver, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,235(1) *Thomas T. Farley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,292(2) *Gale S. Fitzgerald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,614(3) *Patrick Foley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000(4) *Roger F. Greaves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,165(5) *Bruce G. Willison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,250(6) *Frederick C. Yeager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,665(7) *Jay M. Gellert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,185,365(8) 1.90%Jeffrey M. Folick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000(9)Anthony S. Piszel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000(10) *James E. Woys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,594(11) *B. Curtis Westen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612,341(12) *All current directors and executive officers as a group (15 persons) . . . . . . . . . . . . . . 4,205,234(13) 3.65%

* The amount shown is less than 1% of the outstanding shares.

** The information contained in this table is based upon information furnished to the Company by the personsidentified as beneficial owners or obtained from records of the Company. Unless otherwise indicated,beneficial ownership consists of sole power to vote or direct the vote and sole power to dispose or directthe disposition of the shares listed, subject to community property laws where applicable.

(1) Includes 2,843 shares with respect to which Mr. Craver has the right to acquire beneficial ownership byvirtue of outstanding vested options, and 5,342 shares with respect to which Mr. Craver has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(2) Includes 10,000 shares held by the Farley Family Trust of which Mr. Farley is a beneficiary and 10,500shares held under an individual retirement account of which Mr. Farley is a beneficiary. Also includes60,000 shares with respect to which Mr. Farley has the right to acquire beneficial ownership by virtue ofoutstanding vested options, and 7,500 shares with respect to which Mr. Farley has the right to acquirebeneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(3) Includes 26,114 shares with respect to which Ms. Fitzgerald has the right to acquire beneficial ownershipby virtue of outstanding vested options, and 7,500 shares with respect to which Ms. Fitzgerald has the rightto acquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22,2006.

(4) Consists of 55,000 shares with respect to which Mr. Foley has the right to acquire beneficial ownership byvirtue of outstanding vested options, and 7,500 shares with respect to which Mr. Foley has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(5) Includes 64,222 shares with respect to which Mr. Greaves has the right to acquire beneficial ownership byvirtue of outstanding vested options, and 7,500 shares with respect to which Mr. Greaves has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(6) Includes 7,000 shares held in the B&G Willison Living Trust of which Mr. Willison is a beneficiary. Alsoincludes 34,750 shares with respect to which Mr. Willison has the right to acquire beneficial ownership byvirtue of outstanding vested options, and 7,500 shares with respect to which Mr. Willison has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

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(7) Includes 2,843 shares with respect to which Mr. Yeager has the right to acquire beneficial ownership byvirtue of outstanding vested options, and 5,342 shares with respect to which Mr. Yeager has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(8) Includes 445,365 shares with respect to which Mr. Gellert has the right to acquire beneficial ownership byvirtue of outstanding vested options, 1,675,000 shares with respect to which Mr. Gellert has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006,and 65,000 shares of restricted stock (none of which shares of restricted stock are currently vested).

(9) Consists of 500,000 shares with respect to which Mr. Folick has the right to acquire beneficial ownershipby virtue of outstanding vested options.

(10) Consists of 60,000 shares of restricted stock (none of which shares of restricted stock are currently vested.

(11) Includes 254,500 shares with respect to which Mr. Woys has the right to acquire beneficial ownership byvirtue of outstanding vested options, 73,000 shares with respect to which Mr. Woys has the right to acquirebeneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006, and12,500 shares of restricted stock (none of which shares of restricted stock are currently vested).

(12) Includes 525,000 shares with respect to which Mr. Westen has the right to acquire beneficial ownership byvirtue of outstanding vested options, 65,000 shares with respect to which Mr. Westen has the right toacquire beneficial ownership by virtue of outstanding options that vest within 60 days of March 22, 2006.

(13) Includes an aggregate of 3,193,444 shares with respect to which executive officers or directors have theright to acquire beneficial ownership by virtue of outstanding vested options; an aggregate of 153,125shares of unvested restricted stock and an aggregate of 229,934 shares with respect to which executiveofficers or directors have the right to acquire beneficial ownership by virtue of outstanding options thatvest within 60 days of March 22, 2006.

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the Company’s directors andexecutive officers and any person that beneficially owns more than ten percent of the Company’s Common Stockare required to report their beneficial ownership and any changes in that ownership to the SEC and the NYSE.These reports are required to be submitted by specified deadlines, and the Company is required to report in thisproxy statement any failure by directors, officers and beneficial owners of more than ten percent of its CommonStock to file such reports on a timely basis during the Company’s most recent fiscal year or, in the case of such afailure that has not previously been so disclosed, prior fiscal years. Based solely on a review of the copies ofreports furnished to the Company during and with respect to the year ended December 31, 2005 and writtenrepresentations from certain of the Company’s directors and executive officers, the Company does not know ofany failure by its executive officers, directors and beneficial owners of more than ten percent of its CommonStock to file on a timely basis any reports required by Section 16(a) for the year ended December 31, 2005 and,to the extent applicable for purposes of this disclosure, prior fiscal years.

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EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information with respect to securities of the Company authorized for issuanceunder the Company’s equity compensation plans as of December 31, 2005:

(a) (b) (c)

Plan category

Number of securitiesto be issued

upon exercise ofoutstanding options,warrants and rights

Weighted-averageexercise priceof outstanding

options, warrantsand rights

Number of securities remainingavailable for future issuanceunder equity compensationplans (excluding securities

reflected in column (a))

Equity compensation plans approved bysecurity holders (1) . . . . . . . . . . . . . . . . . . . 7,779,462 $26.46 1,406,165

Equity compensation plans not approved bysecurity holders (2) . . . . . . . . . . . . . . . . . . . 4,033,188 $26.49 296,217

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,812,650 $26.47 1,702,382(3)

(1) Includes all stock option plans of the Company other than the Company’s Amended and Restated 1998Stock Option Plan (the “1998 Stock Option Plan”).

(2) The Company currently maintains one stock option plan that has not been approved by stockholders, the1998 Stock Option Plan. The following is a description of the material provisions of the 1998 Stock OptionPlan. This description is qualified in its entirety by reference to the 1998 Stock Option Plan, a copy of whichwas filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 16,2004, and amendment one thereto, a copy of which was filed as Exhibit 10.1 to the Company CurrentReport on Form 8-K filed with the SEC on March 6, 2006.

(3) Of the 1,702,382 securities available for future issuance, 907,165 of such shares are available for issuancepursuant to stock options and 795, 217 are available for issuance for full value (non-option) awards.

1998 Stock Option Plan

On December 5, 1998, the Company adopted the 1998 Stock Option Plan, which was amended and restatedon May 4, 2000, and further amended on October 13, 2000, December 18, 2000, March 14, 2002 andFebruary 26, 2006 (collectively, the “1998 Stock Option Plan” and/or the “Plan”). The purposes of the 1998Stock Option Plan are (1) to align the interests of our stockholders and recipients of awards under the plan byincreasing the proprietary interest of award recipients in our growth and success; (2) to attract and retainemployees and directors and (3) to motivate employees and directors to act in the long-term best interests of ourstockholders. The 1998 Stock Option Plan is administered by the Compensation Committee or by the Board ofDirectors. References in this summary to the Compensation Committee refer also to the Board of Directors, ifand to the extent that the Board of Directors elects to act in an administrative capacity with respect to the Plan.The terms of the Plan permit the Compensation Committee to delegate some or all of its power and authorityunder the Plan to officers of the Company.

General. The Company has reserved for issuance under the 1998 Stock Option Plan a total of 8,256,243shares of Common Stock available for awards, including 500,000 shares available for stock awards. The numberof available shares is subject to adjustment in the event of a stock split, stock dividend, recapitalization,reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similarchange in capitalization or event or any distribution to holders of common stock other than a regular cashdividend. If any award granted under the 1998 Stock Option Plan expires or is terminated for any reason, theshares of Common Stock underlying the award will again be available under the 1998 Stock Option Plan.

Awards. Under the 1998 Stock Option Plan, the Compensation Committee may grant awards consisting ofstock options and stock appreciation rights (“SARs”) and stock awards in the form of restricted stock (which mayinclude associated cash awards), restricted stock units or bonus stock to eligible employees and directors.However, no awards may be granted under the Plan to certain highly compensated officers of the Company.

• Stock options. Stock option awards under the Plan consist of stock options which are not intended toqualify as “incentive stock options” under the Internal Revenue Code of 1986, as amended. At the time

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a stock option is granted, the Compensation Committee determines the number of shares of CommonStock subject to the option, the exercise price per share of underlying Common Stock, the period duringwhich the option may be exercised and the restrictions on and conditions to exercise of the option. Theexercise price of the option per share of underlying Common Stock must be at least equal to the fairmarket value of a share of the Common Stock on the date the option is granted.

• Stock appreciation rights. The Compensation Committee may grant SARs in conjunction with aconcurrent or pre-existing stock option award. A SAR entitles the holder to receive, upon exercise of theSAR and surrender of the related stock option, shares of Common Stock, cash or a combination of stockand cash with an aggregate value equal to the product of

• the excess of (1) the fair market value of one share of Common Stock on the date of exercise over(2) the base price of the SAR,

multiplied by

• the number of shares of Common Stock subject to the surrendered stock option. The base price of aSAR is equal to the exercise price per share of the related stock option. The term, exercisability andother provisions of a SAR are fixed by the Compensation Committee.

The Compensation Committee determines the period for exercise of a SAR, provided, that, the SAR shallnot be exercised later than the expiration, cancellation, forfeiture or other termination of the related option.

• Stock awards. The Compensation Committee may award shares of the Company’s Common Stockeither as a restricted stock award, restricted stock unit award or as bonus stock that is not subject torestriction.

• Bonus Stock. Bonus stock is vested upon grant and is not subject to any restriction period, but mayhave such deferred payment or other restrictions and conditions as the Compensation Committee maydeem advisable.

• Restricted Stock. The Compensation Committee fixes the restrictions, the restriction period and thevaluation date and the price, if any, to be paid to the holder of each share of restricted stock subject tothe award. The recipient of a restricted stock award will be unable to dispose of the shares prior to theexpiration of the applicable restricted period. Unless otherwise determined by the CompensationCommittee, during the restricted period, the recipient is entitled to vote the shares and receive anyregular cash dividends on the shares. In connection with any restricted stock award, the CompensationCommittee may authorize the payment of a cash award, subject to restrictions and other terms andconditions prescribed by the Compensation Committee, to the holder of the restricted stock, payable atany time after the restricted stock becomes vested. The amount of the cash award may not exceed 100%of the average fair market value of the restricted stock as determined over a period of 60 consecutivetrading days ending on the applicable valuation date.

• Restricted Stock Units (“RSU”). An RSU is a right to receive, upon vesting, shares of Common Stock,cash or a combination thereof with a value equal to the fair market value of the Common Stock on thedate of vesting. An RSU shall be subject to forfeiture if, during the restriction period, (i) the holder doesnot remain continuously in the employment of the Company; or (ii) any specified performance measuresare not satisfied. Prior to the settlement of an RSU, the holder of such RSU has no rights as astockholder of the Company with respect to any shares subject to the award; however, the agreementevidencing the award may allow the holder of the RSU to receive, on a current or deferred basis,dividend equivalents with respect to the shares of Common Stock in which the award is denominatedand may also provide interest on, or the deemed reinvestment of, any deferred dividend equivalents.

Change in Control. In the event of a “Change in Control” (as defined in the 1998 Stock Option Plan) allstock options, RSUs and SARs outstanding under the 1998 Stock Option Plan will become immediatelyexercisable in full and the restrictions on all restricted stock awards will lapse. All awards under the Plan arerequired to be evidenced by a written agreement on terms approved by the Compensation Committee, subject to

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the provisions of the Plan. An agreement evidencing stock options, RSUs or restricted stock granted under thePlan may contain provisions limiting the acceleration of the exercisability of options and the acceleration of thelapse of restrictions on restricted stock or RSUs in connection with a Change in Control as the CompensationCommittee deems appropriate to ensure that the penalty provisions applicable to excess parachute paymentsunder the Internal Revenue Code of 1986, as amended, will not apply to any stock, cash or other propertyreceived by the award holder from the Company.

Termination of Employment or Service. In the event of the termination of employment or service as adirector of the holder of an award, other than in the event of a termination or removal for “Cause” (as definedunder the 1998 Stock Option Plan), the Compensation Committee may provide for the vesting of the holder’srestricted stock, RSUs, cash awards and stock options under the Plan. In the event an award holder is terminated(or removed from the Board of Directors) for “Cause,” all of the holder’s restricted stock, RSUs and cash awardsunder the 1998 Stock Option Plan that remain subject to restrictions will be forfeited and all of the holder’s stockoptions under the 1998 Stock Option Plan will be terminated.

Amendment and Termination. The Plan, which is subject to amendment or termination by the Board ofDirectors, will terminate automatically, unless terminated earlier by the Board of Directors, when shares of theCompany’s Common Stock are no longer available for the grant of awards under the 1998 Stock Option Plan.

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REPORT OF THE AUDIT COMMITTEE OF THEBOARD OF DIRECTORS OF HEALTH NET, INC.

The Audit Committee of the Board of Directors of Health Net, Inc. (the “Company”) is responsible formonitoring the integrity of the Company’s consolidated financial statements, its system of internal controls andthe independence and performance of its internal and independent auditors. The Audit Committee is alsoresponsible for the selection, evaluation and oversight of Company’s independent auditors. The Audit Committeeis composed of five non-employee directors and operates under a written charter adopted by the Board ofDirectors. Each Audit Committee member is independent (as defined in Section 303.01(B)(2)(a) and (3) of theNew York Stock Exchange listing standards).

Management is responsible for the financial reporting process, including establishing and maintainingadequate internal control over financial reporting, and for the preparation of consolidated financial statements inaccordance with generally accepted accounting principles. The Company’s independent auditors are responsiblefor auditing management’s assessment of the Company’s internal control over financial reporting and thefinancial statements. The Audit Committee’s responsibility is to monitor and review these processes. The AuditCommittee relies on the accuracy and completeness of the information provided to it and on the representationsmade by management and the independent auditors.

The Audit Committee held 10 meetings during the year ended December 31, 2005 and met in executivesession at each meeting. The Audit Committee reviewed and discussed with management and the independentauditors management’s assessment of internal control over financial reporting as of December 31, 2005 and theaudited consolidated financial statements of the Company for the year ended December 31, 2005. The AuditCommittee also discussed with the independent auditors the matters required to be discussed by Statement ofAuditing Standards No. 61 (Communication with Audit Committees), the standards of the Public CompanyAccounting Oversight Board and Rule 207 of Regulation S-X of the Securities Act of 1933, as amended. Inaddition, the Audit Committee received the written disclosures and the letter from the independent auditorsrequired by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees)and discussed with the independent auditors their independence from the Company and its management. TheAudit Committee also considered whether the provision of non-audit services by the auditors was compatiblewith maintaining the auditors’ independence. The Audit Committee reviewed, among other things, the amount offees paid to the independent auditors for audit and non-audit services.

Based on its review and the foregoing meetings, discussions and reports, and subject to the limitations on itsrole and responsibilities referred to above and in the Audit Committee Charter, the Audit Committeerecommended to the Board of Directors that management’s report on internal control over financial reporting asof December 31, 2005, as presented by management and audited by the Company’s independent auditors, and theaudited consolidated financial statements of the Company for the year ended December 31, 2005, as audited bythe Company’s independent auditors, each be included in the Company’s Annual Report on Form 10-K for filingwith the Securities and Exchange Commission. The Audit Committee selected the Company’s independentauditors and recommended to the Board of Directors that the Board of Directors seek stockholder ratification ofthe Company’s independent auditors.

Theodore F. Craver, Jr. (Chairman)Thomas T. FarleyGale S. FitzgeraldBruce G. WillisonFrederick C. Yeager

Dated: March 24, 2006

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PRINCIPAL INDEPENDENT REGISTERED ACCOUNTANT FEES AND SERVICES

Principal Accountant Fees and Services

The following table shows the fees (in thousands) billed to the Company by Deloitte & Touche LLP foreach of years ended December 31, 2005 and 2004.

2005 2004

Audit fees(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,880 $7,042Audit-related fees(b)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641 704

Total audit and audit-related fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,521 7,746Tax fees(c)(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 195All other fees(c)

Fees for assistance with operational initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962 1,581Total fees(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,643 $9,522

(a) Includes fees for the annual audit of the consolidated financial statements, quarterly reviews and stand-aloneaudits of regulated subsidiaries, and audit of internal controls over financial reporting.

(b) Includes fees for actuarial certifications for regulatory filings, audits of employee benefit plans and divestedsubsidiaries, Sarbanes-Oxley Act Section 404 advisory services and consultations on accounting standardsor transactions.

(c) The Audit Committee has determined that the provision of these services was compatible with maintainingthe principal accountant’s independence.

(d) Includes fees for income and sales tax planning.

(e) All such fees were approved by the Audit Committee of the Company’s Board of Directors.

Approval of Non-Audit Services

The Audit Committee approved the following non-audit services to be performed by Deloitte & ToucheLLP, our independent auditor during 2005: (1) audit related services such as (i) employee benefit plan audits,(ii) actuarial certification services (iii) due diligence, (iv) audits of unique businesses or business segments thatthe Company is considering to be part of a transaction, (v) debt and other SEC registration statement assistance,(vi) accounting and financial reporting standards consultation and (vii) comfort letters; (2) tax matter servicesrelated to tax returns, regulatory rulings, and general consultations; and (3) certain other miscellaneous non-auditservices permitted under Section 10A of the Exchange Act.

All proposed non-audit services shall be presented to the Audit Committee or its Chairman for considerationin advance of seeking approval of the proposed engagement. If such services are first presented to and approvedby the Audit Committee Chairman, the full Audit Committee will review the proposed service at its nextscheduled meeting. All non-audit services performed by our independent auditor in 2005 were pre-approved.

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PROPOSAL 2—APPROVAL OF 2006 LONG-TERM INCENTIVE PLAN

General

On recommendation of the Compensation Committee, the Board of Directors is proposing for stockholderapproval the Health Net, Inc. 2006 Long-Term Incentive Plan (the “2006 Plan”). Upon the effective date of the2006 Plan, no further awards will be granted under the terms of the Company’s 1998 Stock Option Plan and theCompany’s 2005 Long-Term Incentive Plan (the “Prior Plan”), except that the shares available for grant underthe 2006 Plan shall be increased by the amount of shares of Common Stock that are presently subject to awardsunder the Prior Plan (which shall be deemed to include shares subject to or issued pursuant to awards under theHealth Net, Inc. 2002 Stock Option Plan or the Health Net, Inc. 1997 Stock Option Plan) which remain unissuedupon the cancellation or termination of such outstanding awards.

Approval of the 2006 Plan by stockholders will also constitute approval of (i) the performance criteria uponwhich performance-based awards that are intended to be deductible by the Company may be based, and (ii) thelimits on the amount of cash and shares that may be awarded to any individual participant to comply with therequirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The followingis a description of the material provisions of the 2006 Plan. This description is qualified in its entirety byreference to the 2006 Plan itself, a copy of which is attached to this Proxy Statement as Annex B.

Description of the 2006 Plan

Purposes. The purposes of the 2006 Plan are (i) to align the interests of the Company’s stockholders andrecipients of awards under the 2006 Plan by increasing the proprietary interest of such recipients in theCompany’s growth and success, (ii) to advance the interests of the Company by attracting and retaining keyemployees and (iii) to motivate such employees to act in the long-term best interests of the Company’sstockholders. Under the 2006 Plan, the Company may grant non-qualified stock options, incentive stock options(within the meaning of Section 422 of the Code), restricted stock awards, bonus stock awards, restricted stockunit awards and performance awards. All non-employee directors of the Company and key employees andpersons expected to become key employees of the Company will be eligible to participate in the 2006 Plan.

Administration. The 2006 Plan will be administered by the Compensation Committee. Subject to theexpress provisions of the 2006 Plan, the Compensation Committee will have the authority to select eligible keyemployees who will receive awards and determine all of the terms and conditions of each award. Awards tonon-employee directors under the 2006 Plan are made by the Board of Directors. All awards will be evidenced bya written agreement containing such provisions not inconsistent with the 2006 Plan as the CompensationCommittee shall approve. The Compensation Committee will also have authority to prescribe rules andregulations for administering the 2006 Plan and to decide questions of interpretation or application of anyprovision of the 2006 Plan. Except with respect to grants to executive officers of the Company and personswhose compensation is likely to be subject to the $1 million deduction limit under Section 162(m) of the Code,and to the extent legally permissible, the Compensation Committee may delegate some or all of its power andauthority to administer the 2006 Plan to executive officers of the Company as it deems appropriate or necessary.

Section 162(m). Section 162(m) of the Code generally limits to $1 million the amount that a publicly heldcorporation is allowed each year to deduct for the compensation paid to each of the corporation’s chief executiveofficer and four most highly compensated executive officers other than the chief executive officer. However,qualified performance-based compensation is not subject to the $1 million deduction limit. Qualifiedperformance-based compensation is compensation that satisfies the following requirements: (i) the compensationis payable after the attainment of performance goals determined by a committee consisting solely of two or more“outside directors,” (ii) the material terms under which the compensation is to be paid, including the performancegoals, are approved by a majority of the corporation’s stockholders and (iii) payment is not made before thecommittee certifies that the applicable performance goals were satisfied.

The Compensation Committee may establish performance measures based on one or more of the following:the attainment by a share of Common Stock of a specified fair market value for a specified period of time; totalstockholder return over a specified period of time (which may be relative to a peer group); earnings per share;

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earnings before interest, taxes, depreciation or amortization (or any combination thereof); direct margin; expensereduction; customer satisfaction survey results; employee satisfaction survey results; member retention; netincome; operating income; revenues; profit margin; cash flow(s); financial return ratios; return on equity; andstrategic business criteria, consisting of one or more objectives based on achieving specified revenue, marketpenetration, or geographic business expansion goals, or cost targets, or goals relating to acquisitions ordivestitures, or any combination of the foregoing.

Available Shares. Under the 2006 Plan, six million seven hundred fifty thousand (6,750,000) shares ofCommon Stock are available for awards. Under the 2006 Plan, the total number of shares of Common Stockavailable for all Stock Awards (i.e., awards of restricted stock or bonus stock awards) is 350,000 shares. Thenumber of shares available for awards under the 2006 Plan (and the number and exercise price of outstandingawards) is subject to adjustment in the event of any conversion, stock split, stock dividend, recapitalization,reclassification, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off orother similar change or event. To the extent that shares of Common Stock subject to an outstanding award underthe Plan or the Prior Plan are not issued or delivered by reason of (i) the expiration, termination, cancellation orforfeiture of such award or (ii) the settlement of such award in cash, then such shares of Common Stock shallagain be available under the 2006 Plan. The maximum number of shares of Common Stock with respect to whichoptions, SARs and restricted stock, restricted stock unit awards, bonus stock awards or performance awards (orthe fair market value thereof paid in cash) may be granted during the term of the 2006 Plan to any person is3,000,000 shares, subject to adjustment as described above.

Grants of Awards. Because grants under the 2006 Plan are discretionary, the Company is not able topredict the amounts, types, or recipients of future grants. Approximately 610 employees and directors are eligibleto participate in the 2006 Plan.

Effect of Awards. The grant of any award other than a stock option will reduce the number of shares ofCommon Stock available for issuance under the 2006 Plan by two (2) shares of Common Stock for each suchshare actually subject to the award and shall be deemed, for purposes of the shares available under the 2006 Plan,as an award of two (2) shares of Common Stock for each such share actually (or nominally) subject to the award.The grant of a stock option will be deemed, for purposes of 2006 Plan, as an award of one share of CommonStock for each such share actually subject to the award, and the exercise of a stock option shall be treated as anissuance of the full number of shares of Common Stock subject to the exercised portion of the stock option. Inthe event that an award expires, terminates, is cancelled or forfeited, the number of shares of Common Stockdeemed subject to such award shall again be available under the 2006 Plan.

Change in Control. In the event of a “Change in Control” (as defined in the 2006 Plan), (i) all outstandingoptions and SARs will be exercisable in full, (ii) the restriction period applicable to any outstanding restrictedstock award or restricted stock unit award shall lapse, (iii) the performance period applicable to any outstandingperformance award shall lapse and (iv) the performance measures applicable to any outstanding award shall bedeemed satisfied, as determined by the Board of Directors, at the minimum, target or maximum level, except asotherwise provided in the applicable agreement evidencing such award.

Effective Date, Termination and Amendment. If approved by stockholders at the Annual Meeting, the 2006Plan will become effective as of the date of such approval, and will terminate ten years thereafter, unlessterminated earlier by the Board of Directors. The Board of Directors may amend the 2006 Plan at any time,subject to any requirement of stockholder approval required by applicable law, rule or regulation and providedthat no amendment may be made without stockholder approval if such amendment would, among other things,(i) increase the maximum number of shares of Common Stock available under the 2006 Plan, (ii) effect anychange inconsistent with Section 422 of the Code or (iii) extend the term of the 2006 Plan.

Stock Options—General. The Compensation Committee will determine the conditions to the exercisabilityof an option. Upon exercise of an option, including an incentive stock option, the purchase price may be paid incash, by delivery of previously acquired shares of Common Stock, by withholding shares otherwise deliverableupon exercise or, to the extent legally permissible, by delivery of an irrevocable notice of exercise to a brokeracceptable to the Company.

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Non-Qualified Stock Options and Stock Appreciation Rights. The period for the exercise of a non-qualifiedstock option, including the period during which a non-qualified stock option is exercisable following terminationof employment, will be determined by the Compensation Committee. The exercise price of a non-qualified stockoption will not be less than the fair market value of the Common Stock on the date of grant of such option.

Incentive Stock Options. No incentive stock option will be exercisable more than ten years after its date ofgrant, except that if the recipient of the incentive stock option owns more than ten percent of the voting power ofall shares of capital stock of the Company (a “ten percent holder”), such incentive stock option will beexercisable for no more than five years after its date of grant. The exercise price of an incentive stock option willnot be less than the fair market value of the Common Stock on the date of grant of such option, except that if therecipient of the incentive stock option is a ten percent holder, the exercise price will not be less than 110% of thefair market value of the Common Stock on the date of grant of such option.

In the event of the termination of an optionee’s employment by reason of death or permanent and totaldisability (as defined in Section 22(e)(3) of the Code), incentive stock options will be exercisable to the extentexercisable on the date of termination for a period of one year after such termination (or such shorter period asspecified by the Compensation Committee in the option agreement), but in no event after the expiration of theincentive stock option. In the event of the termination of an optionee’s employment for any other reason,incentive stock options will be exercisable to the extent exercisable on the date of termination for a period ofthree months after such termination, but in no event after the expiration of the incentive stock option. If theholder of an incentive stock option dies during the applicable exercise period following termination ofemployment, such incentive stock option will be exercisable only to the extent such option was exercisable onthe date of the holder’s death, and may thereafter be exercised for a period of one year (or such shorter period asspecified by the Compensation Committee in the option agreement), but in no event after expiration of theincentive stock option.

Bonus Stock and Restricted Stock Awards. The 2006 Plan provides for the grant of stock awards which arevested upon grant (“bonus stock”), and stock awards which may be subject to a restriction period (“restrictedstock”). Shares of restricted stock are non-transferable and, as determined by the Compensation Committee,subject to forfeiture if, during the restriction period, (i) the holder does not remain continuously in theemployment of the Company; (ii) specified performance measures are not satisfied or (iii) the holder does notsatisfy any other applicable conditions. All terms relating to the termination of the restriction period, or thecancellation or forfeiture of a restricted stock award upon the termination of employment of a holder of suchaward shall be determined by the Compensation Committee. Unless otherwise determined by the CompensationCommittee, the holder of a restricted stock award will have rights as a stockholder of the Company, including theright to vote and receive dividends or distributions with respect to the shares of restricted stock.

Restricted Stock Unit Awards. The 2006 Plan provides for the grant of restricted stock unit awards(“RSU”). An RSU is a right to receive, upon vesting, shares of Common Stock, cash or a combination thereofwith a value equal to the fair market value of the Common Stock on the date of vesting. An RSU shall be subjectto forfeiture if, during the restriction period, (i) the holder does not remain continuously in the employment of theCompany; (ii) specified performance measures are not satisfied or (iii) the holder does not satisfy any otherapplicable conditions. Prior to the settlement of an RSU award, the holder of such RSU has no rights as astockholder of the Company with respect to the shares subject to the award; however, the agreement evidencingthe award may allow the holder of the RSU to receive, on a current or deferred basis, dividend equivalents withrespect to the shares of Common Stock subject to the award and may also provide interest on, or the deemedreinvestment of, any deferred dividend equivalents.

Performance Awards. The 2006 Plan provides for the grant of performance awards. A performance awardis a right, contingent upon the attainment of performance measures within a specified performance period, toreceive shares of Common Stock or cash of a specified amount. The number of shares of Common Stock subjectto the performance award, the applicable performance measures and the performance period will be determinedby the Compensation Committee. All terms relating to the vesting and forfeiture of such award upon thesatisfaction of, or to failure satisfy, the performance measures shall be determined by the CompensationCommittee.

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New Plan Benefits

Awards under the 2006 Plan are made in the discretion of the Compensation Committee. Accordingly, ingeneral, future awards under the 2006 Plan are not determinable at this time.

Market Price of Common Stock

As of March 22, 2006, the fair market value of the Common Stock was $50.08 per share, based on theclosing price of the Common Stock as reported by the NYSE.

Federal Income Tax Consequences

The following is a brief discussion of the federal income tax consequences of awards made under the 2006Plan, as proposed, and is based on present federal tax laws and regulations. The following does not purport to bea complete description of the federal income tax laws and should not be relied upon as such. The following doesnot address the state, local or other tax consequences of awards made under the 2006 Plan.

Stock Options. A participant will not recognize any income upon the grant of an option. A participant willrecognize compensation taxable as ordinary income (and subject to income tax withholding) upon exercise of anon-qualified stock option equal to the excess of the fair market value on the date of exercise of the sharespurchased over their exercise price, and the Company generally will be entitled to a corresponding deduction. Aparticipant will not recognize taxable income (except for purposes of the alternative minimum tax) upon exerciseof an incentive stock option. If the shares acquired by exercise of an incentive stock option are held for the longerof two years from the date the option was granted and one year from the date the shares were transferred to theparticipant, any gain or loss arising from a subsequent disposition of such shares will be taxed as long-termcapital gain or loss, and the Company will not be entitled to any deduction. If, however, such shares are disposedof within one of the above-described periods, then the participant will recognize ordinary income, and theCompany generally will be entitled to a corresponding deduction, in an amount equal to the excess of the lesserof (i) the amount realized upon such disposition and (ii) the fair market value of such shares on the date ofexercise over the exercise price. Any further gain or loss arising from the disposition of such shares will be taxedas long-term or short-term capital gain or loss, and the Company will not be entitled to any deduction.

Restricted Stock. A participant will not recognize any income at the time of the grant of a restricted stockaward, and the Company will not be entitled to a tax deduction at such time, unless the participant makes anelection to be taxed at the time the restricted stock is granted. If such election is not made, the participant willrecognize compensation taxable as ordinary income (and subject to income tax withholding) at the time therestrictions lapse in an amount equal to the excess of the fair market value of the shares at such time over theamount, if any, paid for such shares. The amount of ordinary income recognized by a participant generally isdeductible by the Company. In addition, a participant receiving dividends with respect to restricted stock forwhich the above-described election has not been made and prior to the time the restrictions lapse will recognizecompensation taxable as ordinary income (and subject to tax withholding), rather than dividend income, in anamount equal to the dividends paid, and the Company generally will be entitled to a corresponding deduction.

Bonus Stock. A participant receiving bonus stock will recognize compensation taxable as ordinary income(and subject to income tax withholding) at the time the bonus stock is awarded in an amount equal to the then fairmarket value of such stock. This amount generally is deductible by the Company as a compensation expense.

Restricted Stock Units. A participant will not recognize any income at the time of the grant of an RSU andthe Company will not be entitled to a tax deduction at such time. The participant will recognize compensationtaxable as ordinary income (and subject to income tax withholding) at the time the restrictions lapse in an amountequal to the fair market value of the shares delivered and cash paid by the Company, and the Company generallywill be entitled to a corresponding deduction.

Performance Awards. A participant will not recognize any income at the time of the grant of aperformance award, and the Company will not be entitled to a tax deduction at such time. Upon the settlement ofthe performance award in shares of Common Stock, cash or a combination of both, the participant will recognize

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compensation taxable as ordinary income (and subject to income tax withholding) in an amount equal to the fairmarket value of the shares delivered and cash paid by the Company, and the Company generally will be entitledto a corresponding deduction. If a performance award is settled in shares of restricted stock, the tax consequencesassociated with such restricted stock shall be determined in accordance with above section titled “RestrictedStock.”

Compensation payable with respect to awards under the 2006 Plan is eligible to be granted in a manner so asnot to be subject to the deduction limit under Section 162(m) of the Code to the extent such awards are granted asa result of, or contain restrictions based on, the attainment of performance measures. However, compensationunder the 2006 Plan, such as that payable with respect to awards that are not granted as a result of, or do notcontain restrictions based on, the attainment of performance measures generally is expected to be subject to suchlimit.

A participant should consult his or her own tax advisor with respect to the specific federal, state, localand other tax consequences of participation in the 2006 Plan.

The affirmative vote of a majority of the votes cast on this proposal will constitute approval of the HealthNet, Inc. 2006 Long-Term Incentive Plan, provided that the total vote cast on the proposal represents over 50% ininterest of all securities entitled to vote on the proposal. For purposes of the vote on the 2006 Plan, an abstentionor broker non-vote will have the effect of a vote against the proposal, unless holders of more than 50% in interestof all of the outstanding shares of Common Stock entitled to vote on the proposal cast votes, in which event anabstention or broker non-vote will have no effect on the result of the vote.

The Board of Directors recommends a vote FOR Proposal 2to approve the Health Net, Inc. 2006 Long-Term Incentive Plan.

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PROPOSAL 3—RATIFICATION OF SELECTION OFINDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

The Audit Committee of the Board of Directors of the Company has selected Deloitte & Touche LLP toaudit the consolidated financial statements of the Company and its subsidiaries for the fiscal year endingDecember 31, 2006. Deloitte & Touche LLP has served in this capacity since June 3, 1994. Representatives ofDeloitte & Touche LLP are expected to be present at the Annual Meeting and will be available to respond toappropriate questions of stockholders and to make a statement if they desire.

The Board of Directors is submitting the ratification of the selection of Deloitte & Touche LLP tostockholders as a matter of good corporate practice, although it is not required to do so. Should the stockholdersfail to provide such ratification, the Board of Directors will reconsider its approval of Deloitte & Touche LLP asthe Company’s independent registered public accountants for the year ending December 31, 2006. Even if theselection is ratified, the Board of Directors, in its discretion, may direct the appointment of a new independentaccounting firm at any time during the fiscal year if the Board of Directors feels that such a change would be inthe best interests of the Company and its stockholders.

The affirmative vote of a majority of the votes cast on this proposal will constitute ratification of theselection of Deloitte & Touche LLP as the Company’s independent public accountants. Abstentions and brokernon-votes will not be counted as votes cast and will have no effect on the vote to ratify the selection ofDeloitte & Touche LLP.

The Board of Directors recommends a vote FOR Proposal 3to ratify the selection of Deloitte & Touche LLP as the Company’s

independent registered public accountants.

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REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF DIRECTOR CANDIDATERECOMMENDATIONS BY STOCKHOLDERS, NOMINATIONS OF DIRECTOR CANDIDATES BY

STOCKHOLDERS AND STOCKHOLDER PROPOSALS

Stockholder Recommendations of Director Candidates. To have a director candidate considered by theGovernance Committee for inclusion on the slate of nominees, a stockholder must submit the recommendation inwriting and must include the following information:

• the name and record address of the stockholder;

• evidence of number of shares of the Company’s Common Stock which are owned beneficially or ofrecord by the stockholder and the length of time owned;

• the name of the candidate, the candidate’s resume or a listing of his or her qualifications to be a directorof the Company; and

• the candidate’s signed consent to be named as a director if selected by the Governance Committee andnominated by the Board of Directors.

The stockholder’s recommendation and information described above must be sent to the Company’sSecretary at 21650 Oxnard Street, Woodland Hills, California 91367 and received by the Secretary not less than120 days prior to the anniversary date of the Company’s most recent annual meeting of stockholders.

Stockholder Nominations of Director Candidates. The Company expects to hold its 2007 Annual Meetingof Stockholders in May 2007, although the Company may determine to hold the meeting at another time.Nominations of director candidates by stockholders must be in proper written form and otherwise comply withthe notice procedures set forth in the Company’s bylaws. To be timely, a stockholder’s nomination must bedelivered to or mailed and received by the Company’s Secretary at 21650 Oxnard Street, Woodland Hills,California 91367 no earlier than January 11, 2007 or later than February 10, 2007, provided that, in the event thatthe 2007 Annual Meeting of Stockholders is called for a date that is earlier than April 16, 2007 or later thanJune 5, 2007, the stockholder’s director nomination, to be timely, must be received not later than the close ofbusiness on the tenth day following the day on which the Company’s notice of the date of the 2007 AnnualMeeting of Stockholders was mailed or public disclosure was made, whichever first occurs.

Stockholder Proposals. Any stockholder that wishes to submit a written proposal for consideration at theCompany’s 2007 Annual Meeting of Stockholders should address such proposal to the Company’s Secretary at21650 Oxnard Street, Woodland Hills, California 91367. To be in proper written form, a stockholder writtenproposal must set forth as to each matter the stockholder proposes to bring before the 2007 Annual Meeting ofStockholders:

• the name and record address of the stockholder;

• the class or series and number of shares of stock of the Company which are owned beneficially or ofrecord by the stockholder;

• a brief description of the business desired to be brought before the 2007 Annual Meeting ofStockholders and the reasons for conducting such business at the 2007 Annual Meeting of Stockholders;

• a description of all arrangements or understandings between the stockholder and any other person orpersons (including their names) in connection with the proposal of such business by the Stockholder andany material interest of the Stockholder in such business; and

• a representation that the stockholder intends to appear in person or by proxy at the 2007 Annual Meetingto bring such business before the meeting.

In order to be included in proxy materials for the Company’s 2007 Annual Meeting of Stockholderspursuant to Rule 14a-8 under the Exchange Act, a stockholder proposal must be received by the Company byDecember 6, 2007. For a stockholder proposal to be considered timely, the stockholder proposal must be receivedby the Company’s Secretary no earlier than January 11, 2007 or later than February 10, 2007, provided that, inthe event that the 2007 Annual Meeting of Stockholders is called for a date that is earlier than April 16, 2007 or

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later than June 5, 2007, the stockholder proposal, to be timely, must be received not later than the close ofbusiness on the tenth day following the day on which the Company’s notice of the date of the 2007 AnnualMeeting of Stockholders was mailed or public disclosure was made, whichever first occurs.

COMMUNICATION WITH DIRECTORS

Communications with Directors. The Board of Directors has established a process to receivecommunications from stockholders and other interested parties (collectively, “Interested Parties”). InterestedParties may contact any member (or all members) of the Board by mail. To communicate with the Board ofDirectors, any individual director, or any group or committee of directors, correspondence should be addressed tothe Board of Directors or any such individual director or group or committee of directors by either name or title.All such correspondence should be sent “c/o Company Secretary” at 21650 Oxnard Street, Woodland Hills,California 91367. In addition, it is Company policy that each of our directors attend the Annual Meeting. All ofour current directors were in attendance at the 2005 Annual Meeting.

All communications received as set forth in the preceding paragraph will be opened by the office of theCompany’s General Counsel for the sole purpose of determining whether the contents represent a message to theCompany’s directors. Any contents that are not in the nature of advertising, promotions of a product or service,or patently offensive material will be forwarded promptly to the addressee. In the case of communications to theBoard or any group or committee of directors, the General Counsel’s office will make sufficient copies of thecontents to send to each director who is a member of the group or committee to which the envelope is addressed.

Upon written request by any stockholder, the Company will provide without charge a copy of theCompany’s Annual Report on Form 10-K and/or proxy statement for the Company’s most recent fiscalyear, including the financial statements and the financial statement schedules required to be filed with theSEC. Such written requests should be directed to David W. Olson, Senior Vice President of InvestorRelations, Health Net, Inc., 21650 Oxnard Street, Woodland Hills, California 91367.

OTHER MATTERS

The Board of Directors knows of no other business that will be presented for consideration at the 2006Annual Meeting of Stockholders. If other matters are properly brought before the meeting, however, it is theintention of the persons named in the accompanying proxy to vote the shares represented thereby on such mattersin accordance with their best judgment.

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ANNEX A

CHARTER OF THE AUDIT COMMITTEEOF THE BOARD OF DIRECTORS OF

HEALTH NET, INC.AS AMENDED AND RESTATED ON DECEMBER 12, 2005

Purpose

The purpose of the Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Health Net,Inc. (“Health Net” or the “Company”) is to (a) assist the Board’s oversight of (i) the integrity of Health Net’sfinancial statements, (ii) Health Net’s compliance with legal and regulatory requirements, (iii) Health Net’sindependent auditors’ qualifications and independence, and (iv) the performance of Health Net’s independentauditors and Health Net’s internal audit function and (b) prepare the report required to be prepared by theCommittee pursuant to the rules of the Securities and Exchange Commission (the “SEC”) for inclusion in HealthNet’s annual proxy statement.

Membership

The Committee shall consist of three or more members, all of whom shall be appointed by the Board after theBoard’s review of the recommendations of Health Net’s Governance Committee (the “Governance Committee”)with respect thereto.

Each member of the Committee (a) must be financially literate, as such qualification is interpreted by the Boardin its business judgment, (b) must be independent of Health Net management and Health Net’s independentauditors, in accordance with the standards that may be applicable to the Committee from time to time, including,but not limited to, the standards set forth in the New York Stock Exchange Listed Company Manual and anyadditional requirements that the Board deems appropriate, and (c) must otherwise be qualified to serve on theCommittee pursuant to such standards. At least one member of the Committee must be determined by the Board,in the exercise of its business judgment, to have accounting or related financial management expertise.

No director may serve as a member of the Committee if such director serves on the audit committee of more thantwo other public companies, unless the Board determines that such simultaneous service would not impair theability of such director to effectively serve on the Committee. Any such determination must be disclosed inHealth Net’s annual proxy statement.

Each member of the Committee shall be appointed to a one-year term, and may be re-appointed annuallythereafter as deemed appropriate by the Board, after the Board’s review of the recommendations of theGovernance Committee with respect thereto, so long as such member continues to meet the membershiprequirements. Any vacancy on the Committee shall be filled by majority vote of the Board. No member of theCommittee shall be removed except by majority vote of the Board. On an annual basis, one member of theCommittee shall be designated as the Chairman of the Committee by the Board after the Board’s review of therecommendations of the Governance Committee with respect thereto. If the Chairman of the Committee is notpresent at a meeting, the Committee may designate an acting Chairman for such meeting.

Meetings

The Committee shall meet as often as it deems necessary to fulfill its responsibilities, but no less frequently thanonce every fiscal quarter. The presence of a majority of the existing members of the Committee at each meetingshall constitute a quorum. A majority of members, but not less than two, present and voting shall approve issuesrequiring a vote. Telephonic attendance by any member at a meeting is specifically authorized, provided thatappropriate equipment is used in order that each member of the Committee can hear one another. Additionally, asnecessary, the Committee may request that members of Health Net management, the Health Net corporate

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internal auditor and representatives of the independent auditor be present at Committee meetings. The Committeeshould meet separately on a periodic basis with Health Net’s (a) management, (b) person or persons responsiblefor internal audit and (c) independent auditors, in each case to discuss any matters that the Committee or any ofthe above persons or firms believe warrant Committee attention. Minutes of each Committee meeting are to beprepared by a person designated by the Committee and approved by the Committee members and a copy thereofprovided to the Board.

Duties and Responsibilities

In carrying out its duties and responsibilities, the Committee’s policies and procedures should remain flexible, sothat it may be in a position to best address, react or respond to changing circumstances or conditions. Thefollowing duties and responsibilities are within the authority of the Committee and the Committee shall,consistent with and subject to applicable law and rules and regulations promulgated by the SEC, NYSE, or anyother applicable regulatory authority:

Selection, Evaluation and Oversight of the Independent Auditors

1. Be directly responsible for the appointment, compensation, retention, termination and oversight of thework of any registered public accounting firm engaged for the purpose of preparing or issuing an auditreport or performing other audit, review or attest services for Health Net, and each such registeredpublic accounting firm must report directly to the Committee (the registered public accounting firmengaged for the purpose of preparing or issuing an audit report for inclusion in Health Net’s AnnualReport on Form 10-K is referred to herein as the “independent auditors”);

2. Review and, in its sole discretion, approve in advance Health Net’s independent auditors’ annualengagement letter, including the proposed fees contained therein, as well as all audit and, as providedin the Act and the SEC rules and regulations promulgated thereunder, all permitted non-auditengagements and relationships between Health Net and such independent auditors (which approvalshould be made after receiving input from Health Net’s management, if desired). Approval of audit andpermitted non-audit services will be made by the Committee or by one or more members of theCommittee as shall be designated by the Committee or the Chairman of the Committee, and theperson(s) granting such approval shall report such approval to the Committee at the next scheduledmeeting;

3. Review the performance of Health Net’s independent auditors, including the lead partner of theindependent auditors;

4. Obtain at least annually from Health Net’s independent auditors and review a report describing:

(a) the independent auditors’ internal quality-control procedures;

(b) any material issues raised by the most recent internal quality-control review, or peer review, of theindependent auditors, or by any inquiry or investigation by any governmental or professionalauthority, within the preceding five years, respecting one or more independent audits carried outby the independent auditors, and any steps taken to deal with any such issues; and

(c) all relationships between the independent auditors and Health Net (including a description of eachcategory of services provided by the independent auditors to Health Net and a list of the feesbilled for each such category);

5. Evaluate the independence of Health Net’s independent auditors.

6. Present to the Board its conclusions with respect to the matters referenced in the preceding paragraphs(3), (4) and (5).

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7. Establish clear hiring policies by Health Net for employees or former employees of Health Net’sindependent auditors.

Oversight of Annual Audit and Quarterly Reviews

8. Review and discuss with the independent auditors their annual audit plan, including the timing andscope of audit activities, and monitor such plan’s progress and results during the year; the Committee’sreview and discussion should explore the independent auditors’ consideration and evaluation of factorsrelevant to determining the scope of audit activities, including:

(a) specific risk characteristics of Health Net;

(b) external reporting requirements;

(c) the materiality of various segments of Health Net’s combined activities;

(d) the quality of internal accounting, administrative and compliance controls;

(e) the extent of the internal auditor’s involvement in the audit examination; and

(f) other areas to be covered during the audit engagement;

9. Review with management and Health Net’s independent auditors information which is required to bereported by the independent auditor under applicable SEC rules and regulations;

10. Meet to review and discuss with management and Health Net’s independent auditors Health Net’sannual audited financial statements and quarterly financial statements, including Health Net’s specificdisclosures under “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and any major issues related thereto, the review of which should include a determinationby the Committee that Health Net’s financial statements constitute a full and meaningful report toHealth Net’s stockholders and creditors;

11. Review with management and Health Net’s independent auditors the following:

(a) significant transactions not a normal part of Health Net’s operations;

(b) significant adjustments proposed or passed on by the independent auditors;

(c) the process used by management in formulating particularly sensitive accounting estimates andthe independent auditors’ conclusions regarding reasonableness of those estimates;

(d) significant issues concerning litigation, contingencies, claims or assessments and all materialaccounting issues that require disclosure in the financial statements;

(e) major issues regarding accounting principles and financial statements presentations, including anysignificant changes in Health Net’s selection or application of accounting principles;

(f) any analyses prepared by management and/or the independent auditors setting forth significantfinancial reporting issues and judgments made in connection with the preparation of the financialstatements, including analyses of the effects of alternative generally accepted accountingprinciples methods on Health Net’s financial statements;

(g) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on thefinancial statements of Health Net; and

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(h) the type and presentation of information to be included in Health Net’s earnings press releases(especially the use of “pro forma” or “adjusted” information not prepared in compliance withgenerally accepted accounting principles), as well as financial information and earnings guidanceprovided by Health Net to analysts and rating agencies (which review may be done generally (i.e.,discussion of the types of information to be disclosed and type of presentations to be made), andthe Committee need not discuss in advance each earnings release or each instance in which HealthNet may provide earnings guidance);

12. Review and resolve all disagreements between Health Net’s independent auditors and managementregarding financial reporting; and

13. Review on a regular basis with Health Net’s independent auditors any problems or difficultiesencountered by the independent auditors in the course of any audit work, including management’sresponse with respect thereto, any restrictions on the scope of the independent auditor’s activities or onaccess to requested information, and any significant disagreements with management.

Oversight of the Financial Reporting Process and Internal Controls

14. Review:

(a) the adequacy and effectiveness of Health Net’s accounting and internal control policies andprocedures on a regular basis, including the responsibilities, budget and staffing of Health Net’sinternal audit function, through inquiry and discussions with Health Net’s independent auditorsand management ;

(b) the yearly report prepared by management, and attested to by Health Net’s independent auditors,assessing the effectiveness of Health Net’s internal control over financial reporting and statingmanagement’s responsibility for establishing and maintaining adequate internal control overfinancial reporting prior to its inclusion in Health Net’s Annual Report on Form 10-K;

(c) the Committee’s level of involvement and interaction with Health Net’s internal audit function,including the Committee’s line of authority and role in appointing and compensating employees inthe internal audit function;

(d) the services provided by Health Net’s internal audit function, which review should consider(i) results of prior period corporate internal audit activities and any related follow-up actions,(ii) the status of ongoing internal audit projects and activities, (iii) the relationship between HealthNet’s internal audit department and the independent auditors and (iv) management’s actions withrespect to appointment, promotion and/or termination of Health Net’s lead internal auditor; and

(e) the controls that management has established to protect the integrity of the quarterly reportingprocess, including the adequacy of management controls over expense reimbursement of thePresident and Chief Executive Officer and the chief operating officer.

15. Discuss guidelines and policies governing the process by which senior management of Health Net andthe relevant departments of Health Net, including the internal auditing department, assess and manageHealth Net’s exposure to risk, as well as Health Net’s major financial risk exposures and the stepsmanagement has taken to monitor and control such exposures;

16. Review with management the progress and results of all internal audit projects, and, when deemednecessary or appropriate by the Committee, assign, or direct the President and Chief Executive Officeror chief financial officer to assign, additional internal audit projects to Health Net’s internal auditingdepartment;

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17. Review with management Health Net’s administrative, operational and accounting internal controls,including any special audit steps adopted in light of the discovery of material control deficiencies;

18. Receive periodic reports from Health Net’s independent auditors, management and Health Net’sinternal auditing department to assess the impact on Health Net of significant accounting or financialreporting developments that may have a bearing on Health Net;

19. Review with management and the independent auditors instances where management has obtained“second opinions” on the independent audit or on accounting and financial reporting policies fromother certified public accountants or other financial accounting advisors that must be reported underapplicable disclosure rules;

20. Discuss with the independent auditors the quality of Health Net’s financial and accounting personneland any recommendations that the independent auditors may have (which discussion may cover,among other topics, improving internal financial controls, controls over accounting and financialcompliance, the selection of accounting principles and management reporting systems);

21. Review and monitor compliance with governmental laws, regulations and undertakings;

Miscellaneous

22. Meet periodically with the general counsel, and outside counsel when appropriate, to review legal andregulatory matters, including (a) any matters that may have a material impact on the financialstatements of Health Net and (b) any matters involving potential or ongoing material violations of lawor breaches of fiduciary duty by Health Net or any of its directors, officers, employees or agents orbreaches of fiduciary duty to Health Net;

23. Prepare the report required by the rules of the SEC to be included in Health Net’s annual proxystatement;

24. Review Health Net’s policies relating to the ethical handling of conflicts of interest and review past orproposed transactions between Health Net and members of management as well as policies andprocedures with respect to officers’ expense accounts and perquisites, including the use of corporateassets. The Committee shall consider the results of any review of these policies and procedures byHealth Net’s independent auditors;

25. (a) Obtain reports regarding the performance of Health Net’s program to monitor compliance withHealth Net’s Code of Business Conduct, (b) make all necessary inquiries of management, Health Net’sinternal audit function and the independent auditors concerning established standards of conduct andperformance, and deviations therefrom (which inquiries in respect of management other than thePresident and Chief Executive Officer shall be made through the President and Chief ExecutiveOfficer, and which inquiries in respect of the President and Chief Executive Officer shall be madethrough the Board), (c) review reports on final actions taken under the Code of Business Conduct andon types and categories of pending matters under the Code of Business Conduct and (d) meetperiodically with Health Net’s Compliance Officer to discuss compliance with the Code of BusinessConduct;

26. Establish procedures for (a) the receipt, retention and treatment of complaints received by Health Netregarding accounting, internal accounting controls or auditing matters, and (b) the confidential,anonymous submission by employees of Health Net of concerns regarding questionable accounting orauditing matters;

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27. Establish procedures for the receipt, retention and treatment of reports of evidence of a materialviolation made by attorneys appearing and practicing before the SEC in the representation of HealthNet or any of its subsidiaries, or reports made by Health Net’s chief executive officer or generalcounsel in relation thereto;

28. As requested by the Board from time to time, review with management significant financial mattersaffecting Health Net, whether or not related to a review of the quarterly or annual financial statements(which reviews may include, among other things, discussion of such matters as Health Net’s interimoperating results versus planned results, management’s plan regarding Health Net’s businesscombination strategies, regulatory audit results or Health Net’s capital financing alternatives);

29. Review the audit results of audits conducted by governmental and regulatory agencies (e.g., InternalRevenue Service, Centers for Medicare & Medicaid Services, Department of Managed Health Care andvarious State Department(s) of Insurance) and external auditors engaged for specific purposes;

30. Report regularly to the Board on its activities, as appropriate. In connection therewith, the Committeeshould review with the Board any issues that arise with respect to the quality or integrity of HealthNet’s financial statements, Health Net’s compliance with legal or regulatory requirements, theperformance and independence of Health Net’s independent auditors, or the performance of the internalaudit function; and

31. Perform such additional activities, and consider such other matters, within the scope of itsresponsibilities, as the Committee or the Board deems necessary or appropriate.

Evaluation of the Committee and its Charter

The Committee shall, on an annual basis and in coordination with the Governance Committee, evaluate itsperformance with respect to the requirements set forth in this Charter. The evaluation shall address all mattersthat the Committee considers relevant to its performance, including a review and assessment of the adequacy ofthis Charter, and shall be conducted in such manner as the Committee deems appropriate.

The Committee shall deliver to the Board a report, which may be oral, setting forth the results of its evaluation,including any recommended amendments to this Charter.

Investigations and Studies; Outside Advisors

The Committee may secure independent expert advice to the extent the Committee determines it to beappropriate, including retaining, with or without Board approval, independent counsel, accountants, consultantsor others, to assist the Committee in fulfilling its duties and responsibilities, the cost of such independent expertadvisors to be borne by Health Net.

Resources and Authority; Publication of Charter

The Committee shall be given the resources and authority necessary to carry out its duties and responsibilities asset forth in this Charter. The Company must provide for appropriate funding, as determined by the Committee inits capacity as a committee of the Board, for payment of (a) compensation to the independent auditor,(b) compensation to any advisers employed by the Company as set forth in the preceding paragraph and(c) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

The Company shall make this Charter available on its website at www.healthnet.com

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While the Committee has the duties and responsibilities set forth in this Charter, the Committee is not responsiblefor preparing or certifying the financial statements, for planning or conducting the audit or for determiningwhether Health Net’s financial statements are complete and accurate and are in accordance with generallyaccepted accounting principles.

In fulfilling their responsibilities hereunder, it is recognized that members of the Committee are not full-timeemployees of Health Net, it is not the duty or responsibility of the Committee or its members to conduct “fieldwork” or other types of auditing or accounting reviews or procedures or to set auditor independence standards,and each member of the Committee shall be entitled to rely on (a) the integrity of those persons andorganizations within and outside Health Net from which it receives information and (b) the accuracy of thefinancial and other information provided to the Committee, in either instance absent actual knowledge to thecontrary.

Nothing contained in this charter is intended to create, or should be construed as creating, any responsibility orliability of the members of the Committee, except to the extent otherwise provided under the applicable laws ofthe State of Delaware which shall continue to set the legal standard for the conduct of the members of theCommittee.

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ANNEX B

HEALTH NET, INC.2006 LONG-TERM INCENTIVE PLAN

I. INTRODUCTION

The purposes of the Health Net, Inc. 2006 Long-Term Incentive Plan (the “Plan”) are to (i) align theinterests of the stockholders of Health Net, Inc., a Delaware corporation (the “Company”), and the recipients ofawards under the Plan by increasing the proprietary interest of such recipients in the Company’s growth andsuccess, (ii) advance the interests of the Company by attracting and retaining directors and key employees of theCompany and its subsidiaries and (iii) motivate such directors and employees to act in the long-term bestinterests of the Company’s stockholders.

II. DEFINITIONS

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

“Agreement” shall mean the written instrument evidencing an award hereunder between the Company andthe recipient of such award.

“Board” shall mean the Board of Directors of the Company.

“Bonus Stock” shall mean shares of Common Stock which are not subject to a Restriction Period at thetime of grant.

“Bonus Stock Award” shall mean an award of Bonus Stock.

“Cause” shall have the meaning set forth in Section 8.10(b).

“Change in Control” shall, unless otherwise determined by the Committee, have the meaning set forth inSection 8.9(a).

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

“Committee” shall mean the Compensation Committee of the Board or a subcommittee thereof that, ineach case, consists solely of two or more members of the Board of Directors who each qualify as an “outsidedirector” within the meaning of Section 162(m) of the Code, a “nonemployee director” within the meaning ofRule 16b-3 promulgated under the Exchange Act and an “independent director” within the meaning of the NewYork Stock Exchange Listed Company Manual.

“Common Stock” shall mean the Common Stock, $.001 par value, of the Company and any other equitysecurity into which the Common Stock is converted by reason of a recapitalization, reclassification,reorganization, merger, consolidation, combination, exchange of shares or other similar change in capitalizationor similar event.

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

“Disability” shall mean the termination of employment or service of a Participant due to such individual’sinability, as determined solely by the Committee, to perform substantially such holder’s duties andresponsibilities for a continuous period of at least six months, provided, however, that in the case of awardswhich are subject to the provisions of section 409A of the Code, the existence of Disability shall be determinedin accordance with such section and the regulations and guidance promulgated thereunder from time to time.

“Employer” shall mean the Company or any Subsidiary.

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

“Fair Market Value” shall mean the closing price of a share of Common Stock as reported in The WallStreet Journal on the New York Stock Exchange Composite Transactions list for the date as of which such valueis being determined or, if there shall be no reported transaction for such date or if such date is not a trading day,on the next immediately preceding date for which a transaction was reported or which was a trading day;provided, however, that if Fair Market Value for any date cannot be so determined, Fair Market Value shall bedetermined by the Committee by whatever means or method as the Committee, in the good faith exercise of itsdiscretion, shall at such time deem appropriate.

“Incentive Stock Option” shall mean an option to purchase shares of Common Stock that meets therequirements of section 422 of the Code, or any successor provision, and which is intended by the Committee toconstitute, and designated as, an Incentive Stock Option.

“Mature Shares” shall mean previously acquired shares of Common Stock for which the holder thereof hasgood title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least sixmonths (or such shorter period as the Committee may permit, provided that the Company will not be required torecognize any increased compensation expense under applicable accounting principles in connection with itsreceipt of such shares hereunder) or (ii) has purchased on the open market.

“Merger” shall mean any merger of the Company in which the holders of Common Stock immediatelyprior to the merger have the same proportionate ownership of common stock of the surviving or resulting parentcorporation immediately after the merger.

“Nonqualified Stock Option” shall mean an option to purchase shares of Common Stock which is not anIncentive Stock Option.

“Participants” shall mean those individuals described in Section 3.1.

“Performance Measures” shall mean the criteria and objectives, established by the Committee, which shallbe satisfied or met (i) as a condition to the grant or exercisability of all or a portion of an option, (ii) as acondition to the grant of a Stock Award or a Restricted Stock Unit Award or (iii) during the applicableRestriction Period or Performance Period as a condition to the holder’s receipt, in the case of a Restricted StockAward, of the shares of Common Stock subject to such award, or, in the case of a Restricted Stock Unit Award ora Performance Award, of the shares of Common Stock subject to such award or the cash amount payable withrespect to such award. To the extent necessary for an award to be qualified performance-based compensationunder section 162(m) of the Code, such criteria and objectives shall include one or more of the following: theattainment by a share of Common Stock of a specified Fair Market Value for a specified period of time; totalshareholder return over a specified period of time (which may be relative to a peer group); earnings per share;earnings before interest, taxes, depreciation or amortization (or any combination thereof); direct margin; expensereduction; customer satisfaction survey results; employee satisfaction survey results; member retention; netincome; operating income; revenues; profit margin; cash flow(s); financial return ratios; return on equity; andstrategic business criteria, consisting of one or more objectives based on achieving specified revenue, marketpenetration, or geographic business expansion goals, or cost targets, or goals relating to acquisitions ordivestitures, or any combination of the foregoing. Each such goal may be expressed on an absolute or relativebasis and may include comparisons based on current internal targets, the past performance of the Company(including the performance of one or more subsidiaries, divisions, or operating units) or the past or currentperformance of other companies (or a combination of such past and current performance). In the case ofearnings-based measures, performance goals may include comparisons relating to capital (including, but limitedto, the cost of capital), shareholders’ equity, shares outstanding, assets or net assets, or any combination thereof.Performance goals shall be subject to such other special rules and conditions as the Committee may establish atany time within the Performance Period. The Performance Measures for any given Performance Period shall bedetermined in accordance with generally accepted accounting principles (“GAAP”) and in a manner consistent

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with the methods used in the Company’s audited financial statements, without regard to (i) extraordinary items asdetermined by the Company’s independent public accountants in accordance with GAAP or (ii) changes inaccounting, unless, in each case, the Committee decides otherwise within the Performance Period. If theCommittee desires that compensation payable pursuant to any award subject to Performance Measures bequalified performance-based compensation within the meaning of Section 162(m) of the Code, the PerformanceMeasures (i) shall be established in writing by the Committee no later than 90 days after the beginning of thePerformance Period or Restriction Period, as applicable (or such other time designated by the Internal RevenueService) and (ii) shall satisfy all other applicable requirements imposed under Treasury Regulations promulgatedunder Section 162(m) of the Code, including the requirement that such Performance Measures be stated in termsof an objective formula or standard. Subject to Section 162(m) of the Code with respect to an award that isintended to be qualified performance-based compensation, the Committee, in its sole discretion, may amend oradjust the Performance Measures or other terms and conditions of an outstanding award in recognition of unusualor nonrecurring events affecting the Company or its financial statements or changes in law or accountingprinciples.

“Performance Period” shall mean any period designated by the Committee during which the PerformanceMeasures applicable to a Performance Award shall be measured.

“Performance Award” shall mean a right, contingent upon the attainment of specified PerformanceMeasures within a specified Performance Period, to receive payment in cash or in shares of Common Stock of aspecified amount.

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

“Restricted Stock Award” shall mean an award of Restricted Stock.

“Restricted Stock Unit” shall mean a right which entitles the holder thereof to receive, upon vesting,shares of Common Stock, cash, or a combination thereof, with an aggregate valve equal to the Fair Market Valueof one share of Common Stock on the date of vesting. Restricted Stock Units may or may not be granted withdividend equivalent rights.

“Restricted Stock Unit Award” shall mean an award of Restricted Stock Units.

“Restriction Period” shall mean any period designated by the Committee during which (i) Common Stocksubject to a Restricted Stock Award shall not be sold, transferred, assigned, pledged, hypothecated or otherwiseencumbered or disposed of, except as provided in the Plan or the Agreement relating to such award or (ii) therestrictions applicable to a Restricted Stock Unit Award shall remain in effect.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Stock Award” shall mean a Restricted Stock Award or a Bonus Stock Award.

“Subsidiary” shall mean any corporation other than the Company in an unbroken chain of corporationsbeginning with the Company if, at the time of reference, each of the corporations other than the last corporationin the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classesof stock in one of the other corporations in such chain.

“Tax Date” shall have the meaning set forth in Section 8.6.

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

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III. ELIGIBILITY AND ADMINISTRATION

3.1 Eligibility. Participants in the Plan shall consist of non-employee directors of the Company andsuch key employees and persons expected to become key employees (“Participants”) of an Employer as theCommittee in its sole discretion may select from time to time. The Board or Committee’s selection of anindividual to participate in the Plan at any time shall not require the Board or Committee to select suchindividual to participate in the Plan at any other time. For purposes hereof, a non-employee director shall bea member of the Board who is not an employee of the Company or any of its Subsidiaries.

3.2 Administration. (a) In General. The Plan shall be administered by the Committee. The Committeemay grant to Participants any one or a combination of the following awards under the Plan: (i) options topurchase shares of Common Stock in the form of Incentive Stock Options or Nonqualified Stock Options,(ii) Stock Awards in the form of Restricted Stock or Bonus Stock, (iii) Restricted Stock Unit Awards and(iv) Performance Awards. The Committee shall, subject to the terms of the Plan, select Participants forparticipation in the Plan and determine the form, amount and timing of each award to such individuals and,if applicable, the number of shares of Common Stock, the number of Restricted Stock Units subject to suchan award, the exercise price or base price associated with the award, the time and conditions of exercise orsettlement of the award and all other terms and conditions of the award, including, without limitation, theform of the Agreement evidencing the award. The Committee may, in its sole discretion and for any reasonat any time, subject to the requirements imposed under Section 162(m) of the Code and regulationspromulgated thereunder in the case of an award intended to be qualified performance-based compensation,take action with respect to an award such that (i) any or all outstanding options shall become exercisable inpart or in full, (ii) all or a portion of the Restriction Period applicable to any outstanding Restricted StockAward or Restricted Stock Unit Award shall lapse, (iii) all or a portion of the Performance Period applicableto any outstanding Performance Award shall lapse, and (iv) the Performance Measures applicable to anyoutstanding award (if any) shall be deemed to be satisfied at the maximum or any other level. TheCommittee shall, subject to the terms of the Plan, interpret the Plan and the application thereof, establishrules and regulations it deems necessary or desirable for the administration of the Plan, make anydeterminations necessary or desirable to effectuate the purposes of the Plan and may impose, incidental tothe grant of an award, conditions with respect to the award, such as limiting competitive employment orother activities. All such interpretations, rules, regulations, determinations and conditions shall be final,binding and conclusive. Notwithstanding anything in the Plan to the contrary, the functions of theCommittee as set forth herein shall be performed by the Board with respect to Participants who arenon-employee directors.

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

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

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3.3 Shares Available. Subject to Section 3.5 and subject to adjustment as provided in Section 8.8,6,750,000 shares of Common Stock shall be available under the Plan, which number shall be increased by theamount of shares of Common Stock that are presently subject to awards under the Health Net, Inc. 2005 Long-Term Incentive Plan (which shall be deemed to include shares subject to or issued pursuant to awards under theHealth Net, Inc. 2002 Stock Option Plan or the Health Net, Inc. 1997 Stock Option Plan) which remain unissuedupon the cancellation or termination of such award. To the extent that shares of Common Stock subject to anoutstanding award under this Plan are not issued or delivered by reason of the (i) expiration, termination,cancellation or forfeiture of such award or (ii) the settlement of such award in cash, then such shares of CommonStock shall again be available under the Plan. Subject to adjustment as provided in Section 8.8, the total numberof shares of Common Stock available under this Plan for Incentive Stock Option Awards shall not exceed350,000 shares of Common Stock. Shares of Common Stock shall be made available from authorized andunissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held astreasury shares or otherwise or a combination thereof. For the avoidance of doubt, shares of Common Stockactually or constructively (i.e., by attestation) tendered by a Participant in satisfaction of the Participant’sexercise price or tax obligations shall not be made available again for issuance under the Plan.

3.4 Individual Limitation. Subject to the provisions of Section 8.8, the total number of shares of CommonStock subject to awards (including awards which may be payable in cash but denominated as shares of CommonStock), awarded to any Participant shall not exceed 3,000,000 shares during the term of the Plan.

3.5 Effect of Awards. The grant of any award other than an Option shall, for purposes of Section 3.3,reduce the number of shares of Common Stock available for issuance under the Plan by two (2) shares ofCommon Stock for each such share actually subject to the award and shall be deemed, for purposes ofSection 3.4, as an award of two (2) shares of Common Stock for each such share actually (or nominally) subjectto the award. The grant of an Option shall be deemed, for purposes of Sections 3.3 and 3.4, as an Award of oneshare of Common Stock for each such share actually subject to the award, and the exercise of an Option shall betreated for purposes of Section 3.3 as an issuance of the full number of shares of Common Stock subject to theOption. In the event that an award expires, terminates, is cancelled or forfeited, the number of shares of CommonStock deemed subject to such award under this Section 3.5 shall again become available under the Plan.

IV. STOCK OPTIONS

4.1 Stock Options. The Committee may, in its discretion, grant options to purchase shares of CommonStock to such Participants as may be selected by the Committee. Each option, or portion thereof, that is not anIncentive Stock Option, shall be a Nonqualified Stock Option. Each Incentive Stock Option shall be grantedwithin ten years of the date this Plan is approved by the Company’s shareholders. To the extent that the aggregateFair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which optionsdesignated as Incentive Stock Options are exercisable for the first time by an option holder during any calendaryear (under the Plan or any other plan of the Company or any subsidiary corporation as defined in section 424 ofthe Code and the regulations thereunder) exceeds $100,000 (or any other applicable dollar limitation establishedunder the federal tax laws), such options shall constitute Nonqualified Stock Options.

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

(a) Number of Shares and Purchase Price. The number of shares of Common Stock subject to anoption and the purchase price per share of Common Stock purchasable upon exercise of the option shall bedetermined by the Committee; provided, however, that the purchase price per share of Common Stockpurchasable upon exercise of an option shall not be less than 100% of the Fair Market Value of a share ofCommon Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shallbe granted to an employee who, at the time such option is granted, owns capital stock possessing more thanten percent of the total combined voting power of all classes of capital stock of the Company (or of any

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subsidiary corporation as defined in section 424 of the Code and the regulations thereunder) (a “Ten PercentHolder”), then the purchase price per share of Common Stock shall not be less than the price (currently110% of Fair Market Value) required under the Code in order to constitute an Incentive Stock Option.

(b) Exercise Period and Exercisability. The period during which an option may be exercised shall bedetermined by the Committee; provided, however, that no Incentive Stock Option or Nonqualified StockOption shall be exercised later than ten years after its date of grant; provided further, that if an IncentiveStock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than fiveyears after its date of grant. The Committee may, in its discretion, establish Performance Measures whichmust be satisfied as a condition either to a grant of an option or to the exercisability of all or a portion of anoption. The Committee shall determine whether an option shall become exercisable in cumulative ornoncumulative installments and in part or in full at any time. An exercisable option, or portion thereof, maybe exercised only with respect to whole shares of Common Stock.

(c) Method of Exercise. An option may be exercised (i) by giving written notice to the Companyspecifying the number of whole shares of Common Stock to be purchased and accompanied by paymenttherefore in full (or arrangement made for such payment to the Company’s satisfaction) either (A) in cash,(B) by delivery (either actual delivery or by attestation procedures established by the Company) of MatureShares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregatepurchase price payable by reason of such exercise, (C) authorizing the Company to withhold whole sharesof Stock which would otherwise be delivered having a Fair Market Value, determined as of the date ofexercise, equal to the amount necessary to satisfy such obligation, provided that the Committee determinesthat such withholding of shares does not cause the Company to recognize an increased compensationexpense under applicable accounting principles, (D) to the extent legally permissible, in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or(E) a combination of (A), (B) and (C), in each case, except as otherwise set forth in the Agreement relatingto the option and (ii) by executing such documents and taking any other actions as the Company mayreasonably request. Cash payments shall be made by wire transfer, certified or bank check or personalcheck, in each case payable to the order of the Company. Any fraction of a share of Common Stock whichwould be required to pay such purchase price shall be disregarded and the remaining amount due shall bepaid in cash by the optionee. The Company shall not be required to deliver certificates representing sharesof Common Stock until the Company has confirmed the receipt of good and available funds in payment ofthe full purchase price therefor and any withholding taxes thereon, as described in Section 8.6.

4.3 Termination of Employment or Service.

(a) In General. Subject to Sections 8.10 and paragraph 4.5(b) below in the case of an Incentive StockOption, all of the terms relating to the exercise, cancellation or other disposition of an option in the event theholder of such option is no longer employed by an Employer (or, in the case of a non-employee director,ceases to serve on the Board), whether by reason of Permanent and Total Disability, retirement, death orother termination of employment or service, shall be determined by the Committee. Such determinationshall be made at the time of the grant of such option and shall be specified in the Agreement relating to suchoption.

(b) Incentive Stock Options. Each Incentive Stock Option held by an optionee who ceases to beemployed by any Employer by reason of Permanent and Total Disability or death shall be exercisable onlyto the extent that such option is exercisable on the date of such optionee’s termination of employment. In thecase of the optionee’s Permanent and Total Disability, the option may thereafter be exercised by suchoptionee (or such optionee’s legal representative or similar person) for a period of one year (or such shorterperiod as the Committee may specify in the Agreement) after the effective date of such optionee’stermination of employment by reason of Permanent and Total Disability or until the expiration of the termof such Incentive Stock Option, whichever period is shorter. In the case of the optionee’s death, the optionmay thereafter be exercised by the beneficiary or beneficiaries duly designated by the optionee or, if none,

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the executor or administrator of the optionee’s estate or, if none, the person to whom the optionee’s rightsunder such option shall pass by will or by the applicable laws of descent and distribution for a period of oneyear (or such other period as the Committee may specify in the Agreement) after the date of such optionee’sdeath or until the expiration of the term of such Incentive Stock Option, whichever period is shorter.

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

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

(e) Notwithstanding anything in the Plan to the contrary, no option issued under the Plan may berepriced, regranted through cancellation or otherwise amended in each case to reduce the exercise priceapplicable thereto (other than with respect to adjustments made in connection with a change in theCompany’s capitalization or in connection with a corporate transaction) without the approval of theCompany’s stockholders.

V. STOCK AWARDS

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

5.2 Terms of Stock Awards. Stock Awards shall be subject to the following terms and conditions and shallcontain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shalldeem advisable, including such terms as the Committee may determine with respect to dividends payable inrespect of shares of Common Stock subject to such Stock Award.

(a) Number of Shares and Other Terms. The Committee shall determine the number of shares ofCommon Stock subject to a Restricted Stock Award or Bonus Stock Award. The Committee may determinethat the grant of a Stock Award is contingent upon the satisfaction of one or more Performance Measures. Inthe case of a Restricted Stock Award, the Committee shall determine the price, if any, to be paid by theholder for each share of Restricted Stock subject to the award.

(b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock Award shall provide, in themanner determined by the Committee, in its discretion, and subject to the provisions of the Plan, (i) for thevesting of the shares of Common Stock subject to such award (x) if specified Performance Measures aresatisfied during the specified Restriction Period or (y) if the holder of such award remains continuously inthe employment of any one or more Employers through the specified Restriction Period and satisfies anyother applicable conditions and (ii) for the forfeiture of all or a portion the shares of Common Stock subjectto such award (v) if specified Performance Measures are not satisfied during the specified Restriction Period

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or (w) the holder of such award does not remain continuously in the employment of any one or moreEmployers through the specified Restriction Period or does not satisfy any other applicable conditions.Bonus Stock Awards shall not be subject to any Restriction Periods.

(c) Share Certificates. During the Restriction Period, at the Company’s sole discretion, the shares ofCommon Stock subject to a Restricted Stock Award either (i) shall be held be the Company in book entryform, with the restrictions on the shares duly noted, or (ii) shall be represented by a certificate or certificatesregistered in the holder’s name, which may bear a legend, in addition to any legend which may be requiredpursuant to Section 8.7, indicating that the ownership of the shares of Common Stock represented by suchcertificate is subject to the restrictions, terms and conditions of the Plan and the Agreement relating to theRestricted Stock Award. All such certificates shall be deposited with the Company or its agent, togetherwith stock powers or other instruments of assignment (including a power of attorney), each endorsed inblank with a guarantee of signature if deemed necessary or appropriate by the Company, which wouldpermit transfer to the Company of all or a portion of the shares of Common Stock subject to the RestrictedStock Award in the event such award is forfeited in whole or in part. Upon termination of any applicableRestriction Period (and the satisfaction or attainment of any applicable conditions), or upon the grant of aBonus Stock Award, in each case subject to the Company’s right to require payment of any taxes inaccordance with Section 8.6, either (i) a certificate or certificates evidencing ownership of the requisitenumber of shares of Common Stock shall be delivered to the holder of such award or (ii) a notation ofnoncertificated shares shall be made on the stock records of the Company.

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

5.3 Termination of Employment or Service. Subject to Section 8.10, all of the terms relating to thetermination of the Restriction Period or other conditions relating to a Restricted Stock Award, or any cancellationor forfeiture of such Restricted Stock Award in the event the holder of such Restricted Stock Award is no longeremployed by an Employer (or, in the case of a non-employee director, ceases to serve on the Board), whether byreason of Disability, retirement, death or other termination of employment or service, shall be specified in theAgreement relating to such Restricted Stock Award.

VI. RESTRICTED STOCK UNIT AWARDS

6.1 Restricted Stock Unit Awards. The Committee may, in its discretion, grant Restricted Stock UnitAwards to such Participants as may be selected by the Committee. Each Restricted Stock Unit shall contain termsand conditions with comply with the provisions of Section 409A of the Code and shall be interpreted in a mannerso as to comply with such section.

6.2 Terms of Restricted Stock Unit Awards. Restricted Stock Unit Awards shall be subject to the followingterms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms ofthe Plan, as the Committee shall deem advisable.

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(a) Number of Restricted Stock Units and Other Terms. The Committee shall determine the numberof Restricted Stock Units subject to a Restricted Stock Unit Award and the Performance Measures (if any)and Restriction Period applicable to a Restricted Stock Unit Award.

(b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock Unit Award shall provide,in the manner determined by the Committee, in its discretion, and subject to the provisions of the Plan,(i) for the vesting of such award (w) if specified Performance Measures are satisfied or met during thespecified Restriction Period or (x) if the holder of such award remains continuously in the employment of orservice to the Company during the specified Restriction Period and (ii) for the forfeiture of such award (y) ifspecified Performance Measures are not satisfied or met during the specified Restriction Period or (z) if theholder of such award does not remain continuously in the employment of or service to the Company duringthe specified Restriction Period.

(c) Settlement of Vested Restricted Stock Unit Awards. The Agreement relating to a Restricted StockUnit Award (i) shall specify whether such award may be settled in shares of Common Stock or cash or acombination thereof and (ii) may specify whether the holder thereof shall be entitled to receive, on a currentor deferred basis, dividend equivalents, and, if determined by the Committee, interest on or the deemedreinvestment of, any deferred dividend equivalents, with respect to the number of shares of Common Stocksubject to such award. Prior to the settlement of a Restricted Stock Unit Award in shares of Common Stock,the holder of such award shall have no rights as a stockholder of the Company with respect to the shares ofCommon Stock subject to such award.

6.3 Termination of Employment or Service. Subject to Section 8.10, all of the terms relating to thetermination of a Restricted Stock Unit Award, or any cancellation or forfeiture of such Restricted Stock UnitAward in the event the holder of such Restricted Stock Unit Award is no longer employed by an Employer (or, inthe case of a non-employee director, ceases to serve on the Board), whether by reason of Disability, retirement,death or other termination of employment or service, shall be specified in the Agreement relating to suchRestricted Stock Unit Award.

VII. PERFORMANCE AWARDS

7.1 Performance Awards. The Committee may, in its discretion, grant Performance Awards to suchParticipants as may be selected by the Committee.

7.2 Terms of Performance Awards. Performance Awards shall be subject to the following terms andconditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, asthe Committee shall deem advisable.

(a) Amount of Performance Award, Performance Measures and Performance Period. The Committeeshall determine the amount of a Performance Award and the Performance Measures and Performance Periodapplicable to such award.

(b) Vesting and Forfeiture. The Agreement relating to a Performance Award shall provide, in themanner determined by the Committee, in its discretion, and subject to the provisions of the Plan, for thevesting of such award, if specified Performance Measures are satisfied or met during the specifiedPerformance Period, and for the forfeiture of such award, if specified Performance Measures are notsatisfied or met during the specified Performance Period.

(c) Settlement of Vested Performance Awards. The Agreement relating to a Performance Award(i) shall specify whether such award may be settled in shares of Common Stock (including shares ofRestricted Stock) or cash or a combination thereof and (ii) may specify whether the holder thereof shall beentitled to receive, on a current or deferred basis, dividend equivalents, and, if determined by theCommittee, interest on or the deemed reinvestment of, any deferred dividend equivalents, with respect to the

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number of shares of Common Stock subject to such award. Prior to the settlement of a Performance Awardin shares of Common Stock, the holder of such award shall have no rights as a stockholder of the Companywith respect to the shares of Common Stock subject to such award.

7.3 Termination of Employment or Service. Subject to Section 8.10, all of the terms relating to thetermination of a Performance Award, or any cancellation or forfeiture of such Performance Award in the eventthe holder of such Performance Award is no longer employed by an Employer (or, in the case of a non-employeedirector, ceases to serve on the Board), whether by reason of Disability, retirement, death or other termination ofemployment or service, shall be specified in the Agreement relating to such Performance Award.

VIII. GENERAL

8.1 Effective Date and Term of Plan. This Plan shall be submitted to the stockholders of the Company forapproval and, if approved by the affirmative vote of a majority of the shares of Common Stock present in personor represented by proxy at the 2006 annual meeting of stockholders, provided that, the total vote cast on theamended and restated Plan represents over 50% in interest of all securities entitled to vote on the amended andrestated Plan, shall become effective on the date of such meeting. The Plan shall terminate ten years after itseffective date, unless terminated earlier by the Board. Termination of the Plan shall not affect the terms orconditions of any award granted prior to termination.

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

8.2 Amendments. The Board may amend the Plan as it shall deem advisable, subject to any requirement ofstockholder approval required by applicable law, rule or regulation, including Section 162(m) and Section 422 ofthe Code; provided, however, that no amendment shall be made without stockholder approval if required byapplicable law or the rules of any exchange on which the Common Stock is listed. No amendment may impairthe rights of a holder of an outstanding award without the consent of such holder.

8.3 Agreement. Each award under the Plan shall be evidenced by an Agreement setting forth the terms andconditions applicable to such award. No award shall be valid until an Agreement is executed by a duly authorizedrepresentative of the Company and the recipient of such award. Each award under the Plan shall be subject toforfeiture if the Agreement evidencing such award is not executed by the recipient and delivered to the Company.An Agreement may be modified or amended at any time by the Committee, provided that no modification oramendment may adversely affect the rights of the holder of the award evidenced by the Agreement without theholder’s consent.

8.4 Designation of Beneficiaries. Each Participant may designate a beneficiary or beneficiaries withrespect to each of his or her awards by executing and filing with the Company during his or her lifetime a writtenbeneficiary designation on a form prescribed by the Committee. The Participant may change or revoke any suchdesignation by executing and filing with the Company during his or her lifetime a new beneficiary designation. Ifall designated beneficiaries predecease the individual or, in the case of corporations, partnerships, trusts or otherentities which are designated beneficiaries, are terminated, dissolved, become insolvent or are adjudicatedbankrupt prior to the date of the individual’s death, or if the individual fails to designate a beneficiary, then thefollowing persons in the order set forth below shall be the individual’s beneficiaries:

(i) Participant’s spouse, if living; or if none,

(ii) Participant’s then living descendants, per stirpes; or if none,

(iii) Participant’s estate.

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8.5 Transferability of Awards. No Incentive Stock Option shall be transferable other than pursuant to abeneficiary designation effective on the optionee’s death. No other award shall be transferable other than(a) pursuant to a beneficiary designation effective on the holder’s death or (b) as permitted by the Committee,provided, however, that in no event shall an award be transferred to a third party for consideration. Each optionmay be exercised during the optionee’s or holder’s lifetime only by the optionee or holder (or the optionee’s orholder’s legal representative). Except as permitted by the preceding sentences, no award may be sold, transferred,assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law orotherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign,pledge, hypothecate, encumber or otherwise dispose of any award, such an award and all rights thereunder shallimmediately become null and void.

8.6 Tax Withholding. The Company shall have the right to require, prior to the issuance or delivery of anyshares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by theholder of such award of any federal, state, local or other taxes which may be required to be withheld or paid inconnection with such award. The holder may satisfy any such obligation by any of the following means: (A) acash payment to the Company, (B) authorizing the Company to withhold whole shares of Common Stock whichwould otherwise be delivered having an aggregate Fair Market Value, determined as of the date the obligation towithhold or pay taxes arises in connection with the award (the “Tax Date”), or withhold an amount of cash whichwould otherwise be payable to a holder, equal to the minimum amount necessary to satisfy any such obligation,(C) by delivery (either actual delivery or by attestation procedures established by the Company) of shares ofCommon Stock having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amountnecessary to satisfy any such obligation, (D) in the case of the exercise of an option, to the extent legallypermissable, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submittedan irrevocable notice of exercise or (E) a combination of (A), (B) and (C); in each case, except as otherwise setforth in the Agreement relating to the award. Shares of Common Stock to be delivered or withheld may not havean aggregate Fair Market Value in excess of the amount determined by applying the minimum statutorywithholding rate. Any fraction of a share of Common Stock which would be required to satisfy such anobligation shall be disregarded and the remaining amount due shall be paid in cash by the holder.

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

8.8 Adjustment. In the event of any conversion, stock split, stock dividend, recapitalization,reclassification, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off orother similar change in capitalization or event, or any distribution to holders of Common Stock other than aregular cash dividend, the number and class of securities available under the Plan, the maximum number ofsecurities with respect to which options or Restricted Stock Awards, Restricted Stock Unit Awards orPerformance Awards, may be granted during any calendar year to any individual, the number and class ofsecurities subject to each outstanding option and the purchase price per security, the maximum number ofsecurities with respect to which Stock Awards or options may be granted during any calendar year to any person,the terms of each outstanding option, the terms of each outstanding Restricted Stock Award, Restricted StockUnit Award, and Performance Award, and the number and class of securities subject to each outstanding StockAward and Restricted Stock Unit Award shall be appropriately adjusted by the Committee, such adjustments tobe made in the case of outstanding options without an increase in the aggregate purchase price or base price. The

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decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any suchadjustment would result in a fractional security being (a) available under the Plan, such fractional security shallbe disregarded, or (b) subject to an award under the Plan, the Company shall pay the holder of such award, inconnection with the first vesting, exercise or settlement of such award in whole or in part occurring after suchadjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearesthundredth) by (ii) the excess, if any, of (A) the Fair Market Value on such vesting, exercise or settlement dateover (B) the exercise or base price, if any, of such award.

8.9 Acceleration of Awards.

Notwithstanding any provision in the Plan, upon the occurrence of a Change in Control, as defined below,(i) all outstanding options shall immediately become exercisable in full, (ii) the Restriction Period applicable toany outstanding Restricted Stock Award or Restricted Stock Unit Award shall lapse, (iii) the Performance Periodapplicable to any outstanding Performance Award shall lapse, (iv) the Performance Measures applicable to anyoutstanding award shall be deemed satisfied, as determined by the Board, at the minimum, target or maximumlevel, except as otherwise provided in the applicable Agreement.

(a) Definition of Change in Control. Unless otherwise determined by the Committee, a “Change inControl” shall mean:

(i) Consummated Transaction. Consummation of (A) any consolidation or merger of theCompany in which the Company is not the continuing or surviving corporation or pursuant to whichshares of Common Stock are converted into cash, securities or other property, other than a Merger, or(B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) ofall, or substantially all, of the assets of the Company, or (C) the liquidation or dissolution of theCompany;

(ii) Control Purchase. The purchase by any person (as such term is defined in Sections 13(d)(3)and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or anyemployee benefit plan sponsored by an Employer) of any Common Stock of the Company (orsecurities convertible into the Company’s Common Stock) for cash, securities or any otherconsideration pursuant to a tender offer or exchange offer, without the prior consent of the Board and,after such purchase, such person shall be the “beneficial owner” (as such term is defined in Rule 13d-3under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent ormore of the combined voting power of the then outstanding securities of the Company ordinarily (andapart from rights accruing under special circumstances) having the right to vote in the election ofdirectors (calculated as provided in Section (d) of such Rule 13d-3 in the case of rights to acquire theCompany’s securities);

(iii) Board Change. A change in the composition of the Board during any period of twoconsecutive years, such that individuals who at the beginning of such period constitute the entire Boardshall cease for any reason to constitute a majority thereof unless the election, or the nomination forelection by the Company’s stockholders, of each new director was approved by a vote of at leasttwo-thirds of the directors then still in office who were directors at the beginning of the period; orOther Transactions. The occurrence of such other transactions involving a significant issuance ofvoting stock or change in the composition of the Board that the Board determines to be a Change inControl for purposes of the Plan.

(iv) Other Transactions. The occurrence of such other transactions involving a significantissuance of voting stock or change in the composition of the Board that the Board determines to be aChange in Control for purposes of the Plan.

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The Agreement evidencing options or Restricted Stock granted under the Plan may contain such provisionslimiting the acceleration of the exercisability of options and the acceleration of the vesting of Restricted Stock asprovided in this Section as the Committee deems appropriate to ensure that the penalty provisions ofSection 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to anystock, cash or other property received by the holder from the Company.

8.10 Termination of Employment or Service.

(a) Acceleration of Exercisability or Vesting. Notwithstanding any provisions to the contrary in anAgreement, if the employment or service of the holder of an award shall terminate for any reason(including, without limitation, the holder’s death, Permanent and Total Disability, retirement, resignation orvoluntary termination other than for Cause (as defined in subsection (b) hereof) as determined by theCommittee in its sole discretion), the Committee may determine the following, subject to such action notcausing a violation of Section 409A of the Code:

(i) All of the terms relating to the satisfaction of Performance Measures shall be deemed to besatisfied and any Restriction Period applicable to any Restricted Stock Award shall be deemed to haveexpired upon the holder’s termination of employment or service, and all Restricted Stock subject tosuch award shall become vested;

(ii) Any option shall become exercisable in full upon the holder’s termination of employment orservice; and

(iii) All of the terms relating to the satisfaction of Performance Measures and the termination ofthe Performance Period relating to a Performance Award shall be deemed to be satisfied.

(b) Termination By Company For Cause. If the employment or service of a holder of a PerformanceAward, Restricted Stock Award or Restricted Stock Unit Award shall terminate for Cause, then allPerformance Awards, Restricted Stock Awards and Restricted Stock Unit Awards shall be forfeitedimmediately on the effective date of such holder’s termination of employment or service. If the employmentor service of a holder of an option shall terminate for Cause, all options held by such holder shallimmediately terminate and be canceled on the effective date of such holder’s termination of employment orservice. For purposes of this Section 8.10, “Cause” shall have the meaning ascribed thereto in anyemployment agreement to which such holder is a party or, in the absence thereof, shall include, but not belimited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind andthe refusal to perform his or her duties and responsibilities for any reason other than illness or incapacity;provided, however, “Cause” shall mean only a felony conviction for fraud, misappropriation orembezzlement, regardless of whether the holder has an employment agreement with an Employer, if theholder’s employment termination occurs within 12 months after a Consummated Transaction, ControlPurchase or Board Change (as such events are described in Section 8.9(a)); provided, however, that withrespect to non-employee directors Cause shall mean removal by the Company’s stockholders for cause.

(c) General. For purposes of the Plan, a leave of absence, unless otherwise determined by theCommittee prior to the commencement thereof, shall not be considered a termination of employment.Awards made under the Plan shall not be affected by any change of employment so long as the holdercontinues to be an employee of an Employer.

8.11 No Right of Participation or Employment. No person shall have any right to participate in the Plan.Neither the Plan nor any award made hereunder shall confer upon any person any right to continued employmentby any Employer or service as a director or affect in any manner the right of an Employer to terminate theemployment of any person at any time without liability hereunder.

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

8.13 Section 409A Compliance. Awards under the Plan are intended to comply with Section 409A of theCode and all awards shall be interpreted in accordance with such section and Department of Treasury regulationsand other interpretive guidance issued thereunder, including without limitation any such regulations or otherguidance that may be issued after the effective date of the Plan. Notwithstanding any provision of the Plan or anyAgreement to the contrary, in the event that the Committee determines that any award may or does not complywith Section 409A of the Code, the Company may adopt such amendments to the Plan and the affected Award(without Participant consent) or adopt other policies and procedures (including amendments, policies andprocedures with retroactive effect), or take any other actions, that the Committee determines are necessary orappropriate to (i) exempt any award from the application of Section 409A of the Code and/or preserve theintended tax treatment of the benefits provided with respect to award, or (ii) comply with the requirements ofSection 409A of the Code.

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

8.15 Governing Law. The Plan, each award hereunder and the related Agreement, and all determinationsmade and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of theUnited States, shall be governed by the laws of the State of Delaware and construed in accordance therewithwithout giving effect to principles of conflicts of laws.

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