Document:

Exhibit
10.2

SECURITIES PURCHASE
AGREEMENT

among

UNIVERSAL AMERICAN
FINANCIAL CORP.

and

THE SEVERAL INVESTORS
PARTY HERETO

Dated as of May 7, 2007

TABLE OF CONTENTS

	
  

  	
   

  	
  Page

  
	
  ARTICLE 1

  	
  CERTAIN DEFINITIONS

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section 1.1

  	
  Certain Definitions

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section 1.2

  	
  Interpretive Provision

  	
  10

  
	
   

  	
   

  	
   

  
	
  ARTICLE 2

  	
  ISSUANCE AND PURCHASE OF CONVERTIBLE SHARES

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section 2.1

  	
  Issuance and Purchase of Convertible Shares

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section 2.2

  	
  Deliveries

  	
  11

  
	
   

  	
   

  	
   

  
	
  Section 2.3

  	
  Closing

  	
  11

  
	
   

  	
   

  	
   

  
	
  ARTICLE 3

  	
  INVESTOR REPRESENTATIONS AND WARRANTIES

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 3.1

  	
  Organization, Good Standing, Qualification and Power

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 3.2

  	
  Authority; Execution and Delivery; Enforceability

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 3.3

  	
  Non-contravention

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 3.4

  	
  Consents

  	
  12

  
	
   

  	
   

  	
   

  
	
  Section 3.5

  	
  Information Supplied

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section 3.6

  	
  Brokers

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section 3.7

  	
  Acquisition for Investment

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section 3.8

  	
  Disclosure of Information

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section 3.9

  	
  Restricted Securities

  	
  13

  
	
   

  	
   

  	
   

  
	
  ARTICLE 4

  	
  REPRESENTATIONS AND WARRANTIES OF PARENT

  	
  14

  
	
   

  	
   

  	
   

  
	
  Section 4.1

  	
  Organization, Good Standing, Qualification and Power

  	
  14

  
	
   

  	
   

  	
   

  
	
  Section 4.2

  	
  Authority; Execution and Delivery; Enforceability

  	
  14

  
	
   

  	
   

  	
   

  
	
  Section 4.3

  	
  Non-contravention

  	
  15

  
	
   

  	
   

  	
   

  
	
  Section 4.4

  	
  Consents

  	
  15

  
	
   

  	
   

  	
   

  
	
  Section 4.5

  	
  Capitalization of Parent; Parent Subsidiaries

  	
  16

  
	
   

  	
   

  	
   

  
	
  Section 4.6

  	
  Parent SEC Documents

  	
  18

  
	
   

  	
   

  	
   

  
	
  Section 4.7

  	
  No Undisclosed Liabilities

  	
  19

  
	
   

  	
   

  	
   

  
	
  Section 4.8

  	
  Title to Tangible Personal Property

  	
  19

  
	
   

  	
   

  	
   

  
	
  Section 4.9

  	
  Absence of Certain Developments

  	
  19

  
	
   

  	
   

  	
   

  
	
  Section 4.10

  	
  Governmental Authorizations; Licenses; Etc

  	
  20

  
	
   

  	
   

  	
   

  
	
  Section 4.11

  	
  Litigation

  	
  20

  
				

 

 i
 

 

	
  Section 4.12

  	
  Taxes

  	
  20

  
	
   

  	
   

  	
   

  
	
  Section 4.13

  	
  Employee Matters

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section 4.14

  	
  Employee Benefit Plans

  	
  22

  
	
   

  	
   

  	
   

  
	
  Section 4.15

  	
  Intellectual Property Rights

  	
  22

  
	
   

  	
   

  	
   

  
	
  Section 4.16

  	
  Contracts

  	
  22

  
	
   

  	
   

  	
   

  
	
  Section 4.17

  	
  Insurance

  	
  23

  
	
   

  	
   

  	
   

  
	
  Section 4.18

  	
  Real Property

  	
  23

  
	
   

  	
   

  	
   

  
	
  Section 4.19

  	
  Transactions With Affiliates

  	
  23

  
	
   

  	
   

  	
   

  
	
  Section 4.20

  	
  Financing

  	
  23

  
	
   

  	
   

  	
   

  
	
  Section 4.21

  	
  Information Supplied

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section 4.22

  	
  Required Parent Shareholder Approval

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section 4.23

  	
  Valid Issuance of Parent Shares

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section 4.24

  	
  Anti-Takeover Statutes

  	
  25

  
	
   

  	
   

  	
   

  
	
  Section 4.25

  	
  Exemption from Registration

  	
  25

  
	
   

  	
   

  	
   

  
	
  Section 4.26

  	
  Brokers

  	
  25

  
	
   

  	
   

  	
   

  
	
  Section 4.27

  	
  Fairness Opinion; Acknowledgement

  	
  26

  
	
   

  	
   

  	
   

  
	
  Section 4.28

  	
  Merger Agreement

  	
  26

  
	
   

  	
   

  	
   

  
	
  ARTICLE 5

  	
  COVENANTS AND AGREEMENTS

  	
  26

  
	
   

  	
   

  	
   

  
	
  Section 5.1

  	
  Access; Documents and Information

  	
  26

  
	
   

  	
   

  	
   

  
	
  Section 5.2

  	
  Charter Amendment

  	
  27

  
	
   

  	
   

  	
   

  
	
  Section 5.3

  	
  Conduct of Business by Parent.

  	
  27

  
	
   

  	
   

  	
   

  
	
  Section 5.4

  	
  Closing Documents

  	
  29

  
	
   

  	
   

  	
   

  
	
  Section 5.5

  	
  Commercially Reasonable Efforts; Further Assurances

  	
  30

  
	
   

  	
   

  	
   

  
	
  Section 5.6

  	
  Public Announcements

  	
  31

  
	
   

  	
   

  	
   

  
	
  Section 5.7

  	
  Availability of Shares

  	
  31

  
	
   

  	
   

  	
   

  
	
  Section 5.8

  	
  Certificates

  	
  32

  
	
   

  	
   

  	
   

  
	
  Section 5.9

  	
  Certain Claims

  	
  32

  
	
   

  	
   

  	
   

  
	
  Section 5.10

  	
  Certain Tax Matters

  	
  32

  
	
   

  	
   

  	
   

  
	
  Section 5.11

  	
  Preparation of the Proxy Statement; Parent
  Shareholder Meeting

  	
  32

  
				

 

 ii
 

 

	
  Section 5.12

  	
  Anti-Takeover Statutes

  	
  34

  
	
   

  	
   

  	
   

  
	
  Section 5.13

  	
  Nasdaq National Market Listing

  	
  34

  
	
   

  	
   

  	
   

  
	
  Section 5.14

  	
  Legends

  	
  34

  
	
   

  	
   

  	
   

  
	
  Section 5.15

  	
  Use of Proceeds

  	
  35

  
	
   

  	
   

  	
   

  
	
  Section 5.16

  	
  Exchange of Series A Preferred Stock for Series B
  Preferred Stock

  	
  35

  
	
   

  	
   

  	
   

  
	
  ARTICLE 6

  	
  CONDITIONS TO CLOSING

  	
  37

  
	
   

  	
   

  	
   

  
	
  Section 6.1

  	
  Mutual Conditions

  	
  37

  
	
   

  	
   

  	
   

  
	
  Section 6.2

  	
  Conditions to the Obligations of Parent

  	
  37

  
	
   

  	
   

  	
   

  
	
  Section 6.3

  	
  Conditions to the Obligations of the Investors

  	
  38

  
	
   

  	
   

  	
   

  
	
  Section 6.4

  	
  Frustration of Closing Conditions

  	
  40

  
	
   

  	
   

  	
   

  
	
  ARTICLE 7

  	
  TERMINATION

  	
  40

  
	
   

  	
   

  	
   

  
	
  Section 7.1

  	
  Termination

  	
  40

  
	
   

  	
   

  	
   

  
	
  Section 7.2

  	
  Effect of Termination

  	
  41

  
	
   

  	
   

  	
   

  
	
  ARTICLE 8

  	
  MISCELLANEOUS

  	
  41

  
	
   

  	
   

  	
   

  
	
  Section 8.1

  	
  Survival

  	
  41

  
	
   

  	
   

  	
   

  
	
  Section 8.2

  	
  Indemnification

  	
  42

  
	
   

  	
   

  	
   

  
	
  Section 8.3

  	
  Notices

  	
  44

  
	
   

  	
   

  	
   

  
	
  Section 8.4

  	
  Exhibits and Schedules

  	
  46

  
	
   

  	
   

  	
   

  
	
  Section 8.5

  	
  Time of the Essence; Computation of Time

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 8.6

  	
  Expenses and Fees

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 8.7

  	
  Governing Law

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 8.8

  	
  Jurisdiction and Venue; Waiver of Jury Trial

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 8.9

  	
  Assignment; Successors and Assigns; No Third Party
  Rights

  	
  47

  
	
   

  	
   

  	
   

  
	
  Section 8.10

  	
  Counterparts

  	
  48

  
	
   

  	
   

  	
   

  
	
  Section 8.11

  	
  Titles and Headings

  	
  48

  
	
   

  	
   

  	
   

  
	
  Section 8.12

  	
  Entire Agreement

  	
  48

  
	
   

  	
   

  	
   

  
	
  Section 8.13

  	
  Severability

  	
  48

  
	
   

  	
   

  	
   

  
	
  Section 8.14

  	
  No Strict Construction

  	
  48

  
	
   

  	
   

  	
   

  
	
  Section 8.15

  	
  Specific Performance

  	
  49

  
				

 

 iii
 

 

	
  Section 8.16

  	
  Failure or Indulgence not Waiver

  	
  49

  
	
   

  	
   

  	
   

  
	
  Section 8.17

  	
  Amendments

  	
  49

  
	
   

  	
   

  	
   

  
	
  Section 8.18

  	
  Nature of Investors’ Obligations and Rights

  	
  49

  

 

 iv

SECURITIES
PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”),
dated as of May 7, 2007, is entered into by and among Universal American
Financial Corp., a New York corporation (“Parent”), Lee-Universal
Holdings, LLC (“Lee”), Welsh, Carson, Anderson & Stowe X, L.P. (“WCAS”),
Union Square Universal Partners, L.P. (“Union Square”), Perry Partners,
L.P., Perry Partners International, Inc., Perry Commitment Fund, L.P. and Perry
Commitment Master Fund, L.P. (the afore-named Perry entities are referred to
herein collectively as “Perry”). 
Lee, WCAS, Union Square and Perry are herein sometimes referred to each
as an “Investor” and collectively as the “Investors”.

RECITALS

WHEREAS, concurrently with the execution and delivery
of this Agreement, Parent has entered into the Agreement and Plan of Merger and
Reorganization, dated as of the date of this Agreement, among Parent, MHRx LLC,
a Delaware limited liability company, MemberHealth, Inc., an Ohio corporation (“MemberHealth”),
and the other parties named therein, a copy of which is attached as Exhibit
A hereto (the “Merger Agreement”);

WHEREAS, pursuant to the Merger Agreement, Parent has
agreed to acquire, through the merger transactions set forth therein, 100% of
the issued and outstanding shares of capital stock and other equity interests
of and in MemberHealth on the terms, for the consideration and subject to the
conditions set forth in the Merger Agreement (the “Merger”);

WHEREAS, this Agreement is the Securities Purchase
Agreement referred to in Section 4.20 of the Merger Agreement;

WHEREAS, the Board of Directors of Parent has duly
authorized and approved, and created and provided for the issuance of, (i)
Series A Participating Convertible Preferred Stock, par value $1.00 per share,
of Parent (“Series A Preferred Stock”), which Series A Preferred Stock
shall have such powers, preferences and rights as set forth in the Certificate
of Amendment to Parent’s Certificate of Incorporation for the Series A
Preferred Stock attached hereto as Exhibit B-1 (the “Series A
Preferred Stock Certificate of Designations”), and (ii) Series B
Participating Convertible Preferred Stock, par value $1.00 per share, of Parent
(“Series B Preferred Stock”), which Series B Preferred Stock shall have
such powers, preferences and rights as set forth in the Certificate of
Amendment to Parent’s Certificate of Incorporation for the Series B Preferred
Stock attached hereto as Exhibit B-2 (the “Series B Preferred Stock
Certificate of Designations” and, together with the Series A Preferred
Stock Certificate of Designations, the “Certificates of Designations”);

WHEREAS, concurrently with the execution and delivery
of this Agreement, Parent and the Investors are also entering into (i) another
Securities Purchase Agreement, dated as of the date of this Agreement, pursuant
to which Parent has agreed to issue and sell to the Investors, and the
Investors have agreed to purchase from Parent, shares of Series A Preferred
Stock and Series B Preferred Stock on the terms and subject to the conditions
set forth therein, a copy of which is attached as Exhibit C hereto (the “Stage
1 Purchase

Agreement”),
and (ii) a Registration Rights Agreement in the form attached hereto as Exhibit
D (the “Registration Rights Agreement”);

WHEREAS, at or prior to the Closing under this
Agreement, a Shareholders Agreement substantially in the form attached hereto
as Exhibit E (the “Shareholders Agreement”) will be executed and
delivered by the parties hereto and any other Persons contemplated therein to
be initial parties thereto;

WHEREAS, the Board of Directors of Parent has (a)
approved this Agreement, the Stage 1 Purchase Agreement, the Registration
Rights Agreement and the Shareholders Agreement (collectively, the “Transaction
Agreements”), and the Merger Agreement, and all of the transactions
contemplated hereby and thereby (collectively, the “Transactions”),
including, without limitation, (i) the issuance to the Investors pursuant to
this Agreement of an aggregate of 125,000 shares of Series B Preferred Stock (a
portion of which may be issued to and purchased by an Investor instead in the
form of Series A Preferred Stock at the request of such Investor)
(collectively, the “Convertible Shares”), and all shares of common
stock, par value $.01 per share, of Parent (“Parent Common Stock”)
issuable upon conversion of the Convertible Shares, (ii) the issuance to the
Investors pursuant to the Stage 1 Purchase Agreement of an aggregate of 30,473
shares of Series A Preferred Stock and 19,527 shares of Series B Preferred
Stock (collectively, the “Stage 1 Shares”), the shares of Series B
Preferred Stock for which shares of Series A Preferred Stock may be exchanged
as contemplated by the Stage 1 Purchase Agreement, and all shares of Parent
Common Stock issuable upon transfer or conversion, as the case may be, of the
Stage 1 Shares and shares of Series B Preferred Stock for which shares of
Series A Preferred Stock may be exchanged as contemplated by the Stage 1
Purchase Agreement, and (iii) the issuance of the shares of Common Stock
contemplated to be issued as merger consideration pursuant to the Merger
Agreement as in effect on the date of this Agreement ((i) and (iii)
collectively, the “Share Issuances”); and (b) determined that the
Transaction Agreements, the Merger Agreement, and all of the Transactions, are
fair to and in the best interests of Parent and its shareholders;

WHEREAS, as contemplated by Rule 4350(i) of The Nasdaq
Stock Market, Inc. (“Nasdaq”) Marketplace Rules, Parent shall call a
special meeting of its shareholders (the “Parent Shareholder Meeting”)
and, at such meeting, seek the affirmative vote of the holders of a majority of
the shares of Parent Common Stock voting in person or by proxy at such meeting
in favor of the Share Issuances (such vote, together with the Parent Charter
Vote referred to below, being hereinafter referred to as the “Required
Parent Shareholder Approval”);

WHEREAS, at the Parent Shareholder Meeting, Parent
shall also seek the affirmative vote of the holders of a majority of the shares
of Parent Common Stock then outstanding on a proposal to amend the Certificate
of Incorporation of Parent to authorize a new class of Parent non-voting common
stock and increase the number of authorized shares of Parent capital stock on
terms substantially in the form attached hereto as Exhibit F (the “Charter
Amendment”) (the “Parent Charter Vote”);

 2
 

WHEREAS, the Board of Directors of Parent has resolved
to recommend that the shareholders of Parent vote in favor of and approve the
Share Issuances and the Charter Amendment;

WHEREAS, each of the Investors, severally but not
jointly, wishes to purchase from Parent, and Parent wishes to sell to each
Investor, upon the terms and subject to the conditions set forth in this
Agreement, the number of Convertible Shares respectively set forth by the name
of such Investor in Section 2.1 below at a purchase price of $2,000 per
Convertible Share;

WHEREAS, Parent will apply the proceeds from the sale
of the Convertible Shares to the Investors pursuant to this Agreement to
payment of the cash portion of the merger consideration under the Merger
Agreement and payment of fees and expenses incurred by Parent in connection
with the consummation of the Transactions, and the balance for general
corporate purposes;

WHEREAS, Parent and the Investors are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Section 4(2) of the Securities Act, and Rule 506 of
Regulation D promulgated under the Securities Act; and

WHEREAS, concurrently with the execution and delivery
of this Agreement, certain of the Investors are also entering into a Share
Purchase Agreement in the form attached hereto as Exhibit G pursuant to
which they will respectively acquire certain outstanding shares of Parent
Common Stock (the transactions contemplated thereby, collectively with the
Transactions, the “Collective Transactions”);

NOW, THEREFORE, in consideration of the mutual
covenants contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:

ARTICLE 1

CERTAIN
DEFINITIONS

Section 1.1             Certain  Definitions.  As used in this Agreement, the following
terms have the respective meanings set forth below.

“A/B Consents” has the meaning set forth in Section
5.16(b).

“A/B Preferred Exchange” has the meaning set
forth in Section 5.16(a).

“Affiliate” means, with respect to any Person,
any other Person who directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with,
such Person.  The term “control” means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and the terms “controlled”
and “controlling” have meanings correlative thereto.  For purposes hereof, (i)

 3
 

Parent shall not be considered an Affiliate of any
Investor and (ii) the Affiliates of an Investor shall be deemed to include one
or more funds under common management with such Investor.

“Agreement” has the meaning set forth in the
preamble.

“Antitrust Division” has the meaning set forth
in Section 5.5(a).

“Business Day” means a day, other than a
Saturday or Sunday, on which commercial banks in New York City and Cleveland,
Ohio are open for the general transaction of business.

“Capitalization Date” has the meaning set forth
in Section 4.5(a).

“Closing” has the meaning set forth in Section
2.3.

“Closing Date” has the meaning set forth in Section
2.3.

“CMS” means the Centers for Medicare &
Medicaid Services.

“COBRA” means Part 6 of Subtitle B of Title I
of ERISA, Section 4980B of the Code and any similar state law.

“Code” has the meaning set forth in the
recitals.

“Consents” has the meaning set forth in Section
5.5(a).

“Contracts” means the Parent Contracts.

“Contractual Obligation” means, with respect to
any Person, any contract, obligation, agreement, deed, mortgage, lease, sublease,
license or legally binding commitment, promise, undertaking or instrument,
whether written or oral, to which or by which such Person is a party or
otherwise bound or to which or by which any property, business, operation or
right of such Person is bound.

“Conversion Shares” means the shares of Parent
Common Stock issuable upon conversion of (i) the Convertible Shares, (ii) the
Stage 1 Shares, (iii) the shares of Series B Preferred Stock that may be issued
in exchange for the Stage 1 Shares and (iv) the shares of Parent non-voting
common stock that may be issued upon conversion or exchange of any of the
shares referred to in clauses (i)-(iii).

“Debt Commitment Letter” has the meaning set
forth in Section 4.20.

“Disclosure Schedules” means the Investor
Disclosure Schedules and Parent Disclosure Schedules.

“Employee Benefit Plan” means any “employee
benefit plan” (as such term is defined in Section 3(3) of ERISA) and any other
material employee benefit plan, program or arrangement maintained, sponsored or
contributed to by a Person or any of its Subsidiaries.

 4
 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended.

“Exchange Act” means the Securities Exchange
Act of 1934, as amended (together with the rules and regulations promulgated
thereunder).

“Financing” has the meaning set forth in Section
4.20.

“FTC” has the meaning set forth in Section
5.5(a).

“Funded Indebtedness” means, as of any date,
without duplication, the outstanding principal amount of, accrued and unpaid
interest on and other payment obligations (including any prepayment premiums
payable as a result of the consummation of the Collective Transactions) arising
under any obligations of a Person or any of its Subsidiaries consisting of
(i) indebtedness for borrowed money, (ii) indebtedness evidenced by
any note, bond, debenture or other debt security, or (iii) obligations
under any interest rate, currency or other hedging agreements, to the extent
payable if terminated, in each case, as of such date.

“GAAP” means generally accepted accounting
principles as in effect in the United States on the date of this Agreement,
applied on a consistent basis.

“Governing Documents” means the legal
document(s) by which any Person (other than an individual) establishes its
legal existence or which govern its internal affairs.  For example, the “Governing Documents” of a
corporation are its certificate of incorporation and by-laws (or equivalent),
the “Governing Documents” of a limited partnership are its certificate of
formation and its limited partnership agreement and the “Governing Documents”
of a limited liability company are its certificate of formation and its
operating agreement.

“Government Order” means any order, writ,
judgment, injunction, decree, stipulation, ruling, determination or award
entered by or with any Governmental Authority.

“Governmental Authority” means any foreign
government, or the government of the United States of America and any state,
commonwealth, territory, possession, county, or municipality thereof, or the government
of any political subdivision of any of the foregoing, or any entity, authority,
agency, ministry, court or other similar body exercising executive,
legislative, judicial, regulatory or administrative authority or functions of
or pertaining to government, including any authority or other
quasi-governmental entity established to perform any of such functions and, in
the case of Parent, Nasdaq.

“Governmental
Authorization” means any or
all licenses, permits, waivers, accreditations, approvals, qualifications,
certifications, and other authorizations granted by any Governmental Authority,
accreditation organization or Payment Program relating to or affecting a
Medicare prescription drug plan, discount drug plan or other drug plan or
product offered or administered by Parent, the establishment, ownership,
operation, maintenance, management, regulation, development or expansion
thereof.

 5
 

“HSR Act” means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder.

“Insurance Laws” means the laws and regulations of any State of the
United States of America governing insurance companies that are applicable to
Parent or its Subsidiaries, including the respective insurance laws and
regulations of the States of Florida, Kansas, New York, Oklahoma, Pennsylvania
and Texas.

“Intellectual Property Rights” means all
intellectual property, whether owned or held for use under license, whether
registered or unregistered, including, without limitation, such rights in and
to: (i) all patents and patent applications (collectively, “Patents”);
(ii) trademarks, trade dress, service marks, certification marks, logos and
trade names; (iii) copyrights, copyright registrations and applications and
works of authorship; (iv) Internet domain names and uniform resource locators;
(v) trade secrets (as defined in the Uniform Trade Secrets Act and common law)
(“Trade Secrets”); and (vi) software and information technology systems
including, without limitation, data files, source code, object code,
application programming interfaces, databases and other software-related
specifications and documentation (collectively, “Software”).

“Investor Disclosure Schedules” means the
disclosure schedules to this Agreement delivered by the Investors to Parent on
or prior to the date hereof in connection with this Agreement.

“Investor Material Adverse Effect” means, with
respect to a particular Investor, any fact, event, circumstance, change,
occurrence, effect or condition which has had or would reasonably be expected
to have, individually or in the aggregate with all other facts, events,
circumstances, changes, occurrences, effects or conditions, a material adverse
effect on the ability of such Investor to consummate the transactions contemplated
by this Agreement.

“Knowledge” means, with respect to any Person,
the actual knowledge of such Person (and shall in no event encompass
constructive, imputed or similar concepts of knowledge); provided that in the case of Parent,
such actual knowledge shall be limited to the Knowledge of Richard Barasch,
Robert Waegelein, Gary Bryant, Jason Israel, Gary Jacobs, Theodore Carpenter,
Jr., Lisa Spivack and Steve Najjar, none of whom shall have any personal
liability regarding such Knowledge.

“Latest Parent Balance Sheet” has the meaning
set forth in Section 4.7.

“Legal Requirement” means any United States
federal, state or local or foreign law, statute, standard, ordinance, code,
rule, regulation, binding directive, resolution or promulgation, or any
Government Order, or any license, franchise, permit or similar right granted
under any of the foregoing, or any similar provision having the force or effect
of law and, with respect to Parent, the Nasdaq Marketplace Rules.

“Lender” has the meaning set forth in Section
4.20.

 6
 

“Lien” means any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind.  For avoidance of doubt, “Lien” shall
not include any license of Intellectual Property Rights.

“Losses” has the meaning set forth in Section
8.2(a).

“Medicare Part D” means the Outpatient
Prescription Drug Program established by the Medicare Modernization of Act of
2003.

“Merger” has the meaning set forth in the
recitals.

“Multiemployer Plan” has the meaning set forth
in Section 3(37) of ERISA.

“Nasdaq” has the meaning set forth in the
recitals.

“Outstanding Parent Stock Awards” has the
meaning set forth in Section 4.5(a).

“Parent” has the meaning set forth in the
preamble.

“Parent Board Recommendation” has the meaning
set forth in Section 5.11(d).

“Parent Charter Vote” has the meaning set forth
in the recitals.

“Parent Common Stock” has the meaning set forth
in the recitals.

“Parent Confidentiality Agreement” means the
confidentiality agreements by and between the several Investors and Parent.

“Parent Contracts” has the meaning set forth in
Section 4.16.

“Parent Disclosure Schedules” means the
disclosure schedules to this Agreement delivered by Parent and the Investors on
or prior to the date hereof in connection with this Agreement.

“Parent Employee Benefit Plan” means any
Employee Benefit Plan of Parent or any of its Subsidiaries.

“Parent ERISA Affiliate” means any entity that
is considered a single employer with Parent under Section 414 of the Code.

“Parent Intellectual Property Rights” has the
meaning set forth in Section 4.15.

“Parent Material Adverse Effect” means any
fact, event, circumstance, change, occurrence, effect or condition individually
or in the aggregate which has had or would reasonably be expected to have a
material adverse effect on (A) the combined financial condition, business or
results of operations of Parent and its Subsidiaries and MemberHealth and its
Subsidiaries, taken as a whole, assuming completion of the Merger, or (B) the
ability of Parent to consummate the Transactions; provided, that any change, event or effect arising

 7
 

from or related to, or in the case of matters covered
by clauses (ix) and (x) below, directly and solely resulting from: (i)
conditions generally affecting the industries in which Parent and its
Subsidiaries operate or the United States economy generally; (ii) acts of
terrorism, acts of war or the escalation of hostilities; (iii) any disruption
of the financial, banking or securities markets (including any decline in the
price of any security or any market index); (iv) changes in GAAP; (v) changes
in any Legal Requirements, except for changes in Legal Requirements or CMS
written interpretations and guidance related to Medicare Part D or related to
the business of providing health and life insurance or managed care products
and services; (vi) any action taken or omission by Parent in accordance with
this Agreement or at the written request of, or with the prior written consent
of, all of the Investors; (vii) any change in or effect on the business of
Parent or its Subsidiaries that is cured prior to the Closing; (viii) the
announcement of the Transactions; (ix) any failure, in and of itself, by Parent
or any of its Subsidiaries to meet any projections, forecasts or revenue or
earnings predictions for any period ending on or after the date of this
Agreement; or (x) any change, in and of itself, in the market price or trading
volume of shares of Parent Common Stock, shall not be taken into account in
determining whether a “Parent Material Adverse Effect” has occurred, or would
reasonably be expected to occur, except in the case of clauses (i) and (iii),
to the extent that such change, event or effect referred to therein has had a
materially disproportionate impact on the financial condition, business or
results of operations of Parent and its Subsidiaries, taken as a whole,
relative to other industry participants and, except in the case of clauses (ix)
and (x), any fact, event, circumstance, change, occurrence, effect or condition
underlying any failure to meet any projections, forecasts or revenue or
earnings predictions or affecting such market price or trading volume shall be
taken into account in determining whether a Parent Material Adverse Effect has
occurred or would reasonably be expected to occur, and except that clause
(viii) shall not apply with respect to Sections 4.3 and 4.4 hereof.

“Parent Preferred Stock” has the meaning set
forth in Section 4.5(a).

“Parent SEC Documents” has the meaning set
forth in Section 4.6.

“Parent Shareholder Meeting” has the meaning
set forth in the recitals.

“Parent Shareholder Meeting Date” has the
meaning set forth in Section 3.5.

“Parent Significant Subsidiaries” means, the “significant
subsidiaries” of the Parent as defined by Regulation S-X under the Exchange
Act.

“Parent Stock Plans” has the meaning set forth
in Section 4.5(a).

“Payment Program” means Medicare, Medicaid, commercial
and private insurers, employer group health plans (including, without
limitation a “Welfare Plan” described in Section 3(1) of ERISA), and any
other governmental, commercial, or other organization which maintains a health
care reimbursement program or policy.

“Permitted Liens” means (a) mechanics,
materialmen’s, carrier’s, repairer’s and other Liens arising or incurred in the
ordinary course of business or that are not yet delinquent or are being
contested in good faith; (b) Liens for Taxes, assessments or other governmental
charges not yet delinquent or which are being contested in good faith, provided

 8
 

an appropriate reserve is established therefor to the
extent required by GAAP; (c) Liens (including encumbrances and restrictions on
real property such as easements, covenants, rights of way and similar matters
affecting title) that do not, individually or in the aggregate, materially
interfere with the present uses or value of the property subject to such Liens;
(d) Liens granted to any lender at the Closing in connection with the Debt
Financing of the transactions contemplated by the Merger Agreement; (e) with
respect to the Parent Common Stock, restrictions on transfer imposed under
applicable securities laws; and (f) with respect to Parent and its
Subsidiaries, Liens described on Schedule 1.1(b).

“Person” means an individual, partnership,
corporation, limited liability company, joint stock company, unincorporated
organization or association, trust, joint venture, association or other
organization, whether or not a legal entity, or a Governmental Authority.

“Proxy Statement” has the meaning set forth in Section
4.4.

“Registration Statement” has the meaning set
forth in Section 4.4.

“Regulatory Clearance” means, with respect to any Person,
requirements pursuant to Insurance Laws or the HSR Act to make a filing, await
expiration or termination of a regulatory clearance waiting period, or obtain a
clearance, approval or waiver, under Insurance Laws or the HSR Act, before such
Person may lawfully acquire shares of Parent Common Stock or other securities
of Parent that are entitled to vote in the election of directors of Parent
generally.

“Required Parent Shareholder Approval” has the
meaning set forth in the recitals.

“Sarbanes-Oxley Act” means the Sarbanes-Oxley
Act of 2002.

“SEC” means the United States Securities and
Exchange Commission.

“Securities Act” means the Securities Act of
1933, as amended (together with the rules and regulations promulgated
thereunder).

“Subsidiary” of a Person means any and all
corporations, partnerships, limited liability companies and other entities,
whether incorporated or unincorporated, with respect to which such Person, directly
or indirectly, owns securities having the power to elect a majority of the
board of directors or similar body governing the affairs of such entity.

“Tax” means (A) any and all federal, state,
local or foreign income, gross receipts, franchise, estimated, alternative
minimum, add-on minimum, sales, use, transfer, real property gains,
registration, value added, excise, natural resources, severance, stamp,
occupation, windfall profits, environmental (under Section 59A of the Code),
customs, duties, real property, personal property, capital stock, social
security (or similar), unemployment, disability, payroll, license, employee or
other withholding, or other tax assessment, duty, fee, levy, or other
governmental charge, of any kind whatsoever, including any interest, penalties
or additions to tax or similar items in respect of the foregoing (whether
disputed or not) and

 9
 

including any obligations to indemnify or otherwise
assume or succeed to the tax liability of any other Person and (B) any
liability for the payment of any amount of the type described in the
immediately preceding clause (A) as a result of (1) being a “transferee” of
another person, (2) being a member of an affiliated, combined, consolidated or
unitary group, or (3) any contractual liability.

“Tax Return” means any return, report,
declaration, claim for refund, information return or other document (including
any related or supporting schedule, statement or information) filed or required
to be filed in connection with the determination, assessment or collection of
any Tax of any party or the administration of any Legal Requirements relating
to any Tax (including any amendment thereof).

“Termination Date” has the meaning set forth in
Section 7.1(b).

“Third Party Claim” has the meaning set forth
in Section 8.2(d).

“Transactions” has the meaning set forth in the
recitals.

Section 1.2             Interpretive Provision.  Unless otherwise indicated to the contrary
herein by the context or use thereof: (i) the words, “herein,” “hereto,” “hereof”
and words of similar import refer to this Agreement as a whole and not to any
particular Section or paragraph hereof; (ii) the word “including” means “including,
but not limited to”; (iii) masculine gender shall also include the feminine and
neutral genders, and vice versa; and (iv) words importing the singular shall
also include the plural, and vice versa.

ARTICLE 2

ISSUANCE
AND PURCHASE OF CONVERTIBLE SHARES

Section 2.1             Issuance and Purchase of
Convertible Shares. 
 Subject to
the satisfaction (or waiver) of the conditions set forth in Article 6,
at the Closing:

(a)           Parent shall issue and sell to Lee,
and Lee shall purchase from Parent, 27,632 Convertible Shares in exchange for
the payment by Lee to Parent of an aggregate purchase price for such shares
equal to $55,264,000 (such dollar amount, the “Lee Aggregate Purchase Price”);

(b)           Parent shall issue and sell to WCAS,
and WCAS shall purchase from Parent, 36,841 Convertible Shares in exchange for
the payment by WCAS to Parent of an aggregate purchase price for such shares
equal to $73,682,000 (such dollar amount, the “WCAS Aggregate Purchase Price”);

(c)           Parent shall issue and sell to Union
Square, and Union Square shall purchase from Parent, 32,895 Convertible Shares
in exchange for the payment by Union Square to Parent of an aggregate purchase
price for such shares equal to $65,790,000 (such dollar amount, the “Union
Square Aggregate Purchase Price”); and

 10
 

(d)           Parent shall issue and sell to Perry,
and Perry shall purchase from Parent, 27,632 Convertible Shares in exchange for
the payment by Perry to Parent of an aggregate purchase price for such shares
equal to $55,264,000 (such dollar amount, the “Perry Aggregate Purchase
Price”) (the Convertible Shares referred to in this clause (d) shall be
allocated among the entities comprising Perry in such percentages as shall be
determined by Perry prior to Closing).

For the avoidance of doubt, at the option of an
Investor, all or a portion of the shares of Series B Preferred Stock to be
issued to and purchased by such Investor hereunder may instead be issued and
purchased in the form of Series A Preferred Stock.

Parent shall issue and sell all such Convertible
Shares as aforesaid free and clear of any and all Liens (other than transfer
restrictions of general applicability under the Securities Act).

Section 2.2             Deliveries.  At the Closing (and in addition to the other
closing deliveries specified in Article 6):

(a)           Lee shall pay to Parent the Lee
Aggregate Purchase Price;

(b)           WCAS shall pay to Parent the WCAS
Aggregate Purchase Price;

(c)           Perry shall pay to Parent the Perry
Aggregate Purchase Price;

(d)           Union Square shall pay to Parent the
Union Square Aggregate Purchase Price; and

(e)           Parent shall deliver to each Investor
a certificate or certificates (in definitive form) duly executed on behalf of
Parent and registered in the name of such Investor (or its designee)
representing the number of Convertible Shares purchased by such Investor from
Parent pursuant to this Agreement.

All payments pursuant to clauses (a) through (d) of
this paragraph shall be made by wire transfer of immediately available funds to
an account designated by Parent pursuant to wire instructions to be provided by
Parent no later than at least three Business Days prior to the anticipated
Closing Date.

Section 2.3             Closing.  Subject to the satisfaction (or waiver) of
the conditions set forth in Article 6, the closing of the transactions
contemplated hereby (the “Closing”) shall take place at the offices of
Ropes & Gray LLP, 1211 Avenue of the Americas, New York, New York, at 10:00
A.M. (New York City time) on the fifth Business Day following the satisfaction
or waiver of the conditions set forth in Article 6 (other than those
conditions that by their terms cannot be satisfied until the Closing, but
subject to satisfaction of such conditions at the Closing), or on such other
date and time as Parent and the Investors shall mutually agree; provided that, subject to the satisfaction (or waiver) of
the conditions set forth in Article 6, it is the intention of the
parties that the Closing occur contemporaneously with the consummation of the
Merger.  The date of the Closing is
herein called the “Closing Date”.

 11

ARTICLE 3

INVESTOR
REPRESENTATIONS AND WARRANTIES

Except as set
forth in the Investor Disclosure Schedules, each Investor, severally as to
itself only, but not jointly with any other Investor, represents and warrants
to Parent as follows:

Section 3.1             Organization, Good Standing,
Qualification and Power.  Such
Investor is a corporation, limited liability company or other entity duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, formation or organization, as the
case may be, and has the requisite corporate, limited liability company or
partnership power and authority to own or lease its properties and assets and
to carry on its business as presently conducted.

Section 3.2             Authority; Execution and
Delivery; Enforceability.  Such
Investor has the requisite power and authority to execute and deliver this
Agreement and to perform its obligations hereunder, all of which have been duly
authorized by all requisite corporate, limited liability company or
partnership, as applicable, action on its part. 
Such Investor has duly executed and delivered this Agreement and
(assuming this Agreement has been duly and validly authorized, executed and
delivered by each other party hereto), this Agreement is a valid and binding
agreement of such Investor, enforceable against such Investor in accordance
with its terms, except as the enforceability hereof or thereof may be limited
by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other
similar Legal Requirements affecting the enforcement of creditors’ rights
generally or (ii) applicable equitable principles (whether considered in a
proceeding at law or in equity).

Section 3.3             Non-contravention.  Neither the execution and delivery of this
Agreement by such Investor nor the fulfillment of and the performance by such
Investor of its obligations hereunder will (i) contravene any provision
contained in the Governing Documents of such Investor, or (ii) conflict
with, violate or result in a breach (with or without the lapse of time, the
giving of notice or both) of, permit any Person to terminate, or constitute a
default (with or without the lapse of time, the giving of notice or both) under
(A) except as set forth on Schedule 3.3, any contract, agreement, commitment,
indenture, mortgage, lease, pledge, note, bond, license, permit, or other
instrument or obligation to which such Investor is a party or (B) assuming the
completion of the actions described in Section 3.4 and on Schedule 3.4,
any Legal Requirement to which such Investor is bound or subject, which in the
case of any of clause (ii) above, would reasonably be expected to have an
Investor Material Adverse Effect.

Section 3.4             Consents.  No notice to, filing with, or authorization,
registration, consent or approval of any Governmental Authority or other Person
is necessary for the execution, delivery or performance of this Agreement by
such Investor or the consummation of the transactions contemplated hereby by
such Investor, except for (i) compliance with and filings under the HSR Act,
(ii) compliance with and filings under the Exchange Act, (iii) filings and
approvals required by state insurance departments, departments of health,
and/or other Governmental Authorities having jurisdiction over the Governmental
Authorizations or

 12
 

any part of Parent’s business, or such other filings,
authorizations, registrations, consents or approvals that may be required be
reason of Parent’s or MemberHealth’s involvement in the transactions, (iv)
other notices, filings, authorizations, registrations, consents or approvals
set forth on Schedule 3.4, and (v) any other notices, filings,
authorizations, registrations, consents or approvals the failure of which to
obtain or make would not reasonably be expected to have an Investor Material
Adverse Effect.

Section 3.5             Information Supplied.  The information supplied or to be supplied by
such Investor in writing and designated specifically for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is mailed to the
shareholders of Parent or on the date of the Parent Shareholder Meeting (the “Parent
Shareholder Meeting Date”) contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they are made, not misleading.  
Notwithstanding the foregoing, such Investor makes no representation,
warranty or covenant with respect to any information contained in any of the
foregoing documents other than information supplied by such Investor in writing
and designated specifically for inclusion therein.

Section 3.6             Brokers.  No Person is or will be entitled to a broker’s,
finder’s, investment banker’s, financial advisor’s or similar fee from Parent
in connection with this Agreement or any of the transactions contemplated
hereby based on any commitments made by such Investor.

Section 3.7             Acquisition for Investment.  Such Investor is acquiring the shares
issuable to it under this Agreement for investment purposes and not with a view
towards any distribution thereof in violation of applicable securities laws; provided,
however, that by making such representation and warranty, such Investor
does not agree to hold any securities for any minimum or other specific
term.  Such Investor is an “accredited
investor” (as that term is defined in Rule 501(a) of Regulation D under the
Securities Act).  Such Investor
acknowledges that the shares to be purchased by such Investor under this
Agreement may not be resold absent registration under the Securities Act or the
availability of an applicable exemption from Securities Act registration
requirements.  By executing this
Agreement, such Investor further represents that, except as set forth on Schedule
3.7, such Investor does not presently have any contract, undertaking,
agreement or arrangement with any Person, other than a Permitted Transferee (as
defined in the Shareholders Agreement) of such Investor, or any direct or
indirect shareholders, partners or members of such Investor, to sell, transfer
or grant participations to such Person or to any third Person, with respect to
any of the Convertible Shares.

Section 3.8             Disclosure of Information.  Such Investor has had an opportunity to
discuss Parent’s business, management, financial affairs and the terms and
conditions of the offering of the Convertible Shares with Parent’s
management.  The foregoing, however, does
not limit or modify the representations and warranties of Parent in Article
4 of this Agreement or the right of the Investors to rely thereon.

Section 3.9             Restricted Securities.  Such Investor understands that the issuance
and sale of the Convertible Shares have not been registered under the
Securities Act by reason of a

 13
 

specific exemption from the registration provisions of
the Securities Act which depends upon, among other things, the bona fide nature
of the investment intent and the accuracy of the Investor’s representations as
expressed in Section 3.7.  Such
Investor understands that the Convertible Shares are “restricted securities”
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, the Investor must hold the Convertible Shares indefinitely unless
they are registered with the Securities and Exchange Commission and qualified
by state authorities, or an exemption from such registration and qualification
requirements is available.  Such Investor
acknowledges that Parent has no obligation to register or qualify the Convertible
Shares, or the Parent Common Stock into which it may be converted, for resale
except as set forth in the Registration Rights Agreement.  Such Investor further acknowledges that if an
exemption from registration or qualification is available, it may be
conditioned on various requirements including, but not limited to, the time and
manner of sale, the holding period for the Convertible Shares, and on
requirements relating to Parent which are outside of the Investor’s control.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF
PARENT

Except
as set forth in the Parent Disclosure Schedules, Parent hereby represents and
warrants to each Investor as follows:

Section 4.1             Organization, Good Standing,
Qualification and Power.  Parent is a
corporation duly organized, validly existing and in good standing under the
laws of the State of New York and has the requisite corporate power and
authority to own or lease its properties and assets and to carry on its
business as presently conducted. Except as has not had and would not reasonably
be expected to have a Parent Material Adverse Effect, each of the Subsidiaries
of Parent is a corporation, limited liability company or other entity duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, formation or organization, as the
case may be, specified on Schedule 4.1 and has the requisite corporate,
limited liability company or partnership power and authority to own or lease
its properties and assets and to carry on its business as presently
conducted.   Parent and each of Parent’s
Subsidiaries is duly qualified to transact business and is in good standing in
each jurisdiction wherein the nature of its business or the ownership of its
assets makes such qualification necessary, except where the failure to be so
qualified and in good standing has not had and would not reasonably be expected
to have a Parent Material Adverse Effect. 
Parent has delivered to the Investors true and complete copies of the
Governing Documents of Parent.  Parent is
not in material violation of or material default under the provisions of any
such Governing Documents.  None of the
Parent’s Subsidiaries is in material violation or material default under its
governing documents, except as would not cause a Parent Material Adverse
Effect.

Section 4.2             Authority; Execution and
Delivery; Enforceability.  Parent has
the requisite power and authority to execute and deliver this Agreement, the
other Transaction Agreements and the Merger Agreement and to perform its
obligations hereunder, and thereunder (subject, with respect to consummation of
the transactions contemplated by this Agreement and the Merger Agreement, to
obtaining the Required Parent Shareholder

 14
 

Approval), all of which have been duly authorized
(subject, with respect to consummation of the transactions contemplated by this
Agreement and the Merger Agreement, to obtaining the Required Parent
Shareholder Approval) by all requisite corporate action on its part.  Parent has duly executed and delivered this
Agreement, the Stage 1 Purchase Agreement, the Registration Rights Agreement
and the Merger Agreement, and each of this Agreement, the Stage 1 Purchase
Agreement and the Registration Rights Agreement, and (assuming that they have
been duly and validly authorized, executed and delivered by the other parties
thereto, respectively) this Agreement, and the Registration Rights Agreement
are, and each other Transaction Agreement will from and after the Closing be, a
valid and binding agreement of Parent, enforceable against Parent in accordance
with their respective terms, except as the enforceability hereof or thereof may
be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium
or other similar Legal Requirements affecting the enforcement of creditors’
rights generally or (ii) applicable equitable principles (whether considered in
a proceeding at law or in equity).

Section 4.3             Non-contravention.  Neither the execution and delivery of this
Agreement, the other Transaction Agreements and the Merger Agreement nor the
fulfillment of and the performance by Parent of its obligations hereunder or
thereunder, nor consummation of the Collective Transactions, will
(i) contravene any provision contained in the Governing Documents of
Parent, (ii) conflict with, violate or result in a breach (with or without
the lapse of time, the giving of notice or both) of, permit any Person to
terminate, or constitute a default (with or without the lapse of time, the
giving of notice or both) under (A) except as set forth on Schedule 4.3,
any contract, agreement, commitment, indenture, mortgage, lease, pledge, note,
bond, license, permit or other instrument or obligation to which Parent or any
of Parent’s Subsidiaries is a party or is bound or to which any of their
respective properties or assets are subject or (B) assuming the completion of
the actions described in Section 4.4 and on Schedule 4.4, any
Legal Requirement to which Parent or any of Parent’s Subsidiaries is bound or
subject or to which any of their respective assets or properties are subject,
(iii) except as set forth on Schedule 4.3, result in the creation
or imposition of any Lien on any of the assets or properties of Parent or any
of Parent’s Subsidiaries, or (iv) except as set forth on Schedule 4.3,
result in the acceleration of, or permit any Person to terminate, modify,
cancel, accelerate or declare due and payable prior to its stated maturity, any
obligation of Parent or any of Parent’s Subsidiaries, which in the case of any
of clauses (ii) through (iv) above, would reasonably be expected to have a
Parent Material Adverse Effect.

Section 4.4             Consents.  No notice to, filing with, or authorization,
registration, consent or approval of any Governmental Authority or other Person
is necessary for the execution, delivery or performance of this Agreement, the
other Transaction Agreements and the Merger Agreement or the consummation of
the transactions contemplated hereby and thereby by Parent or consummation of
the Collective Transactions, except for (i) compliance with and filings under
the HSR Act with respect to consummation of the transactions contemplated by
this Agreement and the Merger Agreement, (ii) compliance with the notice and
approval requirements of CMS applicable to the Transactions, (iii) with respect
to consummation of the transactions contemplated by this Agreement, the filing
of the Charter Amendment with the Secretary of State of the State of New York,
and with respect to consummation of the transactions contemplated by the Merger
Agreement, the filing of appropriate Certificates of Merger and any related
documents with the Secretaries of State of

 15
 

the States of Ohio and Delaware pursuant to the Merger
Agreement, (iv) filings and approvals required by state insurance departments
and/or departments of health, each as set forth on Schedule 4.4, (v)
with respect to consummation of the transactions contemplated by this Agreement
and the Merger Agreement, the filing with the SEC of (A) a joint proxy
statement/prospectus for distribution to the shareholders of MemberHealth in
connection with the Merger and the shareholders of Parent in connection with
the Parent Shareholder Meeting in accordance with Regulation 14A promulgated
under the Exchange Act (such proxy statement as amended or supplemented from
time to time being hereinafter referred to as the “Proxy Statement”), (B)
a registration statement on Form S-4 relating to the offer and sale of
shares of Parent Common Stock in connection with the Merger pursuant to the
Merger Agreement (such registration statement as amended or supplemented from
time to time being hereinafter referred to as the “Registration Statement”),
and (C) such reports under and such other compliance with the Exchange Act and
the Securities Act as may be required in connection with this Agreement and the
Merger, (vi) compliance with any applicable Legal Requirements relating to
state blue sky laws, securities laws or Nasdaq filing requirements in
connection with the issuance of the Convertible Shares or the shares of Parent
Common Stock issuable in the Merger, and (vii) other notices, filings, authorizations,
registrations, consents or approvals set forth on Schedule 4.4.

Section
4.5             Capitalization of
Parent; Parent Subsidiaries.

(a)           As of the date hereof, the authorized
capital stock of Parent consists of (i) 100,000,000 shares of Parent Common
Stock and (ii) 2,000,000 shares of Preferred Stock, par value $0.01 per share
(the “Parent Preferred Stock”), of which 300,000 shares of Parent
Preferred Stock will be designated as Series A Preferred Stock and 300,000
shares of Parent Preferred Stock will be designated as Series B Preferred Stock
(each having the rights, preferences and privileges set forth in the
Certificates of Designations attached as Exhibits B-1 and B-2,
respectively).  Upon effectiveness of the
Charter Amendment, the authorized capital stock of Parent will consist of at
least (i) 125,000,000 shares of Parent Common Stock, (ii) 30,000,000 shares of
Parent non-voting common stock and (iii) 2,000,000 shares of Parent Preferred
Stock, of which 300,000 shares of Parent Preferred Stock will have been
designated as Series A Preferred Stock and 300,000 shares of Parent Preferred
Stock will have been designated as Series B Preferred Stock (each having the
rights, preferences and privileges set forth in the Certificates of
Designations attached as Exhibits B-1 and B-2, respectively).  As of the close of business on May 7, 2007
(the “Capitalization Date”), 59,442,873 shares of Parent Common Stock
were issued and outstanding; no shares of Parent Preferred Stock were issued
and outstanding; 626,045 shares of Parent Common Stock were held in Parent’s
treasury; and 5,227,403 shares of Parent Common Stock were reserved for
issuance pursuant to the Outstanding Parent Stock Awards.  Schedule 4.5(a) contains a list of
each stock option plan, program or arrangement of Parent (the “Parent Stock
Plans”) and information with respect to all of the outstanding stock
options, restricted stock awards and other stock-based awards issued under the
Parent Stock Plans (“Outstanding Parent Stock Awards”), including the
name of Parent Stock Plan under which such options or awards were issued, the
holders thereof, the number of shares subject thereto, the exercise prices and
other material terms thereof and a description of the vesting provisions
thereof.  Except as set forth above or on
Schedule 4.5(a), there are no outstanding shares of capital stock of
Parent or securities, directly or indirectly, convertible into, or exchangeable
or exercisable for, shares of capital

 16
 

stock of Parent or any outstanding “phantom” stock,
stock appreciation right or other stock-based awards.  Except as set forth on Schedule 4.5(a),
there are no puts, calls, rights (including preemptive rights), commitments or
agreements to which Parent is a party or by which it is bound, in any case
obligating Parent to issue, deliver, sell, purchase, redeem or acquire, any
equity securities of Parent or securities convertible into, or exercisable or
exchangeable for equity securities of Parent, or obligating Parent to grant,
extend or enter into any such option, put, warrant, call, right, commitment or
agreement.  All outstanding shares of
Parent Common Stock are validly issued, fully paid and nonassessable and are
not subject to, and have not been issued in violation of, preemptive or other
similar rights.  No bonds, debentures,
notes or other indebtedness of Parent having any right to vote with the
stockholders of Parent on matters submitted to the stockholders of Parent (or
any such indebtedness or other securities that are convertible into or
exercisable or exchangeable for securities having such voting rights) are
issued or outstanding.  No shares of
capital stock of Parent and no other securities directly or indirectly
convertible into, or exchangeable or exercisable for, capital stock of Parent
have been issued since the Capitalization Date and on or prior to the date of
this Agreement, other than shares of Parent Common Stock issued in respect of
Outstanding Parent Stock Awards.

(b)           Agreements Relating to Capital
Stock.  Except as set forth on Schedule
4.5(b), there are not any stockholder agreements, voting trusts or other
agreements or understandings to which Parent is a party or by which it is bound
relating to the voting or transfer of any shares of Parent Common Stock.  All registration rights agreements, stockholders’
agreements and voting agreements to which Parent or any of its Subsidiaries is
a party are identified on Schedule 4.5(b).

(c)           Set forth on Schedule 4.5(c)
is the number of authorized, issued and outstanding shares of capital stock (or
other ownership interests) of each Parent Significant Subsidiary.  All of the issued and outstanding shares of
capital stock (or other ownership interests) of each Parent Significant
Subsidiary are owned beneficially and of record by Parent or another Subsidiary
of Parent as set forth on Schedule 4.5(c), have been validly issued, and
are fully paid and nonassessable and, except as set forth on Schedule 4.5(c),
are held free and clear of any preemptive rights (other than such rights as may
be held by Parent or a Subsidiary of Parent) or Liens (other than Permitted
Liens).  Except as set forth on Schedule
4.5(c), (a) there are no other issued or outstanding equity securities of
any Parent Significant Subsidiary and (b) there are no other issued and
outstanding securities of any Parent Significant Subsidiary convertible into or
exchangeable for, at any time, equity securities of any Parent Significant
Subsidiary.  Except as set forth on Schedule 4.5(c),
there are no (i) outstanding obligations of Parent or Parent Significant
Subsidiary to repurchase, redeem or otherwise acquire any capital stock (or
other ownership interests) of any of the Parent Significant Subsidiaries or
(ii) voting trusts, proxies or other agreements with respect to the voting or
transfer of the capital stock (or other ownership interests) of the Parent
Significant Subsidiaries.

(d)           Except as set forth on Schedule
4.5(d), and except for the capital stock (or other ownership interests) of
the Parent Significant Subsidiaries, Parent does not own, directly or
indirectly, (i) any shares of outstanding capital stock or membership interests
of any other corporation or limited liability company or securities convertible
into or

 17
 

exchangeable for capital stock or membership interests
of any other corporation or limited liability company (ii) any equity or other
participating interest in the revenues or profits of any Person, and neither
Parent nor any of the Parent Significant Subsidiaries is subject to any
obligation to make any investment (in the form of a loan, capital contribution
or otherwise) in any Person.

Section
4.6             Parent SEC Documents.

(a)           Parent has made available to the
Investors a true and complete copy of each report, schedule, registration
statement and proxy statement filed by Parent with the SEC since December 31,
2004 (the “Parent SEC Documents”), which are all the documents that
Parent was required to file with the SEC since December 31, 2004.  As of their respective dates, the Parent SEC
Documents complied in all material respects with the requirements of the
Securities Act, the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder, and, to the extent in effect and
applicable, the Sarbanes-Oxley Act, and none of Parent SEC Documents contains
any untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.  Parent has made available to the Investors
true and complete copies of all comment letters received by Parent from the SEC
since December 31, 2004, together with all written responses of Parent
thereto.  As of the date hereof, to the
Knowledge of Parent, there are no outstanding or unresolved comments in such
comment letters and none of the Parent SEC Documents is the subject of any
ongoing review by the SEC.

(b)           The financial statements of Parent
included in the Parent SEC Documents comply as to form in all material respects
with the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q or
Rule 10-01 of Regulation S-X of the SEC) and present fairly in all material
respects the consolidated financial position of Parent and its consolidated
Subsidiaries as of their respective dates and the consolidated results of
operations and the consolidated cash flows of Parent and its consolidated Subsidiaries
for the periods presented therein (subject, in the case of the unaudited
statements, to year-end audit adjustments, as permitted by Rule 10-01, and any
other adjustments described therein).

(c)           Parent and its Subsidiaries have
established and maintain “disclosure controls and procedures” (as defined in
Rule 13a-15(e) promulgated under the Exchange Act) and “internal control
over financial reporting” (as defined in Rule 13a-15(f) promulgated under the
Exchange Act), in each case, as required by Rule 13a-15 under the Exchange
Act.  Such “disclosure controls and
procedures” are designed to ensure that information required to be disclosed by
Parent in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC, and that such information is accumulated and
communicated to Parent’s management, including its principal executive officer
and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure and to make
the certifications of the principal executive officer and the principal
financial officer of Parent required by Sections 302 and 906 of the
Sarbanes-Oxley

 18
 

Act with respect to such reports.  For purposes of this Agreement, “principal
executive officer” and “principal financial officer” shall have the meanings
given to such terms in the Sarbanes-Oxley Act. 
Each of the principal executive officer and the principal financial
officer of Parent (and each former principal executive officer of Parent and
each former principal financial officer of Parent, as applicable) has made all
certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act and
the rules and regulations promulgated thereunder with respect to the Parent SEC
Documents.  Such “internal control over
financial reporting” provides reasonable assurances regarding the reliability
of financial reporting and the preparation of financial statements, including
that (A) transactions are executed in accordance with management’s general or
specific authorization; and (B) transactions are recorded as necessary (x) to
permit preparation of consolidated financial statements in conformity with GAAP
and (y) to maintain accountability of the assets of Parent and its
Subsidiaries.  The management of Parent
has disclosed, based on its most recent evaluation, to Parent’s auditors and
the audit committee of Parent’s board of directors (i) all significant
deficiencies in the design or operation of internal control over financial
reporting  which could adversely affect
Parent’s ability to record, process, summarize and report financial data and
have identified for Parent’s auditors any material weaknesses in internal
controls and (ii) any fraud, whether or not material, that involves management
or other employees who have a significant role in Parent’s internal controls
over financial reporting.  A summary of
any such disclosure made by management to Parent’s auditors and audit committee
has been made available to the Investors.

Section 4.7             No Undisclosed Liabilities.  Neither Parent nor any of its Subsidiaries
has any liability other than (i) liabilities reflected in consolidated balance
sheet of Parent included in the Annual Report on Form 10-K for the fiscal year
of Parent ended December 31, 2006 filed by Parent on March 16, 2007 (including
the related notes thereto) (the “Latest Parent Balance Sheet”), (ii)
liabilities arising under Contractual Obligations that are connected with
future performance under such Contractual Obligations and not required to be
reflected on a consolidated balance sheet of Parent and its Subsidiaries
prepared in accordance with GAAP, (iii) liabilities that were incurred in the
ordinary course of business since the date of the Latest Parent Balance Sheet
and (iv) liabilities that have not had and would not reasonably be expected to
have a Parent Material Adverse Effect.

Section 4.8             Title to Tangible Personal
Property.  Parent or a Subsidiary of
Parent has good title to all of the tangible personal property reflected as
being owned by them on the Latest Parent Balance Sheet, in each case, free and
clear of Liens (other than Permitted Liens), except for any such assets which
have been sold or otherwise disposed of since the date of the Latest Parent
Balance Sheet or where the failure to have such good title has not had and
would not reasonably be expected to have a Parent Material Adverse Effect.  Parent and its Subsidiaries own or lease all
tangible assets necessary for the conduct of their business as presently
conducted except where such failure to own or lease has not had and would not
reasonably be expected to have a Parent Material Adverse Effect.

Section 4.9             Absence of Certain Developments.  Except as set forth on Schedule 4.9,
during the period beginning on the date of the Latest Balance Sheet and ending
on the date of this Agreement, (a) there has not been any change, event or
effect that has had or would reasonably be expected to have a Parent Material
Adverse Effect and (b) each of Parent

 19
 

and its Subsidiaries has conducted its business in the
ordinary course substantially consistent with past practices.  Without limiting the generality of the
foregoing, except as set forth on Schedule 4.9, none of Parent or any of
its Subsidiaries has taken any action that would have constituted a violation
of Section 5.3(b) of this Agreement if Section 5.3(b) had been in
effect at all times since the date of the Latest Parent Balance Sheet.

Section 4.10           Governmental Authorizations;
Licenses; Etc.  Except as set forth
on Schedule 4.10, the business of each of Parent and its Subsidiaries is
now and has been at all times since January 1, 2005 operated in compliance with
all applicable Legal Requirements, except where failure to so comply has not had
and would not reasonably be expected to have a Parent Material Adverse
Effect.  Parent is, and has been since
the effective date thereof, in compliance in all material respects with the
provisions of the Sarbanes-Oxley Act applicable to it.   Except as set forth on Schedule 4.10,
each of Parent and its Subsidiaries has all permits, licenses, approvals,
certificates, Governmental Authorizations, and has made all notifications,
registrations, certifications and filings with all Governmental Authorities,
necessary or advisable for the operation of its business as currently
conducted, in each case except as has not had and would not reasonably be
expected to have a Parent Material Adverse Effect.  Except as set forth on Schedule 4.10,
all such permits, licenses, approvals, certificates and Governmental
Authorizations are in full force and effect. 
Except as set forth on Schedule 4.10, there is no action, audit,
case, proceeding or investigation pending or, to Parent’s Knowledge, threatened
in writing by any Governmental Authority with respect to (i) any alleged
violation by Parent or any of its Subsidiaries of any Legal Requirement, (ii)
any alleged failure by Parent or any of its Subsidiaries to have any permit,
license, approval, certification or other authorization required in connection
with the operation of the business of Parent and its Subsidiaries or (iii) any
change or amendment to the permits, licenses, approvals, certifications or
other authorizations which would impair the ability of Parent and/or its
Subsidiaries to operate in the normal course, in each case except as has not
had and would not reasonably be expected to have a Parent Material Adverse
Effect.  This Section 4.10 does
not relate to matters with respect to Taxes (which are the subject of Section
4.12), Employee Matters (which are the subject of Section 4.13) or
Employee Benefit Plans (which are the subject of Section 4.14).

Section 4.11           Litigation.  Except as set forth on Schedule 4.11,
there are no judgments, decrees, lawsuits, actions, proceedings, claims,
complaints, injunctions or orders by or before any Governmental Authority
pending or, to Parent’s Knowledge, threatened in writing or, to Parent’s
Knowledge, any pending investigation by any Governmental Authority, in any such
case, against Parent or any of its Subsidiaries which have had or would
reasonably be expected to have a Parent Material Adverse Effect.

Section
4.12           Taxes.

(a)           Except as set forth on Schedule
4.12(a), or except as has not had and would not reasonably be expected to
have a Parent Material Adverse Effect, each of Parent and its Subsidiaries has
duly and timely filed all Tax Returns required to be filed by it, all such Tax
Returns have been prepared in material compliance with all applicable Legal
Requirements and are true, correct and complete in all material respects.  Except as set forth on Schedule 4.12, or
except as has not had and would not reasonably be expected to have a

 20
 

Parent Material Adverse Effect, all Taxes owed by each
of Parent and its Subsidiaries, whether or not shown as due on any such Tax
Return, have been timely paid.

(b)           Except as set forth on Schedule
4.12(b), or except as has not had and would not reasonably be expected to have
a Parent Material Adverse Effect:

(i)            neither Parent nor any of its Subsidiaries
is currently the subject of a Tax audit or examination nor is party to any
claim, dispute, action or controversy;

(ii)           neither Parent nor any of its
Subsidiaries has consented to extend the time, or is the beneficiary of any
extension of time, in which any Tax may be assessed or collected by any taxing
authority;

(iii)          neither Parent nor any of its
Subsidiaries has received from any taxing authority any written notice of
proposed adjustment, deficiency, underpayment of Taxes or any other such written
notice which has not been satisfied by payment or been withdrawn;

(iv)          no claim, or notice of a claim, has
ever been made by an authority in a jurisdiction where Parent or any of its
Subsidiaries does not file Tax Returns that Parent or any of its Subsidiaries
is or may be subject to taxation by that jurisdiction;

(v)           the unpaid Taxes of Parent and its
Subsidiaries did not, as of December 31, 2006, exceed the reserve for Taxes
(rather than any reserve for deferred Taxes established to reflect timing differences
between GAAP and Tax income) set forth on the face of the Latest Parent Balance
Sheet.  Parent and its Subsidiaries have
paid all estimated Taxes required to be paid for Parent’s, and each of its
Subsidiaries’, current taxable year; and

(vi)          neither Parent nor any of its
Subsidiaries has ever been a member of a combined, consolidated, affiliated or
unitary group for Tax purposes, other than a group of which Parent is or one of
its Subsidiaries was the parent corporation.

Section 4.13           Employee Matters.  Except as set forth on Schedule 4.13,
(i) neither Parent nor any of its Subsidiaries has entered into any collective
bargaining agreement with respect to its employees, (ii) there is no labor
strike, labor dispute, or work stoppage or lockout pending or, to Parent’s
Knowledge, threatened in writing against or affecting Parent or any of its
Subsidiaries and since January 1, 2005 there has been no such action, (iii) to
Parent’s Knowledge, no union organization campaign is in progress with respect
to any of the employees of Parent or any of its Subsidiaries, and (iv) except
as has not had and would not reasonably be expected to have a Parent Material
Adverse Effect, there is no unfair labor practice, charge or complaint pending
or, to Parent’s Knowledge, threatened against Parent or any of its
Subsidiaries.  Neither Parent nor any of
its Subsidiaries has engaged in any plant closing or employee layoff activities
since January 1, 2005 that would violate or give rise to an obligation to
provide any notice required pursuant to the Worker Adjustment Retraining and
Notification Act of 1988, as amended, or any similar state or local plant
closing or mass layoff statute, rule or regulation.

 21
 

Section 4.14           Employee Benefit Plans.  Each Parent Employee Benefit Plan has been
maintained and administered in compliance in all material respects with the
applicable requirements of ERISA, the Code and any other applicable Legal
Requirements.

Section
4.15           Intellectual Property
Rights.

(a)           Except as set forth on Schedule
4.15(a), Parent and its Subsidiaries own all right, title and interest in,
free and clear of all Liens, or have a license or other right to use, all of
the material Intellectual Property Rights necessary for the conduct of the
business of Parent and its Subsidiaries as currently conducted (collectively,
the “Parent Intellectual Property Rights”).

(b)           To Parent’s Knowledge, the Parent
Intellectual Property Rights are valid and enforceable by Parent and/or its
Subsidiaries.  Except as has not had and
would not reasonably be expected to have a Parent Adverse Effect, there is not
pending against Parent or any of its Subsidiaries or, to Parent’s Knowledge,
threatened against Parent or any of its Subsidiaries any claim by any third
party contesting the validity, enforceability, ownership, or Parent’s and its
Subsidiaries’ rights with respect to, any Parent Intellectual Property Rights,
and there has been no such claim pending or, to Parent’s Knowledge, threatened
in the past three (3) years.  Except as
has not had and would not reasonably be expected to have a Parent Adverse
Effect, to Parent’s Knowledge, the operations of Parent and its Subsidiaries,
and the provision of goods and services therein, do not infringe or
misappropriate any material Intellectual Property Rights of any third
party.  Except as has not had and would
not reasonably be expected to have a Parent Adverse Effect, there is no pending
or, to Parent’s Knowledge, threatened assertion or claim and there has been no
such assertion or claim in the last three (3) years asserting that the
operations of Parent or any of its Subsidiaries infringe upon or misappropriate
in any way the material Intellectual Property Rights of any Person.

Section 4.16           Contracts.  Schedule 4.16 sets forth a list
of all contracts, agreements, leases, permits or licenses that would be
required to be filed by Parent as of the date hereof as a “material contract”
pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act (the “Parent
Contracts”).  Each Contractual
Obligation of Parent is a valid and binding agreement of Parent or its
Subsidiary, as the case may be, and, to Parent’s Knowledge, of the other
parties thereto, enforceable by Parent or its Subsidiary against the other
party thereto in accordance with its terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting generally the
enforcement of creditors’ rights and subject to general principles of
equity).  Except as has not had and would
not reasonably be expected to have a Parent Material Adverse Effect, (A)
neither Parent nor any of its Subsidiaries or, to Parent’s Knowledge, any other
party to any Contractual Obligation of Parent, is in breach or violation of, or
default under any such Contractual Obligation of Parent (and no event has
occurred which with notice or lapse of time would constitute such breach,
violation or default) and (B) neither Parent nor any of its Subsidiaries has
received written notice of any such breach, violation or default under any such
Contractual Obligation of Parent.  Parent
has made available to the Investors true and complete copies of all Parent
Contracts, including all amendments thereto.

 22
 

Section 4.17           Insurance.  Except as would not, individually or in the
aggregate, have or reasonably be expected to have a Parent Material Adverse
Effect, the insurance policies maintained by Parent and its Subsidiaries
provide insurance in such amounts and against such risks as are customary and
adequate for companies of similar size and operating in the same industry as
Parent and its Subsidiaries, and such insurance policies are in full force and
effect and were in full force and effect during the periods of time such
insurance policies are purported to be in effect and all premiums due with
respect to all such policies have been paid.

Section
4.18           Real Property.

(a)           Each material lease or sublease of
real property to which Parent or any of its Subsidiaries is a party or by which
it is bound (each a “Parent Lease”, and collectively the “Parent
Leases”) is a valid and binding agreement of Parent or its Subsidiary, as
the case may be, and, to Parent’s Knowledge, of the other parties thereto,
enforceable in accordance with its terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting generally the
enforcement of creditors’ rights and subject to general principles of
equity).  Except as set forth on Schedule
4.18(a), (A) neither Parent nor any of its Subsidiaries or, to Parent’s
Knowledge, any other party to any Parent Lease is in material breach or
material violation of, or material default under any such Parent Lease (and no
event has occurred which with notice or lapse of time would constitute such
material breach, violation or default) and (B) neither Parent nor any of its
Subsidiaries has received written notice of any such material breach, violation
or default under any such Parent Lease. 
Parent has made available to the Investors true and complete copies of
all Parent Leases, including all amendments thereto and all material notices
and correspondence, memoranda of lease, estoppel certificates and
subordination, non-disturbance and attornment agreements related thereto.

(b)           Neither Parent nor any of its
Subsidiaries owns any real property.

Section 4.19           Transactions With Affiliates.  Except as set forth on Schedule 4.19
or as described in Parent SEC Documents filed prior to the date hereof, and
except pursuant to the Transactions, no director or executive officer of Parent
or of any of its Subsidiaries (or, to Parent’s knowledge, any family member of
any such Person who is an individual or any entity in which any such Person or
any such family member owns a material beneficial interest) or any Person
owning 5% of more of Parent Common Stock (i) is involved in any material
business arrangement or relationship with Parent or any of its Subsidiaries
other than employment arrangements and severance arrangements entered into in
the ordinary course of business or (ii) owns any material property or right,
tangible or intangible, which is used by Parent or any of its Subsidiaries.

Section 4.20           Financing.  Parent has received a commitment letter,
dated as of May 7, 2007 (the “Debt Commitment Letter”), from Bank of
America, N.A. (the “Lender”), pursuant to which the Lender has committed,
subject to the terms and conditions set forth therein, to provide up to
$500,000,000 in senior secured debt financing (the “Debt Financing”).
True, accurate and complete copies of the Debt Commitment Letter, as in effect
on the date of this Agreement, have been furnished to the Investors.  The proceeds to Parent from the issuance

 23
 

and sale of the Convertible Shares to the Investors
pursuant to this Agreement together with the financing contemplated by the Debt
Commitment Letter (collectively, the “Financing”) is sufficient for
Parent to consummate the Transactions on the Closing Date and pay the initial
merger consideration under the Merger Agreement and all related fees and
expenses thereunder and hereunder.  As of
the date hereof, (A) the Debt Commitment Letter has not been amended or
modified, and (B) the financing commitments contained in the Debt Commitment
Letter have not been withdrawn or rescinded in any respect.  The Debt Commitment Letter, in the form so
delivered, is in full force and effect and is a legal, valid and binding
obligation of Parent and, to the Knowledge of Parent, the other parties
thereto.  As of the date hereof and
assuming the accuracy of all representations and warranties of MemberHealth in
the Merger Agreement, no event has occurred which, with or without notice,
lapse of time or both, would constitute a default or breach on the part of
Parent under any term or condition of the Debt Commitment Letter.  As of the date hereof and assuming the
accuracy of all representations and warranties of MemberHealth in the Merger
Agreement and compliance by MemberHealth with its agreements in the Merger
Agreement, Parent has no reason to believe that it will be unable to satisfy on
a timely basis any term or condition of closing to be satisfied by it contained
in the Debt Commitment Letter.  Parent
has fully paid, or caused to be fully paid, any and all commitment and other
fees required by the terms of the Debt Commitment Letter to be paid on or before
the date hereof.

Section 4.21           Information Supplied.  The information included or incorporated by
reference or to be included or incorporated by reference in the Registration
Statement (other than information supplied by the Investors in writing
specifically for inclusion therein) shall not at the time the Registration
Statement is filed with the SEC or at any time it is supplemented or amended or
at the time it becomes effective under the Securities Act contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. The information
included or incorporated by reference or to be included or incorporated by
reference in the Proxy Statement (other than information supplied by the
Investors in writing and designated specifically for inclusion therein) shall
not, on the date the Proxy Statement is mailed to the shareholders of Parent
(or of MemberHealth), or on the Parent Shareholder Meeting Date, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.

Section 4.22           Required Parent Shareholder
Approval.  The Required Parent
Shareholder Approval is the only vote of the holders of Parent’s capital stock
or other securities necessary (under applicable Legal Requirement or otherwise)
to consummate the Transactions. No vote of the holders of Parent’s capital
stock or other securities is necessary (under applicable Legal Requirement or
otherwise) to consummate the transactions contemplated by the Stage 1 Purchase
Agreement.

Section 4.23           Valid Issuance of Parent Shares.  Prior to the closing under the Stage 1
Purchase Agreement, Parent shall have (i) duly filed the Series A Preferred
Stock Certificate of Designations and Series B Preferred Stock Certificate of
Designations, in the forms attached as Exhibits B-1 and B-2 hereto,
respectively, with the Secretary of State of the State

 24
 

of New York in accordance with all applicable
provisions of the Business Corporation Law of the State of New York and (ii)
delivered to the Investors a correct and complete official copy of such filing
dated and stamped as accepted and filed by such Secretary of State.  The issuance, sale and delivery by Parent of
the shares of Series A Preferred Stock and Series B Preferred Stock pursuant to
the Stage 1 Purchase Agreement (and the issuance and delivery of shares of
Series B Preferred Stock issuable in exchange for any such shares of Series A
Preferred Stock) and of the Convertible Shares in accordance with this
Agreement, and the issuance and delivery of the Conversion Shares issuable upon
conversion of all such shares of Series A Preferred Stock and Series B
Preferred Stock, have been duly authorized by all necessary corporate action on
the part of Parent (subject, with respect to the Convertible Shares, to
obtaining the Required Parent Shareholder Approval).  The Conversion Shares have been duly reserved
for issuance.  The Convertible Shares
(when issued, sold and delivered at the Closing against payment therefor in
accordance with the provisions of this Agreement), all shares of Series A
Preferred Stock and Series B Preferred Stock deliverable pursuant to the Stage
1 Purchase Agreement (and all shares of Series B Preferred Stock issuable in
exchange for any such shares of Series A Preferred Stock), and all of the
Conversion Shares (when issued upon conversion of such shares of Series A
Preferred Stock and Series B Preferred Stock), will all be duly and validly
issued, fully paid and nonassessable, free and clear of any Liens (other than
transfer restrictions of general applicability under the Securities Act).  No Person has any preemptive right which
would be triggered by reason of the issuance of Convertible Shares, the Stage 1
Shares or Conversion Shares.

Section 4.24           Anti-Takeover Statutes.  The Board of Directors of Parent has taken
all action necessary to ensure that any restrictions on business combinations
contained in the provisions of Section 912 of the New York Business Corporation
Law will not apply to the Transactions (including the Shares Issuances) and the
Collective Transactions.  No other “fair
price,” “moratorium,” “control share acquisition” or other similar
anti-takeover statute or regulation or any anti-takeover provision in Parent’s
Certificate of Incorporation or Bylaws is, or at the Closing will be,
applicable to Parent, the shares of Parent capital stock, the Transactions or
such other transactions contemplated by this Agreement, the other Transaction
Agreements, the Merger Agreement and the Collective Transactions.

Section 4.25           Exemption from Registration.  Assuming the accuracy of the representations
and warranties made by the Investors in Section 3.7 of this Agreement,
the offer and issuance by Parent of the Convertible Shares under this
Agreement, and the issuance and delivery of the Conversion Shares upon
conversion of Convertible Shares, is exempt from registration under the
Securities Act.

Section 4.26           Brokers.  Except as set forth on Schedule 4.26,
no Person is or will be entitled to a broker’s, finder’s, investment banker’s,
financial advisor’s or similar fee from Parent or any of its Subsidiaries in
connection with this Agreement, the Stage 1 Purchase Agreement, the Merger
Agreement or the Transactions.

 25

Section
4.27           Fairness Opinion;
Acknowledgement.

(a)           The Board of Directors of Parent has
received the opinion of Credit Suisse, dated the date of this Agreement, to the
effect that, as of such date, the merger consideration to be paid by Parent
pursuant to the Merger Agreement is fair to Parent from a financial point of
view.  A correct and complete copy of
such opinion has been delivered to the Investors.

(b)           Parent acknowledges and agrees that
Investors are acting solely in the capacity of arm’s length purchasers with
respect to this Agreement and the transactions contemplated hereby.  Parent further acknowledges that (i)
Investors are not acting as advisors or fiduciaries of Parent (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and (ii) Parent’s decision to enter into this Agreement and
the other Transaction Agreements has been based solely on the independent
evaluation of the transactions contemplated hereby and thereby by Parent and
its independent representatives.

Section 4.28           Merger Agreement.  Attached hereto as Exhibit A is a
correct and complete copy of the definitive Merger Agreement executed by the
parties thereto, together with all schedules and exhibits thereto, and none of
the foregoing have been amended, supplemented or otherwise modified as of the
date hereof.

ARTICLE 5

COVENANTS
AND AGREEMENTS

Section
5.1             Access; Documents and
Information.

(a)           Except for information that, if
provided, would adversely affect the ability of a Person or any of its
Subsidiaries to assert attorney-client or attorney work product privilege or a
similar privilege or as limited by applicable Legal Requirements or the
confidentiality provisions of any material agreement, from and after the date
hereof until the earlier of the Closing or the termination of this Agreement in
accordance with its terms, Parent shall, and shall cause its Subsidiaries to,
afford to the officers, employees, accountants, counsel and other
representatives and agents of each Investor (each of the foregoing,
respectively for each Investor, “Investor Representatives”), during
normal business hours and upon reasonable request, reasonable access to Parent’s
and its Subsidiaries’ books, records, leases, licenses, contracts, properties,
officers, employees, accountants, counsel and other representatives who have
material knowledge relating to Parent or any of its Subsidiaries.  Each Investor and its respective Investor
Representatives shall conduct any investigation under this Section 5.1(a)
in a manner that does not unreasonably interfere with the conduct of the
business of Parent and its Subsidiaries. 
An Investor shall be responsible for any breach of this Section
5.1(a) by any of its Investor Representatives.

(b)           All information and documents disclosed
to an Investor or its Investor Representatives, whether before or after the
date hereof, pursuant to this Agreement or in connection with the transactions
contemplated by, or the discussions and negotiations

 26
 

preceding, this Agreement shall be subject to the
terms of the Parent Confidentiality Agreement.

Section 5.2             Charter Amendment.  Prior to the Closing, Parent shall duly file
the Charter Amendment with the Secretary of State of the State of New York in
accordance with all applicable provisions of the Business Corporation Law of
the State of New York.

Section
5.3             Conduct of Business by
Parent.

(a)           From and after the date hereof until
the earlier of the Closing or the termination of this Agreement in accordance
with its terms, Parent will, and will cause its Subsidiaries to, except as
otherwise provided on Schedule 5.3(b) or as otherwise required by this
Agreement or the Merger Agreement (as in effect on the date hereof), by
applicable Legal Requirements, or consented to in writing by each of the Investors
(which consent shall not be unreasonably withheld, conditioned or delayed):

(i)            conduct its business in the ordinary
and regular course in substantially the same manner as heretofore conducted
(including any conduct that is reasonably related, complementary or incidental
thereto);

(ii)           use commercially reasonable efforts
to maintain the insurance described on Schedule 4.17 (or reasonable
replacement policies);

(iii)          preserve intact its business
organization and material relationships with third parties with whom Parent and
its Subsidiaries do business; and

(iv)          consult with the Investors prior to
taking any action which would reasonably be expected to result in a Parent
Material Adverse Effect.

(b)           Without limiting the generality of
the foregoing, from and after the date hereof until the earlier of the Closing
or the termination of this Agreement in accordance with its terms, Parent will
not, and will not cause or permit any of its Subsidiaries to, except as
otherwise provided on Schedule 5.3(b), or as otherwise required by this
Agreement or by applicable Legal Requirements, or as otherwise consented to in
writing by each of the Investors (which consent shall not be unreasonably
withheld, conditioned or delayed):

(i)            amend its Governing Documents
(except to change Parent’s authorized shares of capital stock in the manner
contemplated by this Agreement or to amend Parent’s by-laws to increase the
size of its board of directors);

(ii)           authorize or adopt a plan of
liquidation or dissolution;

(iii)          (A) except with respect to Parent’s
wholly owned Subsidiaries, declare or pay dividends on, or make other
distributions in respect of, any capital stock or other equity interests, (B)
adjust, split, combine or reclassify any capital stock or other equity
interests; (C) issue, sell, pledge or otherwise transfer any capital stock or
other equity interests or any securities exercisable or exchangeable for or
convertible into capital stock or other equity interests, other than (w) the issuance of Convertible Shares as contemplated
by this

 27
 

Agreement, (x) the issuance of the Stage 1 Shares as
contemplated by the Stage 1 Purchase Agreement (and the issuance of shares of
Series B Preferred Stock upon exchange of shares of Series A Preferred Stock),
(y) the issuance of Parent Common Stock as Merger consideration pursuant to,
and on the terms and subject to the conditions set forth in, the Merger
Agreement as in effect on the date of this Agreement, or the issuance of any
Conversion Shares upon conversion of any shares of Series A Preferred Stock or
Series B Preferred Stock and (z) the issuance of Parent Common Stock issued
pursuant to the terms of Outstanding Parent Stock Awards or (D) purchase, redeem or otherwise acquire any capital stock or
other equity interests;

(iv)          merge or consolidate with, or acquire
any equity interest in, any business entity, or acquire any line of business,
division or other material assets other than in the ordinary course of business
or pursuant to the Merger Agreement;

(v)           enter into any new line of business;

(vi)          sell, lease, license, encumber or
otherwise dispose of, or subject to any Lien (other than a Permitted Lien), any
of its material assets other than in the ordinary course of business;

(vii)         make any change in its customary
methods of accounting or accounting practices, other than changes required by
GAAP, industry organizations or Governmental Authorities;

(viii)        enter into a settlement or compromise of
any pending or threatened claims, litigation, arbitrations or other proceedings
if such settlement or compromise (A) involves payments by or to Parent or any
of its Subsidiaries of more than $500,000 in the aggregate or (B) involves a
consent to material non-monetary relief by Parent or any Subsidiary of Parent;

(ix)           incur or guarantee any Funded
Indebtedness other than (A) in the ordinary course of business or (B) pursuant
to the Debt Commitment Letter for purposes of financing the Merger; or

(x)            enter into a contractual obligation
to do any of the things referred to in this Section 5.3(b).

(c)           Promptly after receipt by Parent of
the notice of commencement thereof, Parent shall provide the Investors with
notice of (i) any audit, investigation, claim (excluding immaterial
adjustments, complaints, and corrective activity in the ordinary course of
business), proceeding, settlement, judgment, consent order, or corporate
integrity agreement by or imposed by any Governmental Authority, (ii) any
suspension, debarment or disqualification of Parent from being a government
contractor, holder of any Governmental Authorization or recipient of
reimbursement from any Payment Program, or (iii) any suspension,
termination, or revocation of any Governmental Authorization.

(d)           Parent shall provide the Investors
with reasonable notice of any and all 
settlement discussions and/or negotiations (excluding immaterial
adjustments, complaints,

 28
 

and corrective activity in the ordinary course of
business) (“Settlement Discussions”) between representatives of Parent
and any Governmental Authority, including without limitation negotiations with
respect to any claim, settlement agreement, consent order or corporate
integrity agreement between Parent and any Governmental Authority.  In connection with any such Settlement
Discussions, (i) Parent shall timely provide the Investors with copies of any
and all documents that Parent intends to submit, or that Parent receives, in
connection with any such Settlement Discussions, and (ii) Parent shall timely
advise the Investors as to the status of such Settlement Discussions.

(e)           Parent shall furnish the Investors,
within ten (10) days of the receipt by Parent, any and all written notices or
charges issued relating to non-compliance from any Governmental Authority
and/or any Payment Program that Parent’s Governmental Authorizations, Medicare
or Medicaid certification, or accreditation or ranking by any Governmental
Authority or Payment Program are being, or could be, downgraded, revoked, or
suspended, that action is pending, being considered or being, or could be,
taken to downgrade, revoke, or suspend Parent’s Governmental Authorization or
certification or to fine, penalize or impose material remedies upon Parent, or
that action is pending, being considered, or being, or could be, taken, to
discontinue, suspend, deny, decrease or recoup any payments or reimbursements
due, made or coming due to Parent or related to the operation of Parent.

(f)            Parent shall furnish the Investors,
within ten (10) Business Days of receipt but at least five (5) days prior to
the earliest date on which Parent is required to take any action with respect
thereto or would suffer any material adverse consequence, a copy of any Payment
Program or other Governmental Authority licensing or accreditation or ranking
agency or entity survey, report, warning letter, or written notice, and any
statement of deficiencies, and within the time period required by the
particular agency for furnishing a plan of correction also furnish or cause to
be furnished to the Investors a copy of the plan of correction generated from
such survey, report, warning letter, or written notice for Parent and by
subsequent correspondence related thereto, and use commercially reasonable
efforts to correct or cause to be corrected any deficiency, the curing of which
is a condition of continued licensure or of full participation in any Payment
Program by the date required for cure by such agency or entity (plus extensions
granted by such agency or entity).

(g)           Prior to the Closing, Parent shall
promptly notify the Investors if Parent obtains Knowledge that any of the
representations and warranties of Parent in this Agreement are not true and
correct in all material respects.

(h)           Prior to the Closing, Parent shall
promptly provide the Investors and Investor Representatives correct and
complete copies of all notices, documents and other materials made available by
or to Parent under the Merger Agreement.

Section 5.4             Closing Documents.  Each Investor, severally but not jointly,
hereby agrees that it shall, prior to or on the Closing Date, execute and
deliver, or cause to be executed and delivered to Parent, the documents or
instruments described in Section 6.2 (c) Parent shall, prior to or on
the Closing Date, execute and deliver, or cause to be executed and delivered,
to the Investors, the documents or instruments described in Section 6.3(h).

 29
 

Section 5.5             Commercially Reasonable Efforts;
Further Assurances.

(a)           Each Investor, severally but not
jointly, and Parent, shall cooperate with each other and use (and shall cause
their respective Affiliates to use) their respective commercially reasonable
efforts to take or cause to be taken all actions, and to do or cause to be done
all things necessary, proper or advisable under all applicable Contracts and
Legal Requirements to consummate and make effective the Collective Transactions
as soon as practicable, including preparing and filing as promptly as
practicable all documentation to effect all necessary notices, reports and
other filings and to obtain as promptly as practicable all waivers, consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from CMS and/or any other Governmental Authority or other third
party (hereinafter referred to as “Consents”) and to lift any injunction
or other legal bar to the transactions contemplated hereby in order to
consummate the transactions contemplated hereby as promptly as
practicable.  All costs incurred in
connection with obtaining such Consents, including CMS consent fees and expert
consultant fees, shall be borne by Parent. 
HSR filing fees shall be borne by Parent.  Without limiting the foregoing, each
Investor, severally but not jointly, and Parent, undertakes and agrees to file
(or cause their respective Affiliates to file, as applicable) as soon as
practicable, and in any event prior to fifteen (15) Business Days after the
date hereof, a Notification and Report Form under the HSR Act with the United
States Federal Trade Commission (the “FTC”) and the Antitrust Division
of the United States Department of Justice (the “Antitrust Division”).  Each Investor, severally but not jointly, and
Parent, agrees to make appropriate filings with all appropriate Governmental
Authorities, including insurance regulators, other competition authorities and
CMS (or cause their respective Affiliates to make such filings, as applicable)
with respect to the Collective Transactions promptly after the date of this
Agreement and shall supply as promptly as practicable to such Governmental
Authorities any additional information and documentary material that may be
requested in connection therewith.  Each
Investor, severally but not jointly, and Parent, agrees to (and to  cause their respective Affiliates to) respond
as promptly as practicable to any inquiries received from such Governmental
Authorities for additional information or documentation and to all inquiries
and requests received from any other Governmental Authority in connection with
Consents.

(b)           Parent shall (and shall cause its
Affiliates to) offer to take (and if such offer is accepted, commit to take)
all reasonable steps to avoid or eliminate impediments under any antitrust,
competition, or trade regulation Legal Requirement that may be asserted by the
FTC, the Antitrust Division or any other Governmental Authority with respect to
the Collective Transactions so as to enable the Closing to occur as
expeditiously as possible; provided,  however, that nothing in
this Agreement will require, or be deemed to require, Parent to agree to or
effect any divestiture.  In addition,
nothing in this Agreement will require or be deemed to require Parent to take
any other action (including agreeing to any requirements or conditions to be
imposed in order to obtain CMS or insurance regulatory consents or approvals,
including those listed on Schedule 6.1(b) hereto) if in the reasonable
judgment of Parent doing so would be materially detrimental to the business
conducted by Parent or MemberHealth taken as a whole.  Subject to the foregoing sentence,
Parent shall cooperate in a reasonable manner with the Investors in connection
with Investors’ efforts to seek consents and approvals from Governmental
Authorities in connection with the Transactions (including by keeping the
Investors informed on a reasonably current basis of

 30
 

the status of such efforts and using its commercially
reasonable efforts to permit the representatives of the Investors to attend any
meetings between Parent’s representatives and Governmental Authorities).

(c)           In the event any claim, action, suit,
investigation or other proceeding by any Governmental Authority or other Person
is commenced which questions the validity or legality of the transactions
contemplated hereby or seeks damages in connection therewith, the Investors,
severally but not jointly, and Parent, agree to cooperate and use commercially
reasonable efforts to defend against such claim, action, suit, investigation or
other proceeding and, if an injunction or other order is issued in any such
action, suit or other proceeding, to use commercially reasonable efforts to
have such injunction or other order lifted, and to cooperate reasonably
regarding any other impediment to the consummation of the Collective
Transactions.

(d)           Notwithstanding the foregoing or any
other provision of this Agreement, nothing in this Section 5.5 shall (i) limit
any applicable rights the Investors may have to terminate this Agreement
pursuant to Article 7, (ii) require any Investor to offer, accept or agree to
(A) dispose or hold separate any businesses, assets or operations and/or (B)
restrict the manner in which, or whether, such Investor or any of its
Affiliates may carry on business or compete in any geographic area or line of
business, or (iii) obligate any Investor to litigate or threaten any
litigation.

(e)           Parent shall provide to the Investors
copies of any application or other communication, which references the
Investors, to Governmental Authorities in connection with the Merger Agreement
in advance of filing or submission thereof, and Parent shall provide the
Investors a reasonable opportunity to comment upon or modify any such reference
as to the Investors.  Parent’s consent to
accepting such comment or modification shall not be unreasonably withheld.

Section 5.6             Public Announcements.  The timing and content of all announcements
regarding any aspect of this Agreement to the financial community, governmental
agencies or the general public shall be mutually agreed upon in advance by the
Investors and Parent; provided,
that each party hereto may make any such announcement which it in good faith
believes, based on advice of counsel, is necessary in connection with any Legal
Requirement, it being understood and agreed that each party shall provide the
other parties hereto with copies of any such announcement in advance of such
issuance and the reasonable opportunity to comment on the same.

Section 5.7             Availability of Shares.  Parent will not issue or agree to issue any
shares of Parent Common Stock or options, rights or warrants to purchase shares
of Parent Common Stock or securities convertible into or exchangeable for
shares of Parent Common Stock or take any other action if, after giving effect
thereto, the number of shares of Parent Common Stock remaining unissued and
duly reserved for issuance upon conversion of the shares of Series A Preferred
Stock and Series B Preferred Stock shall be insufficient to permit conversion
of all the then outstanding shares of Series A Preferred Stock and Series B
Preferred Stock after giving effect to any adjustment in the number of shares
of Parent Common Stock into which such shares of Series A Preferred Stock and
Series B Preferred

 31
 

Stock are convertible as a result of such action.  Parent shall take all action necessary to at
all times have authorized, and reserved for the purpose of issuance, after the
Closing Date, the maximum number of shares of Parent Common Stock issuable from
time to time upon conversion of the shares of Series A Preferred Stock and
Series B Preferred Stock.

Section 5.8             Certificates.  If, from and after the Closing, any
certificate for shares of Series A Preferred Stock or Series B Preferred Stock
or Conversion Shares shall be mutilated, lost, stolen or destroyed, Parent
shall issue, in exchange and in substitution the mutilated certificate, or in
lieu of and substitution for the certificate lost, stolen or destroyed, a new
certificate of like tenor and representing an equivalent amount and kind of
shares.  If reasonably required by Parent
in connection with replacing a share certificate as aforesaid, the applicable
record holder of such shares shall furnish Parent with an indemnity on
customary terms for such situations, reasonably sufficient to protect Parent
from any out-of-pocket loss which it may suffer from replacing such
certificate.

Section 5.9             Certain Claims.  Without limiting Parent’s obligations under
any other provision of this Agreement (or under any other contractual
obligation, or under the Certificate of Incorporation or By-laws of Parent),
Parent shall (a) cooperate with the Investors in the defense or settlement of
any claim, suit, litigation, arbitration or proceeding (“Claim”) against
Parent and/or its directors that is brought or asserted by any third party
(whether filed in the name of a shareholder of Parent or other third party or
derivatively in the name of Parent) in which any of the Investors or any of
their respective Affiliates is made a party (by subpoena or otherwise),
challenging, or otherwise arising out of or relating to, this Agreement or the
Stage 1 Purchase Agreement, and (b) reimburse the Investors for reasonable
attorney’s fees and expenses incurred by the Investors or any of their
respective Affiliates in connection with any Claim; provided
that (i) each Investor, severally but not jointly, hereby agrees to cooperate
reasonably with Parent in connection with the defense, or any proposed
settlement of, any such Claim; (ii) unless in the reasonable judgment of the
Investors there exists an actual or potential conflict of interest between
Investors, this clause (b) shall apply only to one counsel (plus local counsel
in each applicable jurisdiction) for all the Investors (it being understood
that this clause (ii) shall not limit any rights a Person may otherwise have to
indemnification or advancement of expenses from Parent); and (iii) this clause
(b) shall not apply to any expenses incurred in connection with any Claim
brought or asserted by any Person in such Person’s capacity as a limited
partner or other investor in any investment fund controlled or managed by an
Investor.

Section 5.10           Certain Tax Matters.  All transfer, documentary, sales, use, stamp,
registration and other such Taxes, and all conveyance fees, recording charges
and other fees and charges (including any penalties and interest) incurred in
connection with consummation of the Transactions shall be paid by Parent.

Section
5.11           Preparation of the Proxy
Statement; Parent Shareholder Meeting.

(a)           As
soon as practicable following the date of this Agreement (but in any event no
later than twenty (20) Business Days
after the date of this Agreement),
Parent shall prepare in accordance with the provisions of the Securities
Act and the Exchange Act, as applicable, and Parent shall file with the SEC the
Proxy Statement.  Each Investor,
severally

 32
 

but not jointly, and Parent, agree to cooperate with
each other in connection with the preparation of the Proxy Statement.  Each of the parties shall be provided with
reasonable opportunity to review and comment on drafts of the Proxy Statement
(including each amendment or supplement thereto) and all responses to requests
for additional information by and replies to comments of the SEC, prior to
filing such with or sending such to the SEC, and Parent will provide the
Investors with copies of all such filings made and correspondence with the
SEC.  Parent shall include in any such
documents or responses all comments reasonably proposed by the Investors and
shall not file, mail or otherwise deliver such document or respond to the SEC
or the staff of the SEC over an Investor’s reasonable objection.  Parent will as promptly as practicable notify
the Investors of (i) the receipt of any oral or written comments from the SEC
with respect to the Registration Statement or the Proxy Statement, (ii) any request by the SEC for any amendment to
the Registration Statement or the Proxy Statement or comments thereon and
responses thereto or requests from the SEC for additional information, (iii)
the time at which the Registration Statement has become effective or any
supplement or amendment has been filed with the SEC, (iv) the issuance of any
stop order or (v) the suspension of the qualification of any of the shares of
Parent capital stock issuable in connection with the Transactions (or shares
issuable upon conversion thereof) for offering or sale in any jurisdiction.

(b)           Parent will use its commercially reasonable
efforts to have the Proxy Statement cleared by the SEC as soon as practical
after the date hereof. Parent shall take all or any action reasonably required
under Legal Requirements pertaining to applicable state securities laws in
connection with the issuance of Stage 1 Shares pursuant to the Stage 1 Purchase
Agreement (and shares of Series B Preferred Stock issuable in exchange for any
shares of Series A Preferred Stock) and of the Convertible Shares in accordance
with this Agreement, and the issuance and delivery of the Conversion
Shares.  Each Investor, severally but not
jointly, and Parent, agree to furnish all information concerning itself as the
other may reasonably request in connection with such actions and the
preparation of the Proxy Statement.  As
promptly as practicable, but in no event later than the third Business Day
after the Registration Statement is declared effective under the Securities
Act, Parent shall mail or cause to be mailed the Proxy Statement to its
shareholders.

(c)           If at any time prior to the Parent
Shareholder Meeting Date, any information should be discovered by any party
hereto which should be set forth in an amendment or supplement to the Proxy
Statement so that the Proxy Statement would not include any misstatement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, the party which discovers such
information shall promptly notify the other parties hereto and, to the extent
required by applicable Legal Requirement, the parties will cooperate with each
other in connection with the preparation of an appropriate amendment or
supplement describing such information, which amendment or supplement will be
promptly filed by Parent with the SEC and, in the case of any amendment or
supplement to the Proxy Statement, disseminated to the shareholders of Parent.

(d)           Parent shall, acting through its
Board of Directors and in accordance with applicable Legal Requirements and the
Certificate of Incorporation and the Bylaws of Parent, (i) duly call, give
notice of, convene and hold the Parent Shareholder Meeting as

 33
 

promptly as practicable for the purpose of obtaining
the Required Parent Shareholder Approval, (ii) use its commercially reasonable
efforts to hold the Parent Shareholder Meeting as soon as practicable after the
date on which the Registration Statement is declared effective under the
Securities Act and (iii) shall in any event hold the Parent Shareholder Meeting
within 45 days after such effective date. 
Parent shall solicit proxies in favor of the Required Parent Shareholder
Approval and shall take all other commercially reasonable action necessary or
advisable to secure the Required Parent Shareholder Approval in accordance with
all applicable Legal Requirements and its Governing Documents.  The Proxy Statement shall include the
recommendation of the Board of Directors of Parent to the stockholders of
Parent to vote in favor of the Parent Charter Vote and the Share Issuances (the
“Parent Board Recommendation”) and neither the Board of Directors of
Parent nor any committee thereof shall withhold or withdraw or amend, modify or
change in any manner adverse to the Investors, or propose to withhold or
withdraw or adversely amend, modify or change, the Parent Board Recommendation.

Section 5.12           Anti-Takeover Statutes.  Parent shall (i) take all action necessary to
ensure that no “business combination”, “fair price”, “control share acquisition”
or other similar anti-takeover statute or regulation, including Section 912 of
the New York Business Corporation Law, is or becomes applicable to the
Transactions (including the Share Issuances, any other transactions
contemplated by this Agreement or the other Transaction Agreements) or the
Collective Transactions or to the ownership and voting of such securities
deliverable in the Collective Transactions and (ii) if any such anti-takeover
statute or similar statute or regulation becomes applicable to any of such
transactions or to the ownership or voting of any such securities, take all
action necessary to ensure that each of such transactions may be consummated as
promptly as practicable on the terms contemplated by this Agreement and the other
agreements referred to herein and otherwise to minimize the effect of such
statute or regulation on such transactions and the ownership and voting of such
securities.

Section 5.13           Nasdaq National Market Listing.  Parent shall promptly prepare and file with
Nasdaq a Notification Form for Listing Additional Shares with respect to the
Conversion Shares, and shall use its reasonable efforts to obtain, prior to the
Closing, approval for the listing of such shares of Parent Common Stock,
subject only to official notice to Nasdaq of issuance, and each Investor,
severally but not jointly, agrees to cooperate with Parent with respect to such
filing.

Section 5.14           Legends.  Each Investor, severally but not jointly,
agrees with Parent not to transfer any Convertible Shares or Conversion Shares
unless (a) there is then in effect a registration statement under the
Securities Act covering such proposed transfer or (b) such transfer is made in
accordance with Rule 144 under the Securities Act or another available exemption
from registration under the Securities Act. 
Certificates representing Convertible Shares issued pursuant to this
Agreement may be imprinted with a legend substantially as follows (in addition
to any legends required pursuant to the Shareholders Agreement):

THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS OF ANY STATE, AND MAY
NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT RELATING

 34
 

THERETO
UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR
SUCH LAWS.

Securities law legends on share certificates shall be
removed by Parent (and a certificate without such legend shall be delivered, at
Parent’s expense) upon request (i) in connection with any transfer pursuant to
clause (b) of this Section if the legend is no longer required to ensure
compliance with the Securities Act, or (ii) in connection with any transfer
pursuant to clause (a) of this Section.

Section 5.15           Use of Proceeds.  Parent shall apply all of the proceeds from
the issuance and sale of Convertible Shares to the Investors pursuant to this
Agreement toward payments of the cash portion of the Merger consideration
pursuant to the Merger Agreement and payments of fees and expenses pursuant to Section
8.6 hereof, and the balance for general corporate purposes.

Section 5.16           Exchange
of Series A Preferred Stock for Series B Preferred Stock.  Without limiting any of Parent’s other
obligations contained elsewhere herein:

(a)           Parent hereby covenants that, at
anytime after the date hereof, at an Investor’s request and to the extent so
requested, Parent shall exchange all or any shares of Series A Preferred Stock
held by such Investor at such time for a like number of shares of Series B
Preferred Stock (such exchange, the “A/B Preferred Exchange”); provided
that, prior to the consummation of any such A/B Preferred Exchange, such
Investor shall have either received Regulatory Clearance, or represented to
Parent that no Regulatory Clearance is required, in connection with such A/B
Preferred Exchange.

(b)           Each Investor, severally but not
jointly, and Parent, shall cooperate with each other and use (and shall cause
their respective Affiliates to use) their respective commercially reasonable
efforts to take or cause to be taken all actions, and to do or cause to be done
all things necessary, proper or advisable under all applicable Contracts and
Legal Requirements to obtain all Regulatory Clearance in anticipation of
effecting any A/B Preferred Exchange requested by such Investor so as to enable
such A/B Preferred Exchange to occur as expeditiously as possible, including
preparing and filing as promptly as practicable all documentation to effect all
necessary notices, reports and other filings and to obtain as promptly as
practicable all waivers, consents, registrations, approvals, permits and
authorizations necessary or advisable to be obtained from CMS and/or any other
Governmental Authority or other third party (hereinafter referred to as “A/B
Consents”) and to lift any injunction or other legal bar to such A/B
Preferred Exchange in order to consummate such A/B Preferred Exchange as
promptly as practicable.  All costs
incurred in connection with obtaining such A/B Consents, including CMS consent
fees and expert consultant fees, shall be borne by Parent.  HSR filing fees shall be borne by
Parent.  Each Investor, severally but not
jointly, and Parent, agrees to make appropriate filings with all appropriate
Governmental Authorities, including insurance regulators, other competition
authorities and CMS (or cause their respective Affiliates to make such filings,
as applicable) promptly after the date of this Agreement in anticipation of any
A/B Preferred Exchange and shall supply as promptly as practicable to such
Governmental Authority any additional information and documentary material that
may be requested in connection therewith. 
Each

 35
 

Investor,
severally but not jointly, and Parent, agrees to (and to cause their respective
Affiliates to) respond as promptly as practicable to any inquiries received
from such Governmental Authority for additional information or documentation
and to all inquiries and requests received from any other Governmental
Authority in connection with A/B Consents.

(c)           Parent shall (and shall cause its
Affiliates to) offer to take (and if such offer is accepted, commit to take)
all reasonable steps to avoid or eliminate impediments under any antitrust,
competition, or trade regulation Legal Requirement that may be asserted by the
FTC, the Antitrust Division or any other Governmental Authority with respect to
any A/B Preferred Exchange so as to enable such A/B Preferred Exchange to occur
as expeditiously as possible; provided,  however, that nothing in this
Agreement will require, or be deemed to require, Parent to agree to or effect
any divestiture.  In addition, nothing in
this Agreement will require or be deemed to require Parent to take any other
action with respect to any A/B Preferred Exchange (including agreeing to any
requirements or conditions to be imposed in order to obtain CMS or insurance
regulatory consents or approvals) if doing so would be materially
detrimental to the business conducted by Parent or MemberHealth taken as a
whole.  Subject
to the foregoing sentence, Parent shall cooperate in a reasonable manner with
the Investors in connection with Investors’ efforts to seek consents and
approvals from Governmental Authorities in anticipation
of effecting any A/B Preferred Exchange (including by keeping the
Investors informed on a reasonably current basis of the status of such efforts
and using its commercially reasonable efforts to permit the representatives of
the Investors to attend any meetings between Parent’s representatives and
Governmental Authorities).

(d)           In the event any claim, action, suit,
investigation or other proceeding by any Governmental Authority or other Person
is commenced which questions the validity or legality of any A/B Preferred
Exchange or seeks damages in connection therewith, each Investor, severally but
not jointly, and Parent, agree to cooperate and use commercially reasonable
efforts to defend against such claim, action, suit, investigation or other
proceeding and, if an injunction or other order is issued in any such action,
suit or other proceeding, to use commercially reasonable efforts to have such
injunction or other order lifted, and to cooperate reasonably regarding any
other impediment to the consummation of such A/B Preferred Exchange.

(e)           Notwithstanding the foregoing or any
other provision of this Agreement, nothing in this Section 5.16 shall
require any Investor to (i) offer, accept or agree to (A) dispose or hold
separate any businesses, assets or operations, (B) restrict the manner in
which, or whether, such Investor or any of its Affiliates may carry on business
or compete in any geographic area or line of business, and/or (C) any
limitations with respect to its or its Affiliates’ ownership or voting of
Parent capital stock, or (ii) obligate any Investor to litigate or threaten any
litigation.

(f)            Parent agrees to use its
commercially reasonable efforts to obtain, at the earliest practicable date,
the Parent Charter Vote.  Upon obtaining
the Parent Charter Vote, Parent shall promptly duly file the Charter Amendment with the Secretary of State
of the State of New York in accordance with all applicable provisions of the
Business Corporation Law of the State of New York, and shall, with respect to
each then outstanding share of Series A Preferred Stock, on or after the first
anniversary of the original issue date of such share of

 36
 

Series A Preferred Stock,
effect an exchange of such share of Series A Preferred Stock for shares of a
class of non-voting Parent Common Stock authorized to be issued by Parent under
the Charter Amendment, which exchange shall be effected in accordance with the
provisions of the Series A Preferred Stock Certificate of Designation as if
such share of Series A Preferred Stock is being converted into Parent Common
Stock (in the form of such class of non-voting Parent Common Stock) under
Section 8 of the Series A Preferred Stock Certificate of Designations and at
the conversion rate specified therein (without giving effect to the provisions
of Section 8(a) of the Series A Preferred Stock Certificate of Designation).

ARTICLE 6

CONDITIONS TO CLOSING

Section 6.1             Mutual Conditions.  The respective obligations of each party to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment or waiver at or prior to the Closing of each of the following
conditions, any and all of which may be waived, in whole or in part, by Parent,
on the one hand, and unanimous consent of the Investors, on the other hand, to
the extent permitted by applicable law:

(a)           No Injunction.  At the Closing there shall be no effective
injunction, writ or preliminary restraining order or any order of any nature
issued by a court or Governmental Authority of competent jurisdiction to the
effect that any of the Collective Transactions contemplated by this Agreement,
the other Transaction Agreements or the Merger Agreement may not be consummated
as herein and therein provided.

(b)           Filings and Consents.  All material consents, authorizations, orders or approvals of, and filings
or registrations with, any state insurance regulators or other Governmental
Authority which are required in connection with the consummation of the
Collective Transactions, as disclosed in Schedule 6.1(b), shall have
been obtained or made and shall be in full force and effect and shall not be
subject to any materially adverse conditions (other than voting restrictions)
imposed by such regulators.

(c)           HSR Waiting Period.  Any waiting period (and any extension
thereof) under the HSR Act applicable to the Collective Transactions shall have
expired or shall have been terminated.

(d)           Required Stockholder Approval.  The Required Parent Shareholder Approval
shall have been obtained at the Parent Shareholder Meeting in accordance with
the New York Business Corporation Law, the Nasdaq Marketplace Rules and the
Certificate of Incorporation and Bylaws of Parent.

Section 6.2             Conditions to the Obligations of
Parent.  The obligations of Parent to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment prior to or at Closing of each of the following conditions, any
and all of which may be waived, in whole or in part, by Parent, to the extent
permitted by applicable law:

(a)           Representations and Warranties of
the Investors.  The representations
and warranties made by the Investors in Article 3 shall be true and
correct (disregarding all

 37
 

qualifications relating to materiality or an Investor
Material Adverse Effect) as of the date of this Agreement and as of the Closing
Date as though such representations and warranties were made as of the Closing
Date (or, in the case of any representation or warranty which specifically
relates to an earlier date, as of such date), except to the extent the failure
of such representations and warranties to be so true and correct as of such
dates, individually or in the aggregate, would not have an Investor Material
Adverse Effect.

(b)           Performance of Obligations.  The Investors shall have duly performed or
complied with, in all material respects, all of the covenants to be performed
or complied with by them under the terms of this Agreement prior to or at
Closing.

(c)           Closing Deliveries.  Prior to or at the Closing, the Investors
shall have delivered (or caused to be delivered) the following closing
documents in the form referred to below or otherwise in form and substance
reasonably acceptable to Parent:

(i)            a certificate of an officer of each
Investor, dated the Closing Date, to the effect that (1) the Person signing
such certificate is familiar with this Agreement and (2) the conditions
specified in Sections 6.2(a) and (b), to the extent relating to
the representations, warranties and covenants of such Investor, have been
satisfied; and

(ii)           the Shareholders Agreement, executed
by the Investors.

(d)           Satisfaction of Merger Agreement
Conditions.  All conditions precedent
set forth in Sections 6.1 and 6.2 of the Merger Agreement shall have been
satisfied and each of the parties to the Merger Agreement (other than Parent
and its Subsidiaries) shall have confirmed that they are ready, willing and
able to consummate the Merger concurrently with the Closing under this
Agreement.

Section 6.3             Conditions to the Obligations of
the Investors.  The obligations of
the Investors to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment at or prior to the Closing of each of the
following conditions, any and all of which may be waived in whole or in part by
unanimous consent of the Investors, to the extent permitted by applicable law:

(a)           Representations and Warranties.  (i) Other than with respect to Sections 4.1,
4.2, 4.5, 4.9(a) (first sentence only), 4.21, 4.22,
4.23, 4.24, 4.25, 4.26, 4.27 and 4.28,
the representations and warranties made by Parent in Article 4 shall be
true and correct (disregarding all qualifications relating to materiality or a
Parent Material Adverse Effect) as of the date of this Agreement and as of the
Closing Date as though such representations and warranties were made as of the
Closing Date (or, in the case of any representation or warranty which
specifically relates to an earlier date, as of such date), except to the extent
the failure of such representations and warranties to be so true and correct as
of such dates, individually or in the aggregate, would not have a Parent Material
Adverse Effect, (ii) the representations and warranties made by Parent in
Sections 4.1, 4.2, 4.5, 4.21, 4.22, 4.23,
4.24, 4.25, 4.26, 4.27 and 4.28 shall be
true and correct in all material respects as of the date of this Agreement and
as of the Closing Date as though such representations and warranties were made
as of the Closing Date (or, in the case of any representation or warranty which
specifically relates to an earlier

 38
 

date, as of such date), and (iii) the representation
contained in clause (a) of the first sentence of Section 4.9 shall be
true and correct in all respects.

(b)           Performance of Obligations.  Parent shall have duly performed or complied
with, in all material respects, all of the covenants, obligations and
conditions to be performed or complied with by Parent under the terms of this
Agreement prior to or at the Closing.

(c)           No Material Adverse Change.  Since the date of this Agreement there shall
not have occurred any event, development or occurrence of any condition that
has had, or would reasonably be expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.

(d)           Nasdaq Listing.  The Conversion Shares shall have been
approved for quotation on the Nasdaq Global Select Market, subject to official
notice of issuance.

(e)           Charter Amendment.  The Charter Amendment shall have been duly
filed with, and accepted for filing by, the Secretary of State of the State of
New York pursuant to all applicable provisions of the Business Corporation Law
of the State of New York, and shall be in full force and effect, and the
Investors shall have received a copy of such due filing.

(f)            Satisfaction of Merger Agreement
Conditions.  All conditions precedent
set forth in Sections 6.1 and 6.2 of the Merger Agreement (as in effect on the
date of this Agreement) (other than the condition in Section 6.2(d) of the
Merger Agreement) shall have been satisfied, without (A) waiver of any such
condition precedent or (B) amendment or other modification of any term set
forth in such Merger Agreement from the original execution version attached
hereto as Exhibit A, unless such waiver, amendment or modification (as
the case may be) shall have been approved in writing by all parties to this
Agreement; provided, however, that, for purposes of this Section
6.3(f):  (x) when the term “Company
Material Adverse Effect” is used in Sections 6.2(a) and 6.2(c) of the Merger
Agreement (or in any related certificates deliverable pursuant to Section
6.2(e)(i) of the Merger Agreement, to the extent such certificates certify that
the conditions specified in Sections 6.2(a) and 6.2(c) of the Merger Agreement
have been satisfied), it shall be deemed to be replaced with the term “Parent
Material Adverse Effect” (as defined in this Agreement), and (y) the figure “95%”
when used in clauses (v) and (vi) of Section 6.2(e) of the Merger Agreement
shall be deemed to be replaced with “75%”. 
At the Closing, each of the parties to the Merger Agreement shall have
confirmed that they are ready, willing and able to consummate the Merger
concurrently with the Closing under this Agreement.

(g)           Board of Directors.  The Board of Directors of Parent shall have
been reconstituted as contemplated by the Shareholders Agreement.

(h)           Closing Deliveries.  Prior to or at the Closing, Parent shall have
delivered to the Investors the following closing documents in the form referred
to below or otherwise in form and substance reasonably acceptable to the
Investors:

 39

(i)            certificates
of officers of Parent, dated the Closing Date, to the effect that (1) the
Person signing such certificate is familiar with the Agreement and (2) the
conditions specified in Sections 6.3(a), (b),  (c), (d),
(e), and (f) have been satisfied;

(ii)           certified
copies of the resolutions of the board
of directors and stockholders of Parent authorizing the execution and
delivery of this Agreement and the other Transaction Agreements and the
consummation of the Transactions;

(iii)          an
opinion of Dechert LLP, dated as of the Closing Date, in the form of Exhibit
6.3(h)(iii);

(iv)          the
Shareholders Agreement and the Registration Rights Agreement, executed and
delivered by Parent; and

(v)           the
certificates (in definitive form) for the Convertible Shares pursuant to
Section 2.2 hereof, duly executed on behalf of Parent and registered in the
names of the applicable Investors (or their respective designees) representing
the number of Convertible Shares purchased pursuant to this Agreement.

Section 6.4             Frustration of Closing
Conditions.  No party hereto may rely
on the failure of any condition set forth in this Article 6 if such
party’s failure to comply with any provision of this Agreement was a proximate
cause of such failure of such condition.

ARTICLE 7

TERMINATION

Section 7.1             Termination.  This Agreement may be terminated and the
transactions contemplated by this Agreement abandoned at any time prior to the
Closing:

(a)           by mutual written consent of Parent
and the Investors;

(b)           by either Parent or the Investors, if
the Closing shall not have been consummated on or before October 7, 2007 (the “Termination Date”),
unless extended by written agreement of the Investors and Parent; provided, that the right to
terminate this Agreement under this paragraph shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the
primary cause of the failure of the Closing to occur on or prior to such date;
and provided  further that the Investors or Parent may extend the
Termination Date by not more than sixty (60) days if the Closing does not occur
by October 7, 2007 as a result of the failure to satisfy the conditions set
forth in (i) Sections 6.1(b) or (c) of this Agreement or (ii)
Sections 6.1(b), (c) or (e) of the Merger Agreement as in
effect on the date of this Agreement;

(c)           by the Investors, if there has been a
breach of any representation, warranty or covenant made by Parent in this
Agreement, such that the conditions in Section

 40
 

6.3 are
not capable of being satisfied and which have not been cured by Parent within
fifteen (15) Business Days after receipt of written notice from the Investors
requesting such breach to be cured; provided that the right to terminate
this Agreement pursuant to this Section 7.1(c) shall not be available to
the Investors if the failure of the Investors to fulfill any of their
obligations under this Agreement has been a proximate cause of such breach;

(d)           by Parent, if there has been a breach
of any representation, warranty or covenant made by the Investors in this
Agreement, such that the conditions in Section 6.2 are not capable of
being satisfied and which have not been cured by the Investors within fifteen
(15) Business Days after receipt of written notice from Parent requesting such
breach to be cured; provided that the right to terminate this Agreement
pursuant to this Section 7.1(d) shall not be available to Parent if the
failure of Parent to fulfill any of its obligations under this Agreement has
been a proximate cause of such breach;

(e)           by either the Investors or Parent, if
any Governmental Authority shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
consummation of the Collective Transactions and such order, decree, ruling or other
action shall have become final and nonappealable;

(f)            by Parent or the Investors, if the
Parent Shareholder Meeting is held (and not adjourned) and Parent fails to
obtain the Required Parent Shareholder Approval at the Parent Shareholder
Meeting (or any reconvened meeting after any adjournment thereof); or

(g)           by Parent or the Investors, if the
Merger Agreement shall have been terminated in accordance with its terms.

Section 7.2             Effect of Termination.  If this Agreement is terminated pursuant to Section 7.1,
all rights and obligations of the parties hereunder shall terminate and no
party shall have any liability to the other party, except for obligations of
the parties hereto in Sections 5.1(b), 5.6, 5.9 and 7.2
and Article 8 (including any definitions set forth in Article I
that are used in such sections), which shall survive the termination of this
Agreement.  Notwithstanding anything to
the contrary contained herein, termination of this Agreement pursuant to Section
7.1 shall not release any party from any liability for any material breach
by such party of the terms and provisions of this Agreement prior to such
termination.

ARTICLE 8

MISCELLANEOUS

Section 8.1             Survival.  The representations and warranties contained
in or made pursuant to this Agreement or in any certificate delivered pursuant
to this Agreement shall survive the execution and delivery of this Agreement
and the Closing for a period beginning on the Closing Date and ending on the
twelve month anniversary of the Closing Date; provided, that the
representations and warranties set forth in Sections 4.1 (first sentence only),
4.2, 4.5, 4.12, 4.21, 4.22, 4.23, 4.24, 4.25, 4.26, 4.27 and 4.28, and
corresponding representations and warranties in any certificate (collectively,
the “Specified

 41
 

Representations”)
shall survive the execution and delivery of this Agreement and the Closing
indefinitely.  All covenants and
agreements that contemplate performance after the Closing contained herein
shall survive the Closing indefinitely or for any shorter period expressly
specified in accordance with their terms. 
Notwithstanding the preceding sentences, if notice of an indemnification
claim shall have been delivered before the aforementioned time period has
elapsed with respect to any breach of any such representation, warranty,
covenant or agreement, such representation, warranty, covenant or agreement
shall survive until such claim is finally resolved.

Section
8.2             Indemnification.

(a)           Indemnification by Parent.  Subject to the limitations set forth in this Section
8.2, from and after the Closing Date, Parent shall indemnify and hold
harmless each of the Investors and each of their respective direct or indirect
Affiliates, officers, directors, members, managers, partners, employees, agents
and other representatives (collectively, the “Investor Indemnified Persons”),
from, against and in respect of any and all liabilities, losses, damages,
fines, penalties, fees, costs and expenses (in each case, including reasonable
attorneys’ fees and expenses), whether or not involving a third party claim
(collectively, “Losses”), incurred or suffered by such Investor
Indemnified Persons as a result of:

(i)            any breach of, or inaccuracy in, any
representation or warranty made by Parent in this Agreement or in any
certificate delivered pursuant to this Agreement; or

(ii)           any breach or violation of any
covenant or agreement of Parent pursuant to this Agreement or the other
Transaction Agreements.

For the purposes of clause (i) of this Section
8.2(a), the representations and warranties of Parent contained in Article 4
of this Agreement (other than the first sentence of Section 4.9), or in
any certificate delivered pursuant to this Agreement, shall be read as if all
qualifications as to materiality, including each reference to the terms and
phrases “material”, “in all material respects” or like phrases, and the defined
term “Parent Material Adverse Effect”, were deleted therefrom in determining
whether there has been a breach of any such representation or warranty.

(b)           Limitations on Liability.

(i)            Investor Indemnified Persons shall
not be entitled to assert any claim for indemnification under Section
8.2(a)(i) until such time as the aggregate of all indemnifiable Losses that
Investor Indemnified Persons may have under Section 8.2(a)(i) exceed
$5,000,000, and then Parent shall be responsible for all Losses except the
first $2,500,000 of such $5,000,000 threshold.

(ii)           The maximum aggregate liability of
Parent for indemnification claims under Section 8.2(a)(i) shall be
limited to $37,500,000.

(iii)          The limitations set forth in Section
8.2(b)(i) and (ii) shall not be applicable to Losses incurred or
suffered by Investor Indemnified Persons as a result of (A)

 42
 

any breach of, or inaccuracy in, the Specified
Representations or (B) fraud, intentional misrepresentation or intentional
omission by Parent.

(iv)          The amount of Losses for which
indemnification is available under this Section 8.2 shall be calculated
net of any amounts actually recovered by the Person entitled to seek
indemnification hereunder (the “Indemnified Person”) under insurance
policies with respect to such Losses.

(c)           Payment of Claims.  If Parent shall be required to make an
indemnification payment to any Investor Indemnified Person pursuant to this Article
8, Parent shall satisfy the claim of such Investor Indemnified Person
through a payment of immediately available funds.

(d)           Third Party Claims.

(i)            Notice of Claim.  If any third party notifies an Indemnified
Person with respect to any matter (a “Third Party Claim”) which may give
rise to a claim for indemnification against an Indemnifying Party, then the
Indemnified Person will promptly (and, in any event, within twenty (20)
Business Days) give written notice thereof to the party required to provide
indemnification under this Section 8.2 (the “Indemnifying Party”);
provided, that no delay on the part of the Indemnified Person in
notifying the Indemnifying Party will relieve the Indemnifying Person from any
obligation under this Article 8, except to the extent such delay actually
and materially prejudices the Indemnifying Party.

(ii)           Assumption of Defense, etc.  The Indemnifying Party will be entitled to
participate in the defense of any Third Party Claim that is the subject of a
notice given by the Indemnified Person pursuant to Section 8.2(d)(i).  In addition, upon written notice to the
Indemnified Person, the Indemnifying Party will have the right to defend the
Indemnified Person against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Person.  In such event, the Indemnified Person may
retain separate co-counsel at its sole cost and expense and participate in the
defense of the Third Party Claim. 
Notwithstanding the foregoing, the Indemnifying Person will not consent
to the entry of any judgment or enter into any compromise or settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnified Person unless such judgment, compromise or settlement (A) provides
for the payment by the Indemnifying Party of money as sole relief for the
claimant and (B) results in the full and general release of all Indemnified
Persons from all liabilities arising or relating to, or in connection with, the
Third Party Claim.

(iii)          Indemnified Party’s Control.  If the Indemnifying Party does not deliver
the notice contemplated by Section 8.2(d)(ii) within twenty (20) days
after the Indemnified Party has given notice of the Third Party Claim pursuant
to Section 8.2(d)(i), the Indemnified Party may defend, and may consent
to the entry of any judgment or enter into any compromise or settlement with
respect to, the Third Party Claim.

 43
 

(e)           Tax Treatment.  The parties will treat any payment received
pursuant to this Section 8.2 as an adjustment to purchase price for Tax
and financial reporting purposes, to the extent permissible under applicable
Legal Requirements.

Section 8.3             Notices.  All notices or other communications required
or permitted under this Agreement shall be in writing and shall be delivered
personally, by facsimile or sent by certified, registered or express air mail,
postage prepaid, and shall be deemed given when so delivered personally, or by
facsimile, or if mailed, two (2) days after the date of mailing, as follows:

If to Parent:

Universal American
Financial Corp.

6 International
Drive

Rye Brook, NY
10573-1068

Attention:  Lisa M. Spivack, Esq.

Facsimile:  (914) 934-0700

with
a required copy (which shall not constitute notice) to:

Dechert LLP

30 Rockefeller
Plaza

New York, NY  10112

Attention:  Gerald Adler, Esq.

Telephone
number:  (212) 698-3679

Facsimile number:  (212) 698-3599

If to WCAS:

Welsh, Carson,
Anderson & Stowe

320 Park Avenue, Suite 2500

New York, NY  10022-6815

Telephone number:  (212) 893-9500

Facsimile number:  (212) 893-9583

Attention:  Sean M. Traynor

with
required copies (which shall not constitute notice) to:

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY  10036

Telephone number:  (212) 596-9000

Facsimile number:  (212) 596-9090

Attention:  Othon A. Prounis, Esq. and
Christopher W. Rile, Esq.

- and-

Weil, Gotshal &
Manges LLP

 44
 

767 Fifth Avenue

New York, NY  10153

Telephone
number:  (212) 310-8000

Facsimile
number:  (212) 310-8007

Attention:  Malcolm Landau, Esq.

If to Lee:

Lee Equity Partners

767 Fifth Avenue

New York, NY  
10153

Telephone number: 
(212) 888-1500

Facsimile number:  (212) 888-6388

Attention:  Mark Gormley/Benjamin
Hochberg

with
required copies (which shall not constitute notice) to:

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, NY 
10153

Telephone number: 
(212) 310-8000

Facsimile number: 
(212) 310-8007

Attention:  Malcolm Landau, Esq.

If
to Perry:

Perry Capital

767 Fifth Avenue

New York, NY   10153

Telephone number:  (212) 583-4000

Facsimile number:  (212) 583-4146

Attention:  Michael C. Neus

with
required copies (which shall not constitute notice) to:

Cravath, Swaine
& Moore LLP

825 Eighth Avenue

New York, NY   10019-7475

Telephone number:  (212) 474-1000

Facsimile number:  (212) 474-3700

Attention:  Mark Greene, Esq.

- and -

 45
 

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, NY 
10153

Telephone number: 
(212) 310-8000

Facsimile number: 
(212) 310-8007

Attention:  Malcolm Landau, Esq.

If to Union Square:

Union Square Partners

230 Park Avenue South, 11th floor

New York, NY  10003

Telephone number:  (212) 965-2400

Facsimile number: 
(212) 343-5206

Attention:  Bob Spass/Eric Leathers

with
required copies (which shall not constitute notice) to:

Weil, Gotshal
& Manges LLP

767 Fifth Avenue

New York, NY  10153

Telephone
number:  (212) 310-8000

Facsimile
number:  (212) 310-8007

Attention:  Malcolm Landau, Esq.

or to such other address as any party hereto shall
notify the other parties hereto (as provided above) from time to time.

Section 8.4             Exhibits and Schedules.  All exhibits and schedules hereto, or
documents expressly incorporated into this Agreement, are hereby incorporated
into this Agreement and are hereby made a part hereof as if set out in full in
this Agreement. The inclusion of any information in the Disclosure Schedules
will not be deemed an admission or acknowledgment, in and of itself and solely
by virtue of the inclusion of such information in the Disclosure Schedules,
that such information is required to be listed in any Disclosure Schedule or
that such items are material to any party hereto or any of their respective
Subsidiaries.  The headings, if any, of
the individual sections of each of the Disclosure Schedules are inserted for
convenience only and will not be deemed to constitute a part thereof or a part
of the Agreement.  The Disclosure
Schedules are arranged in sections and subsections that correspond to the
sections and subsections of this Agreement merely for convenience, and the
disclosure of an item in one section or subsection of the Disclosure Schedules
as an exception to a particular covenant, representation or warranty will be
deemed adequately disclosed as an exception with respect to all other
covenants, representations or warranties herein to the extent that the
relevance of such item to such other covenants, representations or warranties is
reasonably apparent on its face, notwithstanding (x) the presence or absence in
this Agreement of an appropriate reference to the section or subsection of the
Disclosure Schedules, (y) the presence or absence in the Disclosure Schedules
of an

 46
 

appropriate reference to the section or subsection of
this Agreement to which such disclosure relates or (z) an appropriate
cross-reference thereto.

Section 8.5             Time of the Essence; Computation
of Time.  Time is of the essence for
each and every provision of this Agreement. 
Whenever the last day for the exercise of any privilege or the discharge
or any duty hereunder shall fall upon a day that is not a Business Day, the
party having such privilege or duty may exercise such privilege or discharge
such duty on the next succeeding day which is a regular Business Day.

Section 8.6             Expenses and Fees.  Except as otherwise set forth in this
Agreement, if the transactions provided for in this Agreement are not
consummated, each party hereto shall pay its own expenses incident to this
Agreement.  If the transactions provided
for in this Agreement are consummated, Parent shall, in addition to paying all
of its own expenses incident to this Agreement, also (a) pay the expenses of
the Investors incident to this Agreement (including fees and expenses of
financial advisors, outside legal counsel and accountants), and in addition (b)
pay to the Investors the fees separately agreed among the Investors and Parent.

Section 8.7             Governing Law.  All issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the schedules
and exhibits hereto shall be governed by, and construed in accordance with, the
laws of the State of New York without giving effect to any choice of law or
conflict of law rules or provisions that would cause the application of the
laws of any jurisdiction other than the State of New York.

Section 8.8             Jurisdiction and Venue; Waiver
of Jury Trial.  Each of the parties
submits to the exclusive jurisdiction of any state or federal court sitting in
New York, New York, in any action or proceeding arising out of or relating to
this Agreement, agrees that all claims in respect of the action or proceeding
may be heard and determined in any such court and agrees not to bring any action
or proceeding arising out of or relating to this Agreement in any other
court.  Each of the parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety or other security that might be required of
any other party with respect thereto. 
Each party agrees that service of summons and complaint or any other
process that might be served in any action or proceeding may be made on such
party by sending or delivering a copy of the process to the party to be served
at the address of the party and in the manner provided for the giving of
notices in Section 8.3.  Nothing
in this Section 8.8, however, shall affect the right of any party to
serve legal process in any other manner permitted by law.  Each party agrees that a final,
non-appealable judgment in any action or proceeding so brought shall be
conclusive and may be enforced by suit on the judgment or in any other manner
provided by law. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY AND ALL
RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO
THIS AGREEMENT.

Section 8.9             Assignment; Successors and
Assigns; No Third Party Rights. 
Except as otherwise provided herein, this Agreement may not, without the
prior written consent of the other parties hereto, be assigned by any party
hereto by operation of law or otherwise, and any attempted assignment shall be
null and void; provided  that, (a) without the consent of any

 47
 

other parties hereto, each Investor may assign its rights
hereunder to one or more Affiliates of such Investor, and (b) without the
consent of any other parties hereto, each Investor may assign up to 20% of its
equity purchase commitment hereunder to (i) any Permitted Transferees (as
defined in the Shareholders Agreement) or (ii) any other co-investors, provided
in the case of (ii) that such Investor shall maintain beneficial ownership (within the
meaning of Rules 13d-3 and 13d-5 under the Exchange Act) of all Parent shares
directly or indirectly owned by such assignees through such Investor
maintaining voting discretion and voting control over all such shares pursuant
to a written agreement, and the assignee shall, to the extent requested by the
parties hereto other than the assigning Investor, become a party to the
Shareholders Agreement at the Closing; provided that no such
assignment under clause (a) or (b) of this sentence shall relieve the assignor
Investor of any of its obligations hereunder that shall have not been performed
timely by the assignee.  Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors, permitted assigns and
legal representatives.  Notwithstanding
the foregoing or anything to the contrary, WCAS shall not assign any of its
rights hereunder to Welsh, Carson, Anderson & Stowe IX, L.P.  Except as set forth in Section 8.2,
this Agreement shall be for the sole benefit of the parties to this Agreement
and their respective heirs, successors, permitted assigns and legal
representatives and is not intended, nor shall be construed, to give any
Person, other than the parties hereto and their respective heirs, successors,
permitted assigns and legal representatives, any legal or equitable right,
remedy or claim hereunder.  Nothing in
this Agreement, expressed or implied, is intended to or shall constitute the
parties hereto partners or participants in a joint venture.

Section 8.10           Counterparts.  This Agreement may be executed in one or more
counterparts for the convenience of the parties hereto, each of which shall be
deemed an original and all of which together will constitute one and the same
instrument.  Delivery of an executed
counterpart of a signature page to this Agreement by facsimile or other electronic
delivery shall be effective as delivery of a mutually executed counterpart to
this Agreement.

Section 8.11           Titles and Headings.  The titles, captions and table of contents in
this Agreement are for reference purposes only, and shall not in any way define,
limit, extend or describe the scope of this Agreement or otherwise affect the
meaning or interpretation of this Agreement.

Section 8.12           Entire Agreement.  This Agreement (including the Schedules and
Exhibits attached hereto) and the Confidentiality Agreement, constitute the
entire agreement among the parties with respect to the matters covered hereby
and supersedes all previous written, oral or implied understandings among them
with respect to such matters.

Section 8.13           Severability.  The invalidity of any portion hereof shall
not affect the validity, force or effect of the remaining portions hereof.  If it is ever held that any restriction
hereunder is too broad to permit enforcement of such restriction to its fullest
extent, such restriction shall be enforced to the maximum extent permitted by
law.

Section 8.14           No Strict Construction.  Each of the parties hereto acknowledges that
this Agreement has been prepared jointly by the parties hereto, and shall not
be strictly construed against any party.

 48
 

Section 8.15           Specific Performance.  Each of the parties acknowledges that the
rights of each party to consummate the transactions contemplated hereby are
unique and recognize and affirm that in the event of a breach of this Agreement
by any party, money damages may be inadequate and the non-breaching party may
have no adequate remedy at law. 
Accordingly, the parties agree that such non-breaching party shall have
the right, in addition to any other rights and remedies existing in their favor
at law or in equity, to enforce their rights and the other party’s obligations
hereunder by an action or actions for specific performance, injunctive and/or
other equitable relief (without posting of bond or other security).

Section 8.16           Failure or Indulgence not Waiver.  No failure or delay on the part of any party
hereto in the exercise of any right hereunder shall impair such right or be
construed to be waiver of, or acquiescence in, any breach of any
representation, warranty or agreement herein, nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or
any other right.  No provision of this
Agreement may be waived except by an instrument in writing executed by the
party or parties, as applicable, against whom the waiver is to be effective.

Section 8.17           Amendments.  Subject to applicable law, this Agreement may
be amended by the parties hereto at any time prior to the Closing.  This Agreement (including the provisions of
this Section 8.17) may not be amended or modified except by an
instrument in writing signed on behalf of the parties hereto.  Between the date hereof and the Closing,
Parent shall not agree to, or enter into, any amendment to the Merger Agreement
or any agreement with an Investor unless all Investors have consented thereto
(such consent not to be unreasonably withheld or delayed).

Section
8.18           Nature of Investors’
Obligations and Rights.

(a)           The obligations of each Investor
under this Agreement or any other Transaction Agreement are several and not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under this Agreement or any other Transaction Agreement.  Nothing contained herein or in any other
Transaction Agreement, and no action taken by any Investor pursuant hereto or
thereto, shall be deemed to constitute the Investors as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Investors are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by this
Agreement or the other Transaction Agreements. 
Each Investor confirms that it has independently participated in the
negotiation of the transactions contemplated hereby.  All rights, powers and remedies provided to
the Investors under this Agreement or otherwise available in respect hereof at
law or in equity shall be cumulative and not alternative or exclusive, and the
exercise or beginning of the exercise of any thereof by any party shall not
preclude the simultaneous or later exercise of any other rights, powers or
remedies by such party.

(b)           No information made available or
provided to an Investor pursuant to any provision of Article 5 of this Agreement,
or otherwise obtained or known to an Investor other than on account of being
expressly disclosed in the Parent Disclosure Schedule, shall

 49
 

limit or otherwise affect the remedies available to
the Investors, or the representations or warranties of, or the conditions to
the obligations of, the Investors hereunder.

(c)           Notwithstanding anything to the
contrary, in no event shall any Investor’s aggregate liability under this
Agreement exceed an amount equal to the respective purchase price such Investor
may be obligated to pay pursuant to Section 2.1.  In addition, 
notwithstanding anything to the contrary, in no event shall any Investor
be liable for consequential, incidental, punitive or special damages, including
loss of future revenue, income or profits, diminution of value or loss of
business opportunity (provided that the limitation in this sentence shall not
limit Parent’s rights to recover contract damages from an Investor in
connection with a failure by such Investor to close on the purchase of Convertible
Shares in violation of this Agreement).

(d)           This Agreement may only be enforced
against, and any claims or causes of action that may be based upon, arise out
of or relate to this Agreement, or the negotiation, execution or performance of
this Agreement may only be made against, the entities that are expressly
identified as parties hereto and their respective successors and assigns, and
no past, present or future Affiliate, director, officer, employee,
incorporator, member, manager, partner, stockholder, agent, attorney or
representative of any party hereto shall have any liability for any obligations
or liabilities of the parties to this Agreement or for any claim based on, in
respect of, or by reason of, the negotiation, execution or performance of this
Agreement or the transactions contemplated hereby.

*       *      
*       *       *      
*       *

 50
 

IN WITNESS WHEREOF, the parties hereto have caused
this Securities Purchase Agreement to be duly executed as of the day and year
first above written.

	
   

  	
  UNIVERSAL AMERICAN FINANCIAL
  CORP.

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Richard A.
  Barasch

  	
   

  
	
   

  	
  Name: /s/
  Richard A. Barasch

  
	
   

  	
  Title: Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
  LEE-UNIVERSAL
  HOLDINGS, LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Joseph B.
  Rotberg

  	
   

  
	
   

  	
  Name: Joseph
  B. Rotberg

  
	
   

  	
  Title: CFO

  
	
   

  	
   

  
	
   

  	
  WELSH, CARSON,
  ANDERSON & STOWE, X, L.P.,

  
	
   

  	
  By: WCAS X
  ASSOCIATES, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Sean M.
  Traynor

  	
   

  
	
   

  	
  Name: Sean
  M. Traynor

  
	
   

  	
  Title: Managing
  Member

  
	
   

  	
   

  
	
   

  	
  UNION SQUARE
  UNIVERSAL PARTNERS, L.P.

  
	
   

  	
  By: UNION SQUARE
  UNIVERSAL GP, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Eric
  Leathers

  	
   

  
	
   

  	
  Name: Eric
  Leathers

  
	
   

  	
  Title: Authorized
  Signatory

  
	
   

  	
   

  
	
   

  	
  PERRY PARTNERS,
  L.P.,

  
	
   

  	
  By: PERRY CORP.,
  its General Partner

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Michael C. Neus

  	
   

  
	
   

  	
  Name: Michael
  C. Neus

  
	
   

  	
  Title: General
  Counsel

  

 

 51
 

 

	
  

  	
  PERRY PARTNERS
  INTERNATIONAL, INC.

  
	
   

  	
  By: PERRY CORP.,
  its Investment Manager

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Michael C. Neus

  	
   

  
	
   

  	
  Name: Michael
  C. Neus

  
	
   

  	
  Title: General
  Counsel

  
	
   

  	
   

  
	
   

  	
  PERRY COMMITMENT
  FUND, L.P.,

  
	
   

  	
  By: PERRY
  COMMITMENT ASSOCIATES, LLC, its General Partner,

  
	
   

  	
  By: PERRY CORP.,
  its Managing Member

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Michael C. Neus

  	
   

  
	
   

  	
  Name: Michael
  C. Neus

  
	
   

  	
  Title: General
  Counsel

  
	
   

  	
   

  
	
   

  	
  PERRY COMMITMENT
  MASTER FUND, L.P.,

  
	
   

  	
  By: PERRY
  COMMITMENT ASSOCIATES, LLC, its General Partner,

  
	
   

  	
  By: PERRY CORP.,
  its Managing Member

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Michael C. Neus

  	
   

  
	
   

  	
  Name: Michael
  C. Neus

  
	
   

  	
  Title: General
  Counsel

  

 

 52Exhibit 10.1

Short-Term Incentive Plan

For
Fiscal Year 2007

The short-term incentive
plan for fiscal 2007 is built around the STI Concept proposed by our
compensation consultant Compensation Strategies. Their recommendation involved
setting a few number of tactical goals that address key areas of concern for
the company, due to the tremendous change in our business environment.

The key elements of the
plan are as follows:

1.              Market competitive
target bonus percents of base salary will be established for the following
positions:

	
  CEO

  	
   

  	
  50%

  
	
  SVP, Sales

  	
   

  	
  35%

  
	
  CFO

  	
   

  	
  35%

  
	
  Other Key
  Management

  	
   

  	
  25%

  

 

2.              The
following would be the “Universal Tactical Goals that would apply to each of
the participants.

a.               A threshold will be
set at forecasted 2007 earnings after tax of **, below which there will be no
cash bonuses paid. If earnings exceed the threshold the percentage awarded will
be increased on a prorated basis. For example if earnings were 50% higher than
threshold the award would be increased by 50%. This would apply up to a maximum
of 200% of payout. This would represent at least ** of the target bonus.

b.              Digital projector
sales of at least ** units at a threshold of at least ** gross margin and not
financed by BTN. There is no upside potential, hit the threshold and there is a
payout. This would represent 25 % of the target bonus.

c.               STS sales revenue
of ** threshold with upside earn out potential with the same scaling used for
earnings after tax. There should also be a minimum gross margin threshold that
has to be met for a payout, which needs to be determined **. This would
represent 30% of the target bonus.

3.               One tactical objective specific to each manager’s area of
responsibility.

a.               **

b.              **

c.               **

d.              **

e.               **

f.                 **

g.              **

4.               Participants are as follows:

	
  Participant

  	
   

  	
  Salary

  	
   

  	
  Target
  Bonus

  	
   

  	
  Target
  Payout

  
	
  John Wilmers

  	
   

  	
  **

  	
   

  	
  50%

  	
   

  	
  **

  
	
  Ray Boegner

  	
   

  	
  **

  	
   

  	
  35%

  	
   

  	
  **

  
	
  Kevin Herrmann

  	
   

  	
  **

  	
   

  	
  35%

  	
   

  	
  **

  
	
  **

  	
   

  	
  **

  	
   

  	
  25%

  	
   

  	
  **

  
	
  **

  	
   

  	
  **

  	
   

  	
  25%

  	
   

  	
  **

  
	
  **

  	
   

  	
  **

  	
   

  	
  25%

  	
   

  	
  **

  
	
  **

  	
   

  	
  **

  	
   

  	
  25%

  	
   

  	
  **

  
	
  Christopher
  Stark

  	
   

  	
  **

  	
   

  	
  35%

  	
   

  	
  **

  

 

Example:

CEO in this example has a
Base Salary of $250,000 to keep the math simple. His target award would be
$125,000 and would include these four Tactical Objectives:

	
  Earnings of

  **

  	
   

  	
  Weight of the

  Objective = 30%

  	
   

  	
  Actual Earnings =

  ** or 100%

  	
   

  	
  30% of $125K =

  $37,500

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Digital Projector

  Sales of ** units

  @ ** GM

  	
   

  	
  Weight of the

  Objective = 30%

  	
   

  	
  Actual sales =

  ** units, did not

  achieve objective

  	
   

  	
  25% of $125K = $0

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  STS Sales of **

  @ ** GM

  	
   

  	
  Weight of the

  Objective = 30%

  	
   

  	
  Actual Sales =

  ** at GM goal

  and ** GM

  	
   

  	
  30% of $125K =

  $37,500 X 1.4545 =

  $54,545 (**/**)

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  **

  	
   

  	
  Weight of the

  Objective = 15%

  	
   

  	
  **

  	
   

  	
  15% of $125K =

  $18,750

  

 

In this example the total
award would be $110,795.

In the
event the company was not profitable, but some of the objectives were met, the
Compensation Committee would consider Restricted Stock Award, but no cash.

** -
Certain items in this document were redacted but are available to the
Securities and Exchange Commission upon request.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00123-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00123-of-00352.parquet"}]]