Edgar Filing: HUMANA INC

PURSUANT TO RULE NO. 424(b)(1)
FILE NO. 333-63384

PROSPECTUS

[HUMANA (R) LOGO]

$300,000,000
7 1/4% Senior Notes Due 2006

Interest on the notes is payable on February 1 and August 1 of each year,
beginning February 1, 2002. The notes will mature on August 1, 2006. Interest
will accrue from August 7 , 2001.

We may redeem the notes in whole or in part at any time prior to their maturity
at the "make whole" redemption price described in this prospectus.

The notes will be unsecured and will rank equally with all of our other
unsecured senior indebtedness.

Investing in the notes involves risks that are described in the "Risk Factors"
section beginning on page 10 of this prospectus.

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

-------------------------------------------------------

Proceeds, before
Public offering Underwriting expenses, to
price discount Humana
-------------------------------------------------------

Per Note 99.759% 0.875% 98.884%
-------------------------------------------------------
Total $299,277,000 $2,625,000 $296,652,000
-------------------------------------------------------

The notes will not be listed on any securities exchange. Currently, there is no
public market for the notes.

The underwriters expect to deliver the notes to purchasers on or about August
7, 2001 through the Depository Trust Company.

Joint Book-Running Managers

JPMorgan Lehman Brothers
----------------
Banc of America Securities LLC
Salomon Smith Barney
Wachovia Securities, Inc.
Scotia Capital
U.S. Bancorp Piper Jaffray

August 2, 2001

TABLE OF CONTENTS

Page
----

Forward-Looking Statements............................................... ii
Where You Can Find Additional Information................................ ii
Incorporation of Certain Documents by Reference.......................... iii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 18
Capitalization........................................................... 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 39
Management............................................................... 56
Description of Other Indebtedness........................................ 57
Description of the Notes................................................. 59
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Index to Financial Statements ........................................... F-1

----------------

You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.

FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and we are including this
statement for purposes of complying with these safe harbor provisions. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions, including, among other things, information set forth under "Risk
Factors," matters described in the documents incorporated by reference in this
prospectus and the following factors:

. our ability to continue to effectively implement our recent strategic
and operational initiatives,

. our ability to manage health care costs,

. our ability to predict future medical cost trends as they relate to
appropriately pricing our products and setting levels of benefits,

. adverse results in pending or future litigation,

. increased negative publicity regarding the health care industry, and

. legislative reform or other increased governmental regulation of the
health care industry.

Words like "expect," "anticipate," "intend," "plan," "believe," "estimate"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. We undertake no obligations to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this prospectus might
not occur. There may also be other risks that we are unable to predict at this
time.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We are a reporting company under the Securities Exchange Act of 1934 and
file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission, or the SEC. You may
inspect and copy such material at the public reference facilities maintained by
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New
York 10048. You may also obtain copies of such material from the SEC at
prescribed rates for the cost of copying by writing to the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for more information on the public reference rooms.
You can also find our SEC filings at the SEC's web site at www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" into this prospectus
information contained in documents that we file with it, which means that we
can disclose important information to you by referring you to those documents.
The information incorporated by reference into this prospectus is an important
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:

. Our Annual Report on Form 10-K for the fiscal year ended December 31,
2000;

. Our Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2001; and

. Our Current Reports on Form 8-K filed on July 30, 2001 and Form 8-K/A
filed on July 31, 2001.

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

500 West Main Street
Louisville, Kentucky 40202
(502) 580-1000
Attn: Investor Relations

iii

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before making an investment decision. References to "we," "us,"
"our" and "Humana" mean Humana Inc. and all entities we own or control.

Humana Inc.

Our Company

We are one of the largest publicly-traded health benefits companies, based
on our 2000 revenues of $10,514 million. We offer coordinated health insurance
coverage and related services principally through traditional and Internet-
based plans to employer groups and government-sponsored plans. As of May 31,
2001, we had over 6.5 million members in our medical insurance programs,
including approximately 1.2 million new members as a result of a recent
acquisition, as well as approximately 2.2 million members in our specialty
products programs. We contract directly with more than 400,000 physicians,
hospitals, dentists and other providers to provide health care to our members.
In the first quarter of 2001, over 70% of our premium revenues was derived from
members located in Florida, Illinois, Texas, Kentucky and Ohio.

We have organized our business into Commercial and Government segments. Our
Commercial segment consists of three lines of business marketed primarily to
employer groups: fully insured medical, administrative services only, and
specialty. Our fully insured medical products include health maintenance
organizations, or HMOs, and preferred provider organizations, or PPOs. We offer
our administrative services only, or ASO, products to large employers who self-
insure medical benefits. As a complement to our medical products, we offer
specialty insurance products, including dental, group life and short-term
disability. Our Government segment includes government-sponsored benefit plans
under three programs: Medicare+Choice, Medicaid and TRICARE, which provides
health insurance coverage to dependents of active duty military personnel and
to retired military personnel and their dependents.

Throughout 2000 and to date in 2001, we have focused on two top priorities:
completing our turnaround and positioning our company for the future.

Our Turnaround

We have substantially completed our turnaround which has encompassed a
renewed focus on setting appropriate premiums, operating with cost-efficient
levels of staffing, improving product and process design and identifying and
disposing of non-core operations. Components of this plan have included the
following:

. Naming new management and realigning responsibilities--In February 2000,
we named Michael B. McCallister, a Humana employee for over 25 years,
our president and chief executive officer. Additional management changes
include the naming of James H. Bloem as our chief financial officer as
well as the promotion of Kenneth J. Fasola and James E. Murray as chief
operating officers over our respective market and service operations. In
addition, in 2001 we completed a management realignment in order to

enable our senior management team to better focus the selling, operating
and support activities of our core businesses.

. Exiting from non-core operations--After a comprehensive review of our
operations, we divested our workers' compensation business and portions
of our Medicaid business. We also reinsured with third parties
substantially all of our Medicare supplement business. In addition, as
of January 1, 2001, we exited 45 non-core counties in our
Medicare+Choice business and discontinued aspects of our product line
focusing on small group commercial businesses in 17 states.

. Strengthening our core businesses--We have taken a number of steps to
strengthen our core commercial businesses, including:

o adopting a more profit-focused pricing and benefit design strategy,
including increasing premiums, implementing our three-tiered
copayment pricing formula for prescription drugs, which we refer to
as Rx3, and revising our pricing policies, which are designed to
better anticipate prospective changes in provider contracting charges
and to decrease the ability to reduce standard prices during the
quoting process;

o enhancing our actuarial leadership and staff and refining the link
between our actuarial analysis and pricing;

o creating operating units and service coordinators for each of our
primary product lines in each of the markets in which we operate in
order to improve our interaction with our members and increase
accountability;

o further developing our electronic and Internet infrastructure to
enable more claims to be filed and processed electronically; and

o strengthening our large group commercial and ASO product lines, which
we believe offer significant future growth potential, by
incorporating new product designs, new process designs and technology
and by adding depth to our functional leadership and sales force in
these areas.

. Reducing employment costs--As a result of membership reductions, exiting
non-core businesses and operational reviews, between January 2000 and
March 2001, we reduced the number of our employees by approximately
3,100, or 18%.

In the first quarter of 2001, our income before income taxes was $42
million, an increase of 56% over income before income taxes of $27 million for
the first quarter of 2000.

Positioning for the Future

We continue to pursue initiatives that are focused on strengthening our
core businesses, streamlining operations, enhancing profitability and
positioning our company for future growth. Key elements of our strategy going
forward include the following:

. Growing through innovative commercial product designs--We are focused on
designing and marketing products that better address rising health care
costs for our members. We believe innovative consumer-focused products
and benefit designs, which give members an expanded role in selecting
benefits and cost responsibility, will help drive profitable growth as
employers recognize the value of increased consumer responsibility for
health care expenses.

. Utilizing technology to reduce overhead and improve customer
satisfaction--We are committed to developing a strong information
infrastructure. We are focused on developing technology that allows
consumers to see on-line, real-time information about their benefits,
eligibility, referrals, claims and other information in a secured
environment. This technology is currently available to our members,
brokers, agents and providers. We are in the process of introducing
additional enhancements to our technological capabilities that we
believe will increase administrative efficiency and also lead to
membership growth through greater customer satisfaction.

. Focusing on Commercial segment profitability through disciplined pricing
and market decisions--Although our turnaround plan is substantially
complete, we continue to evaluate our business lines on a market-by-
market basis. Our current objective is to profitably grow our Commercial
segment membership in our core markets by focusing on opportunities that
satisfy our pricing criteria.

. Managing our Government segment effectively, leveraging our expertise in
managing government contracts and government-related programs--We have
gained substantial expertise in managing government contracts through
our experience with our TRICARE, Medicare and Medicaid businesses. We
believe that the experience and infrastructure needed to operate these
business lines can be leveraged profitably. For example, we recently
acquired a second TRICARE contract which will utilize existing TRICARE
infrastructure. Our current objective is to focus on our existing
Government business and use our experience to manage it efficiently and
profitably.

Recent Developments

On May 31, 2001, we acquired for approximately $45 million the outstanding
shares of common stock of a newly formed Anthem Alliance Health Insurance
Company subsidiary responsible for administering TRICARE benefits to
approximately 1.2 million eligible members. We provide ASO services for 592,000
of the total 1.2 million eligible members. Premium revenues for this business
were approximately $141 million for the quarter ended March 31, 2001 and
approximately $553 million for the year ended December 31, 2000.

Upon becoming Medicare eligible, which is normally at age 65, TRICARE
beneficiaries generally stop receiving benefits under the TRICARE program and
begin receiving benefits under a Medicare program. However, as of April 1,
2001, a new government program which allows beneficiaries to continue in the
TRICARE program even after becoming eligible for Medicare became effective. As
of May 31, 2001, we provided pharmacy benefits in an administrative capacity
pursuant to this new program to approximately 555,000 members under our two
TRICARE contracts. Effective October 1, 2001, the benefits under this
administrative services program will be expanded to include medical benefits.

On July 30, 2001, we issued a press release in which we announced our
results for the second quarter ended June 30, 2001.

We reported $.15 earnings per diluted share for the second quarter ended
June 30, 2001 versus $.11 earnings per diluted share for the second quarter of
2000. Earnings per diluted share for the first six months were $.31 compared to
$.24 a year ago.

Net income for the second quarter of 2001 was $25 million compared to net
income of $19 million for the same period in the prior year, a 32% increase.
Net income for the first six months of $52 million compares with $40 million in
the same period a year ago. Income before

income taxes for the quarter was up 63% to $39 million versus $24 million a
year ago. Comparable amounts for the six months ended June 30, 2001 and 2000
were $81 million and $51 million, respectively.

Revenue in the second quarter was $2.48 billion versus $2.70 billion in the
second quarter of 2000. We exited numerous non-core markets and products in the
latter part of 2000, accounting for the decline in second quarter revenues.
Those markets and products were deemed non-core because they either lacked
potential for profitability or did not fit into our strategic focus, or both.

Second quarter premium revenues for the Commercial segment totaled $1.29
billion compared to $1.41 billion for the same period in 2000. Fully insured
medical business within the segment averaged premium yields of 12.7% for the
second quarter of 2001 compared to 12.0% for the second quarter of 2000 and
14.1% in the first quarter 2001. Membership for the fully insured medical line
declined by 1.9% to 2,343,300 at June 30, 2001 from 2,387,900 at March 31,
2001, as we continued to focus on pricing discipline in certain non-strategic
markets where the majority of our business is in the small group line, and
continued to exit certain unprofitable markets. Although our fully insured
commercial medical membership declined slightly through the end of the second
quarter of 2001, we anticipate slight growth in the latter half of 2001 in this
membership.

Government segment premium revenues totaled $1.16 billion in the second
quarter of 2001 versus $1.25 billion for the prior year's quarter. Our
Medicare+Choice line averaged premium yields of 8.8% during the second quarter
versus 6.3% in the prior year's quarter and 7.0% in the first quarter 2001.
Medicare+Choice membership at June 30, 2001 was 418,000 versus 428,100 at March
31, 2001, a decline of 10,100 members. TRICARE premium revenues increased to
$300 million in the second quarter versus $227 million in the prior year's
quarter. Our TRICARE membership base expanded sequentially by 1.6 million
members primarily through the acquisition of the TRICARE regions 2 and 5
business on May 31, 2001 and the addition of the TRICARE senior pharmacy
program during the quarter. Of the 2.7 million TRICARE members, approximately
940,000 are in self-funded type arrangements which have correspondingly higher
administrative expenses.

Our medical expense ratio for the second quarter was 83.7%, versus a ratio
of 85.0% for the same period in 2000 and a ratio of 83.2% in the first quarter
of 2001. Our exit from numerous non-core markets and products in the latter
part of 2000 (as well as 45 Medicare+Choice counties on January 1, 2001) drove
much of the year-over-year improvement in our medical expense ratio.

Medical cost trends for the commercial fully insured medical line of
business were in the 9% to 10% range for the second quarter of 2001, unchanged
from both the first quarter 2001 and the second quarter of 2000.

Medicare+Choice medical cost trends for the second quarter 2001 ranged from
3% to 4%, down significantly from 7% to 8% for the second quarter of 2000. The
exit from the 45 Medicare+Choice counties combined with the effect of
significant benefit reductions, both effective January 1, 2001, helped drive
the lower cost trends.

Continued emphasis on controlling administrative costs resulted in a
sequential decrease of 30 basis points in our selling, general and
administrative expense ratio to 14.2%. This compares to 14.5% in the first
quarter of 2001 and a ratio of 13.6% from the year-ago quarter.

Our effective tax rate of 36% for the second quarter of 2001 is unchanged
from the first quarter 2001 and compares to 21% for each of the 2000 quarters.
The lower effective tax rate for 2000 related to the disposition of our
workers' compensation business.

Excluding the timing of the receipt of the Medicare premium payment from the
Centers for Medicare and Medicaid Services, previously the Health Care
Financing Administration, cash flows provided by operations totaled $45 million
in the second quarter of 2001. Cash flows during the quarter include the
negative impact of a $39 million reduction in claims inventories as the
percentage of claims both received and paid electronically accelerated, and $42
million primarily related to the timing of payments to our pharmacy benefit
management company and run-off payments for terminated members. All of these
had a corresponding impact on our days in claims payable and reserves.

The following table summarizes our results for the second quarter ended June
30, 2001.

UNAUDITED FINANCIAL HIGHLIGHTS

Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 2001 2000
--------- --------- -------- --------
(in millions, except per share
results, membership and ratios)

Summary of Operations:
Revenues............................. $ 2,479 $ 2,696 $ 4,924 $ 5,338
Income before income taxes........... 39 24 81 51
Net income........................... 25 19 52 40
Basic earnings per common share...... $ 0.15 $ 0.11 $ 0.31 $ 0.24
Diluted earnings per common shares... $ 0.15 $ 0.11 $ 0.31 $ 0.24
Operating Data:
Medical expense ratio................ 83.7% 85.0% 83.4% 85.0%
SG&A expense ratio................... 14.2% 13.6% 14.3% 13.6%
EBITDA(1)............................ $ 85 $ 68 $ 173 $ 137

At June 30,
-------------------
2001 2000
--------- ---------

Medical Membership by Segment
Commercial:
Fully insured........................................ 2,343,300 2,844,500
Administrative services only......................... 548,100 655,700
Medicare supplement.................................. -- 38,800
--------- ---------
Total Commercial................................... 2,891,400 3,539,000
--------- ---------
Government:
Medicare+Choice...................................... 418,000 522,100
Medicaid............................................. 488,400 675,100
TRICARE.............................................. 1,725,800 1,049,100
TRICARE ASO.......................................... 939,400 --
--------- ---------
Total Government................................... 3,571,600 2,246,300
--------- ---------
Total medical membership........................... 6,463,000 5,785,300
========= =========

--------
(1) See footnote (f) to "Selected Consolidated Financial Data."

For additional information regarding our financial results for the quarter
ended June 30, 2001, we refer you to our Current Reports on Form 8-K, which we
filed with the SEC on July 30, 2001 and Form 8-K/A, which we filed with the SEC
on July 31, 2001. See "Incorporation of Certain Documents by Reference."

----------------

We were incorporated in Delaware in 1964. Our principal executive offices
are located at 500 West Main Street, Louisville, Kentucky 40202. Our telephone
number at that address is (502) 580-1000. Our world wide web site address is
www.humana.com. The information contained in our web site does not constitute
part of this document.

The Offering

Issuer...................... Humana Inc.

Notes offered............... $300,000,000 aggregate principal amount of 7
1/4% senior notes due 2006.

Maturity.................... August 1, 2006.

Interest payment dates...... February 1 and August 1 of each year,
commencing on February 1, 2002.

Ranking..................... The notes will be unsecured senior obligations
and will rank equally with all of our existing
and future unsecured and unsubordinated
indebtedness. The notes will effectively rank
junior to any of our existing and future
secured indebtedness and will be structurally
subordinated to any indebtedness and other
liabilities of our subsidiaries.

Optional redemption......... We may redeem the notes, in whole or in part,
at any time at the "make whole" redemption
price set forth in this prospectus.

Covenants................... The indenture governing the notes will contain
covenants that, subject to exceptions and
qualifications, limit our ability and the
ability of our subsidiaries to:
. create liens, and
. consolidate, merge or transfer all or
substantially all of our assets.
See "Description of the Notes" in this
prospectus.

Use of proceeds............. We estimate that our net proceeds, less
estimated costs of the offering, will be
approximately $295,902,000 million. We intend
to use the net proceeds of this offering for
the repayment of indebtedness under our current
credit facility.

Risk factors................ See "Risk Factors" and other information
included or incorporated by reference in this
prospectus for a discussion of factors you
should carefully consider before deciding to
invest in the notes.

Summary Consolidated Financial Data

We have derived the summary consolidated financial data below from our
consolidated financial statements and accompanying notes, some of which appear
elsewhere in this prospectus or are incorporated by reference in this
prospectus. The summary consolidated financial data should be read together
with "Selected Consolidated Financial Data" and our "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere or incorporated by reference in this prospectus.

Three Months Ended
Fiscal Years Ended December 31, March 31,
---------------------------------------------------------- ----------------------
2000(a) 1999(b) 1998(c) 1997(d) 1996(e) 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions, except membership and ratios)

Summary of Operations
Revenues:
Premiums............... $ 10,395 $ 9,959 $ 9,597 $ 7,880 $ 6,677 $ 2,413 $ 2,611
Investment and other
income, net........... 119 154 184 156 111 32 31
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......... 10,514 10,113 9,781 8,036 6,788 2,445 2,642
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Medical................ 8,782 8,532 8,041 6,522 5,625 2,007 2,220
Selling, general and
administrative........ 1,442 1,368 1,328 1,116 940 350 353
Depreciation and
amortization.......... 147 124 128 108 98 39 34
Asset write-downs and
other charges......... 460 34 96
-- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 10,371 10,484 9,531 7,746 6,759 2,396 2,607
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 143 (371) 250 290 29 49 35
Interest expense........ 29 33 47 20 11 7 8
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 114 (404) 203 270 18 42 27
Provision (benefit) for
income taxes........... 24 (22) 74 97 6 15 6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 90 $ (382) $ 129 $ 173 $ 12 $ 27 $ 21
========== ========== ========== ========== ========== ========== ==========
Financial Position
Cash and investments.... $ 2,307 $ 2,779 $ 2,844 $ 2,828 $ 1,921 $ 2,194 $ 2,391
Total assets............ 4,167 4,900 5,496 5,600 3,306 4,077 4,421
Medical and other
expenses payable....... 1,181 1,756 1,908 2,075 1,099 1,103 1,360
Debt and other long-term
obligations............ 742 830 977 1,057 361 733 832
Stockholders' equity.... 1,360 1,268 1,688 1,501 1,292 1,395 1,299
Operating Data
Medical expense ratio... 84.5% 85.7% 83.8% 82.8% 84.3% 83.2% 85.0%
SG&A expense ratio...... 13.9% 13.7% 13.8% 14.2% 14.1% 14.5% 13.5%
EBITDA (f).............. $ 290 $ (247) $ 378 $ 398 $ 127 $ 88 $ 69
Ratio of earnings to
fixed
charges (g)............ 3.2x (h) 4.3x 10.0x 1.9x 4.2x 2.9x
Medical Membership by
Segment
Commercial:
Fully insured.......... 2,545,800 3,083,600 3,261,500 3,258,600 2,759,600 2,387,900 2,977,500
Administrative services
only.................. 612,800 648,000 646,200 651,200 471,000 547,200 657,000
Medicare supplement.... -- 44,500 56,600 68,800 97,700 -- 40,800
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Commercial....... 3,158,600 3,776,100 3,964,300 3,978,600 3,328,300 2,935,100 3,675,300
---------- ---------- ---------- ---------- ---------- ---------- ----------
Government:
Medicare+Choice........ 494,200 488,500 502,000 480,800 364,500 428,100 518,000
Medicaid............... 575,500 616,600 643,800 635,200 55,200 493,200 656,600
TRICARE................ 1,070,400 1,058,000 1,085,700 1,112,200 1,103,000 1,070,900 1,060,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Government....... 2,140,100 2,163,100 2,231,500 2,228,200 1,522,700 1,992,200 2,234,600
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Medical
Membership.......... 5,298,700 5,939,200 6,195,800 6,206,800 4,851,000 4,927,300 5,909,900
========== ========== ========== ========== ========== ========== ==========

Three Months Ended
Fiscal Years Ended December 31, March 31,
------------------------------------------------- -------------------
2000(a) 1999(b) 1998(c) 1997(d) 1996(e) 2001 2000
--------- --------- --------- --------- --------- --------- ---------
(in millions, except membership and ratios)

Commercial Specialty
Membership
Dental................ 1,665,900 1,628,200 1,375,500 936,400 844,800 1,626,100 1,699,700
Other................. 678,900 1,333,100 1,257,800 1,504,200 1,039,400 640,500 1,280,400
--------- --------- --------- --------- --------- --------- ---------
Total Commercial
Specialty
Membership......... 2,344,800 2,961,300 2,633,300 2,440,600 1,884,200 2,266,600 2,980,100
========= ========= ========= ========= ========= ========= =========

-------
(a) Includes the operations of Memorial Sisters of Charity Health Network since
January 31, 2000, the date of our acquisition.
(b) Includes charges of $585 million pretax ($499 million after tax, or $2.97
per diluted share) primarily related to goodwill write-down, losses on non-
core asset sales, professional liability reserve strengthening, premium
deficiency and medical reserve strengthening.
(c) Includes charges of $132 million pretax ($84 million after tax, or $0.50
per diluted share) primarily related to the costs of certain market exits
and product discontinuances, asset write-offs, premium deficiency and a
one-time non-officer employee incentive.
(d) Includes the operations of the following entities since the dates we
acquired them: Health Direct, Inc., February 28, 1997; Physician
Corporation of America, September 8, 1997; and ChoiceCare Corporation,
October 17, 1997.
(e) Includes charges of $215 million pretax ($140 million after tax, or $0.85
per diluted share) primarily related to the closing of the Washington, D.C.
market and certain other markets, severance and facility costs for
workforce reductions, product discontinuance costs, premium deficiency,
litigation and other costs.
(f) EBITDA is defined as earnings (including investment and other income)
before interest expense, income taxes, depreciation and amortization. We
are presenting information concerning EBITDA because we believe EBITDA is
generally accepted as providing useful information regarding a company's
ability to service and incur debt. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to income from operations or net
income as a measure of operating performance or to net cash provided by
operating activities as a measure of liquidity. In addition, we operate as
a holding company and our earnings are generated by our subsidiaries. See
"Risk Factors--Risks Associated with the Notes--Our ability to obtain funds
from our subsidiaries is limited and the notes will be effectively
subordinated to all liabilities of our subsidiaries."
(g) The ratio was calculated by dividing the sum of the fixed charges into the
sum of the earnings and fixed charges. In calculating this ratio, earnings
include income or loss before income taxes plus fixed charges. Fixed
charges include interest expense, amortization of deferred financing
expenses and an amount equivalent to interest included in rental charges.
One-third of rental expense represents a reasonable approximation of the
interest amount.
(h) Due to a loss in 1999 caused primarily by pretax charges of $585 million,
the ratio of earnings to fixed charges was less than 1.0x. Additional
pretax earnings of $404 million would have been needed to achieve a ratio
of 1.0x. Excluding pretax charges of $585 million primarily related to
goodwill write-down, losses on non-core asset sales, professional liability
reserve strengthening, premium deficiency and medical reserve
strengthening, the ratio of earnings to fixed charges would have been 4.4x
for the year ended December 31, 1999.

RISK FACTORS

You should carefully consider the risk factors described below, in addition
to other information in this prospectus, before making a decision to purchase
the notes.

Risks Relating to Our Business

If the premiums we charge are insufficient to cover the cost of health care
services delivered to our members, or if our reserves are inadequate, our
profitability could decline.

We use a significant portion of our revenue to pay the costs of health care
services delivered to our members. These costs include claims payments,
capitation payments, allocations of certain centralized expenses and various
other costs incurred to provide health insurance coverage to our members, as
well as estimates of future payments to hospitals and others for medical care
provided to our members. Generally, premiums in the health care business are
fixed for one-year periods. Accordingly, costs we incur in excess of our
medical cost projections generally are not recovered in the contract year
through higher premiums. We estimate the costs of our future medical claims and
other expenses using actuarial methods and assumptions based upon payment
patterns, medical inflation, historical developments and other relevant
factors, and create medical claims reserves for future payments. We continually
review estimates of future payments relating to medical claims costs for
services incurred in the current and prior periods and make necessary
adjustments to our reserves. However, competition, government regulations and
other factors may and often do cause actual health care costs to exceed what
was estimated and reflected in premiums. These factors may include:

. increased use of services;

. increased use of prescription drugs;

. increased cost of individual services;

. catastrophes;

. epidemics;

. the introduction of new or costly treatments;

. medical cost inflation; and

. new government mandated benefits or other regulatory changes.

Failure to adequately price our products or develop sufficient reserves may
result in a material adverse effect on our financial position, results of
operations and cash flows.

If we fail to manage prescription drug costs successfully, our financial
results could suffer.

In general, prescription drug costs have been rising over the past few
years. These increases are due to the introduction of new drugs costing
significantly more than existing drugs, direct consumer advertising by the
pharmaceutical industry that creates consumer demand for particular brand-name
drugs, and members seeking medications to address lifestyle changes. In order
to control prescription drug costs, we introduced Rx3, our three-tiered
copayment pricing formula for prescription drugs, as well as a new formula with
four coverage levels which we have recently implemented. We cannot assure that
these efforts will be successful in controlling costs. Failure to control these
costs could have a material adverse effect on our financial position, results
of operations and cash flows.

If competitive pressures restrict or lower the premiums we receive, our
financial results could suffer.

In addition to the challenge of controlling health care costs, we face
competitive pressure to contain premium prices. The managed health care
industry is highly competitive and contracts for the sale of commercial
products are generally bid upon or renewed annually. Many of our competitors
are more established in the health care industry and have larger memberships
and greater financial resources than we do in certain markets. In addition,
other companies may enter our markets in the future. While health plans compete
on the basis of many factors, including service and the quality and depth of
provider networks, we expect that price will continue to be a significant basis
of competition. Failure to compete effectively in our markets could have a
material adverse effect on our financial position, results of operations and
cash flows.

We are involved in various legal actions, which, if resolved unfavorably to us,
could result in substantial monetary damages.

We are a party to a variety of legal actions that affect our business, such
as employment and employment discrimination-related suits, employee benefit
claims, breach of contract actions, tort claims, and shareholder suits,
including securities fraud.

Recently, a number of purported class action lawsuits have been filed
against us and some of our competitors in the health benefits business. The
suits are purported class actions on behalf of all of our managed care members
and network providers for alleged breaches of federal statutes, including
Employee Retirement Income Security Act, as amended, or ERISA, and Racketeer
Influenced and Corrupt Organizations Act, or RICO.

In addition, because of the nature of the health care business, we are
subject to a variety of legal actions relating to our business operations,
including the design, management and offering of products and services. These
include and could include in the future:

. claims relating to the denial of health care benefits;

. medical malpractice actions;

. allegations of anti-competitive and unfair business activities;

. provider disputes over compensation and termination of provider
contracts;

. disputes related to self-funded business, including actions alleging
claim administration errors;

. claims related to the failure to disclose certain business practices;
and

. claims relating to customer audits and contract performance.

In some cases, substantial non-economic or punitive damages, or treble
damages, may be sought. While we currently have insurance coverage for some of
these potential liabilities, other potential liabilities may not be covered by
insurance, insurers may dispute coverage, or the amount of insurance may not be
enough to cover the damages awarded.

In addition, certain types of damages, such as punitive damages, may not be
covered by insurance, particularly in those jurisdictions in which coverage of
punitive damages is prohibited. In connection with one ongoing lawsuit in which
one of our subsidiaries is a defendant, Chipps v. Humana Health Insurance
Company of Florida, Inc., our liability carriers have preliminarily indicated
they believe no coverage is available for punitive damages.

Insurance coverage for all or some forms of liability may become unavailable or
prohibitively expensive in the future.

A description of material legal actions in which we are currently involved
is included in this prospectus under "Legal Proceedings" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
cannot predict the outcome of these suits with certainty, and we are incurring
expenses in the defense of these matters. In addition, recent court decisions
and legislative activity may increase our exposure for any of these types of
claims. Therefore, these legal actions could have a material adverse effect on
our financial position, results of operations and cash flows.

Increased litigation and negative publicity could increase our cost of doing
business.

The managed care industry continues to receive significant negative
publicity and has been the subject of large jury awards that have affected or
reflected public perception of the industry. This publicity and perception have
been accompanied by increased litigation, legislative activity, regulation and
governmental review of industry practices. These factors may adversely affect
our ability to market our products or services, may require us to change our
products or services, and may increase the regulatory burdens under which we
operate. Any combination of these factors could further increase our cost of
doing business and adversely affect our financial position, results of
operations and cash flows.

If we fail to effectively implement our operational and strategic initiatives,
our business could be materially adversely affected.

Our future performance depends in large part upon our management team's
ability to execute our strategy to position the company for the future. This
strategy involves, among other things, the introduction of new products and
benefit designs, the successful implementation of our e-business initiatives
and the selection and adoption of new technologies. We believe we have
experienced, capable management and technical staff who are capable of
implementing this strategy. However, the market for management and technical
staff in the health care industry is competitive. Loss of key employees could
adversely affect the implementation of our initiatives. There can be no
assurance that we will be able to successfully implement our operational and
strategic initiatives that are intended to position the company for future
growth. Failure to implement this strategy may result in a material adverse
effect on our financial position, results of operations and cash flows.

Our industry is currently subject to substantial government regulation, which,
along with possible increased governmental regulation or legislative reform,
increases our costs of doing business and could adversely affect our
profitability.

The health care industry in general, and HMOs and PPOs in particular, are
subject to substantial federal and state government regulation, including:

. regulation relating to minimum net worth;

. licensing requirements;

. approval of policy language and benefits;

. mandatory products and benefits;

. provider compensation arrangements;

. member disclosure;

. premium rates; and

. periodic examinations by state and federal agencies.

State regulations require our HMO and insurance subsidiaries to maintain
minimum net worth requirements and restrict certain investment activities.
Additionally, those regulations restrict the ability of our subsidiaries to
make dividend payments, loans, loan repayments or other payments to us. This
could have a material adverse effect on our ability to repay the notes.

In recent years, significant federal and state legislation affecting our
business has been enacted. State and federal governmental authorities are
continually considering changes to laws and regulations applicable to us and
are currently considering regulations relating to:

. mandatory benefits and products;

. defining medical necessity;

. provider compensation;

. health plan liability to members who fail to receive appropriate care;

. disclosure and composition of physician networks; and

. physicians' ability to collectively negotiate contract terms with
carriers, including fees.

All of these proposals could apply to us. See "Business--Government
Regulation; Health Care Reform."

There can be no assurance that we will be able to continue to obtain or
maintain required governmental approvals or licenses or that legislative or
regulatory changes will not have a material adverse effect on our business.
Delays in obtaining or failure to obtain or maintain required approvals, or
moratoria imposed by regulatory authorities, could adversely affect our revenue
or the number of our members, increase costs or adversely affect our ability to
bring new products to market as forecasted.

The National Association of Insurance Commissioners, or NAIC, has adopted
risk-based capital requirements, also know as RBC, which is subject to state-
by-state adoption and to the extent implemented, sets minimum capitalization
requirements for insurance and HMO companies. The NAIC recommendations for life
insurance companies were adopted in all states and the prescribed calculation
for HMOs has been adopted in most states in which we operate. The HMO rules may
increase the minimum capital required for some of our subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity."

Congress is considering significant changes to Medicare, including a
pharmacy benefit requirement. President Bush announced a prescription drug
discount plan for Medicare-eligible seniors on July 12, 2001. We expect that
this plan will be more fully developed in upcoming weeks and months by the
Centers for Medicare and Medicaid Services, or CMS (formerly known as Health
Care Financing Administration). We are unable to determine what effect, if any,
the prescription drug discount plan will have on our products or our operating
results.

Congress is also considering proposals relating to health care reform,
including a comprehensive package of requirements for managed care plans called
the Patient Bill of Rights, or PBOR, legislation. On June 29, 2001, the U.S.
Senate passed PBOR legislation in the form of Senate Bill 1052, known as the
McCain-Edwards bill. In addition to providing enhanced access to specialists,
emergency care and an external review appeals process, the McCain-

Edwards bill provides that patients could sue health plans for damages in state
court over medical judgment disputes and in federal court over contractual
claim disputes. The bill allows unlimited economic and noneconomic damages and
also allows for up to $5 million in "civil assessments", or punitive damages.

On June 29, 2001, President Bush stated that he would not sign the McCain-
Edwards bill in its present form and would seek passage of H.R. 2315, known as
the Fletcher bill, introduced by Representative Ernest Fletcher of Kentucky.
The Fletcher bill would also provide enhanced access to specialists, emergency
care and an external review appeals process. The Fletcher bill would also allow
patients to sue health plans for damages, but subject those suits to many
limitations not contained in the McCain-Edwards bill. Unlimited economic
damages and up to $500,000 in noneconomic damages would be recoverable in
federal lawsuits under the Flectcher bill, but no punitive damages would be
permitted. Causes of action in state court would permit unlimited damages to be
recovered in circumstances where health plans act contrary to the findings of
an independent review board. On August 1, 2001, President Bush announced that
he had reached an agreement with Representative Charles Norwood of Georgia
regarding PBOR legislation that would permit causes of action in state court
using federal standards for unlimited economic damages and up to $1.5 million
in noneconomic damages. If PBOR legislation becomes law, it could expose us to
significant increased costs and additional litigation risks. Although we could
attempt to mitigate our ultimate exposure from these costs through increases in
premiums or changes in benefits, there can be no assurance that we will be able
to mitigate or cover the costs stemming from any PBOR legislation or the other
costs incurred in connection with complying with any PBOR or similar
legislation.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
includes administrative provisions directed at simplifying electronic data
interchange through standardizing transactions, establishing uniform health
care provider, payor and employer identifiers and seeking protections for
confidentiality and security of patient data. Under the new HIPAA privacy
rules, we must comply with a variety of requirements concerning the use and
disclosure of individuals' protected health information, establish rigorous
internal procedures to protect health information and enter into business
associate contracts with those companies to whom protected health information
is disclosed. Violations of these rules will subject us to significant
penalties. Compliance with HIPAA regulations requires significant systems
enhancements, training and administrative effort. The final rules do not
provide for complete federal preemption of state laws, but rather preempt all
inconsistent state laws unless the state law is more stringent. HIPAA could
also expose us to additional liability for violations by our business
associates.

We are also subject to various governmental audits and investigations. These
can include audits and investigations by state attorneys general, CMS, the
Office of the Inspector General of Health and Human Services, the Office of
Personnel Management, the Department of Justice and state Departments of
Insurance and Departments of Health. These activities could result in the loss
of licensure or the right to participate in various programs, or the imposition
of fines, penalties and other sanctions. In addition, disclosure of any adverse
investigation or audit results or sanctions could negatively affect our
reputation in various markets and make it more difficult for us to sell our
products and services. See "Business--Government Regulation."

As a government contractor, we are exposed to additional risks that could
adversely affect our business or our willingness to participate in government
health care programs.

A significant portion of our revenues relates to federal, state and local
government health care coverage programs, including the Medicare+Choice,
Medicaid and TRICARE programs. These programs involve various risks, including:

. the possibility of reduced or insufficient government reimbursement in
the future;

. higher comparative medical costs;

. government regulatory and reporting requirements;

. higher marketing and advertising costs per member as a result of
marketing to individuals as opposed to groups; and

. the possibility that we will not be able to extend or renew any of the
contracts relating to these programs. For example, our contracts with
the Health Insurance Administration in Puerto Rico are scheduled to
expire on August 31, 2001. We are currently in discussions with the
Health Insurance Administration in Puerto Rico regarding future health
care insurance benefits and any continuing business, and we are unable
to predict if any new business will be awarded to us. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Government Contracts".

These contracts also are generally subject to frequent change, including
changes which may reduce the number of persons enrolled or eligible to enroll,
reduce the revenue we receive or increase our administrative or health care
costs under those programs. In the event government reimbursement were to
decline from projected amounts, our failure to reduce the health care costs
associated with these programs could have a material adverse effect on our
business. Changes to these government programs in the future may also affect
our ability or willingness to participate in these programs. The loss of these
contracts or significant changes in these programs as a result of legislative
action, including reductions in payments or increases in benefits without
corresponding increases in payments, may have a material adverse effect on our
revenues, profitability and business prospects.

In addition, under one of our CMS contracts, at March 31, 2001 we provided
health insurance coverage to approximately 245,200 members in Florida. This
contract accounted for approximately 17% of our total premium revenues in 2000
and approximately 18% of our total premium revenues in the first quarter of
2001. The termination of this contract would likely have a material adverse
effect upon our financial condition, results of operations and cash flows.

If we fail to maintain satisfactory relationships with the providers of care to
our members, our business could be adversely affected.

We contract with physicians, hospitals and other providers to deliver health
care to our members. Our products encourage or require our customers to use
these contracted providers. These providers may share medical cost risk with us
or have financial incentives to deliver quality medical services in a cost-
effective manner.

In any particular market, providers could refuse to contract with us, demand
higher payments, or take other actions that could result in higher health care
costs for us, less desirable products for customers and members, or difficulty
meeting regulatory or accreditation requirements. In some markets, certain
providers, particularly hospitals, physician/hospital organizations or multi-
specialty physician groups, may have significant market positions and
negotiating power. In addition, physician or practice management companies,
which aggregate physician practices for administrative efficiency and marketing
leverage, may, in some cases, compete directly with us. If these providers
refuse to contract with us, use their market position to negotiate favorable
contracts, or place us at a competitive disadvantage, our ability to market
products or to be profitable in those areas could be adversely affected.

In some situations, we have contracts with individual or groups of primary
care physicians for an actuarially determined, fixed, per-member-per-month fee
under which physicians are paid a fixed amount to provide all required medical
services to our members. The inability of providers to properly manage costs
under these arrangements can result in the financial instability of such
providers and the termination of their relationship with us. In addition,
payment or other disputes between the primary care provider and specialists
with whom it contracts can result in a disruption in the provision of services
to our members or a reduction in the services available. A primary care
provider's financial instability or failure to pay other providers for services
rendered could lead that provider to demand payment from us, even though we
have made our regular fixed payments to the primary provider. There can be no
assurance that providers with whom we contract will properly manage the costs
of services, maintain financial solvency or avoid disputes with other
providers, the failure of any of which could have an adverse effect on the
provision of services to our members and our operations.

Risks Associated with the Notes

Our ability to obtain funds from our subsidiaries is limited and the notes will
be effectively subordinated to all liabilities of our subsidiaries.

Because we operate as a holding company, the notes are effectively
subordinated to all existing and future indebtedness and other liabilities of
our subsidiaries. Our subsidiaries are the operating entities which generate
revenues. As a result, we will be dependent upon dividends, administrative
expense reimbursements, and intercompany transfers of funds from our
subsidiaries to meet our payment obligations on the notes. However, these
subsidiaries are generally regulated by state departments of insurance. In most
states, we are required to seek prior approval by these state regulatory
authorities before we transfer money or pay dividends exceeding a certain
amount, or in some states any amount, from these subsidiaries, and we are
required by law to maintain certain proscribed minimum amounts of capital in
these subsidiaries. In addition, we normally notify these authorities prior to
making payments that do not require approval. Accordingly, since all of our
premiums are earned by our subsidiaries, we cannot guarantee that sufficient
funds will be available to us to pay interest on or the principal of the notes.
In addition, in the event of our bankruptcy, liquidation or any similar
proceeding, holders of notes will be entitled to payment only after the holders
of any indebtedness and other liabilities of our subsidiaries have been paid or
provided for by these subsidiaries, including the claims of our members. In
addition, the indenture under which the notes will be issued permits our
subsidiaries to incur additional indebtedness.

We have significant financial and operating restrictions in our debt
instruments that may have an adverse effect on our operations.

Our bank credit facility contains numerous covenants that limit our ability
to incur additional indebtedness, to create liens or other encumbrances, to
make certain payments and investments, including dividend payments and to sell
or otherwise dispose of assets and merge or consolidate with other entities.
Our bank credit facility also requires us to meet certain financial ratios and
tests. As of June 30, 2001, we had $520 million outstanding under our bank
credit facility. After taking into account $60 million of outstanding
commercial paper as of that date, there was an additional $420 million
available for us to borrow under that facility. Agreements we enter into in the
future governing indebtedness could also contain significant financial and
operating restrictions.

364-day credit facility. As of July 31, 2001, we have received commitments
under this facility for an aggregate principal amount of $465 million. We
expect that the proposed new credit facility would contain customary
restrictive and financial covenants as well as customary events of defaults.
There can be no assurance that we will be able to enter into the new credit
facility either at all or on the terms described above. See "Description of
Other Indebtedness."

A failure to comply with the obligations contained in our current or future
bank credit facilities or indentures could result in an event of default or an
acceleration of debt under other instruments that may contain cross-
acceleration or cross-default provisions. We cannot be certain that we would
have, or be able to obtain, sufficient funds to make these accelerated
payments.

The notes are unsecured obligations.

The notes will not be secured by any of our assets and are subordinated to
any of our existing and future secured indebtedness. Accordingly, in the event
of our bankruptcy, liquidation or any similar proceeding, holders of the notes
will be entitled to payment only after the holders of any of our secured
indebtedness have been paid. As of May 31, 2001, we had $4 million of secured
indebtedness outstanding. In addition, the indenture under which the notes will
be issued permits us to incur additional indebtedness.

A liquid trading market for the notes may not develop.

There has not been an established trading market for the notes. We do not
intend to apply for listing of the notes on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System. Although each underwriter has informed us that it currently
intends to make a market in the notes, it has no obligation to do so and may
discontinue making a market at any time without notice. The liquidity of any
market for the notes will depend on the number of holders of the notes, our
performance, the market for similar securities, the interest of securities
dealers in making a market in the notes and other factors. A liquid trading
market may not develop for the notes.

USE OF PROCEEDS

We estimate that our net proceeds from the issuance and sale of the notes
will be approximately $295,902,000 million after deducting the underwriters'
discount and estimated offering expenses. We intend to use all of the net
proceeds from this offering to repay a portion of the amounts outstanding under
our credit facility.

As of June 30, 2001, we had $520 million outstanding under our credit
facility, which expires in August 2002 and had an effective interest rate of
4.6%. Affiliates of several of the underwriters are lenders in our credit
facility and, upon application of the proceeds from the offering of the notes,
will receive their proportionate share of the amount of the credit facility to
be repaid.

CAPITALIZATION

The following table sets forth our actual capitalization as of March 31,
2001 and as adjusted to reflect the sale of the notes and the receipt and use
of the estimated net proceeds, after deducting the underwriting discounts and
our estimated offering expenses.

As of
March 31, 2001
----------------
As
Actual Adjusted
------ --------
(in millions)

Short-term borrowings:
Revolving credit facility................................... $ 510 $ 214
Commercial paper............................................ 80 80
------ ------
Total short-term borrowings............................... 590 294
Long-term debt, excluding current portion:
7 1/4% senior notes due 2006................................ -- 300
------ ------
Total debt.................................................... 590 594
------ ------
Stockholders' equity:
Preferred stock, $1 par value; 10,000,000 shares authorized,
none issued................................................ -- --
Common stock; $0.16 2/3 par value; 300,000,000 shares
authorized; 170,688,314 shares issued...................... 28 28
Capital in excess of par value.............................. 922 922
Retained earnings........................................... 488 488
Accumulated other comprehensive loss........................ (3) (3)
Unearned restricted stock compensation...................... (27) (27)
Treasury stock, at cost, 1,711,504 shares................... (13) (13)
------ ------
Total stockholders' equity................................ 1,395 1,395
------ ------
Total capitalization...................................... $1,985 $1,989
====== ======

As of March 31, 2001, we could borrow up to an additional $410 million under
our credit facility.

SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the selected consolidated financial data below from our
consolidated financial statements and accompanying notes, some of which appear
elsewhere in this prospectus or are incorporated by reference in this
prospectus. The selected consolidated financial data should be read together
with our "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere or incorporated by reference in this
prospectus.

Summary of Operations
Revenues:
Premiums............... $ 10,395 $ 9,959 $ 9,597 $ 7,880 $ 6,677 $ 2,413 $ 2,611
Investment and other
income, net........... 119 154 184 156 111 32 31
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......... 10,514 10,113 9,781 8,036 6,788 2,445 2,642
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Medical................ 8,782 8,532 8,041 6,522 5,625 2,007 2,220
Selling, general and
administrative........ 1,442 1,368 1,328 1,116 940 350 353
Depreciation and
amortization.......... 147 124 128 108 98 39 34
Asset write-downs and
other charges......... -- 460 34 -- 96 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses.............. 10,371 10,484 9,531 7,746 6,759 2,396 2,607
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 143 (371) 250 290 29 49 35
Interest expense........ 29 33 47 20 11 7 8
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 114 (404) 203 270 18 42 27
Provision (benefit) for
income taxes........... 24 (22) 74 97 6 15 6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 90 $ (382) $ 129 $ 173 $ 12 $ 27 $ 21
========== ========== ========== ========== ========== ========== ==========
Basic earnings (loss)
per common share....... $ 0.54 $ (2.28) $ 0.77 $ 1.06 $ 0.07 $ 0.16 $ 0.13
Diluted earnings (loss)
per common share....... 0.54 (2.28) 0.77 1.05 0.07 0.16 0.13
Financial Position
Cash and investments.... $ 2,307 $ 2,779 $ 2,844 $ 2,828 $ 1,921 $ 2,194 $ 2,391
Total assets............ 4,167 4,900 5,496 5,600 3,306 4,077 4,421
Medical and other
expenses payable....... 1,181 1,756 1,908 2,075 1,099 1,103 1,360
Debt and other long-term
obligations............ 742 830 977 1,057 361 733 832
Stockholders' equity.... 1,360 1,268 1,688 1,501 1,292 1,395 1,299
Operating Data
Medical expense ratio... 84.5% 85.7% 83.8% 82.8% 84.3% 83.2% 85.0%
SG&A expense ratio...... 13.9% 13.7% 13.8% 14.2% 14.1% 14.5% 13.5%
EBITDA (f).............. $ 290 $ (247) $ 378 $ 398 $ 127 $ 88 $ 69
Ratio of earnings to
fixed charges (g)...... 3.2x (h) 4.3x 10.0x 1.9x 4.2x 2.9x
Medical Membership by
Segment
Commercial:
Fully insured.......... 2,545,800 3,083,600 3,261,500 3,258,600 2,759,600 2,387,900 2,977,500
Administrative services
only.................. 612,800 648,000 646,200 651,200 471,000 547,200 657,000
Medicare supplement.... -- 44,500 56,600 68,800 97,700 -- 40,800
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Commercial....... 3,158,600 3,776,100 3,964,300 3,978,600 3,328,300 2,935,100 3,675,300
---------- ---------- ---------- ---------- ---------- ---------- ----------
Government:
Medicare+Choice........ 494,200 488,500 502,000 480,800 364,500 428,100 518,000
Medicaid .............. 575,500 616,600 643,800 635,200 55,200 493,200 656,600
TRICARE................ 1,070,400 1,058,000 1,085,700 1,112,200 1,103,000 1,070,900 1,060,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Government....... 2,140,100 2,163,100 2,231,500 2,228,200 1,522,700 1,992,200 2,234,600
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Medical
Membership............ 5,298,700 5,939,200 6,195,800 6,206,800 4,851,000 4,927,300 5,909,900
========== ========== ========== ========== ========== ========== ==========

Commercial Specialty
Membership
Dental................. 1,665,900 1,628,200 1,375,500 936,400 844,800 1,626,100 1,699,700
Other.................. 678,900 1,333,100 1,257,800 1,504,200 1,039,400 640,500 1,280,400
--------- --------- --------- --------- --------- --------- ---------
Total Commercial
Specialty Membership.. 2,344,800 2,961,300 2,633,300 2,440,600 1,884,200 2,266,600 2,980,100
========= ========= ========= ========= ========= ========= =========

--------
(a) Includes the operations of Memorial Sisters of Charity Health Network since
January 31, 2000, the date of our acquisition.
(b) Includes charges of $585 million pretax ($499 million after tax, or $2.97
per diluted share) primarily related to goodwill write-down, losses on non-
core asset sales, professional liability reserve strengthening, premium
deficiency and medical reserve strengthening.
(c) Includes charges of $132 million pretax ($84 million after tax, or $0.50
per diluted share) primarily related to the costs of certain market exits
and product discontinuances, asset write-offs, premium deficiency and a
one-time non-officer employee incentive.
(d) Includes the operations of the following entities since the dates we
acquired them: Health Direct, Inc., February 28, 1997; Physician
Corporation of America, September 8, 1997; and ChoiceCare Corporation,
October 17, 1997.
(e) Includes charges of $215 million pretax ($140 million after tax, or $0.85
per diluted share) primarily related to the closing of the Washington, D.C.
market and certain other markets, severance and facility costs for
workforce reductions, product discontinuance costs, premium deficiency,
litigation and other costs.
(f) EBITDA is defined as earnings (including investment and other income)
before interest expense, income taxes, depreciation and amortization. We
are presenting information concerning EBITDA because we believe EBITDA is
generally accepted as providing useful information regarding a company's
ability to service and incur debt. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to income from operations or net
income as a measure of operating performance or to net cash provided by
operating activities as a measure of liquidity. In addition, we operate as
a holding company and our earnings are generated by our subsidiaries. See
"Risk Factors--Risks Associated with the Notes--Our ability to obtain funds
from our subsidiaries is limited and the notes will be effectively
subordinated to all liabilities of our subsidiaries."
(g) The ratio was calculated by dividing the sum of the fixed charges into the
sum of the earnings and fixed charges. In calculating this ratio, earnings
include income or loss before income taxes plus fixed charges. Fixed
charges include interest expense, amortization of deferred financing
expenses and an amount equivalent to interest included in rental charges.
One-third of rental expense represents a reasonable approximation of the
interest amount.
(h) Due to a loss in 1999 caused primarily by pretax charges of $585 million,
the ratio of earnings to fixed charges was less than 1.0x. Additional
pretax earnings of $404 million would have been needed to achieve a ratio
of 1.0x. Excluding pretax charges of $585 million primarily related to
goodwill write-down, losses on non-core asset sales, professional liability
reserve strengthening, premium deficiency and medical reserve
strengthening, the ratio of earnings to fixed charges would have been 4.4x
for the year ended December 31, 1999.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements incorporated by reference into this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of certain factors, including but not limited to
those discussed in "Risk Factors" and elsewhere in this prospectus.

Introduction

During the first quarter of 2001, we realigned our management to better
reflect our focus on the consumer. As part of this management realignment, we
redefined our business into two segments, Commercial and Government. The
Commercial segment includes three lines of business: fully insured medical,
ASO, and specialty. The Government segment includes three lines of business:
Medicare+Choice, Medicaid, and TRICARE. Results of each segment are measured
based upon income from operations before income taxes. We allocate
administrative expenses, investment income, and interest expense, but not
assets, to our segments. Members served by the two segments generally utilize
the same medical provider networks, enabling us to obtain more favorable
contract terms with providers. Our segments also share overhead costs. As a
result, the profitability of each segment is interdependent.

Throughout 2000 and to date in 2001, we continued to implement a strategy
targeted at improving our financial results while simultaneously positioning
ourselves for future growth. Part of our strategy involved eliminating non-core
businesses and focusing on improving the infrastructure related to our core
businesses. Our core businesses are those that are profitable or have the
potential to be profitable, have sufficient membership to allow us to contract
with an adequate network of medical providers at appropriate rates or have
steady performance.

During 2000 and to date in 2001, we completed transactions to divest our
workers' compensation business and portions of our Medicaid businesses in north
Florida, Milwaukee, Wisconsin, and Austin, Houston and San Antonio, Texas. We
also reinsured with third parties substantially all of our Medicare supplement
business. As of January 1, 2001, we exited 45 non-core counties in our
Medicare+Choice business and discontinued aspects of our product line focusing
on small group commercial businesses in 17 states. As of March 31, 2001, non-
core membership accounted for less than 3% of our total membership. We intend
to continue to reduce our remaining non-core membership through pricing
actions, product streamlining and market exits.

Revenue and Medical Cost Recognition

Premium revenues are recognized as income in the period members are entitled
to receive services. Premiums received prior to such period are recorded as
unearned premium revenues.

Medical costs include claim payments, capitation payments, allocations of
certain centralized expenses and various other costs incurred to provide health
insurance coverage to members, as well as estimates of future payments to
hospitals and others for medical care provided prior to the balance sheet date.
Capitation payments represent monthly prepaid fees disbursed to participating
primary care physicians and other providers who are responsible for providing
medical care to members. We estimate the costs of our future medical claims and
other expense payments using actuarial methods and assumptions based upon
payment patterns, medical inflation, historical developments and other relevant
factors, and create medical claims reserves for future payments. We continually
review estimates of future payments relating to medical claims costs for
services incurred in the current and prior periods and make necessary
adjustments to our reserves.

We reassess the profitability of our contracts for providing health
insurance coverage to our members when current market operating results or
forecasts indicate probable future losses. We record a premium deficiency in
current operations to the extent that the sum of expected medical costs, claim
adjustment expenses and maintenance costs exceeds related future premiums.
Anticipated investment income is not considered for purposes of computing the
premium deficiency. Because the majority of our member contracts renew
annually, we do not anticipate premium deficiencies, except when unanticipated
adverse events or changes in circumstances indicate otherwise.

We believe our medical and other expenses payable are adequate to cover
future claims payments required, however, such estimates are based on knowledge
of current events and anticipated future events, and, therefore, the actual
liability could differ from amounts provided.

Recent Developments

Upon becoming Medicare eligible, which is normally at age 65, TRICARE
beneficiaries generally stop receiving benefits under the TRICARE program and
begin receiving benefits under a Medicare program. However, as of April 1,
2001, a new government program which allows beneficiaries to continue in the
TRICARE program even after becoming eligible for Medicare became effective. As
of May 31, 2001, we provided pharmacy benefits in an administrative capacity
under this new program to approximately 555,000 members under our two TRICARE
contracts. Effective October 1, 2001, the benefits under this administrative
services program will be expanded to include medical benefits.

On July 30, 2001, we issued a press release in which we announced our
results for the second quarter ended June 30, 2001. For a discussion of the
information contained in this press release, see "Prospectus Summary--Humana
Inc.--Recent Developments."

Comparison of Results of Operations

The following discussion deals primarily with our results of operations for
the three-month periods ended March 31, 2001 and 2000, and the fiscal years
ended December 31, 2000 and 1999. For a discussion of our results of operations
for the fiscal year ended December 31, 1998, see "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" in our Annual
Report on Form 10-K for the year ended December 31, 2000, which is incorporated
by reference in this prospectus.

Quarters Ended March 31, 2001 and 2000

Our premium revenues decreased 7.6% to $2.4 billion for the quarter ended
March 31, 2001, or the 2001 quarter, compared to $2.6 billion for the quarter
ended March 31, 2000, or the 2000 quarter. This decrease was due to medical
membership reductions from exiting numerous non-core markets and products in
the last three quarters of 2000, partially offset by higher premium yields.
Premium yield represents the percentage increase in the average premium per
member over the comparable period in the prior year. Items impacting premium
yield include changes in premium rates, changes in government reimbursement
rates, changes in the geographic mix of membership, and changes in the mix of
benefit plans selected by our membership.

Our medical expense as a percentage of premium revenues, or medical expense
ratio, for the 2001 quarter was 83.2% compared to 85.0% for the 2000 quarter.
The decline in the medical expense ratio was primarily due to our exiting
numerous higher cost, non-core markets and products, significant benefit
reductions in our Medicare+Choice product effective January 1, 2001 and
improving fully insured commercial medical premium yields.

Our selling, general and administrative, or SG&A, expense as a percentage of
premium revenues, or SG&A expense ratio, for the 2001 quarter was 14.5%
compared to 13.5% in the 2000 quarter. This increase was the result of planned
spending on infrastructure and technology initiatives combined with a lower
ratio of members to employees. Depreciation and amortization increased $5
million to $39 million in the 2001 quarter from $34 million in the 2000
quarter. The increase was the result of increased capital expenditures
primarily related to our technology initiatives.

Income before income taxes totaled $42 million for the 2001 quarter compared
to $27 million for the 2000 quarter.

On an interim basis, the provision for income taxes is provided for at the
anticipated effective tax rate for the year. Our effective tax rate for the
2001 quarter was approximately 36% compared to 21% for the 2000 quarter. The
lower effective tax rate for the 2000 quarter includes the benefit recognized
for available capital loss carryforwards resulting from the sale of our
workers' compensation business.

Net income was $27 million, or $0.16 per diluted share in the 2001 quarter
compared to $21 million, or $0.13 per diluted share in the 2000 quarter. This
earnings improvement resulted from actions taken to eliminate non-core
businesses, significant Medicare+Choice benefit reductions, and improvements in
determining premiums for our fully insured commercial medical membership, which
process we refer to as pricing discipline.

Business Segment Information for the Quarters Ended March 31, 2001 and 2000

The following table presents certain financial data for our two segments for
the 2001 quarter and 2000 quarter:

Quarters
Ended March
31,
--------------
2001 2000
------ ------
(in millions,
except
ratios)

Premium revenues:
Commercial.............................................. $1,311 $1,431
Government.............................................. 1,102 1,180
------ ------
Total................................................. $2,413 $2,611
====== ======
Medical expense ratios:
Commercial.............................................. 81.6% 83.4%
Government.............................................. 85.0% 86.9%
------ ------
Total................................................. 83.2% 85.0%
====== ======
SG&A expense ratios (a):
Commercial.............................................. 16.6% 15.7%
Government.............................................. 12.0% 10.9%
------ ------
Total................................................. 14.5% 13.5%
====== ======
Income before income taxes:
Commercial.............................................. $ 12 $ 3
Government.............................................. 30 24
------ ------
Total................................................. $ 42 $ 27
====== ======

--------
(a)Excludes depreciation and amortization.

Commercial

Our Commercial segment's premium revenues decreased 8.4% to $1.3 billion for
the 2001 quarter compared with $1.4 billion for the 2000 quarter. Fully insured
commercial medical premiums decreased 8.0% to $1.2 billion during the 2001
quarter from $1.3 billion in the 2000 quarter. This decrease was due to
membership reductions offset by higher premium yields. Fully insured commercial
medical membership decreased 19.8% to 2,387,900 compared with 2,977,500 in the
2000 quarter, as we continued to focus on opportunities that satisfy our
pricing criteria and exited certain unprofitable markets. Fully insured
commercial medical premium yields improved to 14.1% for the 2001 quarter
compared to 11.4% for the 2000 quarter. Although our fully insured commercial
medical membership declined slightly through the end of the second quarter of
2001, we anticipate slight growth in the latter half of 2001 in this
membership.

Our Commercial segment's medical expense ratio for the 2001 quarter was
81.6%, decreasing from 83.4% in the 2000 quarter. This decrease resulted
primarily from lower medical cost trends in our fully insured commercial
product. Fully insured commercial medical cost trends were in the 9% to 10%
range for the 2001 quarter compared to a range of 10% to 11% for the 2000
quarter. Medical cost trends represent the percentage increase in the average
medical cost per member over the comparable period in the prior year. Items
impacting medical cost trends include changes in contracted rates with
providers, changes in utilization of benefits, changes in the geographic mix of
membership, and changes in the mix of benefit

plans selected by our membership. This improvement was primarily driven by
lower physician and pharmacy cost trends offset by higher hospital utilization.
Our three-tier pharmacy benefit continued to have a positive effect on pharmacy
cost trends.

The SG&A expense ratio for the 2001 quarter increased 90 basis points to
16.6% compared to 15.7% for the 2000 quarter. This increase was the result of
planned spending on infrastructure and technology initiatives combined with a
lower ratio of members to employees.

Income before income taxes totaled $12 million for the 2001 quarter compared
to $3 million for the 2000 quarter. This earnings increase was due to the
continued focus on pricing discipline and the exit of certain unprofitable
markets partially offset by a higher SG&A expense ratio.

Government

Premium revenues for our Government segment in the 2001 quarter decreased
6.6% to $1.1 billion compared to $1.2 billion in the 2000 quarter. The decrease
was primarily due to membership reductions from market exits and divestitures.
Medicare+Choice membership at March 31, 2001 was 428,100 compared to 518,000 at
March 31, 2000, a decline of 89,900 members, primarily attributable to the
previously announced exits from 45 non-core counties in our Medicare+Choice
business on January 1, 2001. Medicaid membership at March 31, 2001 of 493,200
declined by 163,400 members compared to the 2000 quarter. This decline resulted
primarily from the divestiture of the north Florida, Milwaukee, Wisconsin, and
Austin and San Antonio, Texas Medicaid businesses. Medicare+Choice premium
yields improved to 7.0% for the 2001 quarter compared to 6.2% for the 2000
quarter. We anticipate that for the remainder of 2001, Medicare+Choice premium
yields will range from 4% to 5% as some members may choose plans with lower
premiums and with correspondingly reduced benefits.

Our Government segment's medical expense ratio for the 2001 quarter was
85.0%, decreasing from 86.9% for the 2000 quarter. This decrease primarily
resulted from exiting 45 non-core counties in our Medicare+Choice business with
higher medical expense ratios on January 1, 2001 coupled with significant
benefit design changes that also became effective January 1, 2001. Medicare
cost trends were in the 4% to 5% range in the 2001 quarter compared to a range
of 6% to 7% in the 2000 quarter. We anticipate that Medicare+Choice cost trends
will be in the 3% to 5% range for the remainder of 2001, while membership
levels are expected to remain relatively constant for the remainder of 2001.

Our Government segment's SG&A expense ratio for the 2001 quarter was 12.0%
compared to 10.9% for the 2000 quarter. This increase was the result of planned
spending on infrastructure and technology initiatives combined with a lower
ratio of members to employees.

Income before income taxes totaled $30 million for the 2001 quarter compared
to $24 million for the 2000 quarter. This earnings increase was primarily
attributable to improved premium yields relative to cost trends and reductions
in higher cost, non-core membership, partially offset by a higher SG&A expense
ratio.

Years Ended December 31, 2000 and 1999

1999 Asset Write-Downs and Operational Charges

The following table presents the components of the asset write-downs and
operational charges and their respective classifications in our 1999
consolidated statement of operations:

Selling, Asset
General and Write-Downs
Medical Administrative and Other Total
------- -------------- ----------- -----
(in millions)

Premium deficiency................ $50 $ 50
Reserve strengthening............. 35 35
Provider costs.................... 5 5
Long-lived asset impairment....... $342 342
Losses on non-core asset sales.... 118 118
Professional liability reserve
strengthening and other costs.... $35 35
--- --- ---- ----
Total 1999 charges.............. $90 $35 $460 $585
=== === ==== ====

Premium Deficiency, Reserve Strengthening and Provider Costs

As a result of our assessment of the profitability of our contracts for
providing health insurance coverage to our members in certain markets, we
recorded a provision for probable future losses, or premium deficiency, of $50
million during the first quarter of 1999. The failure of some of our providers
to satisfy their contractual obligations and the renegotiation of our hospital
agreement in Florida with HCA-The Healthcare Company, formerly Columbia/HCA
Healthcare Corporation, or HCA, in March 1999, contributed to the premium
deficiency by causing an increase in current and projected future medical
costs. The beneficial effect from losses charged to the premium deficiency
liability in 1999 was $50 million.

Prior period adverse claims development primarily in our PPO and
Medicare+Choice products initially identified during an analysis of February
and March 1999 medical claims resulted in the $35 million reserve
strengthening. We release or strengthen medical claims reserves when favorable
or adverse developments in prior periods exceed actuarial margins existing in
the reserves. In addition, we paid HCA $5 million to settle certain contractual
issues associated with the March 31, 1999 hospital agreement in Florida.

Long-Lived Asset Impairment

Historical and current period operating losses in certain of our markets
prompted a review during the fourth quarter of 1999 for the possible impairment
of long-lived assets. This review indicated that estimated future undiscounted
cash flows were insufficient to recover the carrying value of long-lived
assets, primarily goodwill, associated with our Austin and Dallas, Texas and
Milwaukee, Wisconsin markets. Accordingly, we adjusted the carrying value of
these long-lived assets to their estimated fair value resulting in a non-cash
impairment charge of $342 million. Estimated fair value was based on discounted
cash flows.

The long-lived assets associated with the Austin and Dallas markets
primarily resulted from our 1997 acquisition of Physician Corporation of
America, or PCA. Operating losses in Austin and Dallas were related to the
deterioration of risk-sharing arrangements with providers and the failure to
effectively convert the PCA operating model and computer platform to our
platform. The long-lived assets associated with the Milwaukee market primarily
resulted from the 1994 acquisition of CareNetwork, Inc. Operating losses in
Milwaukee were the result of

competitor pricing strategies resulting in lower premium levels to large
employer groups as well as market dynamics dominated by limited provider groups
causing higher than expected medical costs.

In conjunction with the 1999 goodwill impairment, we also reviewed the
estimated life assigned to goodwill. Effective January 1, 2000, we adopted a
20-year amortization period from the date of acquisition for goodwill
previously amortized over 40 years.

The $342 million long-lived asset impairment decreased future depreciation
and amortization expense $13 million annually ($13 million after tax, or $0.08
per diluted share), while the change in the amortization period of goodwill
increased future amortization expense $25 million annually ($24 million after
tax, or $0.15 per diluted share).

Losses on Non-Core Asset Sales

Between December 30, 1999 and February 4, 2000, we entered into definitive
agreements to sell our workers' compensation and north Florida Medicaid
businesses and a definitive agreement to reinsure substantially all of our
Medicare supplement business. Since the carrying value of the net assets of
these businesses exceeded the estimated fair value, we recorded a $118 million
loss in 1999. The estimated fair value was established based upon definitive
sale agreements, net of expected transaction costs. During the first half of
2000, we completed the sale of these businesses. There was no change in the
estimated loss during 2000.

Professional Liability Reserve Strengthening and Other Costs

We insure substantially all professional liability risks through a wholly
owned captive insurance subsidiary. Our subsidiary recorded an additional $25
million expense during the fourth quarter of 1999 primarily related to claim
and legal costs we expected to incur.

In addition, other expenses of $10 million were recorded during the fourth
quarter of 1999 related to a claim payment dispute with a contracted provider
and a government audit.

Comparison of Results of Operations

In order to enhance comparability as well as to provide a baseline against
which historical and prospective periods can be measured, the following
discussion comparing results for the years ended December 31, 2000 and 1999,
excludes the previously described charges from our 1999 financial results, but
does include in our 1999 financial results the beneficial effect from losses
charged to premium deficiency liabilities on operating results for the periods
shown, as described above. There were no adjustments to our results for 2000.
The following table reconciles the results reported on the consolidated
statement of operations, or reported results, to the results contained in the
following discussion, or adjusted results, for 1999:

Reported Excluded Adjusted
Results Charges (a) Results
-------- ----------- --------
(in millions, except per
share results)

Consolidated Statement of Operations caption
items that are adjusted:
Operating expenses:
Medical...................................... $ 8,532 $ (90) $ 8,442
Selling, general and administrative.......... 1,368 (35) 1,333
Depreciation and amortization................ 124 -- 124
Asset write-downs and other charges.......... 460 (460) --
------- ----- -------
Total operating expenses................... 10,484 (585) 9,899
(Loss) income from operations.................. (371) 585 214
(Loss) income before income taxes.............. (404) 585 181
Net (loss) income.............................. $ (382) $ 499 $ 117
Basic (loss) earnings per common share......... $ (2.28) $2.97 $ 0.69
Diluted (loss) earnings per common share....... $ (2.28) $2.97 $ 0.69

Ratio
Effect of
Reported Excluded Adjusted
Ratios Charges (a) Ratios
-------- ----------- --------

Medical expense ratios:
Commercial...................................... 84.9% (1.1)% 83.8%
Government...................................... 86.7% (0.7)% 86.0%
----- ------ -----
Total......................................... 85.7% (0.9)% 84.8%
===== ====== =====
SG&A expense ratios (b):
Commercial...................................... 16.0% (0.3)% 15.7%
Government...................................... 10.9% (0.4)% 10.5%
----- ------ -----
Total......................................... 13.7% (0.3)% 13.4%
===== ====== =====

--------
(a) Reflects the previously discussed medical expenses of $90 million, SG&A
expenses of $35 million and asset write-downs and other charges of $460
million.
(b) Excludes depreciation and amortization.

Our premium revenues increased 4.4% to $10.4 billion for 2000 compared to
$10.0 billion for 1999. Higher premium revenues resulted primarily from strong
premium yields partially offset by a decline in commercial membership. The
fully insured commercial medical premium yield of 12.5% and the Medicare+Choice
premium yield of 6.1% increased in 2000 compared to a fully insured commercial
medical premium yield of 7.4% and a Medicare+Choice premium yield of 3.4% in
1999. Due to the impact the premium increases had on fully insured commercial
medical member retention, total medical membership declined 640,500 with about
half of the loss attributable to non-core members.

Our medical expense ratio for 2000 was 84.5%, improving 30 basis points
compared to an adjusted medical expense ratio of 84.8% for 1999. The 1999 ratio
includes the beneficial effect of losses charged to premium deficiency
liabilities and favorable workers' compensation liability adjustments recorded
in 1999 but not recorded in 2000. Improving fully insured commercial medical
claims experience from lower pharmacy cost trends and the reduction of higher
cost, non-core membership was partially offset by higher Medicare+Choice
utilization in the 45 non-core counties in our Medicare+Choice business which
we exited on January 1, 2001. Fully insured commercial medical pharmacy cost
trends improved to 3.5% in 2000 compared to 19.7% in 1999 primarily as a result
of the conversion of members to a three-tier pharmacy benefit plan. See
"Business--Our Turnaround."

The SG&A expense ratio, increased to 13.9% in 2000 from an adjusted ratio of
13.4% in 1999. Contributing to this increase were planned investments in
infrastructure and technology initiatives and a lower ratio of members to
employees. Depreciation and amortization increased $23 million to $147 million
in 2000 from $124 million in 1999, primarily as a result of the change to a 20-
year life for goodwill previously amortized over 40 years.

Investment and other income totaled $119 million in 2000, compared to $154
million in 1999. The decrease resulted from a lower average invested balance
caused primarily by the sale of our workers' compensation business, lower
realized investment gains and a non-recurring $12 million gain in 1999 from the
sale of a tangible asset. Interest expense declined $4 million during 2000 as a
result of lower average outstanding borrowings.

Income before income taxes totaled $114 million in 2000 compared to adjusted
income before income taxes of $181 million in 1999.

Our effective tax rate in 2000 was approximately 21% compared to an adjusted
35% effective tax rate in 1999. The lower effective tax rate was the result of
recognizing the benefit of capital loss carryforwards resulting from the sale
of our workers' compensation business.

Net income was $90 million, or $0.54 per diluted share in 2000 compared to
adjusted net income of $117 million, or $0.69 per diluted share in 1999. The
earnings decline resulted from favorable adjustments recorded during 1999,
including premium deficiency and workers' compensation reserve adjustments and
a gain from the sale of a tangible asset.

Business Segment Information for the Years Ended December 31, 2000 and 1999

The following table presents medical membership and activity for 2000 and
1999 for our Commercial and Government segments:

2000 1999
---------------------------- ----------------------------
Commercial Government Total Commercial Government Total
---------- ---------- ------ ---------- ---------- ------
(in thousands)

Beginning medical
membership............. 3,776 2,163 5,939 3,964 2,232 6,196
Sales/acquisition...... 520 303 823 640 384 1,024
Cancellations/
dispositions.......... (1,137) (338) (1,475) (828) (425) (1,253)
TRICARE change......... -- 12 12 -- (28) (28)
------ ----- ------ ----- ----- ------
Ending medical
membership............. 3,159 2,140 5,299 3,776 2,163 5,939
====== ===== ====== ===== ===== ======
Ending specialty
membership............. 2,345 -- 2,345 2,961 -- 2,961
====== ===== ====== ===== ===== ======

The following table presents certain financial data for our two segments for
the years ended December 31, 2000 and 1999:

2000 1999 (a)
-------------- -------------
(in millions, except ratios)

Premium revenues:
Commercial............................... $ 5,555 $ 5,568
Government............................... 4,840 4,391
-------------- -------------
Total.................................. $ 10,395 $ 9,959
============== =============
Adjusted medical expense ratios:
Commercial............................... 81.8% 83.8%
Government............................... 87.5% 86.0%
-------------- -------------
Total.................................. 84.5% 84.8%
============== =============
Adjusted SG&A expense ratios (b):
Commercial............................... 16.0% 15.7%
Government............................... 11.5% 10.5%
-------------- -------------
Total.................................. 13.9% 13.4%
============== =============
Adjusted income before income taxes:
Commercial............................... $ 77 $ 18
Government............................... 37 163
-------------- -------------
Total.................................. $ 114 $ 181
============== =============

--------
(a) Excludes the previously discussed medical expenses of $90 million ($58
million Commercial and $32 million Government), SG&A expenses of $35
million ($18 million Commercial and $17 million Government) and asset
write-downs and other charges of $460 million ($333 million Commercial and
$127 million Government).
(b) Excludes depreciation and amortization.

Commercial

Our Commercial segment's premium revenues were $5.6 billion in both 2000 and
1999, as membership reductions in 2000 offset higher premium yields. Our fully
insured commercial medical premium yield of 12.5% in 2000 increased from 7.4%
in 1999, reflecting our improved pricing. The improved pricing during 2000
resulted primarily from higher renewal rates as well as accelerated rate
increases in Colorado and Texas where higher than expected medical cost trends
had been experienced. Fully insured commercial medical membership fell 17.4% to
2,545,800 during 2000. The decrease in the number of members was caused
primarily by our pricing actions, the termination of a large account in Texas,
and the announced exit of our small group product in 17 states.

Our Commercial segment's medical expense ratio was 81.8% in 2000 compared to
an adjusted medical expense ratio of 83.8% in 1999. This 200 basis point
improvement resulted from declining pharmacy cost trends, corrective pricing
related to higher cost, open access products and the reduction of higher cost,
non-core membership. We reduced higher cost, non-core membership when we
terminated a large account in Texas, announced our exit of our small group
product in 17 states and reinsured substantially all of our Medicare supplement
business. Fully insured commercial medical pharmacy cost trends improved to
3.5% compared to 19.7% from the conversion of members to a three-tier pharmacy
benefit plan. Partially offsetting the improvement in the medical expense ratio
were the beneficial effect from losses

charged to premium deficiency liabilities and favorable workers' compensation
liability adjustments recorded in 1999 but not in 2000.

The SG&A expense ratio was 16.0% in 2000 compared to an adjusted ratio of
15.7% in 1999. Contributing to this increase were planned investments in
infrastructure and technology initiatives and a lower ratio of members to
employees.

Income before income taxes totaled $77 million in 2000 compared to adjusted
income before income taxes of $18 million in 1999. The earnings increase
resulted from improved pricing and the reduction of high cost, non-core
membership.

Government

Our Government segment's premium revenues increased 10.2% to $4.8 billion in
2000 compared to $4.4 billion in 1999. Medicare+Choice premiums increased 12.4%
to $3.3 billion in 2000 due to higher premium yields and increased membership.
Premium yield increased to 6.1% during 2000 from the implementation of
additional member premiums for many of our Medicare+Choice members and a higher
proportion of members in markets with higher CMS reimbursement rates.
Medicare+Choice membership increased by 5,700, or 1.2%, despite the exit from
29 non-core counties in our Medicare+Choice business on January 1, 2000. Total
Government segment membership declined as a result of a transaction in 2000 to
divest our north Florida Medicaid business.

Our Government segment's medical expense ratio increased 150 basis points to
87.5% compared to 86.0% in 1999. This increase resulted primarily from higher
than expected utilization in the 45 non-core counties in our Medicare+Choice
business which we exited on January 1, 2001.

Our SG&A expense ratio increased to 11.5% in 2000 from an adjusted ratio of
10.5% in 1999. Contributing to this increase were planned investments in
infrastructure and technology initiatives and a lower ratio of members to
employees.

The Government segment's income before income taxes declined $126 million
during 2000 to $37 million from $163 million in 1999. This earnings decline was
primarily attributable to higher than expected utilization in the 45 non-core
counties in our Medicare+Choice business which we exited on January 1, 2001.

Liquidity

The following table presents cash flows for the quarters ended March 31,
2001 and 2000, and the years ended December 31, 2000 and 1999, excluding the
effects of the timing of the Medicare+Choice premium receipts and previously
funded workers' compensation claim payments:

Quarters Ended Years Ended
March 31, December 31,
---------------- -------------
2001 2000 2000 1999
------- ------- ------ ------

Cash flows (used in) provided by operating
activities.................................. $ (69) $ (70) $ 40 $ 217
Timing of Medicare+Choice premium receipts... (6) (19) 18 (16)
Funded workers' compensation claim payments.. -- 30 30 119
------- ------- ----- ------
Pro forma cash flows (used in) provided by
operating activities........................ $ (75) $ (59) $ 88 $ 320
======= ======= ===== ======

The reduction in the funded workers' compensation claim payments resulted
from the sale of this business on March 31, 2000. Pro forma operating cash used
in the 2001 and 2000 quarters were negatively impacted by run-off claims
payments related to terminated membership and claims inventory pay downs. Our
first quarter of 2001 included run-off claims payments related to terminated
Medicare+Choice and fully insured commercial membership of $55 million and a
$51 million pay down in claims inventories.

On March 31, 2000, we received $125 million from the disposition of our
workers' compensation business ($60 million, net of cash and cash equivalents
included in the disposed operating subsidiary). We used the proceeds from this
transaction to reduce debt and fund infrastructure and information technology
spending.

Our Board of Directors has authorized the repurchase of up to five million
of our common shares. As of June 30, 2001, we had repurchased approximately 3.5
million common shares for an aggregate purchase price of $26 million at an
average cost of $7.71 per share. We did not repurchase any common shares during
the first or second quarters of 2001.

Operating cash flows declined $177 million for the year ended December 31,
2000, primarily from membership and claims inventory reductions, the timing of
government premium receipts and a payment to settle a government audit.
Partially offsetting these items were the net impact of reduced run-off claims
payments and reinsurance recoveries from the sale of our workers' compensation
business.

Our HMO and PPO subsidiaries, other than those dealing with TRICARE, operate
in states that require minimum levels of equity, regulate the payment of
distributions to Humana Inc. and limit investments to approved securities. As
of March 31, 2001, the minimum statutory capital requirements of all of our
regulated subsidiaries totaled $604 million. As of that date, our regulated
subsidiaries maintained aggregate statutory capital and surplus of
approximately $914 million, and each of these subsidiaries was in compliance
with applicable statutory capital requirements. Although all of these
subsidiaries are in compliance with or exceed applicable statutory capital
requirements, the amount of distributions that may be paid by these
subsidiaries without prior approval by state regulatory authorities is limited
based on the entity's level of statutory net income and statutory capital and
surplus, and in some states, prior approval is required before any distribution
can be made. In addition, we normally notify these authorities prior to making
payments that do not require approval.

Our HMO and PPO subsidiaries, other than those dealing with TRICARE, are
impacted by the implementation of risk-based capital requirements, or RBC,
recommended by the NAIC. RBC is a model developed by the NAIC to monitor legal
entity solvency. The outcome of this calculation provides for minimum levels of
capital and surplus for each regulated entity and determines regulatory
measures should actual reported surplus fall below these recommended levels.
Several states are currently in the process of phasing in these requirements
for HMOs over a number of years. If RBC were fully implemented as of March 31,
2001, we would be required to fund additional capital into specific entities
aggregating approximately $73 million. After this capital infusion, we would
have $257 million of aggregate statutory capital and surplus above the required
minimum level.

We file statutory-basis financial statements with state regulatory
authorities in all states in which we conduct business. On January 1, 2001,
changes to the statutory basis of accounting became effective. The cumulative
effect of these changes was recorded as a direct adjustment to January 1, 2001
statutory surplus and did not materially impact our compliance with aggregate
minimum statutory capital and surplus requirements.

We maintain an unsecured revolving credit agreement which provides a line of
credit of up to $1.0 billion and expires in August 2002. Principal amounts
outstanding under our credit agreement were $510 million at March 31, 2001 and
$520 million at December 31, 2000. Interest is at either a fixed rate or a
floating rate, ranging from LIBOR plus 35 basis points to LIBOR plus 80 basis
points, depending on our capitalization and credit ratings. In addition, we
currently pay a 15 basis point annual facility fee on the entire $1.0 billion
facility amount, regardless of utilization. This facility fee may fluctuate
between 6.5 and 20 basis points depending on our capitalization and credit
ratings. We also pay a 12.5 basis point annual usage fee when borrowings exceed
one-third of the facility amount. Our credit agreement contains customary
covenants and events of default including, but not limited to, financial tests
for interest coverage and leverage. We were in compliance with all covenants at
March 31, 2001.

We are in the process of replacing our credit facility with a new credit
facility. On June 29, 2001, we executed a commitment letter with J.P. Morgan
Securities Inc. for a proposed new credit facility consisting of an up to $300
million 4-year credit facility and an up to $300 million 364-day credit
facility. As of July 31, 2001, we had received commitments under this facility
for an aggregate principal amount of $465 million. We expect that the proposed
new credit facility would contain customary restrictive and financial covenants
as well as customary events of defaults. See "Description of Other
Indebtedness."

We also maintain and issue short-term debt securities under a commercial
paper program. We had $80 million of commercial paper borrowings outstanding at
both March 31, 2001 and December 31, 2000. Our weighted average effective
interest rate on all borrowings outstanding at March 31, 2001 was 5.9%. The
carrying value of our borrowings approximates fair value as the interest rate
on our borrowings varies at market rates.

We believe that funds from future operating cash flows and funds available
under our existing credit agreement and commercial paper program are sufficient
to meet future liquidity needs. We also believe the aforementioned sources of
funds are adequate to allow us to fund selected expansion opportunities, as
well as to fund capital requirements.

Capital Expenditures

Our ongoing capital expenditures relate primarily to our technology
initiatives and administrative facilities necessary for activities such as
claims processing, billing and collections, medical utilization review and
customer service. Total capital expenditures, excluding acquisitions, were $135
million for the year ended December 31, 2000, and $89 million for the year
ended December 31, 1999. Capital expenditures were $28 million for the quarter
ended March 31, 2001. Excluding acquisitions, we expect our total capital
expenditures in 2001 will be approximately $130 million, most of which will be
used to fund our technology initiatives and expansion and improvement of
administrative facilities.

Government Contracts

Our operations are regulated by various state and federal government
agencies. Actuarially determined premium rate increases for commercial products
are generally approved by the respective state insurance commissioners, while
increases in premiums for Medicaid and Medicare+Choice products are established
by various state governments and CMS. Premium rates under our TRICARE contract
with the United States Department of Defense for Regions 3 and 4 may be
adjusted on a year by year basis, and for Regions 2 and 5, every six months, to
reflect inflation, changes in the workload volumes of military medical
facilities and contract modifications.

Our 2001 average rate of statutory increase under the Medicare+Choice
contracts was approximately 2%. Over the last five years, annual increases have
ranged from as low as the January 1998 increase of 2% to as high as 7% in
January 1997, with an average of approximately 3%. Our Medicare+Choice
contracts with the federal government are renewed for a one-year term each
December 31 unless terminated 90 days prior thereto. Increased funding
beginning March 1, 2001 under Medicare, Medicaid and the State Children's
Health Insurance Benefits Improvement and Protection Act, or BIPA, is being
used to provide additional reimbursement under our contracts with providers and
lower member premiums in certain markets. Legislative proposals are being
considered which may revise the Medicare program's current support of the use
of managed health care for Medicare beneficiaries and future reimbursement
rates thereunder. Management is unable to predict the outcome of these
proposals or the impact they may have on our financial position, results of
operations or cash flows.

Our Medicaid contracts are generally annual contracts with various states
except for our two regional contracts with the Health Insurance Administration
in Puerto Rico, which have two year terms. These contracts are set to expire on
August 31, 2001. The Health Insurance Administration in Puerto Rico is
currently determining future health care insurance benefits. The Health
Insurance Administration in Puerto Rico has requested bids from us and other
insurers. We expect that our current contracts will be further extended until
the new contracts are awarded. We intend to submit our bids as requested by the
proposal. We are unable to predict if we will be awarded any new contracts, or
what form these contracts may take.

Effective July 1, 2001, we renewed our TRICARE contract for Regions 3 and 4
for up to two additional years subject to annual renewal at the option of the
Department of Defense. The TRICARE contract for Regions 2 and 5 that we
recently acquired from Anthem is scheduled to expire on May 1, 2003, subject to
the right of the Department of Defense to terminate the final year of this
contract.

The loss of any of these government contracts or significant changes in
these programs as a result of legislative action, including reductions in
payments or increases in benefits without corresponding increases in payments,
may have a material adverse effect on our revenues, profitability and business
prospects.

Legal Proceedings

Securities Litigation

Six purported class action complaints were filed in 1999 in the United
States District Court for the Western District of Kentucky at Louisville by
purported stockholders against us and certain of our current and former
directors and officers. The complaints contained the same or substantially
similar allegations, namely, that we and the individual defendants knowingly or
recklessly made false or misleading statements in press releases and public
filings concerning our financial condition, primarily with respect to the
impact of negotiations over renewal of our contract with HCA-The Healthcare
Company, formerly Columbia/HCA Healthcare Corporation, which took effect April
1, 1999. The complaints allege violations of Section 10(b) of the Securities
Exchange Act of 1934, or the 1934 Act, Rule 10b-5 and Section 20(a) of the 1934
Act, and seek certification of a class of stockholders who purchased shares of
our common stock starting either (in four complaints) in late October 1998 or
(in two complaints) on February 9, 1999, and ending (in all complaints) on
April 8, 1999. Plaintiffs moved for consolidation of the actions, now styled In
re Humana Inc. Securities Litigation, and filed a consolidated complaint. On
April 28, 2000, the defendants filed a motion requesting dismissal of the
consolidated complaint. On November 7, 2000, the United States District Court
for the

Western District of Kentucky issued a memorandum opinion and order dismissing
the action. On November 30, 2000, the plaintiffs filed a notice of appeal to
the United States Court of Appeals for the Sixth Circuit. We believe the above
allegations are without merit and intend to continue to pursue defense of the
action.

In late 1997, three purported class action complaints were filed in the
United States District Court for the Southern District of Florida by former
stockholders of Physician Corporation of America, or PCA, and certain of its
former directors and officers. We acquired PCA by a merger that became
effective on September 8, 1997. The three actions were consolidated into a
single action entitled In re Physician Corporation of America Securities
Litigation. The consolidated complaint alleges that PCA and the individual
defendants knowingly or recklessly made false and misleading statements in
press releases and public filings with respect to the financial and regulatory
difficulties of PCA's workers' compensation business. On May 5, 1999,
plaintiffs moved for certification of the purported class, and on August 25,
2000, the defendants moved for summary judgment. On January 31, 2001,
defendants were granted leave to file a third-party complaint for declaratory
judgment on insurance coverage, seeking a determination that the defense costs
and liability, if any, resulting from the class action defense are covered by
an insurance policy issued by one insurer and, in the alternative, declaring
that there is coverage under policies issued by two other insurers. Defendants
have moved for summary judgment on the third-party complaint.

Managed Care Industry Class Action Litigation

We are involved in several purported class action lawsuits that are part of
a wave of generally similar actions that target the health care payor industry
and particularly target managed care companies. As a result of action by the
Judicial Panel on Multi District Litigation, most of the cases against us, as
well as similar cases against other companies in the industry, have been
consolidated in the United States District Court for the Southern District of
Florida and are now styled In re Managed Care Litigation. The cases include
separate suits against us and six other managed care companies that purport to
have been brought on behalf of members, which are referred to as the subscriber
track cases, and a single action against us and seven other companies that
purport to have been brought on behalf of providers, which are referred to as
the provider track case.

In the subscriber track cases, the plaintiffs seek a recovery under RICO for
all persons who are or were subscribers at any time during the four-year period
prior to the filing of the complaints. Plaintiffs also seek to represent a
subclass of policyholders who purchased insurance through their employers'
health benefit plans governed by ERISA, and who are or were subscribers at any
time during the six-year period prior to the filing of the complaints. The
complaint alleges, among other things, that we intentionally concealed from
members certain information concerning the way in which we conduct business,
including the methods by which we pay providers. The plaintiffs do not allege
that any of the purported practices resulted in denial of any claim for a
particular benefit, but instead, claim that we provided the purported class
with health insurance benefits of lesser value than promised. The complaint
also alleges an industry-wide conspiracy to engage in the various alleged
improper practices. We filed a motion to dismiss the complaint on July 14,
2000. On August 15, 2000, the plaintiffs filed their amended motion for class
certification, seeking a class consisting of all members of our medical plans,
excluding Medicare and Medicaid plans, for the period from 1990 to 1999. We
filed our opposition to the motion for class certification on November 15,
2000.

On June 12, 2001, the federal district court rendered its decision with
respect to the motions to dismiss. The court dismissed the ERISA claims against
us and the other defendants

on the grounds that the plaintiffs had failed to exhaust administrative
remedies, but has permitted the plaintiffs to file amended complaints no later
than June 29, 2001. The court declined to dismiss all of the RICO fraud claims
against Humana. In the subscriber track cases against other companies, the
court dismissed all RICO fraud claims against the other defendants for lack of
specificity in their allegations but permitted the plaintiffs to refile all
dismissed RICO claims. The plaintiffs filed amended complaints against some of
the other defendants realleging RICO and ERISA claims on June 29, 2001.
Following the district court's June 12, 2001 ruling, we and other defendants
requested that the court amend its ruling to allow us to ask the United States
Court of Appeals for the Eleventh Circuit to review the court's refusal to
follow the decision by the Third Circuit in Maio v. Aetna that would have
resulted in dismissal of the RICO claims. The district court has not yet ruled
on this request. Additionally, a hearing on the class certification issue was
conducted on July 24, 2001. No ruling was issued.

In the provider track case, the plaintiffs assert that we and other
defendants improperly (i) paid providers' claims and (ii) "downcoded" their
claims by paying lesser amounts than they submitted. The complaint alleges,
among other things, multiple violations under RICO as well as various breaches
of contract and violations of regulations governing the timeliness of claim
payments. We moved to dismiss the provider track complaint on September 8,
2000, and the other defendants filed similar motions thereafter. On March 2,
2001, the court dismissed certain of the plaintiffs' claims, including the RICO
claim, pursuant to the defendants' several motions to dismiss. However, the
court allowed the plaintiffs to attempt to correct the deficiencies in their
complaint with an amended pleading with respect to all of the allegations
except the claim under the federal Medicare regulations, which was dismissed
with prejudice. The court also left undisturbed the plaintiffs' claims for
breach of contract. On March 26, 2001, the plaintiffs filed their amended
complaint which, among other things, added four state or county medical
associations as additional plaintiffs. Two of those, the Denton County Medical
Society and the Texas Medical Association, purport to bring their actions
against us, as well as against several other defendant companies. The Medical
Association of Georgia and the California Medical Association purport to bring
their actions against various other defendant companies. The associations seek
injunctive relief only. On October 27, 2000, the provider track plaintiffs
filed a motion for class certification. We filed our opposition to that motion
on November 17, 2000. Oral argument on the motion for class certification was
conducted May 7, 2001. Some defendants have filed appeals to the United States
Court of Appeals for the Eleventh Circuit from a ruling by the district court
that refused to enforce several arbitration clauses in the provider agreements
with the defendants. On June 25, 2001, the Eleventh Circuit stayed all
proceedings in the district court pending these appeals. Other defendants,
including us, have filed similar motions to enforce arbitration agreements
which have not yet been ruled on by the district court.

We intend to continue to defend these actions vigorously.

Chipps v. Humana Health Insurance Company of Florida, Inc.

On January 4, 2000, a jury in Palm Beach County, Florida, rendered an
approximately $80 million verdict against us in a case arising from removal of
an insured from a special case management program. The award included
approximately $78.5 million of punitive damages, $1 million of damages for
emotional distress and $29,000 of damages for contractual benefits. The
defendant, Humana Health Insurance Company of Florida, Inc., one of our
subsidiaries, filed its notice of appeal to the Fourth District Court of
Appeals in Florida on March 13, 2000. Oral argument was held on May 1, 2001.

Government Audits and Other Litigation and Proceedings

In July 2000, the Office of the Florida Attorney General initiated an
investigation, apparently relating to some of the same matters that are
involved in the purported class action lawsuits described above. While the
Attorney General has filed no action against us, he has indicated that he may
do so in the future. In June 2001, our Florida subsidiary, Humana Medical Plan,
Inc., reached an agreement with the Florida Attorney General's office to
reimburse $8 million in overpayments in connection with members who were
enrolled in both Medicaid and Medicare managed care plans. The overpayments
resulted from enrollments by Physician Corporation of America, or PCA, a health
plan that we acquired in 1997, in its Medicaid program of persons enrolled in
Medicare HMO's operated by PCA and other companies.

In addition, our business practices are subject to review by various state
insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been increased scrutiny by these regulators of
the managed health care companies' business practices, including claims payment
practices and utilization management. We have been and continue to be subject
to such reviews. Some of these could require changes in some of our practices
and could also result in fines or other sanctions.

We also are involved in other lawsuits that arise in the ordinary course of
our business operations, including claims of medical malpractice, bad faith,
failure to properly pay claims, nonacceptance or termination of providers,
failure to disclose network discounts and various provider arrangements,
challenges to subrogation practices, and claims relating to performance of
contractual obligations to providers and others. Recent court decisions and
pending state and federal legislative activity may increase our exposure for
any of these types of claims.

Personal injury claims and claims for extracontractual damages arising from
medical benefit denials are covered by insurance from our wholly-owned captive
insurance subsidiary and excess carriers, except to the extent that claimants
seek punitive damages, which may not be covered by insurance in certain states
in which insurance coverage for punitive damages is not permitted. In
connection with the case of Chipps v. Humana Health Insurance Company of
Florida, Inc., our insurance carriers have preliminarily indicated they believe
no coverage may be available for a punitive damages award. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not be enough to cover the damages awarded. In
addition, insurance coverage for all or certain forms of liability may become
unavailable or prohibitively expensive in the future.

We do not believe that any pending or threatened legal actions against us or
audits by agencies will have a material adverse effect on our financial
position, results of operations or cash flows. However, the likelihood or
outcome of current or future suits, like the purported class action lawsuits
described above and the appeal of the Chipps case, cannot be accurately
predicted with certainty. In addition, the increased litigation which has
accompanied the recent negative publicity and public perception of our industry
adds to this uncertainty. Therefore, such legal actions could have a material
adverse effect on our financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets.

Statement 141 requires that all business combinations be accounted for using
the purchase method. Use of the pooling-of-interest method is no longer
permitted. Statement 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001.

Statement 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment at least annually. Impairment losses that
arise from completing a transitional impairment test during 2002 are to be
reported as resulting from a change in accounting principle. The amortization
of existing goodwill ceases upon adoption of the Statement, which for us, will
be January 1, 2002. Goodwill acquired after June 30, 2001 will not be subject
to amortization. In the first quarter of 2001, goodwill amortization expense of
$14 million impacted earnings per diluted share $0.08.

BUSINESS

Our Company

Throughout 2000 and to date in 2001, we have focused on two top priorities:
completing our turnaround and positioning our company for the future.

Our Turnaround

. Strengthening our core businesses--We have taken a number of steps to
strengthen our core commercial businesses, including:

o adopting a more profit-focused pricing and benefit design strategy,
including increasing premiums, implementing our three-tiered copayment
pricing formula for prescription drugs, which we refer to as Rx3, and
revising our pricing policies, which are designed to better anticipate
prospective changes in provider contracting charges and to decrease
the ability to reduce standard prices during the quoting process;

o enhancing our actuarial leadership and staff and refining the link
between our actuarial analysis and pricing;

o further developing our electronic and Internet infrastructure to
enable more claims to be filed and processed electronically; and

o strengthening our large group commercial and ASO product lines, which
we believe offer significant future growth potential, by incorporating
new product designs, new process designs and technology and by adding
depth to our functional leadership and sales force in these areas.

In the first quarter of 2001, our income before income taxes was $42
million, an increase of 56% over income before income taxes of $27 million for
the first quarter of 2000.

Positioning for the Future

We continue to pursue initiatives that are focused on strengthening our core
businesses, streamlining operations, enhancing profitability and positioning
our company for future growth. Key elements of our strategy going forward
include the following:

Business Segments

During the first quarter of 2001, we realigned our management to better
focus on the profitability and growth of our core businesses. As part of this
strategy, we have redefined our business into two segments, Commercial and
Government.

Our Commercial segment includes three lines of business marketed primarily
to employer groups:

. our fully insured medical business line, which provides comprehensive
health insurance services to our members;

. our ASO business line, which offers services that help large employers
who self-insure their employee health plans to manage these plans; and

. our specialty products business line, which includes dental, group life
and short-term disability insurance services.

Our Government segment also includes three lines of business:

. our Medicare+Choice business line, which provides recipients of Medicare
with managed care benefits;

. our Medicaid business line, which, through various state governments,
offers health care services to low-income residents; and

. our TRICARE business line, which provides health insurance coverage to
the dependents of active duty military personnel, as well as to retired
military personnel and their dependents.

The following table presents our segment membership and premium revenues
by product for the quarter ended March 31, 2001:

Percent
Ending Ending of Total
Medical Specialty Premium Premium
Membership Membership Revenues Revenues
---------- ---------- -------- --------
(dollars in millions)

Commercial:
Fully insured..................... 2,387,900 -- $ 1,236 51.2%
Administrative services only...... 547,200 -- -- --
Specialty......................... -- 2,266,600 75 3.1
--------- --------- ------- -----
Total Commercial................ 2,935,100 2,266,600 1,311 54.3%
--------- --------- ------- -----
Government:
Medicare+Choice................... 428,100 -- 734 30.5%
Medicaid.......................... 493,200 -- 124 5.1
TRICARE........................... 1,070,900 -- 244 10.1
--------- --------- ------- -----
Total Government................ 1,992,200 -- 1,102 45.7
--------- --------- ------- -----
Total........................... 4,927,300 2,266,600 $ 2,413 100.0%
========= ========= ======= =====

The following table presents our segment membership and premium revenues by
product for the year ended December 31, 2000:

Percent
Ending Ending of Total
Medical Specialty Premium Premium
Membership Membership Revenues Revenues
---------- ---------- -------- --------
(dollars in millions)

Commercial:
Fully insured..................... 2,545,800 -- $ 5,235 50.3%
Administrative services only...... 612,800 -- -- --
Specialty......................... -- 2,344,800 291 2.8
Medicare supplement............... -- -- 29 0.3
--------- --------- ------- -----
Total Commercial................ 3,158,600 2,344,800 5,555 53.4%
--------- --------- ------- -----
Government:
Medicare+Choice................... 494,200 -- 3,286 31.6%
Medicaid.......................... 575,500 -- 661 6.4
TRICARE........................... 1,070,400 -- 893 8.6
--------- --------- ------- -----
Total Government................ 2,140,100 -- 4,840 46.6
--------- --------- ------- -----
Total........................... 5,298,700 2,344,800 $10,395 100.0%
========= ========= ======= =====

Our Products

Commercial Products

HMO

Our HMO products provide prepaid health insurance coverage to our members
through a network of independent primary care physicians, specialty physicians
and other health care providers who contract with the HMO to furnish such
services. Primary care physicians generally include internists, family
practitioners and pediatricians. Generally, the member's primary care physician
must approve access to specialty physicians and other health care providers.
These other health care providers include, among others, hospitals, nursing
homes, home health

agencies, pharmacies, mental health and substance abuse centers, diagnostic
centers, optometrists, outpatient surgery centers, dentists, urgent care
centers and durable medical equipment suppliers. Because the primary care
physician must generally approve access to these other health care providers,
the HMO product is the most restrictive form of managed care.

An HMO member, typically through the member's employer, pays a monthly fee,
which generally covers, with minimal copayments, health care services received
from or approved by the member's primary care physician. For the quarter ended
March 31, 2001, commercial HMO premium revenues totaled approximately $532
million or 22% of our total premium revenues for the quarter. For the year
ended December 31, 2000, commercial HMO premium revenues totaled approximately
$2.2 billion or 21% of our total premium revenues. For the quarter ended March
31, 2001, approximately $39 million of our commercial HMO premium revenues were
derived from contracts with the United States Office of Personnel Management,
or OPM, under which we provide health insurance coverage through the Federal
Employee Health Benefit Plan, or FEHBP, to approximately 72,800 federal
civilian employees and their dependents. For 2000, approximately $224 million
of our commercial HMO premium revenues were derived from these OPM contracts to
approximately 117,000 federal civilian employees and their dependents. In
January 2001, we did not renew coverage in some areas, resulting in a reduction
of approximately 48,800 FEHBP members. Pursuant to these contracts, payments
made by OPM may be retrospectively adjusted downward by OPM if an audit
discloses we offered a comparable product to a similar size subscriber group at
a lower premium rate than that offered to OPM. We believe that any
retrospective adjustments as a result of OPM audits will not have a material
adverse impact on our financial position or results of operations.

PPO

Our PPO products include many elements of managed health care. PPOs are also
similar to traditional health insurance because they provide a member with the
freedom to choose a physician or other health care provider. In a PPO, the
member is encouraged, through financial incentives, to use participating health
care providers, which have contracted with the PPO to provide services at
favorable rates. In the event a member chooses not to use a participating
health care provider, the member may be required to pay a greater portion of
the provider's fees.

For the quarter ended March 31, 2001, commercial PPO premium revenues
totaled approximately $704 million or 29% of our total premium revenues. For
2000, commercial PPO premium revenues totaled approximately $3.0 billion or 29%
of our total premium revenues.

Medicare Supplement

Even though participating in both Part A and Part B of the traditional
Medicare program, beneficiaries are still required to pay certain deductible
and coinsurance amounts. They may, if they choose, supplement their Medicare
coverage by purchasing Medicare supplement policies, which pay these
deductibles and coinsurance amounts. Many of these policies also cover other
services (such as prescription drugs) that are not included in Medicare
coverage.

Effective June 30, 2000, we fully reinsured substantially all of our
Medicare supplement policies to United Teacher Associates Insurance Company.
These policies paid for hospital deductibles, copayments and coinsurance for
which an individual enrolled in the traditional Medicare program is
responsible. Through June 30, 2000, Medicare supplement premium revenues
totaled approximately $29 million, or less than 1% of our total premium
revenues for 2000. Under this reinsurance arrangement, we have not received any
Medicare supplement premiums since July 1, 2000.

Other

We also offer an administrative services only, or ASO, product to those who
self-insure their employee health plans and various specialty products,
including dental, group life and short-term disability. At March 31, 2001, we
had approximately 547,200 ASO members and 2.3 million specialty members. ASO
and specialty product premium revenues were approximately $75 million for the
first quarter of 2001, or 3% of our total premium revenues. ASO and specialty
product premium revenues were approximately $291 million or 3% of our total
premium revenues for the year ended December 31, 2000.

Government Products

Medicare+Choice Product

Medicare is a federal program that provides persons age 65 and over and some
disabled persons certain hospital and medical insurance benefits, which include
hospitalization benefits for up to 90 days per incident of illness plus a
lifetime reserve aggregating 60 days. Each Medicare-eligible individual is
entitled to receive inpatient hospital care, known as Part A care, without the
payment of any premium, but is required to pay a premium to the federal
government, which is adjusted annually, to be eligible for physician care and
other services, known as Part B care.

We contract with the federal government's CMS under the Medicare+Choice
program, to provide health insurance coverage in exchange for a fixed monthly
payment per member for Medicare-eligible individuals residing in the geographic
areas in which our HMOs operate. Individuals who elect to participate in
Medicare+Choice programs are relieved of the obligation to pay some or all of
the deductible or coinsurance amounts but are generally required to use
exclusively the services provided by the HMO and are required to pay a Part B
premium to the Medicare program.

The Medicare+Choice product involves a contract between an HMO and CMS
pursuant to which CMS makes a fixed monthly payment to the HMO on behalf of
each Medicare-eligible individual who chooses to enroll for coverage in the
HMO. The fixed monthly payment, payable on the first day of a month, is
determined by formula established by federal law. We sometimes receive the
fixed monthly payment early due to a weekend or holiday falling on the first
day of a month. We also collect premiums from our members in certain of our
markets. The member may terminate membership at any time during the month.

As of March 31, 2001, we provided health insurance coverage under CMS
contracts to approximately 428,100 Medicare+Choice members for which we
received premium revenues of approximately $734 million, or 31% of our total
premium revenues in the first quarter of 2001. As of that date, one such CMS
contract covered approximately 245,200 members in Florida and accounted for
premium revenues of approximately $433 million, which represented 59% of our
Medicare+Choice premium revenues, or 18% of our total premium revenues for the
first quarter of 2001. As of December 31, 2000, we provided health insurance
coverage under CMS contracts to approximately 494,200 Medicare+Choice members
for which we received premium revenues of approximately $3.3 billion, or 32% of
our total premium revenues in 2000. As of that date, one such CMS contract
covered approximately 273,100 members in Florida and accounted for premium
revenues of approximately $1.8 billion, which represented 55% of our
Medicare+Choice premium revenues, or 17% of our total premium revenues in 2000.

Our Medicare+Choice contracts with the federal government are renewed for a
one-year term each December 31 unless terminated 90 days prior thereto.
Increased federal funding in

2001 specific to the Medicare+Choice, Medicaid and State Children's Health
Insurance Benefits Improvement and Protection Act, or BIPA, will be used to
provide additional reimbursement under our contracts with providers and lower
member premiums in certain markets. As of January 1, 2001, we exited 45 non-
core counties in our Medicare+Choice business, affecting approximately 54,000
members. These county exits were the result, in part, of lower CMS
reimbursement rates.

The loss of our contracts or significant changes in the Medicare+Choice
program as a result of legislative action, including reductions in payments or
increases in benefits without corresponding increases in payments, would have a
material adverse effect on our financial position, results of operations and
cash flows.

Medicaid Product

Medicaid is a federal program that is state-operated to facilitate the
delivery of health care services to low-income residents. Each state that
chooses to do so develops, through a state specific regulatory agency, a
Medicaid managed care initiative that must be approved by CMS. CMS requires
that Medicaid managed care plans meet federal standards and cost no more than
the amount that would have been spent on a comparable fee-for-service basis.
States currently either use a formal proposal process in which they review many
bidders before selecting one or award individual contracts to qualified bidders
which apply for entry to the program. In either case, the contractual
relationship with a state is generally for a one-year period. Under these
contracts, we receive a fixed monthly payment from a government agency for
which we are required to provide health insurance coverage to enrolled members.
Due to the increased emphasis on state health care reform and budgetary
constraints, more states are utilizing a managed care product in their Medicaid
programs.

TRICARE

TRICARE provides health insurance coverage to the dependents of active duty
military personnel and to retired military personnel and their dependents. In
November 1995, the United States Department of Defense awarded us its first
TRICARE contract for Regions 3 and 4 covering approximately 1.1 million
eligible members in Florida, Georgia, South Carolina, Mississippi, Alabama,
Tennessee and Eastern Louisiana. On July 1, 1996, we began providing health
insurance coverage to these approximately 1.1 million eligible members. In
2000, we renewed the TRICARE contract for up to two additional years subject to
annual renewal terms, beginning July 1, 2001. We have subcontracted with third
parties to provide various administration and specialty services under the
contract.

Three health benefit options are available to TRICARE beneficiaries. In
addition to a traditional indemnity option, participants may enroll in an HMO-
like plan with a point-of-service option or take advantage of reduced
copayments by using a network of preferred providers. For the quarter ended
March 31, 2001, TRICARE premium revenues were

approximately $244 million or 10% of our total premium revenues. In 2000,
TRICARE premium revenues were approximately $893 million or 9% of our total
premium revenues.

On May 31, 2001, we acquired for approximately $45 million the outstanding
shares of common stock of a newly formed Anthem Alliance Health Insurance
Company subsidiary responsible for administering TRICARE benefits to
approximately 1.2 million eligible members in Illinois, Indiana, Kentucky,
Michigan, a portion of Missouri, North Carolina, Ohio, Tennessee, Virginia,
Wisconsin and West Virginia. The TRICARE contract for Regions 2 and 5 expires
on May 1, 2003, subject to the right of the Department of Defense to terminate
the final year of this contract. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Recent Transactions."

The following table summarizes our medical membership at May 31, 2001, by
market and product, and excludes approximately 554,500 TRICARE pharmacy members
we service in an administrative capacity:

Commercial Government
--------------------- -------------------------
Medicare Percent
HMO PPO ASO +Choice Medicaid TRICARE Total of Total
------- ------- ----- -------- -------- ------- ------- --------
(in thousands)

Florida................. 146.0 91.2 3.7 241.6 47.0 404.9 934.4 15.8%
Illinois................ 291.7 226.6 84.8 87.5 15.5 92.5 798.6 13.5
Texas................... 152.9 275.6 17.5 33.9 24.1 504.0 8.5
Puerto Rico............. 17.7 43.6 403.1 464.4 7.8
Ohio.................... 187.6 87.2 63.9 91.6 430.3 7.3
Kentucky................ 105.9 153.5 25.9 14.5 76.7 376.5 6.4
Wisconsin............... 66.2 40.4 238.3 27.5 372.4 6.3
Georgia................. 17.1 56.2 2.8 268.9 345.0 5.8
North Carolina.......... 29.9 3.7 305.2 338.8 5.7
Virginia................ 2.7 0.4 283.7 286.8 4.8
Tennessee............... 36.8 17.8 107.1 161.7 2.7
South Carolina.......... 12.4 0.6 130.0 143.0 2.4
Indiana................. 44.7 28.3 46.0 119.0 2.0
Arizona................. 22.4 31.7 24.1 24.0 102.2 1.8
Alabama................. 0.5 0.2 98.7 99.4 1.7
Mississippi............. 5.3 0.3 74.5 80.1 1.4
Michigan................ 25.2 4.6 46.3 76.1 1.3
Kansas.................. 44.2 8.3 6.2 20.2 78.9 1.3
Colorado................ 72.7 72.7 1.2
Others.................. 0.2 57.2 20.5 56.7 134.6 2.3
------- ------- ----- ----- ----- ------- ------- -----
Totals................. 1,051.9 1,301.7 543.6 421.7 489.7 2,110.3 5,918.9 100.0%
======= ======= ===== ===== ===== ======= ======= =====

Provider Arrangements

We provide our members with access to health care services through our
networks of health care providers with whom we have contracted. These networks
include hospitals and other independent facilities such as outpatient surgery
centers, primary care physicians, specialist physicians, dentists and providers
of ancillary health care services and facilities. These ancillary services and
facilities include ambulance services, medical equipment services, home health
agencies, mental health providers, rehabilitation facilities, nursing homes,
optical services and pharmacies. Our membership base and the ability to
influence where our members seek care generally enables us to obtain
contractual discounts with providers.

We typically contract with hospitals on either a per diem rate, which is an
all-inclusive rate per day, or a case rate, which is an all-inclusive rate per
admission, for inpatient hospital services. Outpatient hospital services are
generally contracted at a flat rate by type of service or at a discounted
charge. These contracts are typically multi-year agreements with rates that are

adjusted for inflation annually based on the consumer price index or other
nationally recognized inflation index. Outpatient surgery centers and other
ancillary providers are typically contracted at flat rates per service provided
or are reimbursed based upon a nationally recognized fee schedule such as
Medicare.

Our contracts with physicians typically are automatically renewed each year,
unless either party gives written notice to the other party of their intent to
terminate the arrangement. Most of the physicians in our PPO networks and some
of our physicians in our HMO networks are reimbursed based upon a fixed fee
schedule, which typically provides for reimbursement based upon a percentage of
the standard Medicare allowable fee schedule. Many physicians, usually primary
care physicians, participating in our HMO networks are reimbursed a fixed
monthly amount per member, known as a capitation payment, for directly
providing health care services to these members.

Under other types of capitation arrangements, the providers are paid a
monthly capitation payment per member both for directly providing health care
services to members and arranging for services by other providers. Accordingly,
they assume financial risk for all or some portion of the cost of health care
services for their membership, which may include the costs for specialist
physicians, hospitals and prescription drugs. Primary care physicians under
these types of arrangements typically have stop loss coverage so that a
physician's financial risk for any single member is limited to a maximum amount
on an annual basis. We remain financially responsible for health care services
to our members in the event our providers fail to provide such services. Some
physicians may have arrangements under which they can earn bonuses when certain
target goals relating to the provisions of patient care are met.

We use a variety of techniques to provide for effective and efficient use of
health care services for our members. These techniques include the coordination
of care for our members, product and benefit designs, hospital inpatient
management systems, or HIMS, and enrolling members into our disease management
programs. The focal point for health care services in many of our
Medicare+Choice and HMO networks is the primary care physician who, under
contract, provides services, and controls utilization of appropriate services,
by directing or approving hospitalization and referrals to specialists and
other providers. Our HIMS programs use specially trained physicians to
effectively manage the entire range of an HMO member's medical care during a
hospital admission and to effectively coordinate the members's discharge and
post-discharge care. We have a variety of disease management programs related
to specific medical conditions such as congestive heart failure, coronary
artery disease, prenatal and premature infant care, asthma related illness, end
stage renal disease, diabetes and breast cancer screening. We also focus on
certain rare conditions where disease management techniques benefit members in
a more cost effective manner.

As of March 31, 2001, we had approximately 406,000 health care providers
participating in our networks, including more than 330,000 physicians and more
than 3,000 hospitals. Of these physicians, approximately 61,000 contract with
our HMO networks. Some of these physicians also contract with our PPO networks.

Quality Assessment

Our quality assessment program consists of several internal programs such as
those that credential providers and those designed to meet the audit standards
of federal and state agencies and external accreditation standards. We also
offer quality and outcome measurement and improvement programs such as the
Health Plan Employer Data Information Sets, or HEDIS, which is used by
employers, government purchasers and the National Committee for Quality

Assurance, or NCQA, to evaluate HMOs based on various criteria, including
effectiveness of care and member satisfaction.

Physicians participating in our HMO networks must satisfy specific criteria,
including licensing, hospital admission privileges, patient access, office
standards, after-hours coverage and many other factors. Participating hospitals
must also meet accreditation criteria established by CMS and/or the Joint
Commission on Accreditation of Healthcare Organizations, or JCAHO.

Participating HMO physicians are recredentialed regularly. Recredentialing
of primary care physicians includes verification of their medical license;
review of their malpractice liability claims history; review of their board
certification, if applicable; and review of any quality complaints, member
appeals and grievances regarding the physicians. Committees, composed of a peer
group of physicians, review participating primary care physicians being
considered for credentialing and recredentialing.

We request accreditation for certain of our HMO plans from NCQA and the
American Accreditation Healthcare Commission/Utilization Review Accreditation
Commission, or AAHC/URAC. Accreditation or external review by an approved
organization is mandatory in the states of Florida and Kansas for licensure as
an HMO.

NCQA performs reviews for quality improvement, credentialing, utilization
management, preventative health, member rights and responsibilities and medical
records. As of March 31, 2001, the following seven of our markets have received
commendable accreditation from NCQA for all HMO product lines: Humana Medical
Plan, Inc. in central Florida, which includes Daytona Beach and Orlando; Humana
Medical Plan, Inc. in north Florida; Humana Medical Plan, Inc. in south
Florida; Humana Health Plan, Inc. in Chicago, Illinois; Humana Health Plan,
Inc. and Humana Kansas City, Inc. in Kansas City, Missouri; Humana Health Plan,
Inc. in Louisville, Kentucky; and Humana Health Plan of Ohio, Inc. in
Cincinnati, Ohio. Humana Medical Plan, Inc. in Tampa Bay has received
commendable accreditation for its commercial product line and has received
accredited status for its Medicare+Choice product line.

AAHC/URAC performs reviews of standards for confidentiality, staff
qualifications and credentials, program qualifications, quality improvement
programs, accessibility and on site review procedures, information
requirements, utilization review procedures and appeals. AAHC/URAC
accreditation was received for all of our HMO markets that have utilization
management functions performed in the Green Bay, Wisconsin or Louisville,
Kentucky service centers and for Humana Military Healthcare Services, Inc.,
which administers the TRICARE program.

JCAHO performs reviews of standards for rights, responsibilities and ethics,
continuum of care, education and communication, health promotion and disease
prevention, management of human resource information and improving network
performance. Humana Medical Plan, Inc. in Ft. Walton Beach, Florida received a
three-year accreditation from JCAHO in 1998. Although Humana Medical Plan, Inc.
has a single HMO license in Florida, it operates through six market offices
that are in the process of being consolidated into three. One of the original
six market offices, the Ft. Walton Beach market office, sought JCAHO HMO
accreditation so we could evaluate the benefits of a JCAHO review versus
reviews performed by NCQA and AAHC/URAC. The other five Florida markets either
have been or currently are accredited by NCQA. In addition, we received state-
wide accreditation in Florida from AAHC/URAC this year, which will satisfy our
accreditation requirement when our JCAHO accreditation expires.

Some of our HMO entities are unaccredited, because we sought accreditation
only where regulatory requirements were in place, such as in Florida, which
requires accreditation for HMO

licensing, or in market areas where commercial groups use it as a variable in
choosing carriers. As the requirements of accreditation have become less
focused on factors under our control and more focused on other factors such as
provider behavior, we have concluded that these programs do not add value for
our customers. We are piloting ISO 9000 certification as an alternative to
accreditation. ISO is the international standards organization, which has
developed an international commercial set of certifications as to quality and
process, called ISO 9000.

Sales and Marketing

Individuals become members of our commercial HMOs and PPOs through their
employer or other groups which typically offer employees or members a selection
of health insurance products, pay for all or part of the premiums and make
payroll deductions for any premiums payable by the employees. We attempt to
become an employer's or group's exclusive source of health insurance benefits
by offering a variety of HMO and PPO products that provide cost-effective
quality health care coverage consistent with the needs and expectations of the
employees or members.

We use various methods to market our commercial, Medicare+Choice and
Medicaid products, including television, radio, the Internet, telemarketing and
mailings. At March 31, 2001, we used approximately 50,000 licensed independent
brokers and agents and approximately 415 licensed employees to sell our
commercial products. Many of our employer group customers are represented by
insurance brokers and consultants who assist these groups in the design and
purchase of health care products. We generally pay brokers a commission based
on premiums, with commissions varying by market and premium volume.

At March 31, 2001, we used approximately 755 employed sales representatives,
who are each paid a salary and/or per member commission, to market our
Medicare+Choice and Medicaid products. We also used approximately 280
telemarketing representatives who assisted in the marketing of Medicare+Choice
and Medicaid products by making appointments for sales representatives with
prospective members.

Risk Management

Through the use of internally developed underwriting criteria, we determine
the risk we are willing to assume and the amount of premium to charge for our
commercial products. In most instances, employer and other groups must meet our
underwriting standards in order to qualify to contract with us for coverage.
Small group reform laws in some states have imposed regulations which provide
for guaranteed issue of certain health insurance products and prescribe certain
limitations on the variation in rates charged based upon assessment of health
conditions.

Underwriting techniques are not employed in connection with Medicare+Choice
products because CMS regulations require us to accept all eligible Medicare
applicants regardless of their health or prior medical history. We also are not
permitted to employ underwriting criteria for the Medicaid product, but rather
we follow CMS and state requirements. In addition, with respect to our TRICARE
business, we do not employ any underwriting techniques because we must accept
all eligible beneficiaries who choose to participate.

Competition

The managed health care industry is highly competitive and contracts for the
sale of commercial products are generally bid or renewed annually. Our
competitors vary by local

market and include other publicly traded managed care companies, national
insurance companies and other HMOs and PPOs, including HMOs and PPOs owned by
Blue Cross/Blue Shield plans. Many of our competitors have larger memberships
and/or greater financial resources than our health plans in the markets in
which we compete. Our ability to sell our products and to retain customers is
or may be influenced by such factors as benefits, pricing, contract terms,
number and quality of participating physicians and other managed health care
providers, utilization review, claims processing, administrative efficiency,
relationships with agents, quality of customer service and accreditation
results.

Government Regulation

Government regulation of health care products and services is a changing
area of law that varies from jurisdiction to jurisdiction. Regulatory agencies
generally have broad discretion to issue regulations and interpret and enforce
laws and rules. Changes in applicable laws and regulations are continually
being considered, and the interpretation of existing laws and rules also may
change periodically. These regulatory revisions could affect our operations and
financial results. Also, it may become increasingly difficult to control
medical costs if federal and state bodies continue to consider and enact
significant and sometimes onerous managed care laws and regulations.

Enforcement of health care fraud and abuse laws has become a top priority
for the nation's law enforcement entities. The funding of such law enforcement
efforts has increased dramatically in the past few years and is expected to
continue. The focus of these efforts has been directed at participants in
federal government health care programs such as Medicare, Medicaid and FEHBP.
We participate extensively in these programs and have enhanced our regulatory
compliance efforts for these programs. The programs are subject to very
technical rules. When combined with law enforcement intolerance for any level
of noncompliance, these rules mean that compliance efforts in this area
continue to be challenging.

We are subject to various governmental audits, investigations and
enforcement actions. These include possible government actions relating to
ERISA, FEHBP, federal and state fraud and abuse laws, and other laws relating
to Medicare, including adjusted community rating development, special payment
status, payments for emergency room visits, and various other areas. Adjusted
community rating development is the government-defined rating formula used to
justify the Medicare+Choice benefits we offer individuals eligible for Medicare
benefits based on a particular community and certain other factors. Special
payment status refers to Medicare+Choice members who are institutionalized,
Medicaid-eligible, or have contracted end-stage renal disease. The
Medicare+Choice plan receives a higher payment for members who qualify for one
or more of these statuses. We are currently involved in various government
investigations, audits and reviews, some of which are under ERISA, and the
authority of state departments of insurance. On May 31, 2000, we entered into a
five-year Corporate Integrity Agreement with the Office of the Inspector
General for the Department of Health and Human Services as part of a $15
million settlement of a Medicare overpayment issue arising from an audit by the
Office of the Inspector General. In June 2001, our Florida subsidiary, Humana
Medical Plan, Inc., reached an agreement with the Florida Attorney General's
office to reimburse $8 million in overpayments in connection with members who
were enrolled in both Medicaid and Medicare managed care plans. The
overpayments resulted from enrollments by Physician Corporation of America, or
PCA, a health plan that we acquired in 1997, in its Medicaid program of persons
enrolled in Medicare HMO's operated by PCA and other companies. Three of our
affiliates are in the process of entering into a consent order with the Texas
Department of Insurance pursuant to which we have been assessed administrative
penalties of $1.25 million for our alleged failure to pay a small percentage of
our insurance

claims in a timely manner under regulations of the Texas Department of
Insurance that became effective on August 1, 2000. Based on this consent order,
we may be required to pay certain additional amounts to health care providers
if it is determined that we failed to pay insurance claims in a timely manner
during the period from August 1, 2000 to the present time. We believe that we
have been and are in substantial compliance with the Texas Insurance Code and
the rules and regulations of the Texas Department of Insurance and we agreed to
enter into the consent order subject to the express reservation that we do not
admit to any violation of these laws, rules and regulations. Although any of
the pending government actions could result in assessment of damages, civil or
criminal fines or penalties, or other sanctions against us, including exclusion
from participation in government programs, we do not believe the results of any
of these actions, individually or in the aggregate, will have a material
adverse effect on our financial position, results of operations or cash flows.

Of our 12 licensed and active HMO subsidiaries as of March 31, 2001, seven
are qualified under the Federal Health Maintenance Organization Act of 1973, as
amended. To obtain federal qualification, an HMO must meet certain
requirements, including conformance with benefit, rating and financial
reporting standards. In certain markets, and for certain products, we operate
HMOs that are not federally qualified because this provides greater flexibility
with respect to product design and pricing than is possible for federally
qualified HMOs.

As of March 31, 2001, Humana Medical Plan, Inc., Humana Health Plan of
Texas, Inc., Humana Health Plan, Inc., and Humana Kansas City, Inc. each hold
CMS contracts under the Medicare+Choice program to sell Medicare+Choice
products in eight states. Effective June 30, 2001, Humana Kansas City, Inc.
merged into Humana Health Plan, Inc. as approved by the Departments of
Insurance of Kentucky and Missouri.

CMS conducts audits of HMOs qualified under its Medicare+Choice program at
least biannually and may perform other reviews more frequently to determine
compliance with federal regulations and contractual obligations. These audits
include review of the HMOs' administration and management, including management
information and data collection systems, fiscal stability, utilization
management and physician incentive arrangements, health services delivery,
quality assurance, marketing, enrollment and disenrollment activity, claims
processing, and complaint systems.

CMS regulations require submission of quarterly and annual financial
statements. In addition, CMS requires certain disclosures to CMS and to
Medicare beneficiaries concerning operations of a health plan qualified under
the Medicare+Choice program. CMS's rules require disclosure to members upon
request of information concerning financial arrangements and incentive plans
between an HMO and physicians in the HMOs' networks. These rules also require
certain levels of stop-loss coverage to protect contracted physicians against
major losses relating to patient care, depending on the amount of financial
risk they assume. The reporting of certain health care data contained in HEDIS
is another important CMS disclosure requirement.

Our Medicaid products are regulated by the applicable state agency in the
state in which we sell a Medicaid product and by the Health Insurance
Administration in Puerto Rico, in conformance with federal approval of the
applicable state plan, and are subject to periodic reviews by these agencies.
The reviews are similar in nature to those performed by CMS.

Laws in each of the states and the Commonwealth of Puerto Rico in which we
operate our HMOs, PPOs and other health insurance-related services regulate our
operations, including the scope of benefits, rate formulas, delivery systems,
utilization review procedures, quality assurance, complaint systems, enrollment
requirements, claim payments, marketing and

advertising. The HMO, PPO and other health insurance-related products we offer
are sold under licenses issued by the applicable insurance regulators. Under
state laws, our HMOs and health insurance companies are audited by state
departments of insurance for financial and contractual compliance, and our HMOs
are audited for compliance with health services standards by respective state
departments of health. Most states' laws require such audits to be performed at
least once every three years.

Our licensed subsidiaries are subject to regulation under state insurance
holding company and Commonwealth of Puerto Rico regulations. These regulations
generally require, among other things, prior approval and/or notice of certain
material transactions, including dividend payments, intercompany agreements and
the filing of various financial and operational reports.

Our HMO and PPO subsidiaries, other than those dealing with TRICARE, operate
in states that require minimum levels of equity, regulate the payment of
distributions to Humana Inc. and limit investments to approved securities. As
of March 31, 2001, the minimum statutory capital requirements of all of our
regulated subsidiaries totaled $604 million. As of that date, our regulated
subsidiaries maintained aggregate statutory capital and surplus of
approximately $914 million and each of these subsidiaries was in compliance
with or exceed applicable statutory capital requirements. Although all of these
subsidiaries are in compliance with applicable statutory capital requirements,
the amount of distributions that may be paid by these subsidiaries without
prior approval by state regulatory authorities is limited based on the entity's
level of statutory net income and statutory capital and surplus, and in some
states, prior approval is required before any distribution can be made. In
addition, we normally notify these authorities prior to making payments that do
not require approval.

Management works proactively to ensure compliance with all governmental laws
and regulations affecting our business.

Health Care Reform

Diverse legislative and regulatory initiatives at both the federal and state
levels continue to address aspects of the nation's health care system.

Federal

In 2000, Congress passed BIPA, amending certain provisions of the Balanced
Budget Act of 1997, and certain provisions of the Medicare, Medicaid and State
Children's Health Insurance

Program Balanced Budget Refinement Act of 1999. The Balanced Budget Act changed
the way health plans are compensated for Medicare members by eliminating over
five years amounts paid for graduate medical education, increasing the blend of
national cost factors applied in determining local reimbursement rates over a
six-year phase-in period and directing CMS to implement a risk adjusted
mechanism on its monthly member payment to Medicare plans over the same period.
These changes have had the effect of reducing reimbursement in high cost
metropolitan areas with a large number of teaching hospitals. Congress has
subsequently lengthened this timetable to allow the risk adjusted mechanism to
be fully implemented by 2007. BIPA, among other things, enacted modest
increases to the payment formula for Medicare+Choice plans. While we believe
that these increases and modifications restore some Medicare+Choice
reimbursement, pending legislative and regulatory initiatives could cause us to
again consider increasing enrollee out-of-pocket costs, modifying benefits or
exiting markets. On January 1, 2001, we exited 45 non-core counties in our
Medicare+Choice business, affecting approximately 54,000 members. These county
exits were the result, in part, of lower CMS reimbursement rates.

Other federal laws which govern our business and which significantly affect
our operations include, among others, the Newborn's and Mothers' Health
Protection Act of 1996. This Act generally prohibits group health plans and
health insurance issuers from restricting benefits for a mother's or newborn
child's hospital stay in connection with childbirth to less than 48 hours for a
normal delivery and to less than 96 hours for a caesarean section.

ERISA governs self-funded plans. There have been recent legislative attempts
to limit ERISA's preemptive effect on state laws. If such limitations are
enacted, they might increase our exposure under state law claims that relate to
self-funded plans administered by us and may permit greater state regulation of
other aspects of those business operations.

The U.S. Department of Labor published regulations that revise claims
procedures for both insured and self-insured employee benefit plans governed by
ERISA effective for claims filed on or after January 1, 2002. Although the cost
of complying with these regulations is likely to be significant, we cannot
predict the ultimate impact on our business or results of operations in future
periods.

HIPAA includes administrative provisions directed at simplifying electronic
data interchange through standardizing transactions, establishing uniform
health care provider, payor and employer identifiers and seeking protections
for confidentiality and security of patient data. Under the new HIPAA privacy
rules, we must comply with a variety of requirements concerning the use and
disclosure of individuals' protected health information, establish rigorous
internal procedures to protect health information and enter into business
associate contracts with those companies to whom protected health information
is disclosed. Violations of these rules will subject us to significant
penalties. Compliance with HIPAA regulations requires significant systems
enhancements, training and administrative effort. The final rules do not
provide for complete federal preemption of state laws, but rather preempt all
inconsistent state laws unless the state law is more stringent. HIPAA could
also expose us to additional liability for violations by our business
associates.

Further in 1999, Congress passed the Financial Services Modernization Act,
or Gramm-Leach-Bliley Act, that includes provisions related to privacy
standards for personal information to be implemented by both the federal
government and the states. The effective date for compliance with this
provision of the law is July 2001. Many states are currently enacting laws or
regulations to implement the federal law. We intend to comply with such
provisions.

The Electronic Signatures and Global and National Commerce Act was enacted
in June 2000. It provides, under secured electronic technology systems, the
same legal status to electronic transactions, including health insurance
transactions as is given to paper transactions. This law became effective in
October 2000 and supports our e-business initiatives.

There are several other legislative proposals under consideration that
include, among other things, PBOR legislation, which would provide for
expansion of a patient's right to sue and mandatory external review of health
plan coverage decisions. If PBOR legislation becomes law, it could expose us to
significant increased costs and additional litigation risks. For a further
discussion of PBOR bills before Congress, see "Risk Factors--Risks Relating to
Our Business--Our industry is currently subject to substantial government
regulation, which, along with possible increased governmental regulation or
legislative reform, increases our costs of doing business and could adversely
affect our profitability."

In addition, Congress is evaluating proposals to expand tax credits to
provide health insurance for low-income families or expansion of governmental
programs to permit enrollment at lower costs. Other proposals include
establishing additional protections for personal health information, collective
bargaining rights for independent physicians, proposals to reduce the number of
medical errors by health care providers and systems of care, and various state
and/or federal purchasing pools to allow individuals and small employers to
purchase health insurance. Also, President Bush has proposed a prescription
drug card program for Medicare-eligible seniors. Many of these proposals may
require additional administrative costs to ensure compliance and we are
currently assessing their cost and impact on premiums for the future.

State

A number of states continue to enact some form of managed care reform. Three
of these states in which we conduct business, including Arizona, Georgia and
Texas, have passed health plan liability laws. To date, no significant increase
in litigation has arisen as a result; however, management is unable to predict
future activity under these laws. Issues relating to managed care consumer
protection standards, including increased plan information disclosure,
expedited appeals and grievance procedures, third party review of certain
medical decisions, health plan liability, access to specialists, prompt payment
of claims, physician collective bargaining rights and confidentiality of
medical records continue to be under discussion. Further, proposals that place
restrictions on the selection and termination of participating health care
providers also are receiving review.

During 2001, a number of states will consider legislation relating to health
plan liability, prompt payment of claims, physician collective bargaining
rights and confidentiality of personal health information. A few states are
also expected to consider rules for selecting and terminating contracted
physicians, small group purchasing alliances and small group rating
legislation.

We believe that the liability and privacy discussions in most states will
follow the framework of pending federal legislation or current federal law
respectively. The prompt claims payment legislation generally reflects
refinements of existing prompt payment laws.

We are unable to predict how existing federal or state laws and regulations
may be changed or interpreted, what additional laws or regulations affecting
our businesses may be enacted or proposed, when and which of the proposed laws
will be adopted or what effect any such new laws and regulations will have on
our financial position, results of operations or cash flows.

For further discussion of these initiatives, see "Risk Factors--Risks
Relating to Our Business--Our industry is currently subject to substantial
government regulation, which, along with possible increased governmental
regulation or legislative reform, increases our costs of doing business and
could adversely affect our profitability."

Other

Captive Insurance Company

We insure substantially all professional liability risks through a wholly
owned subsidiary. Independent actuaries determine the annual premiums paid to
this subsidiary. Our subsidiary reinsures levels of coverage for losses in
excess of our retained limits with unrelated insurance carriers.

Centralized Management Services

We provide centralized management services to each health plan from our
headquarters and service centers. These services include management information
systems, product administration, financing, personnel, development, accounting,
legal advice, public relations, marketing, insurance, purchasing, risk
management, actuarial, underwriting and claims processing.

Employees

As of March 31, 2001, we had approximately 14,200 employees, including
approximately 50 employees covered by collective bargaining agreements. We have
not experienced any work stoppages and believe we have good relations with our
employees.

Legal Proceedings

A description of material legal actions in which we are currently involved
is included in this prospectus under "Legal Proceedings" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT

Our executive officers and directors, and their ages as of June 30, 2001,
are as follows:

Name Age Position
---- --- --------

Michael B. McCallister........... 49 President and Chief Executive Officer
and Director
John M. Bertko................... 51 Vice President--Chief Actuary
James H. Bloem................... 51 Senior Vice President and Chief
Financial Officer
Douglas R. Carlisle.............. 51 Senior Vice President--Market
Operations
Kenneth J. Fasola................ 42 Chief Operating Officer--Market
Operations
Bruce J. Goodman................. 59 Senior Vice President and Chief
Information Officer
Bonita C. Hathcock............... 52 Senior Vice President and Chief Human
Resources Officer
Arthur P. Hipwell................ 52 Senior Vice President and General
Counsel
Thomas J. Liston................. 40 Senior Vice President--Strategy and
Corporate Development
Jonathan T. Lord, M.D. .......... 46 Senior Vice President and Chief
Clinical Strategy and Innovation
Officer
Steven O. Moya................... 51 Senior Vice President and Chief
Marketing Officer
James E. Murray.................. 47 Chief Operating Officer--Service
Operations
Thomas T. Noland, Jr. ........... 47 Senior Vice President--Corporate
Communications
R. Eugene Shields................ 53 Senior Vice President--Government
Programs
David A. Jones................... 69 Chairman of the Board
David A. Jones, Jr. ............. 43 Vice Chairman of the Board
Charles M. Brewer................ 42 Director
Michael E. Gellert............... 69 Director
John R. Hall..................... 68 Director
Irwin Lerner..................... 70 Director
W. Ann Reynolds, Ph.D. .......... 63 Director

DESCRIPTION OF OTHER INDEBTEDNESS

Credit Facility

Pursuant to a credit agreement dated August 13, 1997, as amended, we have an
unsecured, five-year $1.0 billion revolving credit facility with a group of
commercial banks. We established the credit facility to finance repayment of
other indebtedness, acquisition opportunities and repurchases and redemptions
of our capital stock, and for general corporate purposes. The credit facility
allows us to borrow funds

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

. by obtaining loans from individual banks within the group by way of a
bidding process; or

. by obtaining letters of credit in an aggregate amount of up to $300
million.

Repayment. The credit facility expires on, and we must repay all borrowings
outstanding under the credit facility by, August 12, 2002. We intend to use all
of our net proceeds from this offering to repay a portion of the amounts
outstanding under our credit facility.

Covenants. The credit agreement contains financial covenants, which relate
to our net worth, ratio of debt to EBITDA and fixed charge coverage ratio, and
negative covenants, which limit our ability and that of our subsidiaries to,
among other things,

. incur indebtedness and liens;

. dispose of or lease property; and

. engage in or enter into mergers, consolidations, asset dispositions and
transactions with affiliates.

In addition, the negative covenants limit our ability to pay dividends and
make other distributions on our capital stock and repurchase shares of our
capital stock.

The limits imposed on us by the covenants under the credit facility could
impair our operational and financial flexibility, which could have a material
adverse effect on our business, financial condition or results of operations.

Interests and Fees. Committed loans under the credit facility bear interest
at an effective interest rate of 5.9% as of March 31, 2001. Interest is at
either a fixed rate or a floating rate, ranging from LIBOR plus 35 basis points
to LIBOR plus 80 basis points, depending on our capitalization and credit
ratings. In addition, we currently pay a 15 basis point annual facility fee on
the entire $1.0 billion facility amount regardless of utilization. This
facility fee may fluctuate between 6.5 and 20 basis points depending on our
capitalization and credit ratings. We also pay a 12.5 basis point annual usage
fee when borrowings exceed one-third of the facility amount.

Events of Default. The credit agreement provides for acceleration upon the
occurrence of customary events of default.

We are in the process of replacing our credit facility with a new credit
facility. On June 29, 2001, we executed a commitment letter with J.P. Morgan
Securities Inc., or JP Morgan, pursuant to which JP Morgan would serve as lead
arranger for a proposed new credit facility consisting of an up to $300 million
4-year credit facility and an up to $300 million 364-day credit facility. Under
each facility we could borrow, at our option, on either a competitive advance
basis or a

revolving credit basis. Up to $100 million of the revolving portion of the $300
million 4-year credit facility could be used for the issuance of standby or
commercial letters of credit. As of July 31, 2001, we had received written
commitments from a total of eight financial institutions, including affiliates
of each of the underwriters, in an aggregate amount of $465 million, which
would be applied in equal amounts to the 4-year credit facility and the 364-day
credit facility.

The competitive advance portion of the proposed new credit facility would
bear interest at market rates prevailing at the time of borrowing, while the
revolving credit portion of the facility would bear interest at rates based, at
our option, on either an alternative base rate linked to the prime rate or the
federal funds rate, or LIBOR, in each case plus an applicable margin that could
fluctuate based on our credit ratings. We expect that the proposed new credit
facility would contain customary restrictive and financial covenants as well as
customary events of defaults. In particular, we expect the facility to include
financial covenants regarding minimum consolidated net worth, maximum leverage
and minimum interest coverage amounts substantially similar to those in our
existing credit facility. We would also pay a facility fee that could fluctuate
based on our credit ratings.

We expect that both the proposed 4-year credit facility and the 364-day
credit facility would support our existing commercial paper program. In
addition, we expect that the proposed 364-day credit facility would also
support a new conduit commercial paper financing program of up to $300 million
that is currently being arranged by JP Morgan to the extent of available credit
under that facility. Under this proposed program, a special purpose limited
liability company would issue commercial paper and loan the proceeds of those
issuances to us so that interest and principal payments on the loans would
match those on the commercial paper.

There can be no assurance that we will be able to enter into the new credit
facility or the new conduit commercial paper financing program, either at all
or on the terms described above.

Commercial Paper Program

Our commercial paper program is designed to meet our short-term borrowing
needs for ordinary operating expenses. This program is backed by our $1 billion
credit facility described above. Aggregate borrowings under both the credit
facility and the commercial paper program cannot exceed $1 billion. As
discussed above, we expect our existing commercial paper program to be backed
by our new credit facility.

As of March 31, 2001, we had $80 million outstanding under our commercial
paper program at a weighted average effective interest rate of 6.3%.

DESCRIPTION OF THE NOTES

The notes will be issued under an indenture to be dated as of August 7,
2001, between Humana and The Bank of New York, as trustee. The terms of the
notes include those expressly set forth in the indenture and those made part of
the indenture by reference to the Trust Indenture Act of 1939.

This description of notes is intended to be an overview of the material
provisions of the notes and the indenture. Because this description of notes is
only a summary, you should refer to the indenture for a complete description of
our obligations and your rights.

In this description of notes, references to "Humana", the "issuer", "we",
"our" and "us" refer to Humana Inc. and do not include its subsidiaries.

General

The notes:

. will be our senior unsecured obligations;

. will constitute a series of debt securities issued under the indenture
and will initially be limited to an aggregate principal amount of $300
million;

. will mature on August 1, 2006;

. will be subject to earlier redemption at the option of the issuer as
described under "--Optional Redemption";

. will not have the benefit of any sinking fund;

. will be issued in denominations of $1,000 and integral multiples of
$1,000; and

. will be represented by one or more registered notes in global form, but
in certain limited circumstances may be represented by notes in
certificated form. See "Book-Entry Issuance".

Interest on the notes will:

. accrue at the rate of 7 1/4% per annum;

. accrue from August 7, 2001 or the most recent interest payment date;

. be payable in cash semi-annually in arrears on February 1 and August 1
of each year, commencing on February 1, 2002;

. be payable to the holders of record on the January 15 and July 15
immediately preceding the related interest payment date; and

. be computed on the basis of a 360-day year comprised of twelve 30-day
months.

If any interest payment date or maturity date falls on a day that is not a
business day, the required payment of principal or interest will be made on the
next business day as if made on the date that payment was due, and no interest
will accrue on that payment for the period from and after the interest payment
date or maturity date, as the case may be, to the date of the payment on the
next business day.

Payment and Transfer

Principal of and interest on the notes will be payable, and the notes may be
exchanged or transferred, at the office or agency maintained by us for such
purpose, which initially will be

the corporate trust office of the trustee located at 101 Barclay Street, New
York, New York 10286. Payment of principal of and interest on notes in global
form registered in the name of or held by The Depository Trust Company, which
is referred to as "DTC", or its nominee will be made in immediately available
funds to DTC or its nominee, as the case may be, as the registered holder of
such global notes. If any of the notes are no longer represented by global
notes, payment of interest on the notes in certificated form may, at our
option, be made by check mailed directly to holders at their registered
addresses.

Any money paid by us to a paying agent for the payment of principal of or
interest on the notes which remains unclaimed for two years after the date the
payment was due will be returned to us. Upon the return of those moneys to us,
holders of the notes will look to us for payment as our general unsecured
creditors and any liability of the paying agent with respect to those moneys
will cease.

A holder may transfer or exchange notes in definitive form at the same
location given in the paragraph above. No service charge will be made for any
registration of transfer or exchange of notes, but we may require payment of a
sum sufficient to cover any transfer tax or other similar governmental charge
payable in connection with a transfer or exchange.

The registered holder of a note will be treated as the owner of it for all
purposes.

Further Issuances

We may from time to time, without the consent of existing holders, create
and issue further notes having the same terms and conditions as the notes in
all respects, except for issue date, issue price and, if applicable, the first
payment of interest thereon. Additional notes issued in this manner will be
consolidated with and will form a single series with the previously outstanding
notes.

Ranking

The notes will be our senior and unsecured indebtedness and will rank
equally with all of our other existing and future senior and unsecured
indebtedness. The notes will effectively rank junior to any of our existing and
future secured indebtedness, to the extent of the assets securing such
indebtedness and to all indebtedness and other liabilities of our subsidiaries.
Indebtedness of our subsidiaries and obligations and liabilities of our
subsidiaries are structurally senior to the notes since, in the event of our
bankruptcy, liquidation, dissolution, reorganization or other winding up, the
assets of our subsidiaries will be available to pay the notes only after the
subsidiaries' indebtedness and obligations and liabilities are paid in full.
Because we stand as an equity holder, rather than a creditor, of our
subsidiaries, creditors of those subsidiaries will have their debt satisfied
out of the subsidiaries' assets before our creditors, including the note
holders. Because our operations are and will be conducted by our subsidiaries,
these subsidiaries have incurred and will continue to incur significant
obligations.

Our operations are, and will continue to be, conducted by our subsidiaries,
and substantially all of our assets are, and will continue to, be owned by our
subsidiaries, which are not obligated or required to pay any of the amounts due
on the notes. Because we conduct our operations through subsidiaries, we depend
on dividends, loans, advances and other payments from these subsidiaries to
satisfy our financial obligations. Applicable corporate and other laws and
regulations, as well as contractual obligations, could prevent these
subsidiaries from making payments to us in amounts sufficient to allow us to
satisfy our debts, including the notes. Our direct and indirect subsidiaries
include HMOs and insurance companies, which are subject to state regulations
that, among other things, require the maintenance of minimum

levels of statutory capital and restrict the timing and amount of dividends and
other distributions to their parent companies. Regulatory approval could be
subject to significant delay. As a general matter, the amount of dividend
distributions that may be paid by a regulated insurance or HMO company without
prior approval by state regulatory authorities is limited based on the entity's
level of statutory net income and statutory capital and surplus. In addition,
we normally give notice to these regulatory authorities prior to making any
payments that do not require prior approval.

Optional Redemption

The notes will be redeemable, at our option, at any time in whole, or from
time to time in part, at a price equal to the greater of:

. 100% of the principal amount of the notes to be redeemed; and

. the sum of the present values of the remaining scheduled payments on the
notes to be redeemed consisting of principal and interest, exclusive of
interest accrued to the date of redemption, discounted to the date of
redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the applicable Treasury Yield plus 25 basis
points plus accrued interest to the date of redemption.

The notes called for redemption become due on the date fixed for redemption.
Notices of redemption will be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. The notice of redemption for the notes will
state the amount to be redeemed. On and after the redemption date, interest
will cease to accrue on any notes that are redeemed. If less than all the notes
are redeemed at any time, the trustee will select notes on a pro rata basis or
by any other method the trustee deems fair and appropriate.

For purposes of determining the optional redemption price, the following
definitions are applicable:

"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the notes that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining
terms of the notes.

"Comparable Treasury Price" means, with respect to any redemption date:

the average of the bid and the asked prices for the Comparable Treasury
Issue, expressed as a percentage of its principal amount, at 4:00 p.m.
on the third business day preceding that redemption date, as set forth
on "Telerate Page 500," or such other page as may replace Telerate Page
500; or

if Telerate Page 500, or any successor page, is not displayed or does
not contain bid and/or asked prices for the Comparable Treasury Issue
at that time, the average of the Reference Treasury Dealer Quotations
obtained by the trustee for that redemption date, after excluding the
highest and lowest of such Reference Treasury Dealer Quotations, or, if
the trustee is unable to obtain at least four such Reference Treasury
Dealer Quotations, the average of all Reference Treasury Dealer
Quotations obtained by the trustee.

"Independent Investment Banker" means either J.P. Morgan Securities Inc. or
Lehman Brothers Inc., as selected by us or, if both such firms are unwilling or
unable to select the

applicable Comparable Treasury Issue, an independent investment banking
institution of national standing appointed by the trustee and reasonably
acceptable to us.

"Reference Treasury Dealer" means J.P. Morgan Securities Inc. and Lehman
Brothers Inc. and their respective successors and three other primary U.S.
government securities dealers in New York City selected by the Independent
Investment Banker (each, a "Primary Treasury Dealer"); provided, however, that
if any of the foregoing shall cease to be a Primary Treasury Dealer, the issuer
shall substitute therefor another Primary Treasury Dealer.

"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date for the notes, an average, as
determined by the trustee, of the bid and asked prices for the Comparable
Treasury Issue for the notes, expressed in each case as a percentage of its
principal amount, quoted in writing to the trustee by the Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third business day preceding
the redemption date.

"Treasury Yield" means, with respect to any redemption date applicable to
the notes, the rate per annum equal to the semiannual equivalent yield to
maturity, computed as of the third business day immediately preceding the
redemption date, of the Comparable Treasury Issue, assuming a price for the
Comparable Treasury Issue, expressed as a percentage of its principal amount,
equal to the applicable Comparable Treasury Price for the redemption date.

Except as set forth above, the notes will not be redeemable by the issuer
prior to maturity and will not be entitled to the benefit of any sinking fund.

Covenants

We will not be restricted by the indenture from incurring any type of
indebtedness or other obligation, from paying dividends or making distributions
on our capital stock or purchasing or redeeming our capital stock, in each case
except as set forth below. The indenture will not require the maintenance of
any financial ratios or specified levels of net worth or liquidity. In
addition, the indenture will not contain any provisions that would require us
to repurchase or redeem or otherwise modify the terms of any of the notes upon
a change in control or other events involving us which may adversely affect the
creditworthiness of the notes.

Limitations on Liens. The indenture will provide that we will not, and will
not permit any of our Principal Subsidiaries to, issue, assume, incur or
guarantee any indebtedness for borrowed money secured by a mortgage, pledge,
lien or other encumbrance, directly or indirectly, on any of the Common Stock
of a Principal Subsidiary owned by us or any of our Principal Subsidiaries,
unless our obligations under the notes and, if we so elect, any other
indebtedness of us, ranking on a parity with, or prior to, the notes, shall be
secured equally and ratably with, or prior to, such secured indebtedness for
borrowed money so long as it is outstanding and is so secured.

Merger, Consolidation or Sale of Assets. The indenture will provide that we
may not consolidate with or merge with or into, or sell, lease or convey all or
substantially all of its assets to, another person unless:

. either we are the resulting, surviving or transferee person, which is
referred to as the "successor", or the successor is a person organized
under the laws of the United States, any state or the District of
Columbia;

. the successor expressly assumes by supplemental indenture all of our
obligations under the indenture and the notes; and

. immediately after giving effect to the transaction no event of default
or event which with notice or lapse of time would be an event of default
has occurred and is continuing.

The successor will be substituted for us in the indenture with the same
effect as if it had been an original party to the indenture. Thereafter, the
successor may exercise the rights and powers of the issuer under the
indenture.

For purposes of the above covenants and "--Events of Default", the
following definitions apply:

"Common Stock" means, with respect to any Principal Subsidiary, capital
stock of any class, however designated, except capital stock which is non-
participating other than fixed dividend and liquidation preferences and the
holders of which have either no voting rights or limited voting rights
entitling them, only in the case of certain contingencies, to elect less than
a majority of the directors (or persons performing similar functions) of such
Principal Subsidiary, and shall include securities of any class, however
designated, which are convertible into such Common Stock.

"Principal Subsidiary" means a consolidated subsidiary of ours, that, as of
the relevant time of the determination, is a "significant subsidiary" as
defined under Rule 405 under the Securities Act (as that Rule is in effect on
the date of this prospectus without giving effect to any further amendment of
that Rule).

Events of Default

Each of the following will be an event of default under the indenture:

(1) default in any payment of interest on any note when due, continued
for 30 days;

(2) default in the payment of principal of or premium, if any, on any
note when due at its stated maturity, upon optional redemption, upon
declaration or otherwise;

(3) our failure, after notice by the trustee or the holders of at least
25% in principal amount of the outstanding notes, to comply within 60 days
with any of our other agreements contained in the indenture applicable to
the notes;

(4) (A) our failure or the failure of any of our subsidiaries to pay
indebtedness for money we borrowed or any of our subsidiaries borrowed in
an aggregate principal amount of at least $40,000,000, at the later of
final maturity and the expiration of any related applicable grace period
and such defaulted payment shall not have been made, waived or extended
within 30 days after notice or (B) acceleration of the maturity of
indebtedness for money we borrowed or any of our subsidiaries borrowed in
an aggregate principal amount of at least $40,000,000, if that acceleration
results from a default under the instrument giving rise to or securing such
indebtedness for money borrowed and such indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days after notice; or

(5) certain events of bankruptcy, insolvency or reorganization for us,
or any of our Principal Subsidiaries.

A default under clause (3) or (4) of this paragraph will not constitute an
event of default until the trustee or the holders of at least 25% in principal
amount of the outstanding notes

notify us of the default and such default is not cured within the time
specified in clause (3) or (4) of this paragraph after receipt of such notice.

If an event of default (other than an event of default referred to in clause
(5) above with respect to us) occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the outstanding notes by notice
to us and the trustee, may, and the trustee at the request of such holders
shall, declare the principal of and accrued and unpaid interest, if any, on all
the notes to be due and payable. Upon such a declaration, such principal and
accrued and unpaid interest will be due and payable immediately. If an event of
default referred to in clause (5) above occurs with respect to us and is
continuing, the principal of and accrued and unpaid interest on all the notes
will become and be immediately due and payable without any declaration or other
act on the part of the trustee or any holders.

In order for holders of the notes to initiate proceedings for a remedy under
the indenture, holders of at least 25% in principal amount of the notes must
first give notice to us as provided above, must request that the trustee
initiate a proceeding in its own name and must offer the trustee reasonable
indemnity against costs and liabilities. If the trustee still refuses for 60
days to initiate the proceeding, and no inconsistent direction has been given
to the trustee by holders of a majority of the notes, the holders may initiate
a proceeding as long as they do not adversely affect the rights of any other
holders of notes.

The holders of a majority in principal amount of the outstanding notes may
rescind a declaration of acceleration if all events of default, besides the
failure to pay principal or interest due solely because of the declaration of
acceleration, have been cured or waived.

If we default on the payment of any installment of interest and fail to cure
the default within 30 days, or if we default on the payment of principal when
it becomes due, then the trustee may require us to pay all amounts due to the
trustee, with interest on the overdue principal or interest payments, in
addition to the expenses of collection.

The indenture provides that if a default occurs and is continuing and is
known to the trustee, the trustee must mail to each holder notice of the
default within 90 days after it occurs. Except in the case of a default in the
payment of principal of, or interest on any note, the trustee may withhold
notice if the trustee determines that withholding notice is in the best
interests of the holders.

The holders of a majority in principal amount of the outstanding notes may
waive any past default or event of default except for a default in the payment
of principal of or interest on the notes or a default relating to a provision
that cannot be amended without the consent of each affected holder.

Reports

We are required to file an officer's certificate with the trustee every year
confirming that we are complying with all conditions and covenants in the
indenture.

We must also file with the trustee copies of our annual reports and the
information and other documents which we may be required to file with the SEC
under Section 13 or Section 15(d) of the Securities Exchange Act of 1934. These
documents must be filed with the trustee within 15 days after they are required
to be filed with the SEC. If we are not required to file the information,
documents or reports under either of these sections of the Securities Exchange
Act, then we must file with the trustee and the SEC, in accordance with the
rules and regulations of the SEC, the supplementary and periodic information,
documents and reports

which may be required by Section 13 of the Exchange Act, in respect of a debt
security listed and registered on a national securities exchange, as may be
required by the rules and regulations of the SEC.

Within 30 days of filing the information, documents or reports referred to
above with the trustee, we must mail to the holders of the notes any summaries
of the information, documents or reports which are required to be sent to the
holders by the rules and regulations of the SEC.

Rights and Duties of the Trustee

The holders of a majority in principal amount of outstanding notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or other power conferred on
the trustee. The trustee may decline to follow that direction if it would
involve the trustee in personal liability or would be illegal. During a
default, the trustee is required to exercise the standard of care and skill
that a prudent man would exercise under the circumstances in the conduct of his
own affairs. The trustee is not obligated to exercise any of its rights or
powers under the indenture at the request or direction of any of the holders of
notes unless those holders have offered to the trustee reasonable security or
indemnity.
The trustee is entitled, in the absence of bad faith on its part, to rely on
an officer's certificate before taking action under the indenture.

Supplemental Indentures

Supplemental Indentures Not Requiring Consent of Holders. Without the
consent of any holders of notes, we and the trustee may supplement the
indenture, among other things, to:

. reflect that a successor has succeeded us and has assumed our covenants
and obligations under the notes and the indenture;

. add further covenants for the benefit of the holders of notes;

. add any additional event of default;

. pledge property to the trustee as security for the notes;

. add guarantees with respect to the notes;

. change the trustee or provide for an additional trustee;

. modify the indenture in order to continue its qualification under the
Trust Indenture Act of 1939 or as may be necessary or desirable in
accordance with amendments of that act;

. issue and establish the form and terms and conditions of other series of
debt securities as provided in the indenture; or

. cure any ambiguity or inconsistency in the indenture or in the notes or
make any other provisions necessary or desirable, as long as the
interests of the holders of the notes are not adversely affected in any
material respect.

Supplemental Indenture Requiring Consent of Holders. With the consent of the
holders of at least a majority in principal amount of the outstanding notes,
the indenture permits us and the trustee to supplement the indenture or modify
in any way the terms of the indenture or the rights of the holders of the
notes. However, without the consent of each holder of all of the notes affected
by that modification, we and the trustee may not:

. reduce the principal of, premium, if any, on, or change the stated final
maturity of, any note;

. reduce the rate of or change the time for payment of interest on any
note;

. make the principal of or interest on any note payable in a currency
other than U.S. dollars or change the place of payment;

. modify the right of any holder of notes to receive or sue for payment of
the principal of or interest on a note that would be due and payable at
the maturity thereof;

. reduce the principal amount of the outstanding notes whose holders must
consent to supplement the indenture or to waive any of its provisions;
or

. take certain other specified actions as provided in the indenture.

Defeasance

We can terminate all of our obligations under the indenture with respect to
the notes, other than the obligation to pay principal of and interest on the
notes and certain other obligations, at any time by:

. depositing money or U.S. government obligations with the trustee in an
amount sufficient to pay the principal and interest on the notes to
their maturity; and

. complying with certain other conditions, including delivery to the
trustee of an opinion of counsel to the effect that holders of notes
will not recognize income, gain or loss for federal income tax purposes
as a result of our defeasance.

In addition, we can terminate all of our obligations under the indenture
with respect to the notes, including the obligation to pay principal of and
interest on the notes, at any time by:

. depositing money or U.S. government obligations with the trustee in an
amount sufficient to pay the principal of and interest on the notes to
their maturity; and

. complying with certain other conditions, including delivery to the
trustee of an opinion of counsel stating that there has been a ruling by
the Internal Revenue Service, or a change in the federal tax law since
the date of the indenture, to the effect that holders of debt securities
will not recognize income, gain or loss for federal income tax purposes
as a result of our defeasance.

Book-Entry Issuance

The notes will be represented by one or more global notes that will be
deposited with and registered in the name of DTC or its nominee. We will not
issue certificated notes to you, except in the limited circumstances described
below. Each global note will be issued to DTC, which will keep a computerized
record of its participants whose clients have purchased the notes. Each
participant will then keep a record of its own clients. Unless it is exchanged
in whole or in part for a certificated note, a global note may not be
transferred. DTC, its nominees and their successors may, however, transfer a
global note as a whole to one another, and these transfers are required to be
recorded on our records or a register to be maintained by the trustee.

Beneficial interests in a global note will be shown on, and transfers of
beneficial interests in the global note will be made only through, records
maintained by DTC and its participants. DTC has provided us with the following
information: DTC is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of

the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC holds securities that its direct
participants deposit with DTC. DTC also records the settlements among direct
participants of securities transactions, such as transfers and pledges, in
deposited securities through computerized records for direct participants'
accounts. This book-entry system eliminates the need to exchange certificated
securities. Direct participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations.

DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on
file with the SEC.

DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.

When you purchase notes through the DTC system, the purchases must be made
by or through a direct participant, which will receive credit for the notes on
DTC's records. When you actually purchase the notes, you will become their
beneficial owner. Your ownership interest will be recorded only on the direct
or indirect participants' records. DTC will have no knowledge of your
individual ownership of the notes. DTC's records will show only the identity of
the direct participants and the principal amount of the notes held by or
through them. You will not receive a written confirmation of your purchase or
sale or any periodic account statement directly from DTC. You should instead
receive these from your direct or indirect participant. As a result, the direct
or indirect participants are responsible for keeping accurate account of the
holdings of their customers. The trustee will wire payments on the notes to
DTC's nominee. We and the trustee will treat DTC's nominee as the owner of each
global note for all purposes. Accordingly, we, the trustee and any paying agent
will have no direct responsibility or liability to pay amounts due on a global
note to you or any other beneficial owners in that global note.

It is DTC's current practice, upon receipt of any payment of distributions
or liquidation amounts, to proportionately credit direct participants' accounts
on the payment date based on their holdings. In addition, it is DTC's current
practice to pass through any consenting or voting rights to such participants
by using an omnibus proxy. Those participants will, in turn, make payments to
and solicit votes from you, the ultimate owner of notes, based on their
customary practices. Payments to you will be the responsibility of the
participants and not of DTC, the trustee or our company.

Notes represented by one or more global notes will be exchangeable for
certificated notes with the same terms in authorized denominations only if:

. DTC is unwilling or unable to continue as a depositary or ceases to be a
clearing agency registered under applicable law, and a successor is not
appointed by us within 90 days;

. an event of default occurs and is continuing in respect of the notes; or

. we decide to discontinue the book-entry system.

If a global note is exchanged for certificated notes, the trustee will keep the
registration books for the notes at its corporate office and follow customary
practices and procedures regarding those certificated notes.

Euroclear and Clearstream

Links have been established among DTC, Clearstream Banking S.A. and
Euroclear Bank S.A./N.V., which are two European book-entry depositaries
similar to DTC, to facilitate the initial issuance of notes sold outside the
United States and cross-market transfers of the notes associated with secondary
market trading.

Noteholders may hold their notes through the accounts maintained by
Euroclear or Clearstream in DTC only if they are participants of those systems,
or indirectly through organizations which are participants in those systems.

Euroclear and Clearstream will hold omnibus book-entry positions on behalf
of their participants through customers' securities accounts in Euroclear's and
Clearstream's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the names of the
nominees of the depositaries on the books of DTC. All securities in Euroclear
and Clearstream are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.

Transfers of notes by persons holding through Euroclear or Clearstream
participants will be effected through DTC, in accordance with DTC rules, on
behalf of the relevant European international clearing system by its
depositaries; however, such transactions will require delivery of exercise
instructions to the relevant European international clearing system by the
participant in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the exercise meets its requirements,
deliver instructions to its depositaries to take action to effect exercise of
the notes on its behalf by delivering notes through DTC and receiving payment
in accordance with its normal procedures for next-day funds settlement.
Payments with respect to the notes held through Euroclear and Clearstream will
be credited to the cash accounts of Euroclear participants or Clearstream
participants in accordance with the relevant system's rules and procedures, to
the extent received by its depositaries.

All information in this prospectus on Euroclear and Clearstream is derived
from Euroclear or Clearstream, as the case may be, and reflects the policies of
such organizations. These organizations may change these policies without
notice.

Governing Law

The indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York.

Concerning the Trustee

The Bank of New York is the trustee under the indenture and has been
appointed as registrar and paying agent with regard to the notes. The Bank of
New York is also a participant in our existing credit facility.

UNDERWRITING

We intend to offer our notes through a number of underwriters. Subject to
the terms and conditions set forth in an underwriting agreement among us and
each of the underwriters named below, dated as of August 2, 2001, we have
agreed to sell to the underwriters, and each of the underwriters severally and
not jointly has agreed to purchase from us, the aggregate principal amount of
the notes set forth opposite its name below:

Principal
Amount
Underwriter of Notes
----------- ------------

J.P. Morgan Securities Inc.................................. $105,000,000
Lehman Brothers Inc......................................... 105,000,000
Banc of America Securities LLC.............................. 21,000,000
Salomon Smith Barney Inc.................................... 21,000,000
Wachovia Securities, Inc.................................... 21,000,000
Scotia Capital (USA) Inc.................................... 13,500,000
U.S. Bancorp Piper Jaffray Inc.............................. 13,500,000
------------
Total..................................................... $300,000,000
============

The underwriters have agreed, subject to the terms and conditions of the
underwriting agreement, to purchase all of the notes being sold if any of the
notes being sold are purchased. In the event of a default by an underwriter,
the underwriting agreement provides that, in certain circumstances, the
purchase commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.

We have agreed to indemnify the underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.

The notes are being offered by the several underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the underwriters and certain other
conditions. The underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part.

The underwriters propose initially to offer the notes to the public at the
initial public offering price set forth on the cover page of this prospectus,
and to certain dealers at such price less a concession not in excess of 0.50%
of the principal amount of the notes. The underwriters may allow, and such
dealers may reallow, a discount not in excess of 0.25% of the principal amount
of the notes to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

We estimate that the expenses of the offering, exclusive of the underwriting
discount, will be $750,000 and will be payable by us.

We have agreed not to, without the prior written consent of each of J.P.
Morgan Securities Inc. and Lehman Brothers Inc. on behalf of the underwriters,
directly or indirectly, issue, offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or otherwise
dispose of any debt securities of or guaranteed by us or any securities
convertible into or exercisable or exchangeable for debt securities of or
guaranteed by us or file any registration statement under the Securities Act
with respect to any of the foregoing for a period of 90 days following the date
of this prospectus, subject to certain exceptions.

The notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the notes on any national securities
exchange or for quotation of the notes on any automated dealer quotation
system. We have been advised by the underwriters that they presently intend to
make a market in the notes after consummation of the offering contemplated
hereby, although they are under no obligation to do so and may discontinue any
market-making activities at any time without any notice. We cannot assure you
that there will be a liquid trading market for the notes or that an active
public market for the notes will develop. If an active trading market for the
notes does not develop, the market price and liquidity of the notes may be
adversely affected.

In connection with the offering, the underwriters may engage in transactions
that stabilize the market price of the notes. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
notes. If the underwriters create a short position in the notes in connection
with the offering, i.e., if they sell more notes than are set forth on the
cover page of this prospectus, the underwriters may reduce that short position
by purchasing notes in the open market. In general, purchases of a security for
the purpose of stabilizing the price or to reduce a short position may cause
the price of the security to be higher than it might be in the absence of such
purchases.

Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes. In addition, neither we nor
any of the underwriters make any representation that the underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.

Certain of the underwriters and their affiliates have from time to time
provided, and may in the future provide, investment banking and general
financing and commercial banking services to us and our affiliates. Affiliates
of several of the underwriters of the offering are lenders under the company's
credit facility. These affiliates will receive a proportionate share of the
amount of the credit facility to be repaid with the proceeds of this offering.
In addition, we expect that J.P. Morgan Securities Inc. will be the lead
arranger, and we expect it to be the administrative agent, of our proposed new
credit facility, and that affiliates of each of the underwriters will be
lenders under our new credit facility.

This offering is being conducted pursuant to Conduct Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc.

J.P. Morgan Securities Inc. and Lehman Brothers Inc. will make notes
available for distribution on the Internet through a proprietary web site
and/or a third-party system operated by Market Axess Inc., an Internet-based
communications technology provider. Market Axess Inc. is providing the system
as a conduit for communications between J.P. Morgan Securities Inc. and Lehman
Brothers Inc. and their respective customers and is not a party to any
transactions. Market Axess Inc., a registered broker-dealer, will receive
compensation from J.P. Morgan Securities Inc. and Lehman Brothers Inc. based on
transactions the underwriters conduct through the system. J.P. Morgan
Securities Inc. and Lehman Brothers Inc. will make notes available to their
respective customers through the Internet distributions, whether made through a
proprietary or third party system, on the same terms as distributions made
through other channels.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
notes will be passed upon for us by Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations), New York, New York. Certain
legal matters in connection with the offering will be passed upon for the
underwriters by Simpson Thacher & Bartlett, New York, New York.

EXPERTS

The consolidated financial statements and parent company financial
information as of December 31, 2000 and 1999 and for each of the three years in
the period ended December 31, 2000 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

Index to Financial Statements

Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. F-3
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Parent Company Financial Information, Condensed Balance Sheets as of
December 31, 2000 and 1999............................................... F-29
Parent Company Financial Information, Condensed Statements of Operations
for the years ended December 31, 2000, 1999 and 1998..................... F-30
Parent Company Financial Information, Condensed Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998..................... F-31
Parent Company Financial Information, Notes to Condensed Financial
Statements............................................................... F-32
Condensed Consolidated Balance Sheets at March 31, 2001 (Unaudited) and
December 31, 2000........................................................ F-33
Condensed Consolidated Statements of Income for the quarters ended March
31, 2001 and 2000 (Unaudited)............................................ F-34
Condensed Consolidated Statements of Cash Flows for the quarters ended
March 31, 2001 and 2000 (Unaudited)...................................... F-35
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-36

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Humana Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Humana Inc. and its subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the parent company financial information listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and parent company financial
information are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
parent company financial information based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

PricewaterhouseCoopers LLP

Louisville, Kentucky
February 7, 2001

F-2

Humana Inc.

CONSOLIDATED BALANCE SHEETS

December 31,
--------------
2000 1999
------ ------
(in millions,
except share
amounts)

Assets
Current assets:
Cash and cash equivalents.................................... $ 658 $ 978
Investment securities........................................ 1,409 1,507
Premiums receivable, less allowance for doubtful
accounts of $42 in 2000 and $61 in 1999.................... 205 225
Deferred income taxes........................................ 67 128
Other........................................................ 160 193
------ ------
Total current assets....................................... 2,499 3,031
------ ------
Property and equipment, net.................................... 435 418
Other assets:
Long-term investment securities.............................. 240 294
Cost in excess of net assets acquired........................ 790 806
Deferred income taxes........................................ 103 87
Other........................................................ 100 264
------ ------
Total other assets......................................... 1,233 1,451
------ ------
Total assets................................................. $4,167 $4,900
====== ======

Liabilities and Stockholders' Equity
Current liabilities:
Medical and other expenses payable........................... $1,181 $1,432
Trade accounts payable and accrued expenses.................. 402 482
Book overdraft............................................... 149 215
Unearned premium revenues.................................... 333 349
Debt......................................................... 600 686
------ ------
Total current liabilities.................................. 2,665 3,164
------ ------
Long-term medical and other expenses payable................... -- 324
Professional liability and other obligations................... 142 144
------ ------
Total liabilities.......................................... 2,807 3,632
------ ------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; 10,000,000 shares authorized; none
issued
Common stock, $0.162/3 par; 300,000,000 shares authorized;
170,889,142 and 167,608,558 shares issued in 2000 and 1999,
respectively................................................ 28 28
Capital in excess of par value............................... 923 899
Retained earnings............................................ 461 371
Accumulated other comprehensive loss......................... (8) (28)
Unearned restricted stock compensation....................... (30) (2)
Treasury stock, at cost, 1,823,348 shares.................... (14) --
------ ------
Total stockholders' equity................................. 1,360 1,268
------ ------
Total liabilities and stockholders' equity................... $4,167 $4,900
====== ======

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

Humana Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended
December 31,
-----------------------
2000 1999 1998
------- ------- ------
(in millions, except
per share results)

Revenues:
Premiums.......................................... $10,395 $ 9,959 $9,597
Investment and other income, net.................. 119 154 184
------- ------- ------
Total revenues.................................. 10,514 10,113 9,781
------- ------- ------
Operating expenses:
Medical........................................... 8,782 8,532 8,041
Selling, general and administrative............... 1,442 1,368 1,328
Depreciation and amortization..................... 147 124 128
Asset write-downs and other charges............... -- 460 34
------- ------- ------
Total operating expenses........................ 10,371 10,484 9,531
------- ------- ------
Income (loss) from operations....................... 143 (371) 250
Interest expense.................................... 29 33 47
------- ------- ------
Income (loss) before income taxes................... 114 (404) 203
Provision (benefit) for income taxes................ 24 (22) 74
------- ------- ------
Net income (loss)................................... $ 90 $ (382) $ 129
======= ======= ======
Basic earnings (loss) per common share.............. $ 0.54 $ (2.28) $ 0.77
======= ======= ======
Diluted earnings (loss) per common share............ $ 0.54 $ (2.28) $ 0.77
======= ======= ======

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

Humana Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock Capital Accumulated Unearned
------------- In Excess Other Restricted Total
Issued of Par Retained Comprehensive Stock Treasury Stockholders'
Shares Amount Value Earnings (Loss) Income Compensation Stock Equity
------ ------ --------- -------- ------------- ------------ -------- -------------
(in millions)

Balances, January 1,
1998................... 164 $27 $844 $ 624 $ 9 $ (3) $1,501
Comprehensive income:
Net income............. 129 129
Other comprehensive
income:
Net unrealized
investment gains,
net of $2 tax....... 4 4
------
Comprehensive
income.............. 133
Restricted stock grant.. 8 (8) --
Restricted stock
amortization........... 2 2
Stock option exercises.. 4 1 35 36
Stock option tax
benefit................ 16 16
--- --- ---- ----- ---- ---- ---- ------
Balances, December 31,
1998................... 168 28 903 753 13 (9) -- 1,688
Comprehensive loss:
Net loss............... (382) (382)
Other comprehensive
loss:
Net unrealized
investment losses,
net of $27 tax...... (41) (41)
------
Comprehensive loss... (423)
Restricted stock
amortization........... 2 2
Restricted stock market
value adjustment....... (5) 5 --
Stock option exercises.. 1 1
--- --- ---- ----- ---- ---- ---- ------
Balances, December 31,
1999................... 168 28 899 371 (28) (2) -- 1,268
Comprehensive income:
Net income............. 90 90
Other comprehensive
income:...............
Net unrealized
investment gains,
net of $13 tax...... 20 20
------
Comprehensive
income.............. 110
Common stock
repurchases............ $(26) (26)
Restricted stock grant.. 3 21 (33) 12 --
Restricted stock
amortization........... 7 7
Restricted stock market
value adjustment....... 2 (2) --
Stock option exercises.. 1 1
--- --- ---- ----- ---- ---- ---- ------
Balances, December 31,
2000................... 171 $28 $923 $ 461 $ (8) $(30) $(14) $1,360
=== === ==== ===== ==== ==== ==== ======

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

Humana Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended
December 31,
-----------------------
2000 1999 1998
------- ----- -------
(in millions)

Cash flows from operating activities
Net income (loss).................................... $ 90 $(382) $ 129
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Asset write-downs and other charges................ -- 460 17
Depreciation and amortization...................... 147 124 128
Gain on sale of property and equipment, net........ (3) (12)
Gain on sale of investment securities, net......... (6) (11) (21)
Provision for deferred income taxes................ 19 5 26
Provision for doubtful accounts.................... 11 12 11
Payment for government audit settlement............ (15) -- --
Changes in operating assets and liabilities:
Premiums receivable............................... (1) 39 34
Other assets...................................... (9) 54 32
Medical and other expenses payable................ (195) (23) (22)
Workers' compensation liabilities................. (30) (150) (134)
Other liabilities................................. 39 42 (135)
Unearned premium revenues......................... (16) 56 (10)
Other.............................................. 9 3 --
------- ----- -------
Net cash provided by operating activities....... 40 217 55
------- ----- -------
Cash flows from investing activities
Acquisitions, net of cash and cash equivalents
acquired............................................ (13) (14)
Divestitures, net of cash and cash equivalents
disposed............................................ 29 (26)
Purchases of property and equipment.................. (135) (89) (113)
Dispositions of property and equipment............... 21 54 12
Purchases of investment securities................... (1,205) (796) (1,053)
Maturities of investment securities.................. 543 391 380
Proceeds from sales of investment securities......... 582 472 828
------- ----- -------
Net cash (used in) provided by investing
activities..................................... (178) 18 28
------- ----- -------

Cash flows from financing activities
Revolving credit agreement borrowings................ 520 -- 123
Revolving credit agreement repayments................ -- (93) (330)
Net commercial paper (repayments) borrowings......... (606) (44) 141
Change in book overdraft............................. (66) (19) 82
Common stock repurchases............................. (26) -- --
Other................................................ (4) (14) 35
------- ----- -------
Net cash (used in) provided by financing
activities..................................... (182) (170) 51
------- ----- -------
(Decrease) increase in cash and cash equivalents..... (320) 65 134
Cash and cash equivalents at beginning of period..... 978 913 779
------- ----- -------
Cash and cash equivalents at end of period........... $ 658 $ 978 $ 913
======= ===== =======
Supplemental cash flow disclosures:
Interest payments.................................. $ 30 $ 33 $ 49
Income tax (refunds) payments, net................. $ (35) $ (58) $ 69
Details of businesses acquired in purchase
transactions:
Fair value of assets acquired, net of cash
acquired.......................................... $ 126 $ 20
Less: liabilities assumed.......................... (113) (6)
------- -----
Cash paid for acquired businesses, net of cash
acquired.......................................... $ 13 $ 14
======= =====

The accompanying notes are an integral part of the consolidated financial
statements.

F-6

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. REPORTING ENTITY

Nature of Operations

Humana Inc. ("Humana" or "the Company") is one of the nation's largest
publicly traded health services companies offering coordinated health insurance
coverage, primarily to employer groups and government-sponsored plans, through
a variety of product options including health maintenance organizations
("HMOs") and preferred provider organizations ("PPOs"). The Company also offers
an administrative services only ("ASO") product to those who self-insure their
employee health plans and various specialty products, including dental, group
life and short-term disability. In total, the Company's products are licensed
in 49 states, the District of Columbia and Puerto Rico, with approximately 29
percent of its premium revenues in the state of Florida.

During 1999 and 2000, the Company was organized into two business units: the
Health Plan segment and the Small Group segment. The Health Plan segment
includes the Company's large group commercial (100 employees and over),
Medicare, Medicaid, ASO and military or TRICARE business. The Small Group
segment includes small group commercial (under 100 employees) and specialty
benefit lines, including dental, life and short-term disability. Results of
each segment are measured based upon results of operations before income taxes.
The Company allocates administrative expenses, investment income and interest
expense, but no assets, to the segments. Members in the same geographic area
that are served by the two segments generally utilize the same medical provider
networks, enabling the Company to obtain more favorable contract terms with
providers. As a result, the profitability of each segment is somewhat
interdependent. In addition, premium revenue pricing to large group commercial
employers has historically been more competitive than that to small group
commercial employers, resulting in less favorable underwriting margins for the
large group commercial line of business. Costs to distribute and administer
products to small group commercial employers are higher compared to large group
commercial employers resulting in small group's higher administrative expense
ratio. The Company is in the process of repositioning its lines of business and
its distribution focus towards a more commercial line emphasis, including
commercial products sold to customers who self-insure their financial exposure.
As a result of this repositioning, the Company announced a management
realignment during the first quarter of 2001. Future quarterly and annual
financial reports will give effect to this realignment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include all subsidiaries of the
Company. All significant intercompany accounts and transactions have been
eliminated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates are based on

F-7

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

knowledge of current events and anticipated future events, and accordingly,
actual results may ultimately differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash, time deposits, money market funds,
commercial paper and certain U.S. Government securities with an original
maturity of three months or less. Carrying value approximates fair value due to
the short-term maturity of the investments.

Investment Securities

Investment securities, which consist primarily of debt and equity
securities, have been categorized as available for sale and, as a result, are
stated at fair value based generally on quoted market prices. Investment
securities available for current operations are classified as current assets.
Investment securities available for the Company's capital spending,
professional liability, long-term insurance product requirements and strategic
investments are classified as long-term assets. Unrealized holding gains and
losses, net of applicable deferred taxes, are included as a component of
stockholders' equity until realized.

For the purpose of determining gross realized gains and losses, the cost of
investment securities sold is based upon specific identification.

Long-Lived Assets

Property and equipment is carried at cost, and is comprised of the following
at December 31, 2000 and 1999:

2000 1999
----- -----
(in
millions)

Land........................................................... $ 33 $ 32
Buildings...................................................... 319 345
Equipment and computer software................................ 527 451
----- -----
879 828
Accumulated depreciation....................................... (444) (410)
----- -----
$ 435 $ 418
===== =====

Depreciation is computed using the straight-line method over estimated
useful lives ranging from three to ten years for equipment, three to five years
for computer software and 20 to 40 years for buildings. Depreciation expense
was $85 million, $79 million and $75 million for the years ended December 31,
2000, 1999 and 1998, respectively.

Cost in excess of net assets acquired, or goodwill, represents the
unamortized excess of cost over the fair value of net tangible and identifiable
intangible assets acquired. Identifiable intangible assets, which are included
in other long-term assets in the accompanying Consolidated Balance Sheets,
primarily relate to subscriber and provider contracts and the cost of acquired
licenses. Goodwill and identifiable intangible assets are amortized on a
straight-line method over their estimated useful lives. Goodwill is amortized
over periods ranging from six to 20 years, and identifiable intangible assets
are amortized over periods ranging from five to 20 years.

F-8

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-lived assets are periodically reviewed by management for impairment
whenever adverse events or changes in circumstances indicate the carrying value
of the asset may not be recoverable. Losses are recognized when the
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying value. In addition, the
estimated life of all long-lived assets are periodically reviewed by management
for reasonableness. See Note 3 for a discussion related to the Company's 1999
impairment and estimated life review.

Amortization expense was $62 million, $45 million and $53 million for the
years ended December 31, 2000, 1999 and 1998, respectively. In conjunction with
its 1999 goodwill impairment, the Company also reviewed the estimated life
assigned to goodwill. Effective January 1, 2000, the Company adopted a 20-year
amortization period from the date of acquisition for goodwill previously
amortized over 40 years.

Revenue and Medical Cost Recognition

Premium revenues are recognized as income in the period members are entitled
to receive services. Premiums received prior to such period are recorded as
unearned premium revenues.

Medical costs include claim payments, capitation payments, allocations of
certain centralized expenses and various other costs incurred to provide health
insurance coverage to members, as well as estimates of future payments to
hospitals and others for medical care provided prior to the balance sheet date.
Capitation payments represent monthly prepaid fees disbursed to participating
primary care physicians and other providers who are responsible for providing
medical care to members. The estimates of future medical claim and other
expense payments are developed using actuarial methods and assumptions based
upon payment patterns, medical inflation, historical development and other
relevant factors. Estimates of future payments relating to services incurred in
the current and prior periods are continually reviewed by management and
adjusted as necessary.

The Company assesses the profitability of its contracts for providing health
insurance coverage to its members when current market operating results or
forecasts indicate probable future losses. The Company records a premium
deficiency in current operations to the extent that the sum of expected medical
costs, claim adjustment expenses and maintenance costs exceeds related future
premiums. Anticipated investment income is not considered for purposes of
computing the premium deficiency. Because the majority of the Company's member
contracts renew annually, the Company does not anticipate premium deficiencies,
except when unanticipated adverse events or changes in circumstances indicate
otherwise. See Note 3 for a discussion related to premium deficiencies recorded
in 1999 and 1998.

Management believes the Company's medical and other expenses payable are
adequate to cover future claims payments required, however, such estimates are
based on knowledge of current events and anticipated future events, and,
therefore, the actual liability could differ from amounts provided.

Book Overdraft

Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes and
are classified as a current liability in the Consolidated Balance Sheets.

F-9

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Options

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and uses Accounting Principles Board Opinion No. 25
and related interpretations in the accounting for its stock option plans. No
compensation expense has been recognized in connection with the granting of
stock options. See Note 8 for discussion of stock options and the disclosures
required by SFAS 123.

Income Taxes

The Company recognizes an asset or liability for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. The Company also recognizes as deferred tax assets the future tax
benefits such as net operating and capital loss carryforwards. A valuation
allowance is provided against these deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed on the basis of the
weighted average number of unrestricted common shares outstanding. Diluted
earnings (loss) per common share is computed on the basis of the weighted
average number of unrestricted common shares outstanding plus the dilutive
effect of outstanding employee stock options and restricted shares using the
"treasury stock" method.

Reclassifications

Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In general, SFAS 133 requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
at their fair value, and sets forth the manner in which gains or losses thereon
are to be recorded. The treatment of such gains or losses is dependent upon the
type of exposure, if any, for which the derivative is designated as a hedge.
This standard is effective for the Company's financial statements beginning
January 1, 2001, with early adoption permitted. Management of the Company has
determined that the adoption of SFAS 133 on January 1, 2001 will not have a
material impact on the Company's financial position, results of operations or
cash flows.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 provides

F-10

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

guidance on revenue recognition and related disclosures and was effective
beginning October 1, 2000. The Company was previously following the
requirements provided under SAB 101 and as such there was no material impact on
the Company's financial position, results of operations, cash flows or
disclosures.

3. 1999 AND 1998 ASSET WRITE-DOWNS AND OPERATIONAL CHARGES

The following table presents the components of the asset write-downs and
operational charges and their respective classifications in the 1999 and 1998
Consolidated Statements of Operations:

Selling, Asset
General and Write-Downs
Medical Administrative and Other Total
------- -------------- ----------- -----
(in millions)

1999:
Premium deficiency................... $50 $ 50
Reserve strengthening................ 35 35
Provider costs....................... 5 5
Long-lived asset impairment.......... $342 342
Losses on non-core asset sales....... 118 118
Professional liability reserve
strengthening and other costs....... $35 35
--- --- ---- ----
Total 1999......................... $90 $35 $460 $585
=== === ==== ====
1998:
Premium deficiency................... $46 $ 46
Provider costs....................... 27 27
Market exit costs.................... $ 15 15
Losses on non-core asset sales....... 12 12
Merger dissolution costs............. 7 7
Non-officer employee incentive and
other costs......................... $25 25
--- --- ---- ----
Total 1998......................... $73 $25 $ 34 $132
=== === ==== ====

1999 Charges

Premium Deficiency, Reserve Strengthening and Provider Costs

As a result of management's assessment of the profitability of its contracts
for providing health insurance coverage to its members in certain markets, the
Company recorded a provision for probable future losses (premium deficiency) of
$50 million during the first quarter of 1999. Ineffective provider risk-sharing
contracts and the impact of the March 31, 1999 HCA--The Healthcare Company,
formerly Columbia/HCA Healthcare Corporation ("HCA"), hospital agreement in
Florida on current and projected future medical costs contributed to the
premium deficiency. The beneficial effect from losses charged to the premium
deficiency liability in 1999 was $50 million.

Prior period adverse claims development primarily in the Company's PPO and
Medicare products initially identified during an analysis of February and March
1999 medical claims resulted in the $35 million reserve strengthening. The
Company releases or strengthens medical

F-11

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

claims reserves when favorable or adverse development in prior periods exceed
actuarial margins existing in the reserves. In addition, the Company paid HCA
$5 million to settle certain contractual issues associated with the March 31,
1999 hospital agreement in Florida.

Long-Lived Asset Impairment

Historical and current period operating losses in certain of the Company's
markets prompted a review during the fourth quarter of 1999 for the possible
impairment of long-lived assets. This review indicated that estimated future
undiscounted cash flows were insufficient to recover the carrying value of
long-lived assets, primarily goodwill, associated with the Company's Austin,
Dallas and Milwaukee markets. Accordingly, the Company adjusted the carrying
value of these long-lived assets to their estimated fair value resulting in a
non-cash impairment charge of $342 million. Estimated fair value was based on
discounted cash flows.

The long-lived assets associated with the Austin and Dallas markets
primarily resulted from the Company's 1997 acquisition of Physician Corporation
of America ("PCA"). Operating losses in Austin and Dallas were related to the
deterioration of risk-sharing arrangements with providers and the failure to
effectively convert the PCA operating model and computer platform to Humana's.
The long-lived assets associated with the Milwaukee market primarily resulted
from the Company's 1994 acquisition of CareNetwork, Inc. Operating losses in
Milwaukee were the result of competitor pricing strategies resulting in lower
premium levels to large employer groups as well as market dynamics dominated by
limited provider groups causing higher than expected medical costs.

In conjunction with its 1999 goodwill impairment, the Company also reviewed
the estimated life assigned to goodwill. Effective January 1, 2000, the Company
adopted a 20-year amortization period from the date of acquisition for goodwill
previously amortized over 40 years.

Losses on Non-Core Asset Sales

Between December 30, 1999 and February 4, 2000, the Company entered into
definitive agreements to sell its workers' compensation, Medicare supplement
and North Florida Medicaid businesses. Since the carrying value of the net
assets of these businesses exceeded the estimated fair value, the Company
recorded a $118 million loss in 1999. The estimated fair value was established
based upon definitive sale agreements, net of expected transaction costs.
During the first half of 2000, the Company completed the sale of these
businesses. There was no change in the estimated loss during 2000. See Note 12
for additional discussion related to these divestitures.

Professional Liability Reserve Strengthening and Other Costs

The Company insures substantially all professional liability risks through a
wholly owned captive insurance subsidiary (the "Subsidiary"). The Subsidiary
recorded an additional

F-12

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$25 million expense during the fourth quarter of 1999 primarily related to
expected claim and legal costs to be incurred by the Company.

In addition, other expenses of $10 million were recorded during the fourth
quarter of 1999 related to a claim payment dispute with a contracted provider
and government audits.

1998 Charges

Market Exits, Non-Core Asset Sales and Merger Dissolution Costs

On August 10, 1998, the Company and UnitedHealth Group Incorporated,
formerly United HealthCare Corporation ("United"), announced their mutual
agreement to terminate the previously announced Agreement and Plan of Merger,
dated May 27, 1998. The planned merger, among other things, was expected to
improve the operating results of the Company's products and markets due to
overlapping markets with United. Following the merger's termination, the
Company conducted a strategic evaluation, which included assessing the
Company's competitive market positions and profit potential. As a result, the
Company recognized expenses of $34 million during the third quarter of 1998.
The expenses included $15 million of costs associated with exiting five
markets, $12 million of losses on disposals of non-core assets and $7 million
of merger dissolution costs.

The costs associated with the market exits of $15 million included
severance, lease termination costs as well as write-offs of equipment and
uncollectible provider receivables. The planned market exits were Sarasota and
Treasure Coast, Florida, Springfield and Jefferson City, Missouri and Puerto
Rico. Severance costs were estimated based upon the provisions of the Company's
employee benefit plans. The plan to exit these markets was expected to reduce
the Company's market office workforce, primarily in Puerto Rico, by
approximately 470 employees. In 1999, the Company reversed $2 million of the
severance and lease discontinuance liabilities after the Company contractually
agreed with the Health Insurance Administration in Puerto Rico to extend the
Company's Medicaid contract, with more favorable terms. The Company estimated
annual pretax savings of approximately $40 million, after all market exits were
completed by June 30, 1999, primarily from a reduction in underwriting losses.
Approximately 100 employees were ultimately terminated resulting in
insignificant severance payments. Substantially all lease termination costs
were paid as of December 31, 1999.

In accordance with the Company's policy on impairment of long-lived assets,
equipment of $5 million in the exited markets was written down to its fair
value after an evaluation of undiscounted cash flows in each of the markets.
The fair value of equipment was based upon discounted cash flows for the same
markets. Following the write-down, the equipment was fully depreciated.

Premium Deficiency and Provider Costs

F-13

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

overlapped with United, including more favorable risk-sharing arrangements. The
beneficial effect from losses charged to the premium deficiency liability in
1999 and 1998 was $23 million and $17 million, respectively. In 1999, the
Company reversed $6 million of premium deficiency liabilities after the Company
contractually agreed with the Health Insurance Administration in Puerto Rico to
extend the Company's Medicaid contract, with more favorable terms.

The Company also recorded $27 million of expense related to receivables
written-off from financially troubled physician groups, including certain
bankrupt providers.

Non-Officer Employee Incentive and Other Costs

During the third quarter of 1998, the Company recorded a one-time incentive
of $16 million paid to non-officer employees and a $9 million settlement
related to a third party pharmacy processing contract.

4. INVESTMENT SECURITIES

Investment securities classified as current assets at December 31, 2000 and
1999 included the following:

2000 1999
-------------------------------------- --------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------ --------- ---------- ---------- ------
(in millions)

U.S. Government
obligations............ $ 140 $ 1 $ 141 $ 178 $ -- $ (3) $ 175
Tax exempt municipal
securities............. 811 5 $ (6) 810 889 (24) 865
Corporate and other
securities............. 258 2 (4) 256 253 (7) 246
Mortgage-backed
securities............. 28 1 29 57 57
Redeemable preferred
stocks................. 61 (3) 58 67 (2) 65
------ --- ---- ------ ------ ----- ---- ------
Debt securities....... 1,298 9 (13) 1,294 1,444 -- (36) 1,408
Equity securities....... 124 1 (10) 115 96 9 (6) 99
------ --- ---- ------ ------ ----- ---- ------
$1,422 $10 $(23) $1,409 $1,540 $ 9 $(42) $1,507
====== === ==== ====== ====== ===== ==== ======

F-14

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investment securities classified as long-term assets at December 31, 2000
and 1999 included the following:

2000 1999
------------------------------------- -------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
(in millions)

U.S. Government
obligations............ $ 16 $ -- $ 16
Tax exempt municipal
securities............. $ 77 $ 1 $(1) $ 77 180 $ (7) 173
Corporate and other
securities............. 76 1 (1) 76 15 15
Mortgage-backed
securities............. 26 26 13 13
Redeemable preferred
stocks................. 3 3 27 (1) 26
---- --- --- ---- ---- ----- ---- ----
Debt securities....... 182 2 (2) 182 251 -- (8) 243
Equity securities....... 58 58 56 (5) 51
---- --- --- ---- ---- ----- ---- ----
$240 $ 2 $(2) $240 $307 $ -- $(13) $294
==== === === ==== ==== ===== ==== ====

The contractual maturities of debt securities available for sale at December
31, 2000, regardless of their balance sheet classification, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

Amortized Fair
Cost Value
--------- ------
(in millions)

Due within one year...................................... $ 135 $ 133
Due after one year through five years.................... 589 588
Due after five years through ten years................... 319 319
Due after ten years...................................... 437 436
------ ------
$1,480 $1,476
====== ======

Gross realized investment gains were $8 million, $18 million and $30 million
and gross realized investment losses were $2 million, $7 million and $9 million
in 2000, 1999 and 1998, respectively.

F-15

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. INCOME TAXES

The provision (benefit) for income taxes consisted of the following:

Years Ended
December 31,
---------------
2000 1999 1998
---- ---- ----
(in millions)

Current provision (benefit):
Federal.................................................. $ 3 $(18) $39
State and Puerto Rico.................................... 2 (9) 9
--- ---- ---
5 (27) 48
--- ---- ---
Deferred provision:
Federal.................................................. 17 4 24
State and Puerto Rico.................................... 2 1 2
--- ---- ---
19 5 26
--- ---- ---
$24 $(22) $74
=== ==== ===

The provision (benefit) for income taxes was different from the amount
computed using the federal statutory rate due to the following:

Years Ended
December 31,
-----------------
2000 1999 1998
---- ----- ----
(in millions)

Income tax provision (benefit) at federal statutory
rate................................................. $ 40 $(141) $ 71
State and Puerto Rico income taxes, net of federal
benefit.............................................. 9 (16) 8
Tax exempt investment income.......................... (17) (19) (18)
Amortization expense.................................. 17 11 17
Capital loss on sale of workers' compensation
business............................................. (43)
Capital loss valuation allowance...................... 15
Long-lived asset impairment........................... 143
Other, net............................................ 3 (4)
---- ----- ----
$ 24 $ (22) $ 74
==== ===== ====

F-16

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred income tax balances reflect the impact of temporary differences
between the tax bases of assets or liabilities and their reported amounts in
the financial statements, and are stated at enacted tax rates expected to be in
effect when the reported amounts are actually recovered or settled. Principal
components of the net deferred tax balances for the Company at December 31,
2000 and 1999 are as follows:

Assets
(Liabilities)
--------------
2000 1999
------ ------
(in millions)

Investment securities..................................... $ 5 $ 18
Long-term assets.......................................... (44) (30)
Medical and other expenses payable........................ 38 43
Asset write-downs and other charges....................... 37
Professional liability risks.............................. 9 8
Alternative minimum tax credit............................ 18 1
Net operating loss carryforwards.......................... 53 72
Workers' compensation liabilities......................... 24
Compensation and other accruals........................... 50 42
Capital loss carryforward................................. 56
Valuation allowance-capital loss carryforward............. (15)
------ ------
$ 170 $ 215
====== ======

At December 31, 2000, the Company has approximately $135 million of net
operating losses to carryforward related to prior acquisitions. These net
operating loss carryforwards, if unused to offset future taxable income, will
expire in 2001 through 2011.

During 2000, the Company generated approximately $186 million of capital
losses, primarily from the sale of its workers' compensation businesses. After
available carrybacks and other adjustments, the Company has approximately $145
million of available capital losses to carryforward. These capital loss
carryforwards, if unused to offset future capital gains, will expire in 2005. A
valuation allowance was established for a portion of these deferred tax assets.

Based on the Company's historical taxable income record and estimates of
future capital gains and profitability, management has concluded that operating
income and capital gains will be sufficient to give rise to tax expense and
capital gains to recover all deferred tax assets, net of the valuation
allowance.

6. DEBT

The Company maintains a revolving credit agreement ("Credit Agreement")
which provides a line of credit of up to $1.0 billion and expires in August
2002. Principal amounts outstanding under the Credit Agreement bear interest at
either a fixed rate or a floating rate, ranging from LIBOR plus 35 basis points
to LIBOR plus 80 basis points, depending on the Company's credit ratings. LIBOR
was 6.56 percent at December 31, 2000. In addition, the Company pays a 15 basis
point facility fee on the entire $1.0 billion facility amount, regardless of
utilization, and a 12.5 basis point usage fee when borrowings exceed one-third
of the facility amount. The facility fee fluctuates between 6.5 and 20 basis
points depending on the Company's credit rating. The Credit Agreement contains
customary covenants and events of default including, but not

F-17

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

limited to, financial tests for interest coverage and leverage. The Company was
in compliance with all covenants at December 31, 2000. The Company also
maintains and issues short-term debt securities under a commercial paper
program, which is backed by the Credit Agreement. The carrying value of the
Company's borrowings approximates fair value as the interest rate on the
borrowings varies at market rates.

Borrowings at December 31, 2000 and 1999 were as follows:

2000 1999
---- ----
(in
millions)

Credit agreement................................. $520
Commercial paper program......................... 80 $686
---- ----
$600 $686
==== ====

7. PROFESSIONAL LIABILITY AND OTHER OBLIGATIONS

The components of professional liability and other obligations are as
follows at December 31, 2000 and 1999:

2000 1999
---- ----
(in
millions)

Allowance for professional liabilities......................... $135 $133
Liabilities for disability and other long-term insurance
products, the Company's retirement and benefit plans and
other......................................................... 36 44
Less: current portion of allowance for professional
liabilities................................................... (29) (33)
---- ----
$142 $144
==== ====

The Company insures substantially all professional liability risks through a
wholly owned captive insurance subsidiary (the "Subsidiary"). Provisions for
such risks, including expenses incident to claim settlements, were $32 million,
$57 million and $27 million for the years ended December 31, 2000, 1999 and
1998, respectively. The amount for 1999 includes $25 million of professional
liability reserve strengthening discussed in Note 3. The Subsidiary reinsures
levels of coverage for losses in excess of its retained limits with unrelated
insurance carriers. Reinsurance recoverables were $28 million and $29 million
at December 31, 2000 and 1999, respectively. The current portion of allowance
for professional liabilities is included with trade accounts payable and
accrued expenses in the Consolidated Balance Sheets.

In 1998, the Subsidiary entered into a loss portfolio transfer agreement
with unrelated insurance carriers for approximately $39 million, providing for
the transfer of all professional and workers' compensation liabilities on
claims incurred prior to December 31, 1997 limited to individual and maximum
claim retention levels.

8. EMPLOYEE BENEFIT PLANS

Employee Savings Plan

The Company has defined contribution retirement and savings plans covering
qualified employees. The Company's contribution to these plans is based on
various percentages of compensation, and in some instances is based upon the
amount of the employees' contributions to the plans. The cost of these plans
amounted to approximately $33 million, $27 million and $40 million in 2000,
1999 and 1998, respectively, the substantial portion of which was funded
currently. The amount for 1998 includes the $16 million one-time incentive paid
to non-officer employees discussed in Note 3.

F-18

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Based Compensation

The Company has plans under which restricted stock awards and options to
purchase common stock have been granted to officers, directors and key
employees. In 2000, the Company awarded 4,785,000 shares of restricted stock to
officers and key employees all of which vest in August 2003. In 1998, the
Company awarded 400,000 shares of performance-based restricted stock to
officers and key employees. The 1998 restricted shares had the potential to
vest in equal one-third installments beginning January 1, 2000, provided the
Company met certain earnings goals. As this goal was not met for 1999 or 2000,
and the awards are cumulative, the entire award has the potential to vest in
2001. Unearned compensation under the restricted stock award plans is amortized
over the vesting periods. Compensation expense recognized related to the
restricted stock award plans was $7 million for the year ended December 31,
2000, and $2 million for each of the years ended December 31, 1999 and 1998.

Options are granted at the average market price on the date of grant.
Exercise provisions vary, but most options vest in whole or in part one to five
years after grant and expire ten years after grant. At December 31, 2000, there
were 13,823,487 shares reserved for employee and director stock option plans
and there were 2,433,470 shares of common stock available for future grants.

On September 17, 1998, the Company repriced 5,503,491 of its stock options
with original exercise prices ranging from $18.31 to $26.31 to the market price
of the Company's common stock on that date of $15.59. Outstanding stock options
with an exercise price in excess of $18.13 per share could be exchanged in
return for a reduced number of options, with a deferred vesting date of one
year after the exchange date. The repricing resulted in the cancellation of
5,503,491 options and the granting of 4,559,438 options.

The Company's option plan activity for the years ended December 31, 2000,
1999 and 1998 is summarized below:

Weighted
Shares Exercise Price Average
Under Option Per Share Exercise Price
------------ ---------------- --------------

Balance, January 1, 1998....... 12,222,264 $ 5.80 to $26.94 $15.54
Granted...................... 6,403,788 15.59 to 26.22 17.04
Exercised.................... (3,067,202) 5.80 to 26.31 11.72
Canceled or lapsed........... (6,753,198) 6.56 to 26.31 20.03
---------- ---------------- ------
Balance, December 31, 1998..... 8,805,652 6.56 to 26.94 14.52
Granted...................... 3,966,750 6.88 to 19.25 14.16
Exercised.................... (105,232) 6.56 to 8.91 7.26
Canceled or lapsed........... (1,347,989) 8.00 to 26.31 18.32
---------- ---------------- ------
Balance, December 31, 1999..... 11,319,181 6.56 to 26.94 14.00
Granted...................... 1,090,500 6.41 to 14.19 7.26
Exercised.................... (267,171) 7.59 to 15.47 7.89
Canceled or lapsed........... (752,493) 6.50 to 23.06 15.74
---------- ---------------- ------
Balance, December 31, 2000..... 11,390,017 $ 6.41 to $26.94 $13.41
========== ================ ======

F-19

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of stock options outstanding and exercisable at December 31, 2000
follows:

Stock Options
Stock Options Outstanding Exercisable
------------------------------------ ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
---------------- ---------- ----------- -------- --------- --------

$ 6.41 to $10.69 4,471,342 6.42 years $ 7.86 2,213,647 $ 7.57
11.63 to 15.63 4,235,042 5.48 years 15.49 3,700,808 15.58
16.94 to 21.94 2,566,833 5.82 years 19.18 1,560,186 19.13
22.44 to 26.94 116,800 4.85 years 23.93 109,300 23.96
---------------- ---------- ---------- ------ --------- ------
$ 6.41 to $26.94 11,390,017 5.92 years $13.41 7,583,941 $14.09
================ ========== ========== ====== ========= ======

As of December 31, 1999 and 1998, there were 6,286,826 and 3,636,481 options
exercisable, respectively. The weighted average exercise price of options
exercisable during 1999 and 1998 was $13.71 and $12.32, respectively. If the
Company had adopted the expense recognition provisions of SFAS 123 for purposes
of determining compensation expense related to stock options granted during the
years ended December 31, 2000, 1999 and 1998, net income (loss) and earnings
(loss) per common share would have been changed to the pro forma amounts shown
below:

Years Ended
December 31,
----------------------
2000 1999 1998
------ ------- ------
(in millions, except
per share results)

Net income (loss)............. As reported............. $ 90 $ (382) $ 129
Pro forma............... 82 (402) 116

Basic earnings (loss) per
common share................. As reported............. $ 0.54 $ (2.28) $ 0.77
Pro forma............... 0.49 (2.40) 0.69

Diluted earnings (loss) per
common share................. As reported............. $ 0.54 $ (2.28) $ 0.77
Pro forma............... 0.49 (2.40) 0.69

The fair value of each option granted during 2000, 1999 and 1998 was
estimated on the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions:

2000 1999 1998
----- ----- -----

Dividend yield............................................. None None None
Expected volatility........................................ 44.84% 43.8% 40.9%
Risk-free interest rate.................................... 6.7% 5.6% 4.9%
Expected option life (years)............................... 7.5 8.3 6.8
Weighted average fair value at grant date.................. $4.17 $8.10 $8.59

The effects of applying SFAS 123 in the pro forma disclosures are not likely
to be representative of the effects on pro forma net income for future years
since variables such as option grants, exercises and stock price volatility
included in the disclosures may not be indicative of future activity.

F-20

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. EARNINGS (LOSS) PER COMMON SHARE COMPUTATION

Detail supporting the computation of basic and diluted earnings (loss) per
common share follows:

Net Per Share
Income Shares Results
------ ----------- ---------
(in millions, except per
share results)

Year Ended December 31, 2000:
Basic earnings per common share................. $ 90 166,224,437 $ 0.54
Effect of dilutive stock options and restricted
shares......................................... 707,143
----- ----------- ------
Diluted earnings per common share............... $ 90 166,931,580 $ 0.54
===== =========== ======

Year Ended December 31, 1999:
Basic loss per common share..................... $(382) 167,555,917 $(2.28)
Effect of dilutive stock options and restricted
shares.........................................
----- ----------- ------
Diluted loss per common share................... $(382) 167,555,917 $(2.28)
===== =========== ======

Year Ended December 31, 1998:
Basic earnings per common share................. $ 129 166,471,824 $ 0.77
Effect of dilutive stock options and restricted
shares......................................... 1,792,756
----- ----------- ------
Diluted earnings per common share............... $ 129 168,264,580 $ 0.77
===== =========== ======

There were no adjustments required to be made to net income (loss) for
purposes of computing basic or diluted earnings (loss) per common share.
Antidilutive stock options and restricted shares totaling 11,676,093, 9,427,060
and 1,562,949 shares for the years ended December 31, 2000, 1999 and 1998,
respectively, were not included in the computation of diluted earnings (loss)
per common.

10. STOCKHOLDERS' EQUITY

Stock Repurchase Plan

In July 2000, the Company's Board of Directors authorized the repurchase of
up to five million of its common shares. This program allows the Company to
repurchase the shares from time to time in open-market purchases, in negotiated
transactions, or by using forward-purchase contracts. Shares repurchased under
the Board of Directors' authorization are used in connection with various
incentive plans aimed at the retention of key employees. During 2000, the
Company repurchased approximately 3.5 million of its common shares for
$26 million, at an average cost of $7.71 per share. In conjunction with the
2000 restricted stock award, the Company reissued 1.7 million treasury shares
and reserved an additional 215,000 treasury shares for future stock awards.

Stockholders' Rights Plan

The Company has a stockholders' rights plan designed to deter takeover
initiatives not considered to be in the best interests of the Company's
stockholders. The rights are redeemable by action of the Company's Board of
Directors at a price of $0.01 per right at any time prior to

F-21

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

their becoming exercisable. Pursuant to the plan, under certain conditions,
each share of stock has a right to acquire 1/100th of a share of Series A
Participating Preferred Stock at a price of $145 per share. The plan expires in
2006.

Regulatory Requirements

The Company's subsidiaries operate in states that require minimum levels of
equity and regulate the payment of dividends to the parent company. Generally,
the amount of dividend distributions that may be paid by regulated
subsidiaries, without prior approval by state regulatory authorities, is
limited based on the entity's level of statutory net income and statutory
capital and surplus. As of December 31, 2000, the Company's regulated
subsidiaries maintained aggregate statutory capital and surplus of
approximately $824 million, compared with their aggregate minimum statutory
capital and surplus requirements of approximately $616 million.

Most of the Company's statutory entities are impacted by the implementation
of risk-based capital ("RBC") requirements recommended by the National
Association of Insurance Commissioners. Several states are currently in the
process of phasing these requirements in for HMOs over a number of years. If
RBC were fully implemented as of December 31, 2000, the Company would be
required to fund additional capital into specific entities of approximately $95
million. After this capital infusion, the Company would have $186 million of
aggregate statutory capital and surplus above the required minimum level.

The Company files statutory-basis financial statements with state regulatory
authorities in all states in which the Company conducts business. On January 1,
2001, changes to the statutory basis of accounting, known as the Codification
guidance, became effective. The cumulative effect of these changes will be
recorded as a direct adjustment to January 1, 2001 statutory surplus. The
effect of the adoption is not expected to materially impact the Company's
compliance with aggregate minimum statutory capital and surplus requirements.

11. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases facilities, computer hardware and other equipment under
long-term operating leases that are noncancelable and expire on various dates
through 2017. Rent expense and sublease income for all operating leases are as
follows for the years ended December 31, 2000, 1999 and 1998:

Years Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
(in millions)

Rent expense............................... $ 63 $ 61 $42
Sublease rental income..................... (21) (18) (9)
---- ---- ---
Net rent expense......................... $ 42 $ 43 $33
==== ==== ===

F-22

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Future annual minimum payments under all noncancelable operating leases in
excess of one year subsequent to December 31, 2000 are as follows (in
millions):

(in millions)

2001.......................................... $ 54
2002.......................................... 42
2003.......................................... 36
2004.......................................... 30
2005.......................................... 23
Thereafter.................................... 49
----
Total minimum lease payments................ $234
Less: minimum sublease rental income.......... 48
----
Net minimum lease payments.................. $186
====

Government and Other Contracts

The Company's Medicare HMO contracts with the federal government are renewed
for a one-year term each December 31, unless terminated 90 days prior thereto.
Legislative proposals are being considered which may revise the Medicare
program's current support of the use of managed health care for Medicare
beneficiaries and future reimbursement rates thereunder. Management is unable
to predict the outcome of these proposals or the impact they may have on the
Company's financial position, results of operations or cash flows. The
Company's Medicaid contracts are generally annual contracts with various states
except for the two-year contract with the Health Insurance Administration in
Puerto Rico which expires April 30, 2001. The Company has submitted a bid for
renewal of the contract in Puerto Rico and at this time is unable to predict if
it will be renewed, under what terms, and what effect any such renewal or non-
renewal will have on its financial position, results of operations or cash
flows. Additionally, the Company renewed its TRICARE contract for up to two
additional years subject to annual renewal terms, beginning July 1, 2001. The
loss of these contracts or significant changes in these programs as a result of
legislative action, including reductions in payments or increases in benefits
without corresponding increases in payments, may have a material adverse effect
on the revenues, profitability and business prospects of the Company. In
addition, the Company continually contracts and seeks to renew contracts with
providers at rates designed to ensure adequate profitability. To the extent the
Company is unable to obtain such rates, its financial position, results of
operations and cash flows could be adversely impacted.

Legal Proceedings

The Company and Physician Corporation of America ("PCA"), formerly a
publicly traded company acquired by the Company as a subsidiary in 1997, are
each involved in securities litigation. The complaints involving the Company,
which were consolidated, allege it and certain current and/or former directors
and officers knowingly or recklessly made false or misleading statements in
press releases and public filings concerning the Company's financial condition,
primarily with respect to the impact of negotiations over renewal of the
Company's contract with HCA in 1999. On November 7, 2000, the action was
dismissed by the United States District Court for the Western District of
Kentucky. The plaintiffs have filed an appeal to the Court of Appeals for the
Sixth Circuit. The PCA complaint, filed in 1997, alleges certain of its former
directors and officers knowingly or recklessly made false or misleading
statements in

F-23

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

press releases and public filings with respect to the financial and regulatory
difficulties of PCA's workers' compensation business. The Company intends to
pursue the defense of the actions vigorously and does not believe that these
actions will have a material adverse effect on the Company's financial position
or results of operations.

The Company is involved in several purported class action lawsuits that are
part of a wave of generally similar actions that target the health care payor
industry and particularly target managed care companies. The cases include
separate suits that purport to have been brought on behalf of members (so-
called "Subscriber Track" cases) and a single action against the Company and
seven other managed care companies that purports to have been brought on behalf
of providers (so-called "Provider Track" case). The Subscriber Track complaints
allege, among other things, that Humana intentionally concealed from members
certain information concerning the way in which it conducts business, including
the methods by which it pays providers. The complaints allege violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the Employee
Retirement Income Security Act ("ERISA"). The plaintiffs do not allege that any
of the purported practices resulted in denial of any claims for a particular
benefit, but, instead, claim that Humana provided the purported class with
health insurance benefits of lesser value than promised. In the Provider Track
case, the plaintiffs assert that the companies improperly (i) paid providers'
claims and (ii) "downcoded" their claims by paying lesser amounts than they
submitted. The complaint alleges, among other things, multiple violations under
RICO as well as various breaches of contract and violation of regulations
governing the timeliness of claim payments. The Company believes the
allegations in the complaints are without merit and intends to pursue the
defense of the actions vigorously.

On January 4, 2000, a jury in Palm Beach County, Florida, issued an
approximately $80 million verdict in a case arising from removal of an insured
from a special case management program ("Chipps"). The award included
approximately $78.5 million for punitive damages, $1 million for emotional
distress and $29,000 for contractual benefits. The defendant, Humana Health
Insurance Company of Florida, Inc., is in the process of appealing the verdict.

During 2000, the Company paid approximately $15 million in a settlement to
the United States Department of Justice and the Department of Health and Human
Services relating to Medicare premium overpayments. The Company had previously
established adequate liabilities for the resolution of these issues and,
therefore, the settlement did not have a material impact on the Company's
financial position or results of operations. As part of this settlement, on May
31, 2000, the Company entered into a five-year Corporate Integrity Agreement
("CIA") with the Office of Inspector General ("OIG") of the Department of
Health and Human Services. Under the CIA, the Company is obligated to, among
other things, provide training, conduct periodic audits and make periodic
reports to the OIG.

In July 2000, the Office of the Florida Attorney General initiated an
investigation, apparently relating to some of the same matters as are involved
in the purported class action lawsuits described above. While the Attorney
General has filed no action against the Company, he has indicated that he may
do so in the future.

The Company's business practices are subject to review by various state
insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been

F-24

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

increased scrutiny by these regulators of the managed health care companies'
business practices, including claims payment practices and utilization
management. The Company has been and continues to be subject to such reviews.
Some of these could require changes in some of the Company's practices and
could also result in fines or other sanctions.

The Company also is involved in other lawsuits that arise in the ordinary
course of its business operations, including claims of medical malpractice, bad
faith, failure to properly pay claims, nonacceptance or termination of
providers, failure to disclose network discounts and various provider
arrangements, challenges to subrogation practices, and claims relating to
performance of contractual obligations to providers and others. Recent court
decisions and pending state and federal legislative activity may increase the
Company's exposure for any of these types of claims.

Personal injury and claims for extracontractual damages arising from medical
benefit denial are covered by insurance from the Company's wholly owned captive
insurance subsidiary and excess carriers, except to the extent that claimants
seek punitive damages, which may not be covered by insurance in certain states
in which insurance coverage for punitive damages is not permitted. In
connection with the case of Chipps v. Humana Health Insurance Company of
Florida, Inc., the Company's liability carriers have preliminarily indicated
they believe no coverage may be available for a punitive damages award. Other
potential liabilities may not be covered by insurance, insurers may dispute
coverage, or the amount of insurance may not be enough to cover the damages
awarded. In addition, insurance coverage for all or certain forms of liability
may become unavailable or prohibitively expensive in the future.

Management does not believe that any pending or threatened legal actions
against the Company or audits by agencies will have a material adverse effect
on the Company's financial position, results of operations or cash flows.
However, the likelihood or outcome of current or future suits, including any
appeals, like the appeal of the Chipps case, cannot be accurately predicted
with certainty. Therefore, such legal actions could adversely affect the
Company's financial position, results of operations or cash flows. See "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Legal Proceedings" in this document.

12. ACQUISITIONS AND DIVESTITURES

Divestitures

During 2000, the Company completed transactions to divest its workers'
compensation, North Florida Medicaid and Medicare supplement businesses. The
Company previously estimated and recorded a $118 million loss in 1999 related
to the divestitures. There was no change in the estimated loss during 2000.
Divested assets, consisting primarily of investment securities and reinsurance
recoverables, totaled $653 million. Divested liabilities, consisting primarily
of workers' compensation and other reserves, totaled $437 million. Cash
proceeds were $98 million ($29 million net of divested subsidiaries' cash) for
the year ended December 31, 2000. Revenue and pretax results associated with
these businesses for the years ended December 31, 2000, 1999 and 1998 were as
follows:

Years Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
(in millions)

Revenues................................. $103 $218 $213
Pretax results........................... $ (8) $(13) $ 20

F-25

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Acquisitions

During 2000, the Company acquired a Houston-based health plan, two operating
shell entities for future business initiatives, and a hospital in-patient
management services firm for $77 million ($13 million net of acquired
subsidiaries' cash).

On June 1, 1999, the Company reached an agreement with FPA Medical
Management, Inc. ("FPA"), FPA's lenders and a federal bankruptcy court under
which the Company acquired the operations of 50 medical centers from FPA for
approximately $14 million in cash. The Company has subsequently transferred
operating responsibility for all acquired FPA medical centers under long-term
provider agreements.

The above acquisitions were accounted for under the purchase method of
accounting. In connection with these acquisitions, the Company allocated the
acquisition cost to net tangible and identifiable intangible assets based upon
their fair value. Identifiable intangible assets primarily relate to provider
and subscriber contracts and the cost of the acquired licenses. Any remaining
value not assigned to net tangible or identifiable intangible assets was then
allocated to cost in excess of net assets acquired, or goodwill. Goodwill and
identifiable intangible assets acquired, recorded in connection with the
acquisitions were $52 million and $17 million in 2000 and 1999, respectively.
The identifiable intangible assets are being amortized over periods ranging
from five to 20 years while goodwill is being amortized over periods ranging
from six to 20 years. Unaudited pro forma results of operations information has
not been presented because the effects of these acquisitions were not,
individually or in the aggregate, significant to the Company's results of
operations or financial position.

During 1999, the Company recorded an impairment loss and, effective January
1, 2000, adopted a 20-year amortization period from the date of acquisition for
goodwill previously amortized over 40 years as discussed in Note 3.

13. SEGMENT INFORMATION

During 1999 and 2000, the Company was organized into two business units: the
Health Plan segment and the Small Group segment. The Health Plan segment
includes the Company's large group commercial (100 employees and over),
Medicare, Medicaid, ASO and military or TRICARE business. The Small Group
segment includes small group commercial (under 100 employees) and specialty
benefit lines, including dental, life and short-term disability. Results of
each segment are measured based upon results of operations before income taxes.
The Company allocates administrative expenses, investment income and interest
expense, but no assets, to the segments. Members in the same geographic area
that are served by the two segments generally utilize the same medical provider
networks, enabling the Company to obtain more favorable contract terms with
providers. As a result, the profitability of each segment is somewhat
interdependent. In addition, premium revenue pricing to large group commercial
employers has historically been more competitive than that to small group
commercial employers, resulting in less favorable underwriting margins for the
large group commercial line of business. Costs to distribute and administer
products to small group commercial employers are higher compared to large group
commercial employers resulting in small group's higher administrative expense
ratio. The accounting policies of each segment are similar and are described in
Note 2. The Company is in the process of repositioning its lines of business
and its distribution focus towards a more commercial line emphasis, including
commercial products sold to customers who self-insure their financial exposure.
As a result of this repositioning, the Company announced a management
realignment during the first quarter of 2001. Future quarterly and annual
financial reports will give effect to this realignment.

F-26

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The segment results for the years ended December 31, 2000, 1999 and 1998
are as follows:

Health Small
Plan Group Total
------ ------ -------
(in millions)

2000
Revenues:
Premiums......................................... $7,303 $3,092 $10,395
Investment and other income, net................. 83 36 119
------ ------ -------
Total revenues................................. 7,386 3,128 10,514
Underwriting margin................................ 978 635 1,613
------ ------ -------
Depreciation and amortization...................... 91 56 147
------ ------ -------
Interest expense................................... 20 9 29
------ ------ -------
Income before income taxes......................... 54 60 114
------ ------ -------

Health Small
Plan Group Total
------ ------ ------
(in millions)

1999
Revenues:
Premiums......................................... $6,847 $3,112 $9,959
Investment and other income, net................. 102 52 154
------ ------ ------
Total revenues................................. 6,949 3,164 10,113
Underwriting margin................................ 863 564 1,427
------ ------ ------
Depreciation and amortization...................... 70 54 124
------ ------ ------
Interest expense................................... 22 11 33
------ ------ ------
(Loss) income before income taxes.................. (410) 6 (404)
------ ------ ------

Health Small
Plan Group Total
------ ------ ------
(in millions)

1998
Revenues:
Premiums......................................... $6,734 $2,863 $9,597
Investment and other income, net................. 140 44 184
------ ------ ------
Total revenues................................. 6,874 2,907 9,781
Underwriting margin................................ 988 568 1,556
------ ------ ------
Depreciation and amortization...................... 76 52 128
------ ------ ------
Interest expense................................... 33 14 47
------ ------ ------
Income (loss) before income taxes.................. 183 20 203
------ ------ ------

F-27

Humana Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As discussed in Note 3, during 1999 and 1998, the Company recorded pretax
expenses of $585 million and $132 million, respectively. The following table
details the impact these expenses had on the Health Plan and Small Group
segments for the years ended December 31, 1999 and 1998:

1999 1998
------------------ ------------------
Health Small Health Small
Plan Group Total Plan Group Total
------ ----- ----- ------ ----- -----
(in millions)

Underwriting margin.................... $ 66 $24 $ 90 $60 $13 $ 73
---- --- ---- --- --- ----
Income before income taxes............. $553 $32 $585 $96 $36 $132
---- --- ---- --- --- ----

The Company markets health and specialty insurance products. The Company's
health insurance offerings include primarily HMO and PPO products while its
specialty offerings include dental, group life and ASO products. Health
insurance product premiums were approximately $10.1 billion, $9.7 billion and
$9.4 billion for the years ended December 31, 2000, 1999 and 1998,
respectively. Specialty product premiums were approximately $291 million, $277
million and $239 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

Premium revenues derived from contracts with the federal government for the
years ended December 31, 2000, 1999 and 1998 represent approximately 42
percent, 40 percent and 41 percent, respectively, of total premium revenues.

F-28

HUMANA INC.

PARENT COMPANY FINANCIAL INFORMATION

CONDENSED BALANCE SHEETS
December 31, 2000 and 1999

Assets

2000 1999
------ ------
(in millions,
except share
amounts)

Cash and cash equivalents....................................... $ 14 $ 3
Receivables from operating subsidiaries, net.................... -- 41
Other current assets............................................ 27 30
------ ------
Total current assets.......................................... 41 74
Property and equipment, net..................................... 221 176
Investments in subsidiaries..................................... 2,089 1,991
Notes receivable from operating subsidiaries.................... 87 81
Other........................................................... 71 40
------ ------
Total assets.................................................. $2,509 $2,362
====== ======
Liabilities and Stockholders' Equity

Payable to operating subsidiaries, net.......................... $ 52 $ --
Book overdraft.................................................. 173 160
Other current liabilities....................................... 200 145
Debt............................................................ 600 686
------ ------
Total current liabilities..................................... 1,025 991
Notes payable to operating subsidiaries......................... 97 77
Other........................................................... 27 26
------ ------
Total liabilities............................................. 1,149 1,094
------ ------
Contingencies
Preferred stock, $1 par; 10,000,000 shares authorized; none
issued
Common stock, $0.162/3 par; 300,000,000 shares authorized;
170,889,142 and
167,608,558 shares issued in 2000 and 1999, respectively....... 28 28
Treasury stock, at cost, 1,823,348 shares....................... (14) --
Other stockholders' equity...................................... 1,346 1,240
------ ------
Total stockholders' equity.................................... 1,360 1,268
------ ------
Total liabilities and stockholders' equity.................... $2,509 $2,362
====== ======

See accompanying notes to the parent company financial statements.

F-29

HUMANA INC.

PARENT COMPANY FINANCIAL INFORMATION

CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998

2000 1999 1998
---- ----- ----
(in millions)

Revenues:
Management fees charged to operating subsidiaries........ $381 $ 364 $297
Investment and other income.............................. 4 19 5
---- ----- ----
385 383 302
---- ----- ----
Expenses:
Selling, general and administrative...................... 334 331 293
Depreciation............................................. 50 36 33
Interest expense......................................... 34 35 44
---- ----- ----
418 402 370
---- ----- ----
Loss before income taxes and equity in net earnings (loss)
of subsidiaries........................................... (33) (19) (68)
Benefit for income taxes................................... 33 6 38
---- ----- ----
Loss before equity in net earnings (loss) of subsidiaries.. -- (13) (30)
Equity in net earnings (loss) of subsidiaries.............. 90 (369) 159
---- ----- ----
Net income (loss).......................................... $ 90 $(382) $129
==== ===== ====

See accompanying notes to the parent company financial statements.

F-30

HUMANA INC.

PARENT COMPANY FINANCIAL INFORMATION

CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998

2000 1999 1998
----- ----- -----
(in millions)

Net cash provided by (used in) operating activities......... $ 134 $ 62 $ (18)
Cash flows from investing activities:
Purchases of property and equipment, net.................. (98) (11) (43)
Capital contributions to operating subsidiaries........... (48) (191) (59)
Dividends from operating subsidiaries..................... 185 276 123
Surplus note funding to operating subsidiaries............ (10) -- --
Surplus note redemption from operating subsidiaries....... 4 -- --
Acquisitions.............................................. (77) -- --
Other..................................................... 2 -- (5)
----- ----- -----
Net cash (used in) provided by investing activities..... (42) 74 16
----- ----- -----
Cash flows from financing activities:
Revolving credit agreement borrowings..................... 520 -- 123
Revolving credit agreement repayments..................... -- (93) (330)
Net commercial paper (repayments) borrowings.............. (606) (44) 141
Proceeds from notes issued to operating subsidiaries...... 20 18 --
Common stock repurchases.................................. (26) -- --
Other..................................................... 11 (14) 68
----- ----- -----
Net cash (used in) provided by financing activities..... (81) (133) 2
----- ----- -----
Change in cash and cash equivalents......................... 11 3 --
Cash and cash equivalents at beginning of period............ 3 -- --
----- ----- -----
Cash and cash equivalents at end of period.................. $ 14 $ 3 $ --
===== ===== =====

See accompanying notes to the parent company financial statements.

F-31

HUMANA INC.

PARENT COMPANY FINANCIAL INFORMATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

Parent company financial information has been derived from the consolidated
financial statements of the Company and excludes the accounts of all
subsidiaries. This information should be read in conjunction with the
consolidated financial statements of the Company.

Certain reclassifications have been made to the prior years' parent company
financial information.

2. Transactions with Subsidiaries

In the normal course of business, the parent company indemnifies certain of
its subsidiaries for health plan obligations its subsidiaries may be unable to
meet.

Notes receivables from operating subsidiaries

The parent company has funded certain subsidiaries with surplus note
agreements. These notes are generally non-interest bearing and may not be
repaid without the prior approval of the Departments of Insurance. In January
2001, the parent company received $22.5 million from one of its subsidiaries in
satisfaction of two surplus notes.

Notes payable to operating subsidiaries

The parent company has borrowed funds from certain subsidiaries with notes
generally collateralized by real estate. These notes, which have various
payment and maturity terms, bear interest ranging from 6.65 percent to 7.50
percent and are payable between 2002 and 2009. The parent company recorded
interest expense of $6 million, $5 million and $4 million related to these
notes for the years ended December 31, 2000, 1999 and 1998, respectively.
During the first quarter of 2001, the parent company paid $20 million to one of
its subsidiaries in satisfaction of a note.

F-32

Humana Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited at March 31, 2001

March 31, December 31,
2001 2000
--------- ------------
(in millions, except
share amounts)

ASSETS
Current assets:
Cash and cash equivalents............................. $ 570 $ 658
Investment securities................................. 1,398 1,409
Premiums receivable, less allowance for doubtful
accounts of $40
at March 31, 2001 and $42 at December 31, 2000....... 249 205
Other................................................. 212 227
------ ------
Total current assets................................ 2,429 2,499
Long-term investment securities......................... 226 240
Property and equipment, net............................. 439 435
Cost in excess of net assets acquired................... 786 790
Other................................................... 197 203
------ ------
Total assets........................................ $4,077 $4,167
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical and other expenses payable.................... $1,103 $1,181
Trade accounts payable and accrued expenses........... 378 402
Book overdraft........................................ 128 149
Unearned premium revenues............................. 340 333
Debt.................................................. 590 600
------ ------
Total current liabilities........................... 2,539 2,665
Professional liability and other obligations............ 143 142
------ ------
Total liabilities................................... 2,682 2,807
------ ------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par; authorized 10,000,000 shares;
none issued
Common stock, $0.16 2/3 par; 300,000,000 shares
authorized; 170,688,314 and 170,889,142 shares issued
in 2001 and 2000, respectively....................... 28 28
Capital in excess of par value........................ 922 923
Retained earnings..................................... 488 461
Accumulated other comprehensive loss.................. (3) (8)
Unearned restricted stock compensation................ (27) (30)
Treasury stock, at cost, 1,711,504 and 1,823,348
shares in 2001 and 2000, respectively................ (13) (14)
------ ------
Total stockholders' equity.......................... 1,395 1,360
------ ------
Total liabilities and stockholders' equity........ $4,077 $4,167
====== ======

See accompanying notes to condensed consolidated financial statements.

F-33

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the quarters ended March 31, 2001 and 2000
Unaudited

Quarters
Ended
-------------
2001 2000
------ ------
(in millions,
except per
share
results)
-------------

Revenues:
Premiums....................................................... $2,413 $2,611
Investment and other income, net............................... 32 31
------ ------
Total revenues............................................... 2,445 2,642
------ ------
Operating expenses:
Medical........................................................ 2,007 2,220
Selling, general and administrative............................ 350 353
Depreciation and amortization.................................. 39 34
------ ------
Total operating expenses..................................... 2,396 2,607
------ ------
Income from operations........................................... 49 35
Interest expense............................................... 7 8
------ ------
Income before income taxes....................................... 42 27
Provision for income taxes..................................... 15 6
------ ------
Net income....................................................... $ 27 $ 21
====== ======
Basic earnings per common share.................................. $ 0.16 $ 0.13
====== ======
Diluted earnings per common share................................ $ 0.16 $ 0.13
====== ======

See accompanying notes to condensed consolidated financial statements.

F-34

Humana Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the quarters ended March 31, 2001 and 2000
Unaudited

Quarters
Ended
------------
2001 2000
----- -----
(in
millions)

Cash flows from operating activities:
Net income...................................................... $ 27 $ 21
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.................................. 39 34
Provision for deferred income taxes............................ 16 5
Changes in operating assets and liabilities excluding effects
of acquisitions and divestitures:
Premiums receivable........................................... (48) (48)
Other assets.................................................. 3 (8)
Medical and other expenses payable............................ (78) (26)
Workers' compensation run-out claims reduction................ -- (30)
Other liabilities............................................. (27) (71)
Unearned premium revenues..................................... 1 53
Other.......................................................... (2) --
----- -----
Net cash used in operating activities........................ (69) (70)
----- -----
Cash flows from investing activities:
Acquisitions, net of cash and cash equivalents acquired......... -- 3
Disposition, net of cash and cash equivalents disposed.......... -- 60
Purchases of investment securities.............................. (479) (257)
Maturities of investment securities............................. 168 179
Proceeds from sales of investment securities.................... 352 88
Purchases of property and equipment............................. (28) (33)
Proceeds from sales of property and equipment................... -- 9
----- -----
Net cash provided by investing activities.................... 13 49
----- -----
Cash flows from financing activities:
Net revolving credit agreement repayments....................... (10) --
Net commercial paper repayments................................. -- (7)
Change in book overdraft........................................ (21) (50)
Other........................................................... (1) (3)
----- -----
Net cash used in financing activities........................ (32) (60)
----- -----
Decrease in cash and cash equivalents........................... (88) (81)
Cash and cash equivalents at beginning of period................ 658 978
----- -----
Cash and cash equivalents at end of period...................... $ 570 $ 897
===== =====
Supplemental cash flow information:
Interest payments.............................................. $ 9 $ 8
Income tax payments (refunds), net............................. $ 1 $ (1)

See accompanying notes to condensed consolidated financial statements.

F-35

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

A. Basis of Presentation

The accompanying condensed consolidated financial statements are presented
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the disclosures
normally required by generally accepted accounting principles or those normally
made in an Annual Report on Form 10-K. For further information, the reader of
this Form 10-Q should refer to the Form 10-K of Humana Inc. (the "Company" or
"Humana") for the year ended December 31, 2000 filed with the Securities and
Exchange Commission on March 30, 2001.

The preparation of the Company's condensed consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. These estimates are based on
knowledge of current events and anticipated future events and accordingly,
actual results may ultimately differ from those estimates.

The financial information has been prepared in accordance with the Company's
customary accounting practices and has not been audited. In the opinion of
management, the information presented reflects all adjustments necessary for a
fair statement of interim results. All such adjustments are of a normal and
recurring nature.

B. Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In general, SFAS 133 requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
at their fair value, and sets forth the manner in which gains or losses thereon
are to be recorded. The treatment of such gains or losses is dependent upon the
type of exposure, if any, for which the derivative is designated as a hedge.
The adoption of this standard effective January 1, 2001 was not material to the
Company's financial position, results of operations, or cash flows.

C. Contingencies

Government and Other Contracts

F-36

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited

financial position, results of operations or cash flows. Additionally, the
Company renewed its TRICARE contract for up to two additional years subject to
annual renewal terms, beginning July 1, 2001. The loss of these contracts or
significant changes in these programs as a result of legislative action,
including reductions in payments or increases in benefits without corresponding
increases in payments, may have a material adverse effect on the revenues,
profitability, and business prospects of the Company. In addition, the Company
continually contracts and seeks to renew contracts with providers at rates
designed to ensure adequate profitability. To the extent the Company is unable
to obtain such rates, its financial position, results of operations, and cash
flows could be adversely impacted.

Legal Proceedings

The Company and Physician Corporation of America ("PCA"), formerly a
publicly traded company acquired by the Company as a subsidiary in 1997, are
each involved in securities litigation. The complaints involving the Company,
which were consolidated, allege it and certain current and/or former directors
and officers knowingly or recklessly made false or misleading statements in
press releases and public filings concerning the Company's financial condition,
primarily with respect to the impact of negotiations over renewal of the
Company's contract with HCA in 1999. On November 7, 2000, the action was
dismissed by the United States District Court for the Western District of
Kentucky. The plaintiffs have filed an appeal to the United States Court of
Appeals for the Sixth Circuit. The PCA complaint, filed in 1997, alleges
certain of its former directors and officers knowingly or recklessly made false
or misleading statements in press releases and public filings with respect to
the financial and regulatory difficulties of PCA's workers' compensation
business. The Company intends to pursue the defense of the actions vigorously
and does not believe that these actions will have a material adverse effect on
the Company's financial position or results of operations.

The Company is involved in several purported class action lawsuits that are
part of a wave of generally similar actions that target the health care payor
industry and particularly target managed care companies. The cases include
separate suits that purport to have been brought on behalf of members (so-
called "Subscriber Track" cases) and a single action against the Company and
seven other managed care companies that purports to have been brought on behalf
of providers (so-called "Provider Track" case). The Subscriber Track complaints
allege, among other things, that Humana intentionally concealed from members
certain information concerning the way in which it conducts business, including
the methods by which it pays providers. The complaints allege violations of the
Racketeer Influenced and Corrupt Organizations Act ("RICO") and the Employee
Retirement Income Security Act ("ERISA"). The plaintiffs do not allege that any
of the purported practices resulted in denial of any claims for a particular
benefit, but, instead, claim that Humana provided the purported class with
health insurance benefits of lesser value than promised. In the Provider Track
case, the plaintiffs assert that the companies improperly (i) paid providers'
claims and (ii) "downcoded" their claims by paying lesser amounts than they
submitted. Following dismissal of their initial complaint, the plaintiffs filed
an amended complaint on March 26, 2001, which, among other things, added
another defendant, Coventry Health Care, Inc., and several additional
individual plaintiffs. The amended complaint also added claims by physician
medical associations in Texas, California and Georgia. The complaint alleges,
among other things, multiple violations under RICO as well as various breaches
of contract and violation of regulations governing the timeliness of claim
payments. The Company believes the allegations in the complaints are without
merit and intends to pursue the defense of the actions vigorously.

F-37

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited

On May 31, 2000, the Company entered into a five-year Corporate Integrity
Agreement ("CIA") with the Office of Inspector General ("OIG") of the
Department of Health and Human Services. Under the CIA, the Company is
obligated to, among other things, provide training, conduct periodic audits and
make periodic reports to the OIG.

The Company's business practices are subject to review by various state
insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been increased scrutiny by these regulators of
the managed health care companies' business practices, including claims payment
practices and utilization management. The Company has been and continues to be
subject to such reviews. Some of these reviews could require changes in some of
the Company's practices and could also result in fines or other sanctions.

Management does not believe that any pending or threatened legal actions
against the Company or audits by agencies will have a material adverse effect
on the Company's financial position, results of operations or cash flows.
However, the likelihood or outcome of current or future suits, including any
appeals, e.g., the appeal of the Chipps case, cannot be accurately predicted
with certainty. Therefore, such legal actions could have a material adverse
effect on the Company's financial position, results of operations or cash
flows.

F-38

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited

D. Earnings Per Common Share

Basic earnings per common share is computed on the basis of the weighted
average number of unrestricted common shares outstanding. Diluted earnings per
common share is computed on the basis of the weighted average number of
unrestricted common shares outstanding plus the dilutive effect of outstanding
employee stock options and restricted shares using the "treasury stock" method.

There were no adjustments required to be made to net income for purposes of
computing basic or diluted earnings per common share. Reconciliations of the
average number of unrestricted common shares outstanding used in the
calculation of basic earnings per common share and diluted earnings per common
share for the quarters ended March 31, 2001 and 2000 are as follows:

Quarters Ended
-----------------------
2001 2000
----------- -----------

Shares used to compute basic earnings per common
share........................................... 164,054,724 167,752,402
Effect of dilutive common stock options and
restricted shares............................... 3,318,612 99,246
----------- -----------
Shares used to compute diluted earnings per
common share.................................... 167,373,336 167,851,648
=========== ===========
Number of antidilutive stock options excluded
from computation................................ 6,996,471 9,686,003
=========== ===========

E. Comprehensive Income

The following table presents comprehensive income for the quarters ended
March 31, 2001 and 2000:

Quarters
Ended
---------
2001 2000
---- ----
(in
millions)

Net income....................................................... 27 21
Net unrealized investment gains, net of tax...................... 5 7
--- ---
Comprehensive income, net of tax................................. 32 28
=== ===

F. Segment Information

During the first quarter of 2001 the Company implemented a management
realignment to reflect its consumer-centric focus. As a result of this
realignment, the Company redefined its business segments into the Commercial
segment and the Government segment. All prior period segment information has
been reclassified to conform to the current period's presentation. The
Commercial segment includes the Company's fully insured medical, administrative
services only ("ASO"), and specialty lines of business marketed primarily to
employer groups, and the Government segment includes the Medicare+Choice,
Medicaid, and TRICARE lines of business. The TRICARE program provides health
insurance coverage to the dependents of active duty

F-39

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited

military personnel as well as to retired military personnel and their
dependents. Results of each segment are measured based upon results of
operations before income taxes. The Company allocates administrative expenses,
interest income, and interest expense, but no assets, to its segments. Members
served by the two segments generally utilize the same medical provider
networks, enabling the Company to obtain more favorable contract terms with
providers. The segments also share overhead costs. As a result, the
profitability of each segment is interdependent.

The following table presents financial information for the Company's
Commercial and Government segments for the quarters ended March 31, 2001 and
2000:

2001
Commercial Government Total
---------- ---------- ------
(in millions)

Revenues:
Premiums........................................ $1,311 $1,102 $2,413
Investment and other income, net................ 17 15 32
------ ------ ------
Total revenues................................ 1,328 1,117 2,445
------ ------ ------
Operating expenses:
Medical......................................... 1,070 937 2,007
Selling, general and administrative............. 218 132 350
Depreciation and amortization................... 24 15 39
------ ------ ------
Total operating expenses...................... 1,312 1,084 2,396
------ ------ ------
Income from operations............................ 16 33 49
Interest expense................................ 4 3 7
------ ------ ------
Income before income taxes........................ $ 12 $ 30 $ 42
====== ====== ======

2000
Commercial Government Total
---------- ---------- ------

Revenues:
Premiums........................................ $1,431 $1,180 $2,611
Investment and other income, net................ 16 15 31
------ ------ ------
Total revenues................................ 1,447 1,195 2,642
------ ------ ------
Operating expenses:
Medical......................................... 1,194 1,026 2,220
Selling, general and administrative............. 224 129 353
Depreciation and amortization................... 22 12 34
------ ------ ------
Total operating expenses...................... 1,440 1,167 2,607
------ ------ ------
Income from operations............................ 7 28 35
Interest expense................................ 4 4 8
------ ------ ------
Income before income taxes........................ $ 3 $ 24 $ 27
====== ====== ======

F-40

Humana Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited

G. Subsequent Event

On April 18, 2001, the Company reached a definitive merger agreement with
Anthem Alliance Health Insurance Company ("Anthem"), to acquire by merger the
outstanding shares of common stock of a newly formed Anthem subsidiary
responsible for administering TRICARE benefits to approximately 1.0 million
eligible members for consideration of approximately $45 million. This
transaction, which is subject to regulatory approval, is expected to close in
the second quarter of 2001.

H. Reclassifications

Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation.

F-41

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