UnitedHealth Group (UNH)

Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care benefits and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; health care professional services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions PBM business, revenues are derived from both products sold and administrative services. Product revenues also include sales of Ingenix syndicated content products.

Consolidated revenues for the three and nine months ended September 30, 2008 of $20.2 billion and $60.7 billion, respectively, increased $1.5 billion, or 8%, and $4.0 billion, or 7%, over the comparable 2007 periods, primarily due to the increase in premium revenue in the Health Care Services segment. The 8% and 7% increases in consolidated revenues for the three and nine month periods ended September 30, 2008, respectively, include organic increases of 3% over both comparable 2007 periods. The following is a discussion of consolidated revenues for each of our revenue components.

Premium Revenues. Consolidated premium revenues for the three and nine months ended September 30, 2008 of $18.3 billion and $55.0 billion, respectively, increased by $1.3 billion, or 8%, and $3.2 billion, or 6%, over the comparable 2007 periods. The 8% and 6% increases in consolidated premium revenues for the three and nine month periods ended September 30, 2008, respectively, include organic increases of 4% over both comparable 2007 periods. Premium revenues generated by our Health Care Services segment increased $1.3 billion, or 8%, to

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$17.7 billion and increased $3.1 billion, or 6%, to $53.3 billion, for the three and nine months ended September 30, 2008, respectively, as compared to the prior year periods. The revenue growth for both the three and nine month periods was primarily due to growth in individuals served by our Public and Senior Markets Group, premium rate increases for medical cost inflation and acquisitions completed in 2008, partially offset by a decline in individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans. The remaining increase in consolidated premium revenues was primarily due to an increased number of individuals served by the OptumHealth segment.

Service Revenues. Service revenues for the three and nine months ended September 30, 2008 totaled $1.3 billion and $3.9 billion, respectively, an increase of $133 million, or 12%, and $451 million, or 13%, over the comparable 2007 periods. The increase was driven by an increased number of individuals served by fee-based product arrangements in the Health Care Services segment, primarily due to the Fiserv Health acquisition. Also, our Ingenix segment generated service revenue growth from its health intelligence and contract research businesses as well as from businesses acquired since the beginning of 2007.

Product Revenues. Product revenues for the three and nine months ended September 30, 2008 totaled $432 million and $1.2 billion, respectively, an increase of $193 million, or 81%, and $548 million, or 86%, over the comparable 2007 periods, primarily through our acquisition of the PBM business of Fiserv Health.

Investment and Other Income. Investment and other income for the three and nine months ended September 30, 2008 decreased $159 million and $203 million, respectively, over the comparable 2007 periods. Lower investment yields and decreased investment balances were primarily responsible for the decreases in both periods. For the three and nine months ended September 30, 2008, we incurred other-than-temporary impairment charges of $53 million and $59 million, respectively, primarily due to the adverse market conditions that existed in the latter part of the quarter. This compared to other-than-temporary impairments of $1 million in both comparable 2007 periods.

Medical Costs

Medical costs for the three and nine months ended September 30, 2008 were $14.9 billion and $45.3 billion, respectively, an increase of $1.4 billion, or 11%, and $3.5 billion, or 8%, over the comparable 2007 periods, primarily due to medical cost inflation, acquisitions completed in 2008 and growth in Ovations products, partially offset by a decrease in the number of individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratios for the three and nine months ended September 30, 2008 of 81.7% and 82.4%, respectively, increased 220 basis points and 160 basis points from 79.5% and 80.8% in the comparable 2007 periods, primarily driven by SecureHorizons Medicare Advantage products, where risk-adjusted revenue yields have been lower than anticipated, gross margin pressures in Special Needs Plans and reduced gross margin performance in Medicare Part D prescription drug plans, particularly in the lower income, government-subsidized population. Also contributing to the increase in consolidated medical care ratios were UnitedHealthcare’s premium yield increases that did not fully match medical cost trend and an increased mix effect from low margin national account pharmaceutical benefit business.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended September 30, 2008 included approximately $10 million in net favorable medical cost development related to prior fiscal years and approximately $120 million of net favorable medical cost development related to the first and second quarters of 2008. Medical costs for the three months

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ended September 30, 2007 included approximately $70 million in net favorable medical cost development related to prior fiscal years and approximately $70 million of net favorable medical cost development related to the first and second quarters of 2007. For the nine months ended September 30, 2008 and 2007, medical costs included approximately $210 million and $350 million, respectively, of net favorable medical cost development related to prior fiscal years.

Operating Costs

The operating cost ratio, calculated as operating costs as a percentage of total revenues, for the three and nine months ended September 30, 2008 was 14.8% and 15.8%, respectively, up from 14.0% and 13.9% in the comparable 2007 periods. The increase included certain charges that increased operating costs as discussed below, costs for anticipated revenue growth that did not fully materialize and a change in business mix towards fee-based businesses, including the Fiserv Health acquisition. Operating costs for the three and nine months ended September 30, 2008 totaled $3.0 billion and $9.6 billion, respectively, an increase of $358 million, or 14%, and $1.7 billion, or 22%, over the comparable 2007 periods, due to the above-referenced factors impacting the operating cost ratios.

Operating costs for the three months ended September 30, 2008 include $50 million related to estimated costs to conclude a legal matter, offset by $40 million from a change in the estimate of the net costs to settle two class action lawsuits related to our historical stock option practices. These amounts have been recorded in the corporate segment.

Operating costs for the nine months ended September 30, 2008 include the items recorded in the three months ended September 30, 2008, described above, as well as $922 million of expenses recorded in the second quarter for the proposed settlements of two class action lawsuits described above and related legal costs, net of expected insurance proceeds. For detail on the proposed settlements, see Note 15 of Notes to the Condensed Consolidated Financial Statements. This amount has been recorded in the corporate segment.

Operating costs for the nine months ended September 30, 2008 also include a $185 million reduction in expenses for proceeds from the sale of certain assets and membership of our individual Medicare Advantage HMO plans in Clark and Nye Counties, Nevada relating to the Sierra acquisition. This amount has been recorded in the corporate segment.

Operating costs for the nine months ended September 30, 2007 include $176 million of expenses recorded in the first quarter of 2007 related to application of deferred compensation rules under Section 409A to our historical stock option practices. The $176 million Section 409A charge includes $87 million of expenses for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expenses for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officer employees and the related cash payments. These amounts have been recorded in the corporate segment. For an expanded discussion of our Section 409A charges, see Note 9 of Notes to the Condensed Consolidated Financial Statements.

Cost of Products Sold

Cost of products sold for the three and nine months ended September 30, 2008 totaled $387 million and $1.1 billion, respectively, an increase of $181 million, or 88%, and $508 million, or 91%, over the comparable 2007 periods, due to increased prescription volume at our Prescription Solutions segment, primarily related to the Fiserv Health acquisition.

Depreciation and Amortization

Depreciation and amortization for the three and nine months ended September 30, 2008 was $254 million and $722 million, respectively, an increase of $52 million and $133 million from $202 million and $589 million for

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the comparable 2007 periods. The increase was primarily related to higher levels of computer equipment and capitalized software as a result of technology development and enhancements, as well as additional amortization from finite-lived intangible assets related to recent business acquisitions.

Interest Expense

Interest expense of $166 million and $484 million for the three and nine months ended September 30, 2008, respectively, increased $24 million and $93 million from $142 million and $391 million for the comparable 2007 periods. The increase in both periods was due to an increase in our debt outstanding, which was partially offset by lower interest rates on our floating-rate debt.

Income Taxes

Our effective income tax rate was 35.8% and 35.7% for the three and nine months ended September 30, 2008, respectively, as compared to 36.3% and 36.6% for the comparable 2007 periods, primarily due to lower earnings resulting in an increased proportion of tax-free investment income to total earnings.

Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; health care professional services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions PBM business, revenues are derived from both products sold and administrative services. Product revenues also include sales of Ingenix syndicated content products.

Consolidated revenues for the three and six months ended June 30, 2008 of $20.3 billion and $40.6 billion, respectively, increased $1.3 billion, or 7%, and $2.5 billion, or 7%, over the comparable 2007 periods primarily due to the increase in premium revenue in the Health Care Services segment. The 7% increases in consolidated revenues for both the three and six month periods ended June 30, 2008 include organic increases of 3% and 4%, respectively, over the comparable 2007 periods. The following is a discussion of consolidated revenues for each of our revenue components.

Premium Revenues. Consolidated premium revenues for the three and six months ended June 30, 2008 of $18.3 billion and $36.7 billion, respectively, increased by $1.0 billion, or 6%, and $1.9 billion, or 5%, over the comparable 2007 periods. The 6% and 5% increases in consolidated premium revenues for both the three and six month periods ended June 30, 2008, respectively, include organic increases of 3% over both comparable 2007 periods. Premium revenues generated by our Health Care Services segment increased $925 million, or 5%, to

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$17.8 billion and increased $1.8 billion, or 5%, to $35.6 billion, for the three and six months ended June 30, 2008, respectively, as compared to the prior year periods. The revenue growth was primarily due to growth in people served by our Public and Senior Markets Group, premium rate increases for medical cost inflation, and the first quarter 2008 acquisition of Sierra, partially offset by a decline in individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans. The remaining increase in consolidated premium revenues was primarily due to an increased number of individuals served by the OptumHealth segment.

Service Revenues. Service revenues for the three and six months ended June 30, 2008 totaled $1.3 billion and $2.6 billion, respectively, an increase of $161 million, or 14%, and $318 million, or 14%, over the comparable 2007 periods. The increase was driven by an increased number of people served by fee-based product arrangements in Health Care Services, primarily due to the Fiserv Health acquisition. Also, our Ingenix segment generated strong service revenue growth from its health intelligence and contract research businesses as well as from businesses acquired since the beginning of 2007.

Product Revenues. Product revenues for the three and six months ended June 30, 2008 totaled $391 million and $754 million, respectively, an increase of $189 million, or 94%, and $355 million, or 89%, over the comparable periods of 2007, primarily through our acquisition of the PBM business of Fiserv Health.

Investment and Other Income. Investment and other income for the three and six months ended June 30, 2008 decreased $53 million and $44 million, respectively, as compared to the prior year periods, primarily driven by lower investment yields and decreased investment balances year-over-year, partially offset by increased net realized gains.

Medical Costs

Medical costs for the three and six months ended June 30, 2008 were $15.3 billion and $30.4 billion, respectively, an increase of $1.3 billion, or 9%, and $2.0 billion, or 7%, over the comparable 2007 periods primarily due to medical cost inflation, the acquisition of Sierra and growth in Ovations products, partially offset by a decrease in the number of individuals served through both UnitedHealthcare risk-based products and Medicare Part D prescription drug plans.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratios for the three and six months ended June 30, 2008 of 83.2% and 82.8%, respectively, increased 290 basis points and 130 basis points from 80.3% and 81.5% in the comparable 2007 periods, primarily driven by SecureHorizons Medicare Advantage products, where risk-adjusted revenue yields have been lower than anticipated, gross margin pressures in Special Needs Plans and reduced gross margin performance in Medicare Part D prescription drug plans, particularly in the lower income, government-subsidized population. Also contributing to the increase in consolidated medical care ratios were UnitedHealthcare’s premium yield increases that did not fully match medical cost trend and an increased mix of national account pharmaceutical benefit business. Partially offsetting these increases were decreases in medical care ratios at AmeriChoice.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. For the three months ended June 30, 2008, there was no net medical cost development related to prior fiscal years or the first quarter of 2008. Medical costs for the three months ended June 30, 2007 included approximately $100 million in net favorable medical cost development related to prior fiscal years and approximately $10 million of net favorable medical cost development related to the first quarter of 2007. For the six months ended June 30, 2008 and 2007, medical costs included approximately $200 million and $280 million, respectively, of net favorable medical cost development.

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Operating Costs

The operating cost ratio, calculated as operating costs as a percentage of total revenues, for the three and six months ended June 30, 2008 was 18.5% and 16.4%, respectively, up from 13.7% and 13.8%, respectively, in the comparable 2007 periods. The increase included certain charges which increased operating costs as discussed below, costs for anticipated revenue growth that did not fully materialize and a change in business mix towards fee-based businesses, including the recent Fiserv Health acquisition. Operating costs for the three and six months ended June 30, 2008 totaled $3.7 billion and $6.6 billion, respectively, an increase of $1.1 billion, or 44%, and $1.4 billion, or 26%, over the comparable 2007 periods due to the above-referenced factors impacting the operating cost ratios.

Operating costs for the three and six months ended June 30, 2008 include $922 million of expenses for the proposed settlements of two class action lawsuits related to our historical stock option practices and related legal costs, net of expected insurance proceeds. For detail on the proposed settlements, see Note 15 of Notes to the Condensed Consolidated Financial Statements. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments.

Operating costs for the three and six months ended June 30, 2008 also include a $185 million reduction in expenses for proceeds from the sale of certain assets and membership of our individual Medicare Advantage HMO plans in Clark and Nye Counties, Nevada relating to the Sierra acquisition. This amount has been recorded in the corporate segment.

Operating costs for the six months ended June 30, 2007 include $176 million of expenses recorded in the first quarter of 2007 related to application of deferred compensation rules under Section 409A to our historical stock option practices. The $176 million Section 409A charge includes $87 million of expenses for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expenses for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officer employees and the related cash payments. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments. For an expanded discussion of our Section 409A charges, see Note 9 of Notes to the Condensed Consolidated Financial Statements

Cost of Products Sold

Cost of products sold for the three and six months ended June 30, 2008 totaled $353 million and $678 million, respectively, an increase of $172 million, or 95%, and $327 million, or 93%, over the comparable 2007 periods, due to increased prescription volume at our Prescription Solutions segment, primarily related to the Fiserv Health acquisition.

Depreciation and Amortization

Depreciation and amortization for the three and six months ended June 30, 2008 was $243 million and $468 million, respectively, an increase of $47 million and $81 million from $196 million and $387 million for the comparable 2007 periods. The increase was primarily related to higher levels of computer equipment and capitalized software as a result of technology development and enhancements, as well as additional amortization from finite-lived intangible assets related to recent business acquisitions.

Interest Expense

Interest expense of $164 million and $318 million for the three and six months ended June 30, 2008, respectively, increased $31 million and $69 million from $133 million and $249 million for the comparable 2007 periods. The increase was due to an increase in our debt outstanding, which was partially offset by lower interest rates on our floating-rate debt.

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Income Taxes

Our effective income tax rate was 33.8% and 35.6% for the three and six months ended June 30, 2008, respectively, as compared to 36.7% in both comparable 2007 periods, primarily due to lower earnings resulting in an increased proportion of tax-free investment income to total earnings.

Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; health care professional services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions PBM business, revenues are derived from both products sold and administrative services. Product revenues also include sales of Ingenix syndicated content products.

Consolidated revenues for the three months ended March 31, 2008 of $20.3 billion increased by $1.3 billion, or 7%, over the comparable 2007 period, primarily due to growth in the Health Care Services segment. The revenue growth was primarily due to growth in people served by our Public and Senior Markets (Ovations and AmeriChoice), premium rate increases for medical cost inflation, and the first quarter 2008 acquisitions of Sierra and Fiserv Health, partially offset by a decline in consumers served through Commercial Markets (UnitedHealthcare and Uniprise) risk-based products.

The following is a discussion of consolidated revenues for each of our revenue components.

Premium Revenues. Consolidated premium revenues for the three months ended March 31, 2008 of $18.4 billion increased by $925 million, or 5%, over the comparable 2007 period. The revenue growth was primarily due to growth in people served by our Public and Senior Markets, premium rate increases for medical cost inflation, and the first quarter 2008 acquisition of Sierra, partially offset by a decline in consumers served through Commercial Markets risk-based products.

Premium revenues generated by our Public and Senior Markets businesses increased by $667 million, or 8%, for the quarter as compared to the prior year quarter, to $8.5 billion. The increased revenues were primarily due to more people being served by our Public and Senior Markets through existing products, including our standardized

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Medicare Supplement, Medicare Advantage, Special Needs and Medicaid plans. The Commercial Markets businesses generated premium revenues for the three months ended March 31, 2008 of $9.3 billion, an increase of $210 million, or 2%, over the comparable 2007 period. The increase was primarily due to premium rate increases for medical cost inflation and the acquisition of Sierra, offset by a decline in people served through risk-based product offerings. The remaining increase in consolidated premium revenues was primarily due to premium rate increases for medical cost inflation, and an increased number of individuals served by the OptumHealth segment.

Service Revenues. Service revenues for the three months ended March 31, 2008 totaled $1.3 billion, an increase of $157 million, or 14%, over the comparable 2007 period. The increase was driven by an increased number of people served by fee-based product arrangements in Commercial Markets, as compared to the prior first quarter, primarily due to the Fiserv Health acquisition. Also, our Ingenix segment generated strong service revenue growth from pharmaceutical services products and health intelligence products.

Product Revenues. Product revenues for the three months ended March 31, 2008 totaled $363 million, an increase of $166 million, or 84%, over the comparable period of 2007, reflecting strong growth in our Prescription Solutions segment, primarily through our acquisition of Fiserv Health and an increase in mail service drug fulfillment.

Investment and Other Income. Investment and other income for the three months ended March 31, 2008 increased $9 million as compared to the prior year quarter, driven by net capital gains of $53 million in the first quarter of 2008 related to the repositioning of our investment portfolio in response to the interest rate changes and growth in the amount of invested assets, partially offset by decreased investment income related to decreased interest rates. During the prior year quarter, we had negligible net capital activity.

Medical Costs

Medical costs for the quarter ended March 31, 2008 were $15.1 billion, an increase of $704 million, or 5%, over the comparable 2007 period primarily due to medical cost inflation, unusually high influenza costs, the acquisition of Sierra and growth in the Ovations products, partially offset by a decrease in the number of individuals served through Commercial Markets risk-based products.

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio, calculated as medical costs as a percentage of premium revenues. Our consolidated medical care ratio for the three months ended March 31, 2008 of 82.4% decreased 30 basis points from 82.7% in the comparable 2007 period, driven by improved ratios in Medicaid and Medicare Advantage products, offset by increases in medical care ratios in Commercial Markets, Evercare, and Part D prescription drug plans. We experienced costs associated with an unusually high incidence of influenza during the 2008 flu season. The impact of higher flu costs moderated the improved ratios in Medicaid and Medicare Advantage products. Our estimate of commercial medical cost trend for 2008 is an increase of approximately 7.5% plus or minus 50 basis points over 2007. We estimate that premium yield increases will not fully match medical cost trend on a full year basis in 2008.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended March 31, 2008 included $200 million of net favorable medical cost development related to prior fiscal years, as compared to $180 million in the same 2007 period.

Operating Costs

The operating cost ratio, calculated as operating costs as a percentage of total revenues, for the three months ended March 31, 2008 was 14.3%, up from 14.0% in the comparable 2007 period, which included the Section 409A charges discussed below. The increase reflected costs for anticipated revenue growth that did not fully materialize, a change in business mix towards fee-based businesses such as Ingenix, and the impact of the recent

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Fiserv Health acquisition. Operating costs for the March quarter totaled $2.9 billion, an increase of $233 million, or 9%, over the comparable 2007 period due to cost inflation, increased business volume, and the above-referenced factors impacting the operating cost ratio.

Included in the operating costs for the three months ended March 31, 2007 is $176 million ($112 million net of tax benefit) of expenses recorded in the first quarter of 2007 related to application of deferred compensation rules under Section 409A to our historical stock option practices. As part of our review of the Company’s historical stock option practices, we determined that certain stock options granted to individuals who were nonexecutive officer employees at the time of grant were granted with an exercise price that was lower than the closing price of our common stock on the applicable accounting measurement date, subjecting these individuals to additional tax under Section 409A. The Company elected to pay these individuals for the additional tax costs relating to such stock options exercised in 2006 and early 2007. For any outstanding stock options subject to additional tax under Section 409A that were granted to nonexecutive officer employees, the Company increased the exercise price and committed to make cash payments to these optionholders for their vested options based on the difference between the original stock option price and the revised increased stock option price. The payments will be made on a quarterly basis upon vesting of the applicable awards.

The $176 million Section 409A charge includes $87 million of expense ($55 million net of tax benefit) for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expense ($57 million net of tax benefit) for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officer employees and the related cash payments. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments.

The first payment of $110 million was made to optionholders in January 2008 for options that vested through December 31, 2007. The second payment of $1 million was made to optionholders in April 2008 for options that vested through March 31, 2008. Aggregate future payments will be $37 million, assuming all applicable options vest during 2008 and 2009. If the modified stock options are subsequently exercised, the Company will recover these cash payments at that time from exercise proceeds at the revised increased stock option exercise prices.

Cost of Products Sold

Cost of products sold for the three months ended March 31, 2008 totaled $325 million, an increase of $155 million, or 91%, over the comparable 2007 period, due to increased sales levels at our Prescription Solutions segment, primarily related to acquisitions.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2008 was $225 million, an increase of $34 million from $191 million for the comparable 2007 period. The increase was primarily related to depreciation on higher levels of computer equipment and capitalized software as a result of technology enhancements, as well as additional amortization from finite-lived intangible assets related to business acquisitions.

Interest Expense

Interest expense of $154 million for the quarter increased $38 million from $116 million for the comparable 2007 period. The increase was due to an increase in our debt outstanding, which was partially offset by lower interest rates on our floating rate debt.

Income Taxes

Our effective income tax rate was 36.2% in the March 2008 quarter as compared to 36.8% in the comparable 2007 period, primarily due to state tax matters.

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Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions pharmacy benefit management (PBM) business, revenues are derived from both products sold and administrative services. Product revenues are recognized upon sale or shipment because the price is fixed and the member cannot return the drugs or receive a refund. Service revenues are recognized when prescription claims are adjudicated. Product revenues also include sales of Ingenix syndicated content products, which are recognized as revenue upon shipment.

Consolidated revenues for the three and nine months ended September 30, 2007 of $18.7 billion and $56.7 billion, respectively, increased by $709 million, or 4%, and $3.3 billion, or 6%, over the comparable 2006 periods driven primarily by rate increases on premium-based and fee-based services, growth in the total number of individuals served during the respective periods in our Medicare Part D program and at AmeriChoice, and new business growth at Ingenix. The following is a discussion of consolidated revenue trends for each of our revenue components.

Premium Revenues

Consolidated premium revenues for the three and nine months ended September 30, 2007 of $17.0 billion and $51.8 billion, respectively, increased by $501 million, or 3%, and $2.7 billion, or 6%, over the comparable 2006 periods.

UnitedHealthcare premium revenues for the three and nine months ended September 30, 2007 of $8.5 billion and $25.5 billion, respectively, increased by $140 million, or 2%, and $433 million, or 2%, over the comparable 2006 periods. These increases were primarily driven by average net premium rate increases of 7% to 8% on UnitedHealthcare’s renewing commercial risk-based products and by premiums from businesses acquired since the beginning of 2006, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products. Ovations premium revenues for the three and nine months ended September 30, 2007 of $6.3 billion and $19.9 billion, respectively, increased by $102 million, or 2%, and $1.6 billion, or 9%, over the comparable 2006 periods. The increase for the three months ended September 30, 2007 was primarily due to rate increases on the Medicare Advantage and Medicare supplement products, partially offset by the seasonal revenue timing caused by the Medicare Part D product benefit design. The increase for the nine months ended September 30, 2007 was driven primarily by rate increases on the Medicare Advantage and Medicare supplement products, resolution of certain matters pertaining to Medicare population risk status and eligibility and continued growth in our Medicare Part D program. AmeriChoice premium revenues for the three and nine months ended September 30, 2007 of $1.1 billion and $3.2 billion, respectively, increased by $200 million, or 22%, and $508 million, or 19%, over the comparable 2006 periods due primarily to an increase in the number of individuals served by Medicaid products as well as rate increases. OptumHealth premium revenues for the three and nine months ended September 30, 2007 of $892 million and $2.6 billion, respectively, increased by $95 million, or 12%, and $262 million, or 11%, over the comparable 2006 periods. These increases were primarily due to strong growth in the number of individuals served by several OptumHealth businesses under premium-based arrangements as well as rate increases.

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Service Revenues

Service revenues for the three and nine months ended September 30, 2007 totaled $1.2 billion and $3.4 billion, respectively, an increase of $79 million, or 7%, and $228 million, or 7%, over the comparable 2006 periods. This was driven primarily by increases in Ingenix service revenues due to new business growth in the health information and contract research businesses and from businesses acquired since the beginning of 2006. In addition, UnitedHealthcare and Uniprise service revenues increased due to an increase in the number of individuals served under fee-based arrangements since the third quarter of 2006 of approximately 2%, as well as annual increases in rates.

Product Revenues

Product revenues for the three and nine months ended September 30, 2007 totaled $239 million and $638 million, respectively, an increase of $53 million, or 28%, and $122 million, or 24%, over the comparable periods of 2006. This was primarily due to increased pharmacy sales at our PBM business.

Investment and Other Income

Investment and other income for the three and nine months ended September 30, 2007 totaled $302 million and $865 million, respectively, representing an increase of $76 million, or 34%, and $246 million, or 40%, from the comparable periods in 2006. Interest income increased for the three and nine months ended September 30, 2007 by $55 million and $221 million, respectively, from the comparable periods in 2006, driven by increased levels of cash and fixed-income investments as well as higher yields on the investments. Net capital gains on sales of investments were $12 million in the third quarter of 2007 compared with net capital losses of $9 million in the third quarter of 2006. For the nine months ended September 30, 2007 and 2006, net capital gains from sales of investments were $36 million and $11 million, respectively.

Medical Costs

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The consolidated medical care ratio for the three and nine months ended September 30, 2007 of 79.5% and 80.8%, respectively, decreased from 81.1% and 81.6% in the comparable 2006 periods. These medical care ratios decreased primarily as a result of a decrease in the medical care ratio relating to Ovations. This was partially offset by an increase in UnitedHealthcare’s commercial medical care ratio, which was partially the result of a shift from favorable medical cost development during 2006 to unfavorable medical cost development during 2007.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended September 30, 2007 included approximately $70 million of favorable medical cost development related to prior fiscal years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2007. Medical costs for the three months ended September 30, 2006 included approximately $10 million in favorable medical cost development related to prior fiscal years and approximately $70 million of favorable medical cost development related to the first and second quarters of 2006. For the nine months ended September 30, 2007 and 2006, medical costs included approximately $350 million and $380 million, respectively, of favorable medical cost development related to prior fiscal years.

Medical costs for the three months ended September 30, 2007 of $13.5 billion increased $131 million, or 1%, over the comparable 2006 period due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to medical cost inflation and increased utilization, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products. Medical costs for the nine months

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ended September 30, 2007 of $41.9 billion increased $1.8 billion, or 5%, over the comparable 2006 period due primarily to the 7% to 8% annual medical cost trend on commercial risk-based business discussed above and growth in Ovations Medicare programs, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products.

Operating Costs

The operating cost ratio (operating costs as a percentage of total revenues) for the three months ended September 30, 2007 was 14.0%, up from 13.5% in the comparable 2006 period, driven by the effect of business mix change as fee-based businesses such as Ingenix increase in size and impact, and increased investment in technology, service and product enhancements. The operating cost ratio for the nine months ended September 30, 2007 of 13.9%, was the same as in the comparable 2006 period. This was primarily driven by productivity gains from technology deployment and other cost management initiatives, offset by the effect of the business mix changes and increased investments discussed above, and expenses in the first quarter of 2007 associated with application of deferred compensation rules under Section 409A to our historic stock option practices, as described below.

Operating costs for the three and nine months ended September 30, 2007 totaled $2.6 billion and $7.9 billion, respectively, an increase of $197 million, or 8%, and $460 million, or 6%, over the comparable 2006 periods. These increases were primarily due to general operating cost inflation, and were also impacted by the items discussed above.

Included in the operating costs for the nine months ended September 30, 2007, is $176 million ($112 million net of tax benefit) of expenses recorded in the first quarter of 2007 related to application of deferred compensation rules under Section 409A to our historic stock option practices. As part of our review of the Company’s historic stock option practices, we determined that certain stock options granted to nonexecutive officer employees were granted with an exercise price that was lower than the closing price of our common stock on the applicable accounting measurement date, subjecting these individuals to additional tax under Section 409A. The Company elected to pay these individuals for the additional tax costs relating to such stock options exercised in 2006 and early 2007. For any outstanding stock options subject to additional tax under Section 409A that were granted to nonexecutive officer employees, the Company increased the exercise price and committed to make cash payments to these optionholders for their vested options based on the difference between the original stock option price and the revised increased stock option price. The payments will be made on a quarterly basis upon vesting of the applicable awards, beginning in January 2008. Aggregate payments, assuming all applicable options vest, will be approximately $150 million. If the modified stock options are subsequently exercised, the Company will recover these cash payments from exercise proceeds at the revised increased stock option exercise prices.

The $176 million charge includes $87 million of expense ($55 million net of tax benefit) for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expense ($57 million net of tax benefit) for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officer employees and the related cash payments. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments.

As previously disclosed, on December 29, 2006, the Company entered into agreements to increase the exercise price of outstanding stock options with individuals who were executive officers of the Company at the time of grant of an applicable stock option. No compensation was payable to any of those individuals as a result of the increase in the exercise price of their stock options.

Cost of Products Sold

Cost of products sold for the three and nine months ended September 30, 2007 totaled $206 million and $557 million, respectively, an increase of $55 million, or 36%, and $126 million, or 29%, over the comparable periods of 2006. This was primarily due to costs associated with increased pharmacy sales at our PBM business.

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Depreciation and Amortization

Depreciation and amortization for the three and nine months ended September 30, 2007 of $202 million and $589 million, respectively, increased from $168 million and $493 million for the comparable 2006 periods. The increases were primarily related to higher levels of computer equipment and capitalized software as a result of technology enhancements, business growth and businesses acquired since the beginning of 2006, as well as separately identifiable intangible assets acquired in business acquisitions since the beginning of 2006.

Income Taxes

Our effective income tax rate for the three months ended September 30, 2007 was 36.3% compared to 35.9% for the comparable 2006 period. Our effective income tax rate for the nine months ended September 30, 2007 was 36.6% compared to 36.2%, for the comparable 2006 period. These rates reflect changes in business and income mix in states with differing income tax rates, as well as a decrease in the benefit related to tax-exempt interest.

Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions

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pharmacy benefit management (PBM) business, revenues are derived from both products sold and administrative services. Product revenues are recognized upon sale or shipment because the price is fixed and the member cannot return the drugs or receive a refund. Service revenues are recognized when the prescription claim is adjudicated. Product revenues also include sales of Ingenix syndicated content products, which are recognized as revenue upon shipment.

Consolidated revenues for the three and six months ended June 30, 2007 of $19.0 billion and $38.0 billion, respectively, increased by $1.1 billion, or 6%, and $2.6 billion, or 7%, over the comparable 2006 periods driven primarily by rate increases on premium-based and fee-based services, growth in the total number of individuals served during the respective periods and growth in our Medicare Part D program. The following is a discussion of consolidated revenue trends for each of our revenue components.

Premium Revenues

Consolidated premium revenues for the three and six months ended June 30, 2007 of $17.4 billion and $34.8 billion, respectively, increased by $0.9 billion, or 6%, and $2.2 billion, or 7%, over the comparable 2006 periods.

UnitedHealthcare premium revenues for the three and six months ended June 30, 2007 of $8.5 billion and $17.0 billion, respectively, increased by $106 million, or 1%, and $293 million, or 2%, over the comparable 2006 periods. These increases were primarily driven by average net premium rate increases of 7% to 8% on UnitedHealthcare’s renewing commercial risk-based products and by premiums from businesses acquired since the beginning of 2006, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products. Ovations premium revenues for the three and six months ended June 30, 2007 of $6.7 billion and $13.6 billion, respectively, increased by $541 million, or 9%, and $1.5 billion, or 12%, over the comparable 2006 periods. These increases were driven primarily by rate increases on the Medicare Advantage and Medicare supplement products, resolution of certain matters pertaining to Medicare population risk status and eligibility and continued growth in our Medicare Part D program. Specialized Care Services premium revenues for the three and six months ended June 30, 2007 of $886 million and $1.7 billion, respectively, increased by $95 million, or 12%, and $167 million, or 11%, over the comparable 2006 periods. These increases were primarily due to the strong growth in the number of individuals served by several Specialized Care Services’ businesses under premium-based arrangements. The remaining premium revenue increase was primarily driven by AmeriChoice’s Medicaid programs which contributed premium revenue increases of $224 million, or 26%, and $308 million, or 18%, for the three and six months ended June 30, 2007, respectively, over the comparable 2006 periods due primarily to an increase in the number of individuals served as well as rate increases.

Service Revenues

Service revenues for the three and six months ended June 30, 2007 totaled $1.1 billion and $2.3 billion, respectively, an increase of $71 million, or 7%, and $149 million, or 7%, over the comparable 2006 periods. The increases in service revenues were driven primarily by aggregate growth of 2% in the number of individuals served by Uniprise and UnitedHealthcare under fee-based arrangements since the second quarter of 2006, as well as annual rate increases. In addition, Ingenix service revenues increased for the three and six months ended June 30, 2007 by approximately 31% and 28%, respectively, due to new business growth in the health information and contract research businesses and from businesses acquired since the beginning of 2006.

Product Revenues

Product revenues for the three and six months ended June 30, 2007 totaled $202 million and $399 million, respectively, an increase of $37 million, or 22%, and $69 million, or 21%, over the comparable periods of 2006. This was primarily due to increased pharmacy sales at our PBM business.

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Investment and Other Income

Investment and other income for the three and six months ended June 30, 2007 totaled $293 million and $563 million, respectively, representing an increase of $99 million, or 51%, and $170 million, or 43%, from the comparable periods in 2006. Interest income increased for the three and six months ended June 30, 2007 by $68 million and $166 million, respectively, from the comparable periods in 2006, principally due to the impact of increased levels of cash and fixed-income investments as well as higher yields on the investments. Net capital gains on sales of investments were $25 million in the second quarter of 2007 compared with net capital losses of $6 million in the second quarter of 2006. For the six months ended June 30, 2007 and 2006, net capital gains from sales of investments were $24 million and $20 million, respectively.

Medical Costs

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The consolidated medical care ratio for the three and six months ended June 30, 2007 of 80.3% and 81.5%, respectively, decreased from 81.6% and 81.8% in the comparable 2006 periods. These medical care ratios decreased primarily as a result of a decrease in the medical care ratio relating to Ovations Medicare programs. This was partially offset by an increase in UnitedHealthcare’s commercial medical care ratio, which was primarily the result of a shift from favorable medical cost development in 2006 to unfavorable medical cost development in 2007.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information identified in the current period, are included in total medical costs reported for the current period. Medical costs for the three months ended June 30, 2007 included approximately $100 million of favorable medical cost development related to prior fiscal years and approximately $10 million of favorable medical cost development related to the first quarter of 2007. Medical costs for the three months ended June 30, 2006 included approximately $150 million in favorable medical cost development, all of which related to prior fiscal years. For the six months ended June 30, 2007 and 2006, medical costs included approximately $280 million and $370 million, respectively, of favorable medical cost development. Favorable medical cost development in all periods includes updated estimates for extension of benefit obligations based upon analysis of historical claim submissions. The decreases in favorable medical cost development year-over-year were primarily the result of UnitedHealthcare experiencing favorable development during the six months ended June 30, 2006 and unfavorable development during the six months ended June 30, 2007. This unfavorable development was partially driven by costs from higher benefit utilization in December 2006 relating primarily to our high-deductible risk-based products.

Medical costs for the three and six months ended June 30, 2007 of $13.9 billion and $28.4 billion, respectively, increased $534 million, or 4%, and $1.7 billion, or 6%, over the comparable 2006 periods due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to medical cost inflation, and growth in the Medicare Part D program.

Operating Costs

The operating cost ratio (operating costs as a percentage of total revenues) for the three and six months ended June 30, 2007 of 13.7% and 13.8%, respectively, improved from 13.9% and 14.1% in the comparable 2006 periods. These decreases were primarily driven by productivity gains from technology deployment and other cost management initiatives, partially offset by expenses in the first quarter of 2007 associated with application of deferred compensation rules under Section 409A of the Internal Revenue Code (Section 409A) to our historic stock option practices, as described below.

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Operating costs for the three and six months ended June 30, 2007 totaled $2.6 billion and $5.3 billion, respectively, an increase of $130 million, or 5%, and $263 million, or 5%, over the comparable 2006 periods. These increases were primarily due to revenue growth and general operating cost inflation. Additionally, the increase for the six months ended June 30, 2007 was impacted by expenses in the first quarter of 2007 associated with Section 409A, as described below.

Included in the operating costs for the six months ended June 30, 2007, is $176 million ($112 million net of tax benefit) of expenses recorded in the first quarter of 2007 related to application of deferred compensation rules under Section 409A to our historic stock option practices. As part of our review of the Company’s historic stock option practices, we determined that certain stock options granted to nonexecutive officer employees were granted with an exercise price that was lower than the closing price of our common stock on the applicable accounting measurement date, subjecting these individuals to additional tax under Section 409A. The Company elected to pay these individuals for the additional tax costs relating to such stock options exercised in 2006 and early 2007. For any outstanding stock options subject to additional tax under Section 409A that were granted to nonexecutive officers, the Company increased the exercise price and committed to make cash payments to these optionholders for their vested options based on the difference between the original stock option price and the revised increased stock option price. The payments will be made on a quarterly basis upon vesting of the applicable awards, beginning in January 2008. Aggregate payments, assuming all applicable options vest, will be approximately $150 million. If the modified stock options are subsequently exercised, the Company will recover these cash payments from exercise proceeds at the revised increased stock option exercise prices.

The $176 million charge includes $87 million of expense ($55 million net of tax benefit) for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expense ($57 million net of tax benefit) for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officers and the related cash payments. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments.

As previously disclosed, on December 29, 2006, the Company entered into agreements to increase the exercise price of outstanding stock options with individuals who were executive officers of the Company at the time of grant of an applicable stock option. No compensation was payable to any of those individuals as a result of the increase in the exercise price of their stock options.

Cost of Products Sold

Cost of products sold for the three and six months ended June 30, 2007 totaled $181 million and $351 million, respectively, an increase of $38 million, or 27%, and $71 million, or 25%, over the comparable periods of 2006. This was primarily due to costs associated with increased pharmacy sales at our PBM business.

Depreciation and Amortization

Depreciation and amortization for the three and six months ended June 30, 2007 of $196 million and $387 million, respectively, increased from $168 million and $325 million for the comparable 2006 periods. The increases were primarily related to higher levels of computer equipment and capitalized software as a result of technology enhancements, business growth and businesses acquired since the beginning of 2006, as well as separately identifiable intangible assets acquired in business acquisitions since the beginning of 2006.

Income Taxes

Our effective income tax rate for the three months ended June 30, 2007 was essentially flat at 36.7% compared to 36.8% for the comparable 2006 period. Our effective income tax rate for the six months ended June 30, 2007 and 2006 was 36.7% and 36.4%, respectively. The increase was largely due to business and income mix in states with differing income tax rates, as well as a decrease in tax-exempt interest.

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Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services; product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions pharmacy benefit management (PBM) business, revenues are derived from both products sold and administrative services. Product revenues are recognized upon sale or shipment because the price is fixed and the member cannot return the drugs or receive a refund. Service revenues are recognized when the prescription claim is adjudicated. Product revenues also include sales of Ingenix syndicated content products, which are recognized as revenue upon shipment.

Consolidated revenues increased by $1.5 billion, or 8%, year-over-year in the first quarter of 2007 to $19.0 billion driven primarily by rate increases on premium-based and fee-based services, growth in the total number of individuals served and growth in our Medicare Part D program. Following is a discussion of first quarter consolidated revenue trends for each of our revenue components.

Premium Revenues

Consolidated premium revenues totaled $17.5 billion in the first quarter of 2007, an increase of $1.3 billion, or 8%, over the first quarter of 2006.

UnitedHealthcare premium revenues increased by $187 million, or 2%, to $8.5 billion in the first quarter of 2007. This increase was primarily driven by average net premium rate increases of 7% to 8% on UnitedHealthcare’s renewing commercial risk-based products and by premiums from businesses acquired since the beginning of 2006, partially offset by a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products. Ovations premium revenues increased by $932 million, or 16%, to $6.9 billion in the first quarter of 2007. The increase was driven primarily by an increase in the number of individuals served by Medicare Advantage and Medicare supplement products and the related rate increases on these products and continued growth in the Medicare Part D program. Specialized Care Services premium revenues increased by approximately $72 million, or 9%, in the first quarter of 2007 over the comparable period of 2006. The increase was primarily due to the strong growth in the number of individuals served by several Specialized Care Services’ businesses under premium-based arrangements. The remaining premium revenue increase was primarily driven by AmeriChoice’s Medicaid programs which contributed premium revenue increases of $84 million, or 10%, over the first quarter of 2006 due primarily to a combination of rate increases and an increase in the number of individuals served.

Service Revenues

Service revenues during the first quarter of 2007 totaled $1.1 billion, an increase of $78 million, or 8%, over the first quarter of 2006. The increase in service revenues was driven primarily by aggregate growth of 3% in the number of individuals served by Uniprise and UnitedHealthcare under fee-based arrangements since the first quarter of 2006, as well as annual rate increases. In addition, Ingenix service revenues increased by

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approximately 26% due to new business growth in the health information and contract research businesses and from businesses acquired since the beginning of 2006.

Product Revenues

Product revenues during the first quarter of 2007 totaled $197 million, an increase of $32 million, or 19%, over the comparable period of 2006. This was primarily due to increased pharmacy revenues at our PBM business.

Investment and Other Income

Investment and other income during the first quarter of 2007 totaled $270 million, representing an increase of $71 million from the comparable period in 2006. Interest income increased by $98 million in the first quarter of 2007 from the comparable period in 2006, principally due to the impact of increased levels of cash and fixed-income investments, due in part to the reduced level of share repurchases, as well as higher yields on fixed-income investments. Net capital losses on sales of investments were $1 million in the first quarter of 2007 compared with net capital gains of $26 million in the first quarter of 2006.

Medical Costs

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The consolidated medical care ratio increased from 82.1% in the first quarter of 2006 to 82.7% in the first quarter of 2007. The medical care ratio increase resulted primarily from an increase in UnitedHealthcare’s commercial medical care ratio due largely to a shift from favorable medical cost development in the first quarter of 2006 to unfavorable medical cost development in the first quarter of 2007 within this business unit and growth in the Medicare Part D program, which carries a higher medical care ratio than the historic UnitedHealth Group businesses, partially offset by a decrease in the medical care ratio related to Ovations Medicare programs.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information, identified in the current period are included in total medical costs reported for the current period. Medical costs for the first quarter of 2007 include approximately $180 million of favorable medical cost development related to prior fiscal years. Medical costs for the first quarter of 2006 also include approximately $220 million of favorable medical cost development related to prior fiscal years. This decrease was primarily the result of UnitedHealthcare experiencing favorable development in the first quarter of 2006 and unfavorable development in the first quarter of 2007. This unfavorable development was partially driven by costs from higher benefit utilization in December 2006 relating primarily to our high-deductible risk-based products.

Medical costs for first quarter 2007 increased $1.2 billion, or 9%, to $14.4 billion, due primarily to an annual medical cost trend of 7% to 8% on commercial risk-based business due to both medical cost inflation and increases in health care consumption as well as growth in the Medicare Part D program.

Operating Costs

The operating cost ratio (operating costs as a percentage of total revenues) for the first quarter of 2007 was 14.0%, down from 14.4% in the comparable 2006 period. This decrease was primarily driven by productivity gains from technology deployment and other cost management initiatives, including cost savings associated with the PacifiCare acquisition integration, partially offset by expenses associated with Section 409A of the Internal Revenue Code (Section 409A), as described below.

Operating costs for the first quarter of 2007 totaled $2.7 billion, an increase of $133 million, or 5%, over the first quarter of 2006. This increase was primarily due to expenses associated with Section 409A, as described below.

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Also contributing to the change in operating costs were revenue growth and general operating cost inflation, more than offset by productivity gains from technology deployment and other cost management initiatives, including cost savings associated with PacifiCare acquisition integration.

Included in the operating costs for the first quarter of 2007 is $176 million ($112 million net of tax benefit) of expenses related to Section 409A. As part of our review of the Company’s historic stock option practices, we determined that certain stock options granted to nonexecutive officer employees were granted with an exercise price that was lower than the closing price of our common stock on the applicable accounting measurement date, subjecting these individuals to additional tax under Section 409A. The Company elected to pay these individuals’ additional tax costs for such stock options exercised in 2006 and early 2007. For any outstanding stock options subject to additional tax under Section 409A that were granted to nonexecutive officers under its 2002 Stock Incentive Plan, the Company increased the exercise price and committed to make cash payments to these optionholders for their vested options based on the difference between the original stock option price and the revised increased stock option price. The payments will be made on a quarterly basis upon vesting of the applicable awards, beginning in January 2008. Aggregate payments, assuming all applicable options vest, will be approximately $150 million. If the modified stock options are subsequently exercised, the Company will recover these cash payments from exercise proceeds at the revised increased stock option exercise prices.

The $176 million charge includes $87 million of expense ($55 million net of tax benefit) for the payment of certain optionholders’ tax obligations for stock options exercised in 2006 and early 2007 and $89 million of expense ($57 million net of tax benefit) for the modification related to increasing the exercise price of unexercised stock options granted to nonexecutive officers and the related cash payments. These amounts have been recorded as corporate expenses and have not been allocated to individual business segments.

As previously disclosed, on December 29, 2006, the Company entered into agreements to increase the exercise price of outstanding stock options with all individuals who were executive officers of the Company at the time of grant of an applicable stock option. No compensation was payable to any of those individuals.

Cost of Products Sold

Cost of products sold during the first quarter of 2007 totaled $170 million, an increase of $33 million, or 24%, over the comparable period of 2006. This was primarily due to costs associated with increased pharmacy sales at our PBM business.

Depreciation and Amortization

Depreciation and amortization was $191 million and $157 million for the three-month periods ended March 31, 2007 and 2006, respectively. The $34 million increase is primarily related to higher levels of computer equipment and capitalized software as a result of technology enhancements, business growth and businesses acquired since the beginning of 2006 as well as separately identifiable intangible assets acquired in business acquisitions since the beginning of 2006.

Income Taxes

Our effective income tax rate increased to 36.8% in the first quarter of 2007 from 35.9% for the first quarter of 2006 largely due to business and income mix in states with differing income tax rates.

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Consolidated Financial Results

Revenues

Revenues consist of premium revenues from risk-based products; service revenues, which primarily include fees for management, administrative and consulting services and product revenues; and investment and other income.

Premium revenues are primarily derived from risk-based health insurance arrangements in which the premium is fixed, typically for a one-year period, and we assume the economic risk of funding our customers’ health care services and related administrative costs. Service revenues consist primarily of fees derived from services performed for customers that self-insure the medical costs of their employees and their dependents. For both premium risk-based and fee-based customer arrangements, we provide coordination and facilitation of medical services; transaction processing; customer, consumer and care provider services; and access to contracted networks of physicians, hospitals and other health care professionals. Through our Prescription Solutions pharmacy benefit management (PBM) business, revenues are derived from both products sold and administrative services. Product revenues are recognized upon sale or shipment because the price is fixed and the member cannot return the drugs or receive a refund. Service revenues are recognized when the prescription claim is adjudicated. Product revenues also include sales of Ingenix syndicated content products, which are recognized as revenue upon shipment.

Consolidated revenues for the three and six months ended June 30, 2006 of $17.9 billion and $35.4 billion, respectively, increased by $6.5 billion, or 57%, and $12.9 billion, or 57%, over the comparable 2005 periods. Excluding the impact of businesses acquired since the beginning of 2005, consolidated revenues increased by approximately $2.4 billion, or 21%, and $4.9 billion, or 22%, respectively, for the three and six months ended June 30, 2006 principally driven by the successful launch of the Medicare Part D program on January 1, 2006, rate increases on premium-based and fee-based services, and growth in the total number of individuals served. Following is a discussion of second quarter consolidated revenue trends for each of our revenue components.

Premium Revenues

Consolidated premium revenues for the three and six months ended June 30, 2006 of $16.4 billion and $32.6 billion, respectively, increased by $6.1 billion, or 59%, and $12.2 billion, or 59% over the comparable 2005 periods. Excluding the impact of acquisitions, consolidated premium revenues increased by approximately $2.3 billion, or 22%, and $4.6 billion, or 22%, over the comparable prior periods.

UnitedHealthcare premium revenues for the three and six months ended June 30, 2006 increased by $2.0 billion, or 31%, and $4.0 billion, or 31%, to $8.4 billion and $16.7 billion, respectively, over the comparable 2005 periods. Excluding premium revenues from businesses acquired since the beginning of 2005, UnitedHealthcare premium revenues were essentially flat for both the three and six months ended June 30, 2006. This was primarily due to average net premium rate increases of approximately 8% or above on UnitedHealthcare’s renewing commercial risk-based products offset by lower premium yields from new business due primarily to a larger portion of new customer sales coming from high-deductible lower-premium products (with correspondingly lower medical costs), as well as a decrease in the number of individuals served by UnitedHealthcare’s commercial risk-based products, excluding the impact of acquisitions. Ovations premium revenues for the three and six months ended June 30, 2006 increased by $3.9 billion and $7.8 billion to $6.1 billion and $12.1 billion, respectively, over the comparable 2005 periods. Excluding the impact of acquisitions, Ovations premium revenues for the three and six months ended June 30, 2006 increased by $2.1 billion, or 96%, and $4.3 billion, or 98%, respectively. The increases were driven primarily by the successful launch of the Medicare Part D program which had premium revenues of $1.5 billion and $3.1 billion for the three and six months ended June 30, 2006, respectively, and an increase in the number of individuals served by Medicare Advantage and Medicare supplement products, as well as rate increases on these products. Specialized Care

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Services premium revenues for the three and six months ended June 30, 2006 of $791 million and $1.6 billion increased by approximately $270 million and $550 million, respectively, over comparable 2005 periods. This was primarily due to the PacifiCare acquisition and strong growth in the number of individuals served under premium-based arrangements. The remaining premium revenue increase was from AmeriChoice’s Medicaid programs primarily driven by rate increases and a slight increase in the number of individuals served.

Service Revenues

Service revenues for the three and six months ended June 30, 2006 totaled $1.1 billion and $2.1 billion, respectively, an increase of $159 million, or 18%, and $317 million, or 18%, respectively over the comparable 2005 periods. Excluding the impact of acquisitions, service revenues increased by approximately 12% and 13%, respectively. The increase in service revenues was driven primarily by aggregate growth of 8% in the number of individuals served by Uniprise and UnitedHealthcare under fee-based arrangements during the six months ended June 30, 2006, as well as annual rate increases. In addition, Ingenix service revenues increased by approximately 22% for both the three and six months ended June 30, 2006 due to new business growth in the health information and contract research businesses and from businesses acquired since the beginning of 2005.

Product Revenues

Product revenues for the three and six months ended June 30, 2006 totaled $165 million and $330 million, respectively, an increase of $148 million and $287 million over the comparable 2005 periods. This was primarily due to pharmacy revenues at our PBM business, which was acquired in December 2005 with the purchase of PacifiCare.

Investment and Other Income

Investment and other income during the three and six months ended June 30, 2006 totaled $194 million and $393 million, respectively, representing increases of $65 million and $150 million, respectively, over the comparable periods in 2005. Interest income for the three and six months ended June 30, 2006 increased by $78 million and $139 million, respectively, over the comparable periods in 2005, principally due to the impact of increased levels of cash and fixed-income investments, due in part to the acquisition of PacifiCare as well as higher yields on fixed-income investments. Sales of investments resulted in net capital losses of $6 million for the three month period ended June 30, 2006 and capital gains of $20 million for the six month period ended June 30, 2006 compared with net capital gains of $7 million and $9 million for the three and six months ended June 30, 2005.

Medical Costs

The combination of pricing, benefit designs, consumer health care utilization and comprehensive care facilitation efforts is reflected in the medical care ratio (medical costs as a percentage of premium revenues). The consolidated medical care ratio for the three and six months ended June 30, 2006 of 81.6% and 81.8%, respectively, increased from 80.3% and 80.2% in the comparable 2005 periods. The medical care ratio increase resulted primarily from the impact of the acquisition of PacifiCare and the Medicare Part D program, both of which carry a higher medical care ratio than the historic UnitedHealth Group businesses.

For each period, our operating results include the effects of revisions in medical cost estimates related to all prior periods. Changes in medical cost estimates related to prior periods, resulting from more complete claim information and other changes in facts and circumstances, identified in the current period are included in total medical costs reported for the current period. Medical costs for the three months ended June 30, 2006 include approximately $150 million of favorable medical cost development, virtually all related to prior years. Medical costs for the three months ended June 30, 2005 include approximately $120 million of favorable medical cost development related to prior years and approximately $20 million of favorable medical cost development related

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to the first quarter of 2005. Medical costs for the six months ended June 30, 2006 and 2005 include approximately $370 million and $310 million, respectively, of favorable medical cost development related to prior years. The increase in net favorable medical cost development was partially due to a reduction in estimates for extension of benefit obligations based upon analysis of historical claim submissions.

Medical costs for the three months and six months ended June 30, 2006 increased $5.1 billion, or 62%, and $10.3 billion, or 63%, to $13.4 billion and $26.7 billion, respectively, due to the impact of businesses acquired since the beginning of 2005, medical costs associated with the new Medicare Part D program, and a medical cost trend of 7% to 8% on commercial risk-based business. Medical costs associated with the new Medicare Part D program for the three months and six months ended June 30, 2006 were $1.4 billion and $2.9 billion, respectively. Medical trend was due to both medical inflation and increases in health care consumption.

Operating Costs

The operating cost ratio (operating costs as a percentage of total revenues) for the three and six months ended June 30, 2006 of 13.9% and 14.1%, respectively, improved from 15.0% and 15.2% in the comparable 2005 periods. This decrease was primarily driven by revenue mix changes, with premium revenues growing at a faster rate than service revenues primarily due to the new Medicare Part D program and the PacifiCare acquisition. Operating costs as a percentage of premium revenues are generally considerably lower than operating costs as a percentage of fee-based revenues. Additionally, the decrease in the operating cost ratio reflected productivity gains from technology deployment and other cost management initiatives, including cost savings associated with the PacifiCare acquisition integration.

Operating costs for the three and six months ended June 30, 2006 increased $770 million, or 45%, and $1.6 billion, or 47%, to $2.5 billion and $5.0 billion, respectively, over the comparable 2005 periods. Excluding the impact of acquisitions, operating costs increased by approximately 15% and 16%, respectively, for the three and six months ended June 30, 2006. These increases were primarily due to the new Part D Program as well as a 4% increase in the total number of individuals served by Health Care Services and Uniprise during the six months ended June 30, 2006 over the comparable 2005 periods, (excluding the impact of acquisitions) growth in Specialized Care Services and Ingenix and general operating cost inflation, partially offset by productivity gains from technology deployment and other cost management initiatives.

Cost of Products Sold

Cost of products sold for the three and six months ended June 30, 2006 totaled $143 million and $280 million, respectively, an increase of $131 million and $252 million over the comparable 2005 periods. This was primarily due to pharmacy sales at our PBM business, which was acquired in December 2005 with the purchase of PacifiCare.

Depreciation and Amortization

Depreciation and amortization for the three and six month periods ended June 30, 2006 of $168 million and $325 million, respectively, increased from $108 million and $217 million in the comparable 2005 periods. The increases were primarily related to separately identifiable intangible assets acquired in business acquisitions since the beginning of 2005 and higher levels of computer equipment and capitalized software as a result of technology enhancements, business growth and businesses acquired since the beginning of 2005.

Income Taxes

Our effective income tax rate for the three and six months ended June 30, 2006 was 36.8% and 36.4%, respectively, compared to 36.3% and 36.1% in the comparable 2005 periods. The increase was mainly driven by the acquisition of PacifiCare which increased our business and income mix in states with higher income tax rates.

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