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Committee Memberships

John H. Austin, M.D.

Audit Committee Compensation Committee (Chairman) Nominating/Corporate Governance Committee

Rodman W. Moorhead, III

Compensation Committee

Timothy T. Weglicki

Compensation Committee


	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):


	o	Fee paid previously with preliminary materials.

	o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

You are cordially invited to attend our Annual Meeting of Shareholders, which will be held on Thursday, June 5, 2003, at 9:30 a.m., Eastern Daylight Saving Time, at the Bethesda Marriott, 5151 Pooks Hill Road, Bethesda, Maryland 20814, Telephone (301) 897-9400. At the meeting, the shareholders will act on the following matters:


	1. To elect three Class III Directors to serve until the annual meeting of shareholders in 2006;

	2. To approve certain amendments to the Amended and Restated 1998 Stock Incentive Plan;

	3. To ratify the appointment of Ernst & Young, LLP as the Company’s independent auditors for 2003; and

	4. To transact such other business as may properly come before the meeting or at any adjournment(s) thereof.

A Proxy Statement, Proxy Card and a copy of the Annual Report describing the operations of the Company during the fiscal year ended December 31, 2002 accompany this notice. Information regarding the matters to be acted upon at the 2003 Annual Meeting of Shareholders is contained in the enclosed Proxy Statement.

All shareholders of record of the Company’s common stock at the close of business on Monday, April 7, 2003, are entitled to vote at the 2003 Annual Meeting or at any adjournment of the meeting.


	By Order of the Board of Directors,



	ALLEN F. WISE
	President and Chief Executive Officer

YOUR VOTE IS IMPORTANT. IF YOU DO NOT PLAN TO ATTEND THE MEETING, PLEASE VOTE. YOU MAY VOTE BY TOLL-FREE TELEPHONE, BY INTERNET OR BY COMPLETING, DATING, SIGNING AND RETURNING THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.

The Annual Meeting of Shareholders of Coventry Health Care, Inc. (the “Company”) will be held at 9:30 a.m., Eastern Daylight Saving Time, on June 5, 2003, at the Bethesda Marriott, 5151 Pooks Hill Road, Bethesda, Maryland 20814, Telephone (301) 897-9400 and at any adjournment thereof (the “2003 Annual Meeting”). Throughout this Proxy Statement, unless the context requires otherwise, the term “Company” shall mean Coventry Health Care, Inc. and its predecessor, Coventry Corporation.

You will be asked to consider and vote upon three proposals: (i) to elect three individuals to serve as Class III Directors of the Company until the annual meeting of shareholders to be held in 2006; (ii) to approve certain amendments to the Company’s Amended and Restated 1998 Stock Incentive Plan; and (iii) to ratify the selection of Ernst & Young LLP as the Company’s independent auditors for 2003. The Board of Directors is not aware of any other matters to be presented for action at the 2003 Annual Meeting. However, if other matters are presented for a vote, the proxies will be voted for these matters in accordance with the judgment of the persons acting under the proxies.

This Proxy Statement is first being sent to shareholders on or about April 29, 2003. A copy of the Company’s Annual Report, containing financial statements for the year ended December 31, 2002, has also been enclosed in the same mailing with this Proxy Statement.

Only shareholders of record at the close of business on Monday, April 7, 2003, the record date for the meeting (the “Record Date”), are entitled to receive notice of and to participate in the 2003 Annual Meeting. If you were a shareholder of record on that date, you will be entitled to vote all of the shares that you owned on that date.

You will have one vote for every share of the Company’s common stock that you owned on Monday, April 7, 2003 (the Record Date).

Your vote is being solicited by and on behalf of the Company’s Board of Directors.

The Company pays the costs of soliciting your vote, including the costs of mailing.

Proxies will be solicited by the use of the mails and may also be solicited personally, or by telephone, telecopy or telegram, by directors, officers and employees of the Company. No directors, officers or employees of the Company will receive additional compensation for soliciting proxies.

The Company will (i) request banking institutions, brokerage firms, custodians, trustees, nominees and fiduciaries as record holders to forward the solicitation materials to the beneficial owners of the Company’s common stock, (ii) furnish the number of copies necessary for such record holders to supply the materials to the beneficial holders and (iii) reimburse the reasonable forwarding expenses incurred by these record holders.

On April 7, 2003, the Record Date, there were 58,966,465 shares of the Company’s common stock outstanding and eligible to vote on each matter brought before the meeting.

A quorum must be present. A “quorum” is a majority (more than half) of the outstanding shares eligible to vote. They may be present at the meeting or represented by proxy. Any shareholder of record present at the 2003 Annual Meeting, but who abstains from voting, will be counted for purposes of determining whether a quorum is present at the 2003 Annual Meeting. If a quorum is not present at the 2003 Annual Meeting, it may be adjourned from time to time until a quorum is present or represented by proxy.

Election of Directors. The affirmative vote of a plurality of the shares of the Company’s common stock represented in person or by properly executed proxy is required to approve the election of each of the Company’s nominees for election as a director. Abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present at the 2003 Annual Meeting, but will not be counted for purposes of calculating a plurality.

Approval of Amendments to Amended and Restated 1998 Stock Incentive Plan. The affirmative vote of the holders of a majority of the shares of the Company’s common stock present in person or represented by properly executed proxy and entitled to vote is required to approve the amendments to the Amended and Restated 1998 Stock Incentive Plan.

Ratification of Independent Auditors. The affirmative vote of a majority of the shares of the Company’s common stock present in person or represented by properly executed proxy and entitled to vote is required to ratify the appointment of the independent auditors for 2003.

How many votes are required for other matters that may properly come before the meeting?

The affirmative vote of a majority of the shares of the Company’s common stock present or represented and entitled to vote is required for all other business that may properly come before the 2003 Annual Meeting or any adjournments.

You can vote either in person at the annual meeting or by proxy without attending the annual meeting. To vote by proxy, you must either:


	•	fill out the enclosed proxy card, date and sign it, and return it in the enclosed postage-paid envelope; or

	•	vote by telephone (instructions are on the proxy card), or

	•	vote by internet (instructions are on the proxy card).

If you return a proxy card without indicating your vote, your shares will be voted For the three Class III director nominees listed on the card, For the amendments to the 1998 Stock Plan, and For the ratification of Ernst & Young as the Company’s independent auditors for 2003, and will be voted in the discretion of the persons named in the proxy on any other matters that may be properly brought before the meeting.

Yes. Just send in a new proxy card with a later date, cast a new vote by telephone or internet, or send a written notice of revocation to the Company’s Secretary at the address on the cover page of this Proxy Statement. If you attend the 2003 Annual Meeting and want to vote in person, you can request that your previously submitted proxy not be used. If your shares are held through a broker, bank or other institution in “street name”, you will need to obtain a proxy form from the institution that holds your shares.

The votes are counted as received by an automated system administered by Mellon Investor Services LLC, the Company’s transfer agent. Abstentions and broker non-votes are each included in the determination of the number of shares present and voting for purposes of determining the existence of a quorum, each is counted separately. Abstentions are counted in tabulations of the votes cast on proposals presented to shareholders and will have the effect of a vote against proposals, other than the election of directors. Broker non-votes will not be counted for purposes of determining whether the proposals have been approved and will not be counted as votes for or against such proposal. A broker non-vote occurs when a nominee holding shares for a beneficial owner expressly does not vote on a particular matter because the nominee does not have discretionary voting power with respect to the matter and has not received instructions from the beneficial owner.

The voting results will be published in the Company’s Form 10-Q for the period ending June 30, 2003. The Form 10-Q will be filed with the Securities and Exchange Commission on or before August 14, 2003.

Can I access the Company’s proxy materials and annual report electronically?

This Proxy Statement and the Company’s Annual Report are available on our internet website at www.cvty.com. If you are a shareholder of record and would like to view future proxy statements and annual reports over the internet instead of receiving paper copies in the mail, follow the instructions provided when you vote over the internet. If you hold your shares through a bank, broker or other holder, check the information provided by that entity for instructions on how to elect to view future proxy statements and annual reports and to vote your shares over the internet. Opting to receive your proxy materials online saves us the cost of producing and mailing the proxy materials to your home or office and gives you an automatic link to the proxy voting site.

If you choose to view future proxy statements and annual reports over the internet, you will receive an e-mail message next year containing the internet address to use to access the proxy materials. Your choice will remain in effect until you tell us otherwise. You do not have to elect internet access each year. To cancel or

The Securities and Exchange Commission recently adopted a new rule concerning the delivery of annual reports and proxy statements. It permits us, with your permission, to send a single set of these proxy materials to any household at which two or more shareholders reside if we believe they are members of the same family. A separate proxy card would still be mailed to each shareholder at the same address. This rule is called “householding” and its purpose is to help reduce printing and mailing costs of proxy materials. To date, the Company has not instituted this procedure, but may do so in the future.

A limited number of brokerage firms have instituted householding. If you and members of your household have multiple accounts holding shares of the Company’s common stock, you may have received householding notification from your broker. Please contact your broker directly if you have questions, require additional copies of this Proxy Statement or Annual Report, or wish to revoke your decision to household. These options are available to you at any time.

The Company’s Bylaws provide that the Company’s Board of Directors shall consist of such number of directors as shall be determined by the Board of Directors from time to time so long as the number of directors does not violate the rights of Warburg Pincus (see below). The Company’s Certificate of Incorporation provides that the directors shall be divided into three classes as nearly equal in numbers as possible. There are currently nine persons serving on the Board of Directors: three in Class I, three in Class II and three in Class III. At each annual meeting, directors of the class whose term of office expires in that year are elected for a three-year term. The Class III Directors’ terms of office expire in 2003.

The nominees designated for election as Class III Directors at the 2003 Annual Meeting will, if elected, each serve three-year terms expiring at the annual meeting of shareholders in 2006. All of the nominees have consented to being nominated and to serve if so elected.

The persons named in the enclosed proxy intend to vote the shares represented by such proxy For the election of the nominees named herein, unless contrary instructions are received. If any of the nominees named below should be unable to accept nomination or election as a director at the 2003 Annual Meeting, an event which the Board of Directors does not anticipate, the proxy will be voted with discretionary authority for a substitute nominee or substitute nominees as shall be designated by the current Board of Directors and for the remaining nominee(s), if any, named below.

The following table provides information about the persons nominated to serve as Class III Directors and the persons serving as Class I and Class II Directors whose terms continue until 2004 or 2005:

The Company issued 8.3% Convertible Exchangeable Senior Subordinated Notes and Warrants to Warburg, Pincus Ventures, L.P. to purchase 2,117,647 shares of the Company’s common stock pursuant to the terms of a Purchase Agreement entered into as of May 9, 1997. Under the terms of the Purchase Agreement, the Company agreed to use its best efforts to elect as directors two nominees designated by Warburg, Pincus Ventures, L.P., as majority holder of the Convertible Notes. Messrs. Moorhead and Ackerman were so designated by Warburg Pincus. On September 3, 1999, Warburg Pincus’ Convertible Notes were converted into 4,235,840 shares of preferred stock, and on December 26, 2000, Warburg Pincus’ preferred stock was converted into 4,236,263 shares, after anti-dilution calculations, of the Company’s common stock. In addition, on December 26, 2000, Warburg Pincus received 1,026,614 shares, after anti-dilution calculations, of the Company’s common stock in a cashless net exercise of the Warrants. As a result of the conversions, under the terms of the Purchase Agreement, so long as Warburg Pincus owns at least 50% of the shares beneficially owned by them (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) at the 1997 closings, Warburg Pincus has the right to designate at least one director as a nominee to the Board of Directors. Warburg Pincus beneficially owned 6,353,487 shares at the 1997 closing and, as of the date of this Proxy Statement, continues to own beneficially more than 50% of those shares. As a result, the Company believes that Warburg Pincus is currently entitled to designate at least one director as a nominee to the Board of Directors.

In November 2002, the Board of Directors decreased the size of the Board from 15 members to nine members. There are currently no vacancies on the Board.

Below you will find information about the business experience of the nominees and the continuing directors:

John H. Austin, M.D. has been a director of the Company since January 1988, and has served as Chairman of the Board since December 1995. Dr. Austin has been Chairman and Chief Executive Officer of Arcadian Management Services, Inc., a company that owns and manages rural health care provider networks, since June 1997. From October 1994 through March 1997, he was President of the Professional Services Division of Unihealth, a voluntary non-profit health care network. From July 1992 to October 1994, Dr. Austin was a self-employed health care consultant and from 1987 to 1992 was Executive Vice President of Health Plan of America, a California HMO.

Joel Ackerman has been a director of the Company since November 1999. He is a general partner of Warburg Pincus & Co. and a Managing Director of Warburg Pincus LLC, where he has been employed since 1993. From April 1997 to present he has also been a voting trustee under Voting Trust Agreements relating to shares of common stock of our company held by Warburg, Pincus Ventures, L.P., Warburg, Pincus Equity Partners, L.P. and certain affiliates. He is a director of Medical Staffing Network Holdings, Inc., a leading

Emerson D. Farley, Jr., M.D. has been a director of the Company since December 1994. He became a Trustee serving on the Board of Trustees of Fork Union Military Academy in April 2003. From 1998 to present he has served as a Trustee serving on the Board of Trustees of First Baptist Church of Ashland, Virginia. From 1972 to 2002, Dr. Farley was engaged in the private practice of medicine in Richmond, Virginia and has been self-employed since July 1997. From 1989 until September 1997, he was the Medical Consultant for Signet Bank in Richmond, Virginia. From 1991 to March 2002, Dr. Farley was the Vice-Chairman of Doctors Insurance Reciprocal Risk Retention Group (“DIR”), which provided medical malpractice insurance coverage to physicians. On January 31, 2003, DIR was placed in receivership, with DIR’s consent, by the Chancery Court of Davidson County, Tennessee, due to the financial instability of DIR’s reinsurer, Reciprocal of America.

Lawrence N. Kugelman has been a director of the Company since August 1992. He has been a director of Arcadian Management Services, Inc., a company that owns and manages rural health care provider networks, since July 2001, and a director of ICN Pharmaceuticals, Inc., a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products, since October 2002. Mr. Kugelman has been a private investor and business consultant since October 1996. During the period between the unanticipated resignation of the Company’s then chief executive officer in December 1995 and the appointment of Mr. Wise as President and Chief Executive Officer in October 1996, Mr. Kugelman served as the Company’s interim Chief Executive Officer and President. From March 1995 until December 1995, he was self-employed. He was Executive Vice President of American Medical International, an organization that owns and operates acute care hospitals nationwide, from January 1993 to March 1995. From November 1986 to January 1992, he was President and Chief Executive Officer of Health Plan of America, an HMO company.

Rodman W. Moorhead, III has been a director of the Company since May 1997. He is a general partner of Warburg Pincus & Co. and a Managing Director and Senior Advisor of Warburg Pincus LLC, where he has been employed since 1973. From January 1998 to present he has served as a trustee of ElderTrust, a health care real estate investment trust. From June 1998 to present he has served as a director of Scientific Learning Corporation, a computer-based special education training company. From 1992 to present he has served as a director of Transkaryotic Therapies, Inc., a biopharmaceutical company specializing in gene therapy. He is also a director of Chancellor Beacon Academies, an operator of charter schools, and 4GL School Solutions, a data management company for schools, and Stroud Water Research Center, Inc. He is also a trustee of the Brandywine Conservancy, a trustee of The Taft School and a member of the Overseer’s Committee on University Resources, Harvard College.

Robert W. Morey has been a director of the Company since August 2001. Mr. Morey has been President, Director and Principal of Catalina Life and Health Reinsurers, Inc. and R.W. Morey Reinsurers Limited since 1992. Mr. Morey has also served as controlling principal of Moors & Cabot, Inc., a retail and institutional stock brokerage firm headquartered in Boston, since 1991 and as President of RWM Management Company, a company providing reinsurance and financial counseling services to various companies in which Mr. Morey holds investments, since 1977.

Elizabeth E. Tallett has been a director of the Company since March 1998. Ms. Tallett is a Principal of Hunter Partners, LLC, which provides management services to developing life sciences companies, and Chief Executive Officer of Marshall Pharmaceuticals, Inc., a specialty pharmaceutical company, positions she has held since July 2002 and November 2000, respectively. She is also President and Chief Executive Officer of Dioscor, Inc., a biopharmaceutical company, a position she has held since May 1996. Ms. Tallett was President and Chief Executive Officer of Ellard Pharmaceuticals, Inc. and Galenor, Inc., both biopharmaceutical companies, from 1997 to 2000 and 1999 to 2000, respectively. Ms. Tallett is also a director of IntegraMed America, Inc., a health services management company specializing in fertility and assisted reproductive technology, Principal Financial Group, Inc., a global financial institution, Varian, Inc., an

Timothy T. Weglicki has been a director of the Company since August 2001. Mr. Weglicki has been employed as a managing member of ABS Partners, L.P., the General Partner of ABS Capital Partners, L.P., a private equity fund, since December 1993. Prior to December 1993, he was employed as a Managing Director of Alex, Brown & Sons, where he established and headed that firm’s capital markets group. He is a director of a number of privately held information technology and health care companies.

Allen F. Wise has been a director and President and Chief Executive Officer of the Company since October 1996. From October 1994 to October 1995, he was Executive Vice President of MetraHealth Companies, Inc., a managed health care company that was acquired by UnitedHealth Group Incorporated in October 1995. From October 1995 to October 1996, he was Executive Vice President of UnitedHealth Group Incorporated. From January 1994 to October 1994, he was President and Chief Executive Officer of Wise Health System, a health care investment company. From 1991 to 1994, Mr. Wise was President and Chief Executive Officer of Keystone Health Plan, a managed health care company, and also Chief Operating Officer of Independence Blue Cross, a health care insurance company. He is a director of NCO Group, Inc., a provider of accounts receivable management and related services.

Your proxy cannot be voted for a greater number of persons than the number of nominees named.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE NOMINEES FOR CLASS III DIRECTORS.

During fiscal year 2002, the Board of Directors of the Company (the “Board”) held four regular meetings and two special telephonic meetings. All members of the Board attended at least 75% of the meetings held by the Board and by the committees of which they were members.

Audit Committee. The Audit Committee is comprised of directors that are independent of the management of the Company and independent of any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of their independent judgment as members of the Audit Committee. The Audit Committee’s responsibilities include overseeing the adequacy and effectiveness of systems and controls in place to reasonably assure the fair presentation of the Company’s financial statements; appointing, dismissing, overseeing the qualifications and performance of and determining the compensation paid to the external and internal auditors; reviewing and approving the scope of audits and related fees; interfacing directly with the internal and external auditors in executive sessions and otherwise; monitoring compliance with legal and regulatory requirements and the Company’s code of business conduct and ethics; and reviewing and setting internal policies and procedures regarding audits, accounting and other financial controls. The current charter of the Audit Committee, which is included as Appendix B, provides a detailed description of its responsibilities. During fiscal year 2002, the Audit Committee held four regular meetings, one special meeting and one special telephonic meeting. The members of the Audit Committee are Lawrence N. Kugelman (Chair), Elizabeth E. Tallett and John H. Austin, M. D.

Compensation Committee. The Compensation Committee is comprised of directors that are independent of the management of the Company. The Compensation Committee’s responsibilities include approving and evaluating the compensation of directors and officers; establishing strategies and compensation policies and programs for employees of the Company to provide incentives for delivery of value to the Company’s shareholders, establishing policies to hire and retain senior executives, with the objective of aligning the compensation of senior management with the business of the Company and the interests of the Company’s shareholders; and ensuring that the compensation policies of the Company meet or exceed all legal and regulatory requirements and any other requirements imposed on the Company by the Board. The current charter of the Compensation Committee, which is available on the Company’s website at www.cvty.com,

provides a detailed description of its responsibilities. During fiscal year 2002, the Compensation Committee held four regular meetings and one special telephonic meeting. The members of the Compensation Committee are John H. Austin, M.D. (Chair), Rodman W. Moorhead, III and Timothy T. Weglicki, and for a portion of the year, Thomas J. Graf. Effective August 29, 2002, Mr. Graf resigned from the Board of Directors and the Compensation Committee.

Nominating/ Corporate Governance Committee. The Nominating/ Corporate Governance Committee is currently comprised of two directors that are independent of the management of the Company. The Nominating Committee’s responsibilities include identifying individuals qualified to become members of the Board; considering nominees made by shareholders in accordance with the Company’s bylaws; selecting or recommending to the Board the director nominees for the next annual meeting of shareholders; and developing and recommending to the Board a set of corporate governance principles applicable to the Company. Nominations for election to the Board may be made by or at the direction of the Nominating Committee or by any eligible shareholder entitled to vote for the election of directors as described below. The current charter of the Nominating/ Corporate Governance Committee, which is available on the Company’s website at www.cvty.com, provides a detailed description of its responsibilities. During 2002, the Nominating Committee held two regular meetings. The members of the Nominating Committee are John H. Austin, M.D., Joel Ackerman and, for a portion of the year, Allen F. Wise. Effective August 1, 2002, Mr. Wise resigned from the Nominating Committee to ensure its independence.

Notice of director nominations by eligible shareholders must be timely received in writing addressed to the Secretary of the Company, 6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817-1850. The 2004 annual meeting of shareholders is expected to be held on June 3, 2004. Eligible shareholders who wish to submit a proposal for consideration by the Nominating/ Corporate Governance Committee for inclusion in the 2004 Proxy Statement must comply with the following nomination procedures described in the Company’s Bylaws.

To be timely, director nominations for the 2004 annual meeting of shareholders must be delivered to or mailed and received by the Secretary at the Company’s address (above) not less than 120 days in advance of the anniversary of the date the Company’s proxy statement was released to shareholders in connection with the previous year’s annual meeting of shareholders (i.e., by January 1, 2004), unless the date of the annual meeting is changed by more than 30 calendar days.

A shareholder’s notice must set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Company’s books, of such shareholder and (ii) the class, series and number of shares, of the Company which are beneficially owned by such shareholder. No person is eligible for election as a director of the Company unless nominated in accordance with the procedures required by the Company’s Bylaws. The chairman of the Board of Directors may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, the defective nomination will be disregarded.

The procedures described above do not supersede the requirements or conditions established by the Securities and Exchange Commission for shareholder proposals to be included in the Company’s proxy statement for future shareholder meetings. See “Shareholder Proposals” on page 32 of this Proxy Statement.

The following table sets forth information, as of April 7, 2003, the Record Date, regarding the beneficial ownership of the Company’s common stock by (i) each person or group known by the Company to be the

beneficial owner of more than five percent of the common stock, (ii) each director and nominee for director of the Company, (iii) each executive officer named in the Executive Compensation Table; and (iv) all directors and executive officers of the Company as a group. The number of shares beneficially owned is determined under rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. On the Record Date, 58,966,465 shares of the Company’s common stock were outstanding.

For purposes of the table, a person or group of persons is deemed to beneficially own shares of common stock issuable upon the exercise of warrants or options that are currently exercisable or that become exercisable within 60 days from the date set forth above. For purposes of computing the percentage of outstanding common stock held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after the date set forth above are deemed outstanding, but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group. The Company believes that the beneficial owners of the common stock listed in the table below, based on information furnished by such owners, have sole voting and dispositive power (or shares such powers with his or her spouse) with respect to such shares, except as explained in the footnotes to the table.


*	Less than one percent

(1)	According to the Joint Schedule 13D, as amended, filed on December 17, 2002, by Warburg, Pincus Ventures, L.P., a Delaware limited partnership (“Ventures”); Warburg Pincus & Co., a New York general partnership (“WP”); Warburg Pincus LLC, a New York limited liability company (“WP LLC”); Warburg, Pincus Equity Partners, L.P., a Delaware limited partnership; Warburg, Pincus Netherlands Equity Partners I, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity Partners II, C.V., a Netherlands limited partnership; Warburg, Pincus Netherlands Equity


	Partners III, C.V., a Netherlands limited partnership (collectively, “Equity Partners”); and Joel Ackerman, Jonathan S. Leff, and Patrick T. Hackett as Trustees of certain voting trusts. WP LLC manages Ventures and Equity Partners, and WP is the sole general partner of Ventures and Equity Partners. The Joint Schedule 13D indicates that Joel Ackerman, Jonathan S. Leff and Patrick T. Hackett (the “Trustees”) have been appointed as voting trustees under Voting Trust Agreements, dated as of April 15, 1997 (as supplemented on November 12, 1997) and July 1, 2000, relating to the Company’s common stock. Messrs. Ackerman, Leff, Hackett and Moorhead are general partners of WP and Managing Directors and members of WP LLC. Messrs. Ackerman and Moorhead are directors of the Company. The address of each of the voting trustees is 466 Lexington Avenue, New York, NY 10017. Under the terms of the Voting Trust Agreements, the Trustees, acting by majority vote, have exclusive authority to vote the Company’s shares held pursuant to the Voting Trust Agreement for the ten-year term of the Voting Trust Agreement. The Voting Trust Agreement may terminate earlier if Ventures and Equity Partners are deemed to beneficially own less than ten percent of the common stock and Warburg Pincus will give notice of termination to the Trustees. According to the Joint Schedule 13D, Warburg Pincus has shared dispositive power for all shares held.

(2)	According to the most recent Schedule 13G filed by Wellington Management Company, LLP (“WMC”), the securities reported are owned of record by clients of WMC, in its capacity as an investment adviser, (e.g., includes Vanguard’s shares at footnote 3 below) and WMC may be deemed to beneficially own such shares of the Company’s common stock. Schedule 13G reports that WMC has shared voting power with respect to 2,547,714 of the above shares and shared dispositive power with respect to all of the 6,908,224 shares above.

(3)	According to the most recent Schedule 13G filed by Vanguard Specialized Funds—Vanguard Health Care Fund (“Vanguard”), Vanguard owns of record the 3,585,000 shares reported, which are also reported by WMC due to WMC’s status as Vanguard’s investment adviser. See footnote 2 above. Schedule 13G reports that Vanguard has sole voting power and shared dispositive power with respect to all of the 3,585,000 shares above.

(4)	Includes the following shares issuable upon exercise of stock options (or warrants) that are currently exercisable or which become exercisable within 60 days of the date set forth above: John H. Austin, M.D., 56,000 shares; Emerson D. Farley, Jr., M.D., 23,000 shares; Lawrence N. Kugelman, 46,000 shares; Robert W. Morey, 2,000 shares; Elizabeth E. Tallett, 8,000 shares; Timothy T. Weglicki, 2,000 shares; Allen F. Wise, 366,667 shares; Harvey C. DeMovick, Jr., 140,511 shares; Bernard J. Mansheim, M.D., 81,250 shares; Thomas P. McDonough, 266,790 shares; Dale B. Wolf, 270,937 shares; and all executive officers and directors as a group (24 persons), 1,818,522 shares.

(5)	Mr. Ackerman and Mr. Moorhead each disclaims beneficial ownership of the common stock owned by Warburg Pincus. See footnote 1 above.

The following table sets forth annual, long-term and other compensation awarded to, earned by or paid, during 2000, 2001 and 2002, to the chief executive officer of the Company and the persons who, in fiscal 2002, were the other four most highly compensated executive officers who were executive officers on December 31, 2002 (the “Named Executive Officers”):


*	Does not exceed reporting thresholds for perquisites and other personal benefits.

(1)	The amounts in this column represent Management Incentive Plan awards earned during the year specified, which are paid in the following year.

(2)	Other Annual Compensation included: for 2002, Mr. Wise received $53,628 for the lease of an automobile and Mr. Wise, Mr. McDonough and Mr. Wolf received $92,647, $55,203 and $71,333, respectively, for use of company transportation; for 2001, Mr. Wise and Mr. Wolf received $64,934 and $35,236, respectively, for use of company transportation.

(3)	Includes the value, based on the closing market price of the common stock on the New York Stock Exchange on the date of issuance of restricted stock awards as follows: for 2002 (issued May 22, 2002), Mr. Wise, 200,000 shares, Mr. McDonough 75,000 shares, Mr. Wolf, 75,000 shares, Mr. DeMovick, 10,000 shares, Dr. Mansheim, 15,000 shares; for 2001 (issued July 11, 2001), Mr. Wise, 150,000 shares, Mr. McDonough, 50,000 shares, Mr. Wolf, 75,000 shares, Mr. DeMovick, 25,000 shares, and Dr. Mansheim, 25,000 shares.


		As of December 31, 2002, the Named Executive Officers’ aggregate holdings of restricted stock of the Company and the market value of such shares were: Mr. Wise, 300,000 shares valued at $8,709,000, Mr. McDonough, 111,559 shares valued at $3,238,558, Mr. Wolf, 131,250 shares valued at $3,810,188, Mr. DeMovick, 28,750 shares valued at $834,613, Dr. Mansheim, 33,750 shares valued at $979,763. The closing market price at December 31, 2002, was $29.03 per share.


(4)	On May 22, 2002, Mr. Wise received a stock option grant of 200,000 shares of common stock vesting in equal increments over three years at an exercise price equal to the closing market price on the date of grant.


(5)	Consists of group life insurance premium, Company matching contribution to its Retirement Savings Plan and Company matching contribution to its Supplemental Executive Retirement Plan, respectively, as follows: for 2002, Mr. Wise, $582, $5,500 and $100,544, Mr. McDonough, $582, $8,250 and $48,841, Mr. Wolf, $582, $7,071 and $49,045, Mr. DeMovick, $582, $8,250 and $23,468, and Dr. Mansheim, $582, $8,250 and $20,229; for 2001, Mr. Wise, $593, $5,251 and $69,635; Mr. McDonough, $593, $7,650 and $35,585; Mr. Wolf, $593, $6,750 and $33,539; Mr. DeMovick, $593, $7,650 and $14,997, and Dr. Mansheim, $593, $7,650 and $17,424; and for 2000, Mr. Wise, $648, $4,725, and $58,102; Mr. McDonough, $648, $7,875 and $26,274; Mr. Wolf, $648, $6,750, and $25,203; Mr. DeMovick, $468, $7,874 and $13,755, and Dr. Mansheim, $545, $7,875 and $17,337.

(6)	Reflects the value of credits to phantom cash and stock equivalent accounts made by the Company under the Company’s 2000 Deferred Compensation Plan (the “2000 Plan”), as follows: for 2002, Mr. Wise, $1,349,200, Mr. McDonough, $555,420, Mr. Wolf, $529,226, Mr. DeMovick, $188,961 and Dr. Mansheim, $186,485; for 2001, Mr. Wise, $868,293; Mr. McDonough, $391,640; Mr. Wolf, $369,349, Mr. DeMovick, $135,950; and Dr. Mansheim, $128,949; for 2000, Mr. Wise, $472,500, Mr. McDonough, $256,764, Mr. Wolf, $240,295, Mr. DeMovick, $96,637; and Dr. Mansheim, $113,844. Actual payouts will not occur until the 2000 Plan terminates at the end of the deferral period elected by the participant (either three years or ten years) and the amounts distributed at that time will depend on investment returns throughout the term of the 2000 Plan. See “Employment Contracts, Terminations of Employment and Change in Control Arrangements” beginning on page 13 of this Proxy Statement for more details.

The following table provides information on option grants to the Named Executive Officers during fiscal year 2002. No stock appreciation rights were granted during fiscal year 2002.

The following table provides information as to options exercised in 2002 by the Named Executive Officers and the value of their options at December 31, 2002:

All directors are reimbursed by the Company for out-of-pocket expenses incurred in connection with attendance at Board or committee meetings. On November 7, 2002, the Board of Directors, at its regularly scheduled meeting, unanimously voted to increase the annual chair retainers from $2,000 to $10,000 for the chairs of the Board of Directors and Audit Committee, and, the chair of the Compensation Committee was unanimously voted an annual retainer of $2,000. At the same time, the fee for attendance at an Audit Committee meeting was increased from $1,000 per meeting to $3,000 per meeting and the fee for attendance at a Compensation Committee meeting was increased from $500 to $1,500 per meeting. The annual retainer of $25,000 for service on the Board of Directors is payable in quarterly installments of $6,250 each. Only members of the Board of Directors who are not officers or employees of the Company, its subsidiaries or affiliates (“Outside Directors”) receive remuneration for their service on the Board or any committee. Fees for each telephonic meeting attended remained at $500 per meeting, with the exception of the Audit Committee that receives $1,000 for each telephonic meeting attended. Pursuant to policies at Warburg Pincus, Messrs. Ackerman and Moorhead have waived payment of director fees to which they otherwise would be entitled.

Pursuant to the Company’s Amended and Restated 1998 Stock Incentive Plan, each Outside Director receives a grant of stock options for 2,000 shares, or 6,000 shares in the case of the Chairman of the Board of Directors, of common stock on the date of the annual meeting of shareholders. On November 7, 2002, the Board of Directors, at its regularly scheduled meeting granted each Outside Director 3,700 stock options vesting over three years at an exercise price of $31.22, equal to the closing market price on the date of grant, and an award of 3,700 shares of restricted stock vesting over three years. Pursuant to policies at Warburg Pincus, Messrs. Ackerman and Moorhead have waived payment of stock options and fees to which they otherwise would be entitled.

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

Allen F. Wise. Mr. Wise’s Employment Agreement with the Company dated December 30, 1998, was amended effective January 1, 2001, and renewed for a term of three years, and will continue thereafter on a year-to-year basis in the absence of notice by either party or unless otherwise extended. Under the terms of the agreement, Mr. Wise receives an annual base salary of not less than $700,000, subject to annual review, and is eligible for an annual bonus that may range from 0% to 200% determined in the sole discretion of the Company’s Compensation Committee. In addition, Mr. Wise is entitled to participate in all benefit plans, stock incentive plans, and has other benefits and perquisites, including a leased automobile and other transportation provided by the Company. In the event of Mr. Wise’s death or disability during the term of his employment agreement, Mr. Wise or his beneficiaries will receive a lump sum payment equal to his average bonus for the previous two years, the cost of medical and dental insurance premiums for 36 months, and, in the event of his disability, Mr. Wise will continue to receive his base compensation until he is eligible for long-term disability benefits. He will then receive 60% of his pre-disability earnings, which will be paid by the Company to the extent not covered under the Company’s long-term disability program. If Mr. Wise’s employment is terminated through a Termination Without Cause (defined below) or a Constructive Termination (defined below), the Company is required to pay Mr. Wise for a period of 24 months a monthly amount equal to 250% of the sum of his base salary plus his average bonus for the previous two calendar years divided by 24 months, reimbursement of the cost of medical and dental benefits for 30 months and an additional 12 months of vesting credit for his stock options and restricted stock awards, and unrestricted title to

the leased automobile. If he is terminated through a Termination Without Cause or a Constructive Termination within two years following a Change in Control (defined below), he would receive (i) a lump sum upon termination of 300% of his combined base salary and average bonus for the previous two years, plus an additional amount for taxes, if any, that may be due under Section 280G of the Internal Revenue Code of 1986, as amended, (ii) the cost of medical and dental insurance for 36 months, (iii) unrestricted title to the leased automobile, (iv) full vesting of all stock options and restricted stock grants. Mr. Wise has agreed not to compete with the Company during his employment and thereafter (i) for two years following a Termination Without Cause or Constructive Termination or (ii) for one year following termination after a Change in Control, or (iii) without restriction following voluntary termination.

Thomas P. McDonough. Mr. McDonough’s Employment Agreement with the Company dated March 13, 1998 (assumed by the Company as of April 1, 1998), as amended on July 12, 1999, was amended effective January 1, 2001, and renewed for a term of three years, and will continue thereafter on a year-to-year basis in the absence of notice by either party or unless otherwise extended. Under the terms of the agreement, Mr. McDonough receives an annual base salary of not less than $450,000, subject to annual review, and is eligible for an annual bonus of 75% of his base salary. In addition, Mr. McDonough is entitled to participate in all benefit plans, stock incentive plans, and has other benefits and perquisites, including an automobile allowance of $1,200.00 per month. In the event of Mr. McDonough’s death or disability during the term of his employment agreement, Mr. McDonough or his beneficiaries will receive a lump sum payment equal to his average bonus for the previous two years, the cost of medical and dental insurance premiums for 24 months, and, in the event of his disability, Mr. McDonough will continue to receive his base compensation until he is eligible for long-term disability benefits. He will then receive 60% of his pre-disability earnings, which will be paid by the Company to the extent not covered under the Company’s long-term disability program. If Mr. McDonough’s employment is terminated through a Termination Without Cause (defined below) or a Constructive Termination (defined below), the Company is required to pay Mr. McDonough for a period of 24 months, a monthly amount equal to 250% of the sum of his base salary plus his average bonus for the previous two calendar years divided by 24 months, reimbursement of the cost of medical and dental benefits for 24 months and an additional 12 months of vesting credit for his stock options and restricted stock awards. If he is terminated through a Termination Without Cause or a Constructive Termination within two years following a Change in Control (defined below), he would receive (i) a lump sum upon termination of 200% of his combined base salary and average bonus for the previous two years, plus an additional amount for taxes, if any, that may be due under Section 280G of the Internal Revenue Code of 1986, as amended, (ii) the cost of medical and dental insurance for 24 months, and (iii) full vesting of all stock options and restricted stock grants. Mr. McDonough has agreed not to compete with the Company during his employment and thereafter (i) for two years following a Termination Without Cause or Constructive Termination or (ii) for one year following termination after a Change in Control, or (iii) without restriction following voluntary termination.

Dale B. Wolf. Mr. Wolf ’s Employment Agreement with the Company dated December 9, 1996 (assumed by the Company as of April 1, 1998), was amended effective January 1, 2001, and renewed for a term of three years, and will continue thereafter on a year-to-year basis in the absence of notice by either party or unless otherwise extended. Under the terms of the agreement, Mr. Wolf receives an annual base salary of not less than $400,000, subject to annual review, and is eligible for an annual bonus in accordance with the Company’s bonus plan in effect. In addition, Mr. Wolf is entitled to participate in all benefit plans, stock incentive plans, and has other benefits and perquisites, including an automobile allowance of $1,200.00 per month. In the event of Mr. Wolf ’s death or disability during the term of his employment agreement, Mr. Wolf or his beneficiaries will receive a lump sum payment equal to his average bonus for the previous two years, the cost of medical and dental insurance premiums for 24 months, and, in the event of his disability, Mr. Wolf will continue to receive his base compensation until he is eligible for long-term disability benefits. He will then receive 60% of his pre-disability earnings, which will be paid by the Company to the extent not covered under the Company’s long-term disability program. If Mr. Wolf ’s employment is terminated through a Termination Without Cause (defined below) or a Constructive Termination (defined below), the Company is required to pay Mr. Wolf for a period of 24 months, a monthly amount equal to 200% of the sum of his base salary plus his average bonus for the previous two calendar years divided by 24 months, reimbursement of the cost of medical and dental benefits for 24 months and an additional 12 months of vesting credit for his stock options and

restricted stock awards. If he is terminated through a Termination Without Cause or a Constructive Termination within two years following a Change in Control (defined below), he would receive (i) a lump sum upon termination of 200% of his combined base salary and average bonus for the previous two years, plus an additional amount for taxes, if any, that may be due under Section 280G of the Internal Revenue Code of 1986, as amended, (ii) the cost of medical and dental insurance for 24 months, and (iii) full vesting of all stock options and restricted stock grants. Mr. Wolf has agreed not to compete with the Company during his employment and thereafter (i) for two years following a Termination Without Cause or Constructive Termination or (ii) for one year following termination after a Change in Control, or (iii) without restriction following voluntary termination.

Harvey C. DeMovick, Jr. Mr. DeMovick entered into an Employment Agreement with the Company effective September 1, 2001 for an initial term expiring December 31, 2003, and will continue thereafter on a year-to-year basis in the absence of notice of either party or unless otherwise extended. Under the terms of the Agreement, Mr. DeMovick receives an annual base salary of not less than $340,000, subject to annual review, and is eligible for an annual bonus in accordance with the Company’s bonus plan in effect on the date of the Agreement. In addition, Mr. DeMovick is entitled to participate in all benefit plans, stock incentive plans and has other benefits and perquisites. In the event of Mr. DeMovick’s death or disability during the term of his employment agreement, Mr. DeMovick or his beneficiaries will receive a lump sum payment equal to his average bonus for the previous two years, the cost of medical and dental insurance premiums for 24 months, and, in the event of his disability, Mr. DeMovick will continue to receive his base compensation until he is eligible for long-term disability benefits. He will then receive 60% of his pre-disability earnings, which will be paid by the Company to the extent not covered under the Company’s long-term disability program. If Mr. DeMovick’s employment is terminated through a Termination Without Cause (defined below) or a Constructive Termination (defined below), the Company is required to pay Mr. DeMovick for a period of 12 months, a monthly amount equal to 100% of the sum of his base salary plus his average bonus for the previous two calendar years divided by 12 months, reimbursement of the cost of medical and dental benefits for 12 months and an additional 12 months of vesting credit for his stock options and restricted stock awards. If he is terminated through a Termination Without Cause or a Constructive Termination within two years following a Change in Control (defined below), he would receive (i) a lump sum upon termination of 100% of his combined base salary and average bonus for the previous two years, plus an additional amount for taxes, if any, that may be due under Section 280G of the Internal Revenue Code of 1986, as amended, (ii) the cost of medical and dental insurance for 12 months, and (iii) full vesting of all stock options and restricted stock grants. Mr. DeMovick has agreed not to compete with the Company during his employment and thereafter (i) for one year following a Termination Without Cause or Constructive Termination or (ii) for one year following termination after a Change in Control, or (iii) without restriction following voluntary termination.

Bernard J. Mansheim, M.D. Dr. Mansheim entered into an Employment Agreement with the Company dated February 2, 1998 (assumed by the Company as of April 1, 1998) for an initial term of one year, which has continued and will continue on a year-to-year basis as long as a new employment contract is not executed or the agreement has not been otherwise terminated. Under the terms of the agreement, Dr. Mansheim currently receives an annual base salary of $350,000, is eligible for a bonus, and receives other perquisites and an annual expense allowance of $7,200. At execution of the agreement, he received an option to purchase 100,000 shares of common stock vesting over a four-year period (which was reduced and repriced on September 10, 1998). Dr. Mansheim is currently eligible for an annual bonus potential of up to 70% of his base compensation and is eligible to participate in any annual incentive bonus programs available to management of the Company and to receive other incentive compensation as determined annually by the Compensation Committee of the Board of Directors. In the event of termination for any reason other than for Good Cause (as defined below), Dr. Mansheim will continue to receive his base salary and bonus earned, based on performance factors, for one year. Dr. Mansheim has agreed not to compete with or solicit employees from the Company during the term of his employment and severance period thereafter.


	(1) “Good Cause” or “Termination With Cause” is generally defined to include termination of the executive’s employment by the Company due to the executive’s conviction for a felony, or his


	perpetration of a fraud, embezzlement or other act of dishonesty or the breach of a trust or fiduciary duty which materially adversely affects the Company or its shareholders.

	(2) “Termination Without Cause” is generally defined to include termination by the Company other than due to the executive’s death or disability or Termination With Cause.

	(4) “Constructive Termination” is generally defined to include a significant change in the nature or scope of the executive’s position and authority, a reassignment to another location after a Change in Control, intentional or material breach by the Company of the agreement, or a reduction in compensation and benefits.

	(5) A “Change in Control” occurs if at any time, substantially all of the assets of the Company are sold or transferred by sale, merger or otherwise, to an entity which is not a direct or indirect subsidiary of the Company, or if any person or entity becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s outstanding securities

2000 Deferred Compensation Plan. As of September 1, 2000, the Company established the 2000 Deferred Compensation Plan (the “2000 Plan”). The 2000 Plan is a three-year deferred compensation plan designed to promote the retention of key senior management and highly compensated employees and to recognize their strategic importance to the Company. Under the terms of the 2000 Plan, the Company will make an annual cash allocation to the 2000 Plan for each Participant. The maximum cash allocation for the Chief Executive Officer of the Company is 25% of Compensation for the initial plan year and such amount determined by the Board of Directors for each subsequent Plan Year. The maximum cash allocation for the Chief Operating Officer and the Chief Financial Officer of the Company is 25% of compensation for the initial plan year and 35% of compensation for each subsequent plan year. The maximum cash allocation for the remaining participants is 15% of compensation for the initial plan year and 20% of compensation for each subsequent plan year. In addition, all participants are eligible to receive a credit to a stock equivalent account according to a formula based on each participant’s cash allocation. The credits in the stock equivalent account increase and decrease in accordance with the price of the Company’s common stock. All cash contributions and stock equivalent credits will vest and be paid in cash after three years, in certain cases, or ten years of participation in the 2000 Plan, except in the event of a change-of-control (as defined in below) in which case all participants’ accounts will vest in full, or in the event of a participant’s death or involuntary discharge not-for-cause in which case such participant’s accounts will vest on the date of death or discharge. As of August 1, 2002, the 2000 Plan was amended to provide participants a one-time election to defer receipt of the plan accounts for an additional ten years, as established by the Company under the terms of the amendment. The 2000 Plan is a non-qualified, unfunded and unsecured deferred compensation plan. All payments made under the 2000 Plan will be reported in the Executive Compensation table in the year paid.

“Change of Control” under the 2000 Plan and under the Amended and Restated 1998 Stock Incentive Plan means:


	(i)	any person or entity, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, other than the Company or a wholly owned subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiaries, becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business or other than transactions which are approved by a majority of the Board of Directors of the Company); or

	(ii)	as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transactions are held in the


		aggregate by the holders of the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or


	(iii)	during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company’s shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period.

In addition, with respect to the Amended and Restated 1998 Stock Incentive Plan, all of the outstanding stock options and other rights will vest and become exercisable in the event the Compensation Committee determines that a potential Change in Control has occurred. See “Proposal Two, Amendments to Amended and Restated 1998 Stock Incentive Plan, Other Provisions of the 1998 Stock Plan” on page 23 of this Proxy Statement for more information on what constitutes a potential Change in Control.

Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, the following report and the Performance Graph on page 21 shall not be incorporated by reference into any such filings.

Under the direction of the Compensation Committee of the Board of Directors (the “Committee”), the Company has developed and implemented compensation practices for its executive officers. The Committee Report set forth below provides information on the Company’s executive compensation philosophy and practices for the fiscal year ended December 31, 2002.

The Company’s compensation philosophy embodies guiding principles for its compensation program design and for compensation decisions pertaining to Coventry’s executive officers with the following three primary objectives:


	1. To provide incentives for delivery of value to the Company’s shareholders.

	2. To establish a clear connection between individual executive performance and compensation.

	3. To provide a system of rewards that is strongly biased toward motivating executives and, at the same time, is competitive with industry standards.

To fulfill these primary objectives, the 2002 executive compensation program provided rewards for the achievement of business plan results and other strategic objectives, which were important motivators for the Company’s executives.

The Committee and its advisors used multiple sources of information for evaluating and establishing appropriate compensation levels. The Committee relied on health care industry data in constructing the peer group of companies. This peer group consisted of publicly traded managed health care companies operating nationwide that had similar operations and were of comparable size to the Company. Some, but not all, of these companies are included in the Custom Peer Group Index used in the Performance Graph on page 21 of this Proxy Statement. Consistent with these objectives, the Company sought to position the compensation of its executives at competitive levels with the peer group.

The Company’s executive compensation program had three components — base salary, annual incentives and long-term compensation. The Committee believes this mix reflects industry-wide practices.

The Committee believes that incentive, or variable, compensation should be awarded as a result of commensurate performance. The Committee, therefore, approved compensation programs that include high

threshold levels for performance. Balanced against the need to condition certain forms of compensation on high levels of Company-wide performance were the necessities of attracting and retaining talented executives in the face of adverse trends in the industry and the need to recognize individual performance in a variety of circumstances.

Base salary serves primarily as an attraction and retention device. Aggregate base salary increases are intended to parallel increases in the pay levels of executives in the health care industry as a whole. Individual executive salary increases reflect the individual’s level of performance and current position within designated salary ranges, as well as industry trends.

The purpose of the Company’s annual incentive plan is to recognize and reward executives for taking actions that build the value of the Company, generate competitive total returns to shareholders and maximize the Company’s profitability. The Company’s 2002 Management Incentive Plan was filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The Plan provided for annual incentive awards on the basis of Company performance, operating unit performance, and individual performance, with a greater emphasis on corporate and operating unit financial performance over individual achievements. Awards were based on meeting a 2002 Company earnings per share goal of $1.65 per share, on achievement of budgeted plan contribution and revenue by operating units and the attainment of critical success factors developed by key executives. For fiscal year 2002, all of the Company’s named executive officers received annual incentive compensation in the form of cash.

Under the terms of the Company’s Amended and Restated 1998 Stock Incentive Plan, the Committee has the authority to grant stock options, stock appreciation rights, restricted stock and/or other stock-based awards, except that the power to grant and establish the terms and conditions of awards to Outside Directors is reserved to the Board of Directors. All decisions made by the Committee pursuant to the 1998 Stock Plan are made in the Committee’s sole discretion, which is final and binding on all persons.

For fiscal year 2002, the Company’s Named Executive Officers received restricted stock awards under the 1998 Stock Plan. The Committee issued the awards with a restriction period of three to four years during which the executive is not permitted to sell, transfer, pledge or assign. The restriction period lapses in annual installments. See “Executive Compensation, Summary Compensation Table” on page 11 of this Proxy Statement for information on the awards granted to the Named Executive Officers.

Effective September 1, 2000, the Committee established the 2000 Plan, a three-year deferred compensation plan designed to promote the retention of key senior management and highly compensated employees and to recognize their strategic importance to the Company. The terms of the 2000 Plan are described under “2000 Deferred Compensation Plan” on page 16 of this Proxy Statement. The 2000 Plan was amended in 2002 to allow the participants to choose whether to defer distribution of their 2000 Plan accounts at the end of three years or ten years.

To provide additional security and stability to its executives and to encourage them to identify with the long-term goals of the Company, the Company has entered into employment agreements with certain of its executive officers. The contracts generally provide for an initial term of one to three years, and are automatically renewable on a year-to-year basis (unless notice is otherwise given), severance in the event of termination of employment not for cause or due to a change in control, and an agreement not to compete with the Company during the term of employment and for a period thereafter.

The Committee has followed an annual review process in administering each of the three components of executive compensation. Moreover, the Committee has used and may continue to use independent outside compensation consultants in order to provide additional information and perspective to the administration of compensation programs.

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation in excess of $1,000,000 paid in any fiscal year to the Company’s chief executive officer and four other most highly compensated executive officers as of the end of any fiscal year. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. The Committee intends that all compensation paid to the Company’s executive officers be fully deductible to the Company under the federal income tax laws; however, from time to time the Committee may deem it appropriate to authorize compensation that is not deductible by reason of Section 162(m) to enable the Company to meet its overall objectives.

Consistent with the compensation philosophy stated above, the Committee based the total compensation of the Company’s chief executive officer, Allen F. Wise, on the overall performance of the Company and on relative levels of compensation for chief executive officers in the health care industry.

In determining Mr. Wise’s compensation for 2002, the Committee considered the Company’s consistent improved performance over the preceding year and prior years, the Company’s balanced progress in all areas and the accomplishment of established goals. Specifically, the Committee recognized the Company’s successful track record under Mr. Wise’s leadership, including continued revenue growth and controlled medical and administrative expenses, resulting in increased revenues and earnings. In 2002, in particular, the Committee considered the Company’s progress, as measured against all other Fortune 500 companies. The Company was ranked No. 12 among all Fortune 500 companies in total return to shareholders in 2002. In addition, the Company ranked 12th among all Fortune 500 companies in percent of annual earnings per share growth from 1997 to 2002, and was the only health plan among 20 companies recognized in this five-year measurement of growth in profits. Based on these achievements, the prevailing marketplace, competitive levels of compensation of other CEOs at comparable companies in the health care industry, and other factors, the Committee determined that Mr. Wise should receive the compensation set forth below for 2002.

Effective May 22, 2002, the Committee granted Mr. Wise a restricted stock award of 200,000 shares of common stock with a three-year restriction period. The restriction period lapses in equal annual installments. In addition, on May 22, 2002, the Committee granted Mr. Wise a stock option for 200,000 shares of common stock that vest annually in equal increments over three years.

Mr. Wise’s base salary for 2002 was set at $900,000. Also, as of September 1, 2002, the Committee authorized a cash allocation of 40% of base compensation and bonus to the 2000 Plan for Mr. Wise. Under the terms of Mr. Wise’s employment agreement, which was amended by the Committee effective as of January 1, 2001, Mr. Wise is eligible to receive an annual incentive bonus in an amount up to 200% (or higher, in the sole discretion of the Committee) of his base compensation based on performance factors determined annually by the Committee, including achievement of budget and operational and other factors determined by the Committee in its discretion. Because of the outstanding performance of the Company in 2002, operational improvements and better than budgeted earnings, the Compensation Committee determined that Mr. Wise’s performance had exceeded the budget and performance criteria set forth at the beginning of the year. In light of these achievements, the Committee awarded Mr. Wise an incentive bonus for 2002 in the total amount of $2,100,000 (230% of his base compensation in 2002).

Mr. Wise’s amended employment agreement also includes severance in the event of certain terminations of employment or changes in control and an agreement not to compete with the Company. Please see “Employment Contracts, Terminations of Employment and Change-in-Control Arrangements” on page 13 of this Proxy Statement.


	COVENTRY HEALTH CARE
	COMPENSATION
	COMMITTEE

	John H. Austin, M.D. (Chair)
	Rodman W. Moorhead, III
	Timothy T. Weglicki

The following graph compares the cumulative total shareholder return on the common stock for the five years ending December 31, 2002 with the cumulative total return of the Standard & Poor’s 500 Index and a Custom Peer Group Index compiled by Standard & Poor’s, assuming an investment of $100 on December 31, 1997. The following companies are included in the Custom Peer Group Index (and the returns of each company have been weighted according to its relative stock market capitalization at the beginning of each period for which a return is indicated): Aetna Inc., Anthem, Inc., CIGNA Corporation, the Company, Health Net, Inc., Humana Inc., MidAtlantic Medical Services, Inc., Oxford Health Plans, Inc., PacifiCare Health Systems, Inc., Sierra Health Services, Inc., UnitedHealth Group Incorporated and Wellpoint Health Networks, Inc.


NOTE:	THE STOCK PRICE PERFORMANCE SHOWN ON THE GRAPH ABOVE IS NOT NECESSARILY INDICATIVE OF FUTURE PRICE PERFORMANCE.

During the year ended December 31, 2002, the Compensation Committee was comprised of John H. Austin, M.D. (Chair), Rodman W. Moorhead, III, Timothy T. Weglicki (elected November 7, 2002) and Thomas J. Graf (January 1, 2002 to August 29, 2002), none of whom had at any time been an officer or employee of the Company or any of its subsidiaries.

Mr. Moorhead is Managing Director and Senior Advisor of Warburg Pincus LLC, which manages Ventures and Equity Partners. See “Certain Relationships and Related Transactions” below for definitions and a description of the related transactions involved.

Mr. Graf is a Senior Vice President of Principal Life Insurance Company and other subsidiaries of Principal Financial Group, Inc. See “Certain Relationships and Related Transactions” below for a description of the related transactions involved.

Warburg Pincus. The sole general partner of Warburg, Pincus Ventures, L.P. (“Ventures”) is Warburg Pincus & Co., a New York general partnership (“WP”). Warburg Pincus LLC, a New York limited liability company (“WP LLC”), manages Ventures. Rodman W. Moorhead, III and Joel Ackerman are Managing Director and Senior Advisor and Managing Director, respectively, of WP LLC. Joel Ackerman, Jonathan S. Leff and Patrick T. Hackett are general partners of WP and Trustees of certain voting trusts relating to the Company’s common stock. During 1997, Coventry issued to Ventures the Warburg Pincus Warrants to purchase 2,117,647 shares of the Company’s common stock at $10.625 per share and Convertible Notes in the aggregate principal amount of $36,000,000, which accrued interest through May 28, 1999, in the amount of $6,358,404. On September 3, 1999, the Convertible Notes held by Ventures and the accrued interest were converted at $10 per share into 4,235,840 shares of preferred stock of the Company. On December 26, 2000, Ventures: (i) converted its 4,235,840 shares of preferred stock into 4,236,263 shares of common stock, as adjusted for anti-dilution, and (ii) acquired 1,026,614 shares of common stock, as adjusted for anti-dilution, in a cashless net exercise of its warrants. On September 8, 2000, Warburg Pincus affiliated partnerships purchased 10,000,000 shares of the Company’s common stock from Principal (see Principal Financial Group, Inc. discussion below) in a private transaction as follows: (i) Warburg Pincus Equity Partners, L.P., 9,450,000 shares; (ii) Warburg, Pincus Netherlands Equity Partners I, C.V., 300,000 shares; (iii) Warburg, Pincus Netherlands Equity Partners II, C.V., 200,000 shares; and (iv) Warburg, Pincus Netherlands Equity Partners III, C.V., 50,000 shares (collectively “Equity Partners”). In addition, Ventures purchased 3,941,500 shares of the Company’s common stock on the open market. At December 31, 2002, Ventures and Equity Partners held a remaining balance of 10,127,384 shares of the Company’s common stock. See “Voting Stock Ownership of Principal Shareholders, Directors and Executive Officers” and footnotes 1 and 5 to the beneficial ownership table on pages 8, 9 and 10 of this Proxy Statement for additional information.

Ventures and Equity Partners entered into a Shareholders’ Agreement with the Company, dated as of May 5, 2000 (the “Warburg Pincus Shareholders’ Agreement”). The Warburg Pincus Shareholders’ Agreement includes (i) a standstill agreement, pursuant to which Ventures and Equity Partners agreed for the five-year period ending September 30, 2004 (A) not to acquire more than 34.9% of the total issued and outstanding shares of the Company’s common stock, and (B) not to take certain other actions; and (ii) certain restrictions on direct or indirect transfers of the common stock by Ventures and Equity Partners.

Principal Financial Group. Coventry Health Care, Inc. was formed in December 1997 in connection with the Capital Contribution and Merger Agreement (the “Combination Agreement”), by and among Coventry Health Care, Inc., Coventry Corporation (the Company’s predecessor), and certain indirect subsidiaries of Principal Financial Group, Inc., a provider of retirement savings, investment and insurance products (“Principal”). Pursuant to the Combination Agreement, effective as of April 1, 1998, Coventry Corporation became a wholly owned subsidiary of Coventry Health Care, Inc. and one of Principal’s subsidiaries contributed certain of its assets and liabilities to Coventry Health Care, Inc. and Coventry Health Care, Inc. issued approximately 33 million shares of its common stock to Coventry Corporation’s shareholders and approximately 25 million shares of common stock to the Principal subsidiary along with a warrant for 5.8 million shares of common stock (the “Principal Warrant”).

On September 8, 2000, Principal sold 10 million shares of the Company’s common stock to affiliates of Warburg Pincus (see Warburg Pincus discussion above). As a result of the sale, Principal’s ownership in the Company was reduced to 15,103,487 shares of the Company’s common stock and shares of common stock available for purchase under the Principal Warrant.

On February 1, 2002, Principal sold another 7 million shares of the Company’s common stock in a secondary public offering and on February 8, 2002, Principal sold an additional 1.1 million shares in the same public offering. Concurrently, the Company purchased from Principal approximately 7.1 million shares of its common stock and the Principal Warrant exercisable, at that time, for approximately 3.1 million shares of common stock. The aggregate purchase price for these shares of common stock and the warrant was approximately $176.1 million, which the Company paid for with cash on hand and the proceeds from the sale of $175.0 million of the Company’s 8.125% Senior Notes due February 15, 2012. Upon completion of these transactions, Principal no longer owned shares of the Company’s common stock. As a result, the Shareholders’ Agreement dated April 1, 1998, between Principal and one of its subsidiaries and the Company is no longer in effect. While in force, the Shareholders’ Agreement had placed certain restrictions on Principal’s ability to acquire, transfer and vote the Company’s common stock and designate members to serve on the Board of Directors.

Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the Company for 2002 pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and written representations from reporting persons that all required reports had been filed, the Company believes that all reporting persons filed the required reports on a timely basis.

The Board of Directors has approved and recommends that its shareholders approve amendments to the Company’s Amended and Restated 1998 Stock Incentive Plan (the “1998 Stock Plan”) to (i) increase the number of shares of common stock subject to issuance under the 1998 Stock Plan from 9,000,000 to 11,000,000, (ii) increase the maximum number of shares of restricted stock that may be issued under the 1998 Stock Plan from 3% to 5% of the total number of shares of common stock outstanding and (iii) require shareholder approval prior to repricing stock options. The 1998 Stock Plan was originally adopted by the Board of Directors on March 19, 1998, and approved by the shareholders on March 31, 1998. The 1998 Stock Plan was amended on March 4, 1999 by the disinterested members of the Board of Directors to amend the definition of Outside Director to allow directors who are not officers or employees of the Company or any of its subsidiaries or an affiliate of the Company to be eligible to receive stock options under formula grants under the 1998 Stock Plan and to receive their grants at each annual meeting of shareholders. The 1998 Stock Plan was also amended on June 8, 2000 by the shareholders to increase the number of shares subject to issuance under the 1998 Stock Plan from 7,000,000 to 9,000,000. Under the 1998 Stock Plan, the Company may grant options and other rights with respect to the Company’s common stock to officers, other key employees, consultants and Outside Directors of the Company. A copy of the 1998 Stock Plan, with the proposed amendments incorporated, is attached as Appendix A.

The Board of Directors has concluded that because of the need to continue to attract highly qualified management personnel and to retain and provide appropriate incentives to motivate and retain key employees, additional shares should be authorized and available for grant under the 1998 Stock Plan. The Board believes that, particularly in light of the improvement in the Company’s operations, equity ownership by senior management and other key employees has provided a significant incentive to encourage performance that will serve to increase shareholder value. As of the Record Date, 8,344,795 shares of common stock were granted under the 1998 Stock Plan and only 655,205 shares of the 9,000,000 shares currently reserved for grant under the 1998 Stock Plan remained available for new grants. Of the shares granted under the 1998 Stock Plan, as of March 31, 2003, 3,639,891 are reserved for issuance under outstanding stock options, 877,825 are restricted shares that have not vested, and the balance of shares has either been exercised with respect to stock options or the restrictions have lapsed with respect to restricted stock awards. As of the Record Date, 514,377 shares (0.9% of the shares then outstanding) were available for grant as restricted stock awards. If the amendments are adopted, a total of 2,655,205 shares (4.5% of the shares currently outstanding) will be available for future

grants under the 1998 Stock Plan, and 1,693,666 of these shares (2.9% of the shares outstanding) could be granted as restricted stock awards. The Compensation Committee has granted options for only 55,000 shares in 2003, and has not made any grants to the executive officers of the Company in 2003. The Board also concluded that if stock options were to be repriced in the future, that such repricing should be subject to approval of the Company’s shareholders.

The 1998 Stock Plan is designed to provide incentives to officers, key employees, directors of and consultants to the Company or any of its subsidiaries or affiliates, and to attract qualified individuals for employment with the Company. Awards under the 1998 Stock Plan may be made to officers, other key employees and Outside Directors of and consultants to the Company or any of its subsidiaries or affiliates. As of the Record Date, the number of individuals who would potentially be eligible for awards under the 1998 Stock Plan is approximately 400 based on the actual number of officers of the Company (27 individuals) and Outside Directors (6 individuals) and an estimated number of key employees (367 individuals) and consultants eligible for awards, but actual awards will be made only at the discretion of the Compensation Committee (the “Plan Committee).

The 1998 Stock Plan is administered by a Plan Committee consisting of not less than two Non-Employee Directors (as defined in the 1998 Stock Plan) appointed to serve by the Board of Directors. Initially, the Plan Committee was and is expected to continue to be the Compensation Committee of the Board of Directors.

The Plan Committee has the authority to grant (i) stock options; (ii) stock appreciation rights (“SARs”); (iii) restricted stock; and/or (iv) other stock-based awards; provided, however, that the power to grant and establish the terms and conditions of awards to Outside Directors under the 1998 Stock Plan is reserved to the Board of Directors. All decisions made by the Plan Committee pursuant to the 1998 Stock Plan shall be made in the Plan Committee’s sole discretion and shall be final and binding on all persons, including the Company and participants in the 1998 Stock Plan.

1. Stock Options. Incentive stock options (“ISOs”) and non-qualified stock options may be granted for such number of shares as the Plan Committee may determine and may be granted alone, in addition to or in tandem with other awards granted under the 1998 Stock Plan, but subject to the per person limitation on awards; provided, however, that ISOs may be granted only to employees of the Company, its subsidiaries or affiliates.

A stock option is exercisable, in whole or in part, at such times and subject to such terms and conditions as the Plan Committee may determine and over a term to be determined by the Plan Committee, which term will be no more than ten years after the date of grant, or no more than five years in the case of an ISO awarded to certain 10% shareholders. The option price for any ISO cannot be less than 100%, or 110% in the case of certain 10% shareholders, of the fair market value of the common stock as of the date of grant, and for any non-qualified stock option will not be less than 100% of the fair market value of the common stock as of the date of grant. Payment of the option price may be by check, note or such other instrument as the Plan Committee may accept or, in the case of a non-qualified stock option, in shares of common stock or shares of restricted stock or shares subject to such option or another award under the 1998 Stock Plan having a fair market value equal to the option price.

Upon termination of an option holder’s employment for cause or upon voluntary termination of employment by the optionee, such employee’s stock options will thereupon terminate. If an option holder’s employment is involuntarily terminated without cause, stock options will be exercisable for three months following termination or until the end of the option period, whichever is shorter. On the disability of an employee, stock options will be exercisable within the lesser of the remainder of the option period or, in the case of a non-qualified stock option, three years, and in the case of an ISO, one year from the date of

disability. Upon the retirement of an employee, stock options will be exercisable within the lesser of the remainder of the option period or, in the case of a non-qualified stock option, three years, and in the case of an ISO, three months from the date of retirement. Upon the death of an employee, stock options will be exercisable by the deceased employee’s legal representative or legatee within the lesser of the remainder of the option period or one year from the date of death. Only options that are exercisable on the date of termination, death, disability or retirement may be subsequently exercised or, except for an ISO, on such accelerated basis as determined by the Plan Committee at or after grant.

2. SARs. SARs may be granted in conjunction with all or part of any stock option granted under the 1998 Stock Plan. Once an SAR has been exercised, the related portion of the stock option, if any, underlying the SAR will terminate. Upon exercise of an SAR the optionee will receive cash and/or shares of common stock equal in value to the excess of the fair market value of one share of common stock over the option price per share in the related option multiplied by the number of shares in respect of which the SAR shall have been exercised. The method of payment shall be determined by the Plan Committee. SARs shall be exercisable only at such time and to the extent that the options to which they relate are exercisable, subject to any terms and conditions as determined by the Plan Committee, and shall be transferable only to the extent the underlying option is transferable.

3. Awards to Outside Directors. On the date of each annual meeting of shareholders beginning with the year 2001, each Outside Director (as defined in the 1998 Stock Plan) has received an automatic grant of a non-qualified stock option to purchase 2,000 shares of common stock. An Outside Director who is also the Chairman of the Board receives an automatic grant of a non-qualified stock option to purchase 6,000 shares of common stock. Each option vests six months after the date of grant and is not transferable without the written consent of the Board, except to immediate family members or by will or the laws of decent and distribution. Outside Directors are eligible to receive other awards as may be determined by the Board of Directors.

4. Restricted Stock. Restricted stock may be granted alone, in addition to or in tandem with other awards granted under the 1998 Stock Plan and/or cash awards made outside of the 1998 Stock Plan, but must be accepted within 60 days after the award date. Currently, the aggregate number of shares of common stock that may be granted as shares of restricted stock is limited to 3% of the then outstanding shares of common stock. However, as proposed to be amended, the 3% limitation would be increased to 5% of the then outstanding shares of common stock. The Plan Committee may condition the grant of restricted stock upon the attainment of specified performance goals or such other factors as the Plan Committee may determine. Subject to the applicable terms set forth in the award agreement, upon termination of the employee’s employment for any reason during the restriction period, all shares subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Plan Committee at or after grant. During the restriction period, the employee will have the right to vote the shares and to receive any cash dividends, unless otherwise restricted by the Plan Committee. At the time of award, the Plan Committee may permit or require that any cash dividends be deferred and reinvested in additional shares of restricted stock. Stock dividends will be treated as additional shares of restricted stock and will be subject to the same terms and conditions as the initial grant.

5. Other Stock-Based Awards. The Plan Committee may also grant other types of awards that are valued by reference to earnings per share or subsidiary performance. These awards may be granted alone, in addition to or in tandem with stock options, SARs or restricted stock granted under the 1998 Stock Plan or cash awards made outside of the 1998 Stock Plan; provided, however, that none may be granted in tandem with ISOs if to do so would disqualify such ISOs under Section 422 of the Code. Such awards will be made upon terms and conditions as the Plan Committee may in its discretion provide. The Plan Committee may also provide for the grant of common stock upon completion of a specified performance period.

The following is a brief summary of the federal income tax aspects of awards made under the 1998 Stock Plan based upon the federal income tax laws in effect on the date hereof. This summary is not intended to be exhaustive and does not describe state or local tax consequences.

1. Incentive Stock Options. No taxable income is realized by the participant upon the grant or exercise of an ISO. If common stock is issued to a participant pursuant to the exercise of an ISO, and if no disqualifying disposition of the shares is made by the participant within two years of the date of grant or within one year after the transfer of the shares to the participant, then: (i) upon the sale of the shares, any amount realized in excess of the option price will be taxed to the participant as long-term capital gain, and any loss sustained will be a capital loss; and (ii) no deduction will be allowed to the Company for federal income tax purposes. The exercise of an ISO will give rise to an item of tax preference that may result in an alternative minimum tax liability for the participant unless the participant makes a disqualifying disposition of the shares received upon exercise.

If common stock acquired upon the exercise of an ISO is disposed of prior to the expiration of the holding periods described above, then generally: (i) the participant will realize ordinary income in the year of disposition in an amount equal to the excess, if any, of the fair market value of the shares at exercise (or, if less, the amount realized on the disposition of the shares) over the option price paid for such shares, and (ii) the Company will be entitled to deduct any such recognized amount. Any further gain or loss realized by the participant will be taxed as short-term or long-term capital gain or loss, as the case may be, and will not result in any deduction by the Company.

Subject to certain exceptions for disability or death, if an ISO is exercised more than three months following the termination of the participant’s employment, the option will generally be taxed as a non-qualified stock option.

2. Non-Qualified Stock Options. Except as noted below, with respect to non-qualified stock options: (i) no income is realized by the participant at the time the option is granted; (ii) generally upon exercise of the option, the participant realizes ordinary income in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares on the date of exercise, and the Company will be entitled to a tax deduction in the same amount; and (iii) at disposition, any appreciation (or depreciation) after the date of exercise is treated either as short-term or long-term capital gain or loss, depending upon the length of time that the participant has held the shares. See “Restricted Stock” below for tax rules applicable where the spread value of an option is settled in an award of restricted stock.

3. SARs. No income will be realized by a participant in connection with the grant of an SAR. When the SAR is exercised, the participant will generally be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash and the fair market value of any shares received. The Company will be entitled to a deduction at the time and in the amount included in the participant’s income by reason of the exercise. If the participant receives common stock upon exercise of an SAR, the post-exercise appreciation or depreciation will be treated in the same manner discussed above under “Non-Qualified Stock Options.”

4. Restricted Stock. A participant receiving restricted stock generally will recognize ordinary income in the amount of the fair market value of the restricted stock at the time the stock is no longer subject to forfeiture, less the consideration paid for the stock. However, a participant may elect, under Section 83(b) of the Code, within 30 days of the grant of the stock, to recognize taxable ordinary income on the date of grant equal to the excess of the fair market value of the shares of restricted stock (determined without regard to the restrictions) over the purchase price of the restricted stock. Thereafter, if the shares are forfeited, the participant will be entitled to a deduction, refund or loss, for tax purposes only, in an amount equal to the purchase price of the forfeited shares regardless of whether he made a Section 83(b) election. With respect to the sale of shares after the forfeiture period has expired, the holding period to determine whether the participant has long-term or short-term capital gain or loss generally begins when the restriction period expires, and the tax basis for such shares will generally be based on the fair market value of such shares on such date. However, if the participant makes an election under Section 83(b), the holding period will commence on the date of grant, the tax basis will be equal to the fair market value of shares on such date (determined without regard to restrictions), and the Company generally will be entitled to a deduction equal to the amount that is taxable as ordinary income to the participant in the year that such income is taxable.

5. Dividends and Dividend Equivalents. Dividends paid on restricted stock generally will be treated as compensation that is taxable as ordinary income to the participant and will be deductible by the Company. If, however, the participant makes a Section 83(b) election, the dividends will be taxable as ordinary income to the participant but will not be deductible by the Company.

6. Other Stock-Based Awards. The federal income tax treatment of other stock-based awards will depend on the nature of any such award and the restrictions applicable to such award. Such an award may, depending on the conditions applicable to the award, be taxable as an option, an award of restricted stock or in a manner not described herein.

Section 162(m) of the Code imposes a limitation on the deductibility of certain compensation paid to the chief executive officer and certain other executive officers of publicly traded companies. Compensation paid to these officers in excess of $1,000,000 cannot be claimed as a tax deduction by such companies unless such compensation qualifies for an exemption as performance-based compensation under Section 162(m) of the Code. Under the 1998 Stock Plan, no officer of the Company or other person whose compensation may be subject to the limitations on deductibility under Section 162(m) of the Code is eligible to receive awards under the 1998 Stock Plan relating to more than 400,000 shares of common stock in any fiscal year (the “Section 162(m) Maximum”). It is anticipated that compensation in respect of stock options and SARs granted under the 1998 Stock Plan will qualify for an exemption as performance-based compensation under Section 162(m) of the Code, if the exercise price per share for such options and SARs is at least equal to the fair market value per share of common stock on the date of grant. Other awards (if any) granted under the 1998 Stock Plan are not expected to qualify for an exemption as performance-based compensation.

Options and other rights that may be granted under the 1998 Stock Plan will vest and become immediately exercisable (to the extent not theretofore vested and exercisable), and the restrictions and forfeiture provisions applicable to restricted stock and other stock-based awards will lapse if:


	(i) any person or entity (including a “group” as defined in Section 13(d) of the Exchange Act), other than the Company or a wholly owned subsidiary thereof or an employee benefit plan of the Company or any of its subsidiaries, becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of all securities of the Company that may be cast in the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company or approved by a majority of the Board of Directors);

	(ii) as a result of, or in connection with, a cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company, or any successor entity entitled to vote generally in the election of directors of the Company or any such successor, are held in the aggregate by holders of the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction;

	(iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute the majority thereof, unless the election or nomination for election by the Company’s shareholders of such individuals first elected during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period; or

	(iv) the Plan Committee determines that a potential change in control has occurred as a result of either (a) shareholder approval of an agreement that would result in one of the events described above or (b) the acquisition of beneficial ownership, directly or indirectly, by any person, entity or group (other than the Company, any of its subsidiaries or any employee benefit plans of the Company) of securities of


	the Company representing 5% or more of the combined voting power of the Company’s outstanding securities.

In addition to any other restrictions on transfer that may be applicable under the terms of the 1998 Stock Plan or the applicable award agreement, no stock option, SAR, restricted stock award or other stock-based award or other right issued under the 1998 Stock Plan is transferable by the participant without the prior written consent of the Plan Committee, or in the case of an Outside Director, the Board of Directors, other than (a) transfers by a participant to a member of his or her Immediate Family or a trust for the benefit of the participant or a member of his or her Immediate Family (except in the case of ISOs) or (b) transfers by will or by the laws of descent and distribution (the designation of a beneficiary will not constitute a transfer).

Following the occurrence of any event that would result in the acceleration of vesting and exercisability as described above, the holders of stock options and other rights will, unless otherwise determined by the Committee, receive cash equal to the difference between the highest price paid per share of common stock in any transaction reported on the New York Stock Exchange, or paid or offered in a bona fide transaction, during the 60 days immediately prior to the change in control or potential change in control event and the exercise price of the option or other right.

In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in the Company’s corporate structure affecting the common stock, an appropriate substitution or adjustment will be made in the maximum number of shares that may be awarded under the 1998 Stock Plan, in the number and option price of options and other awards then outstanding under the 1998 Stock Plan and in the Section 162(m) Maximum. An adjusted option price shall also be used to determine the amount payable upon exercise of any SAR associated with an option.

The 1998 Stock Plan may be amended, altered or discontinued by the Board of Directors to the fullest extent permitted by the Exchange Act and the rules and regulations promulgated thereunder, provided, however, that without the approval of the Company’s shareholders, no amendment, alteration or discontinuation may be made which would (i) except as a result of a stock split, stock dividend, extraordinary cash dividend, merger, recapitalization or similar transaction affecting the common stock, increase the maximum number of shares that may be issued under the 1998 Stock Plan or increase the Section 162(m) Maximum, (ii) change the provisions governing ISOs except as required or permitted under the provisions governing ISOs in the Code, or (iii) make any change for which applicable law or regulatory authority (including the regulatory authority of the New York Stock Exchange or any other market or exchange on which the common stock is traded) would require shareholder approval or for which shareholder approval would be required to secure full deductibility of compensation received under the 1998 Stock Plan under Section 162(m) of the Code. No amendment, alteration or discontinuation shall be made which would impair the rights of an optionee without his consent. Additionally, as proposed to be amended, the Company could not, without the approval of the Company’s shareholders, reprice any outstanding options so as to provide for a lower exercise price.

The 1998 Stock Plan will expire on the tenth anniversary of its effective date, but awards granted prior to such tenth anniversary may be extended beyond that date.

A MAJORITY OF THE VOTES CAST IS NECESSARY FOR APPROVAL OF THE AMENDMENTS TO THE 1998 STOCK PLAN. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE AMENDMENTS TO THE 1998 STOCK PLAN.

The following table summarizes information about the options, warrants and rights and other equity compensation under the Company’s equity plans as of December 31, 2002.


(1)	Includes options to purchase common stock of the Company under the Coventry Share Plan, an employee stock purchase plan.

(2)	Includes options, restricted stock awards, warrants or other rights under the Company’s 1998 Stock Plan, which was approved by the shareholders of Coventry Health Care, Inc. before it became the successor to Coventry Corporation.

(3)	The number of shares and weighted average exercise price under the Coventry Share Plan cannot be determined until the end of an offering period.

(4)	Includes shares under the Company’s (i) Supplemental Executive Retirement Plan, (ii) Warrant Plan, and (iii) Individual Warrant. See below for a description of the material features of these plans.

(5)	Excludes credits to stock equivalent accounts under the Company’s 2000 Deferred Compensation Plan. No shares are reserved under the plan for the future because all amounts are payable in cash. No shares have been purchased or set aside under this plan and participants do not have any rights of shareholders with respect to balances in the stock accounts in this plan.

The material features of the equity compensation plans not approved by security holders of the Company as follows:

Supplemental Executive Retirement Plan (the “SERP”). The SERP is a non-qualified deferred compensation arrangement under the federal tax laws. The SERP allows highly compensated senior management individuals designated by the Compensation Committee to defer additional compensation beyond what they defer under the Coventry Health Care, Inc. Retirement Savings Plan (the “401(k) Plan”) and to receive employer matching contributions. Participants may contribute up to 15% of their base salary, plus up to 100% of their bonus. Aggregate employer matching contributions to the SERP and the 401(k) Plan may not exceed 4.5% of a participant’s compensation and vests in equal increments over two years. In order to receive a matching contribution, participants must contribute the maximum amount permitted under law in the 401(k) Plan.

Warrant Plan (the “Warrant Plan”). The Warrant Plan was adopted by the Board of Directors of Coventry Corporation, the Company’s predecessor, on February 27, 1997, for certain physicians providing services to Group Health Plan, Inc., a subsidiary of the Company. The Board authorized the issuance of an aggregate of 20,000 shares under the Warrant Plan to physicians approved by the Board of Directors. The Warrants were issued on May 1, 1997 and October 22, 1998 to 26 physicians at an exercise price equal to the closing market price on the dates of grant, vesting annually in equal increments over three years and terminating after five years.

Individual Warrant (the “Individual Warrant”). Effective April 19, 1999, the disinterested members of the Board of Directors approved the issuance of a Warrant for 10,000 shares to Laurence DeFrance, a former member of the Board of Directors, in recognition of the contributions made by Mr. DeFrance during his nine-year tenure on the Board and in consideration of the fact that the majority of Mr. DeFrance’s stock options were out-of-the-money and would expire 90 days following his resignation. The Warrant was issued at the closing market price on the date of grant, vesting after six months and terminating after five years.

A MAJORITY OF THE VOTES CAST IS NECESSARY FOR APPROVAL OF THE ADOPTION OF THE AMENDMENTS TO THE 1998 STOCK PLAN. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE AMENDMENTS TO THE 1998 STOCK PLAN.

Under the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder and the Company’s Amended Audit Committee Charter, which is attached as Appendix B, the Audit Committee has the sole responsibility and authority to appoint the Company’s independent auditors. The Audit Committee, comprised of independent members of the Board of Directors, has appointed Ernst & Young, LLP, certified public accountants, to be the independent auditors of the Company for the fiscal year ending December 31, 2003 and requests shareholder ratification of this action. In taking this action, the Audit Committee considered the qualifications of Ernst & Young and other independent auditors, the past performance of Ernst & Young since its retention in 2002, its independence with respect to the services to be performed and its qualifications and general adherence to professional auditing standards. A representative of Ernst & Young is expected to be present at the meeting, will have an opportunity to make a statement if he desires to do so and is expected to respond to appropriate questions.

If the appointment of Ernst & Young is not ratified by the shareholders, the Audit Committee is not obligated to appoint other independent public accountants, but will reconsider the appointment.

Fees for all services provided by Arthur Andersen LLP and Ernst & Young, LLP for 2001 and 2002, respectively, are set forth below. All fees have been paid by the Company.

Audit fees billed for the fiscal years 2001 and 2002 audits and the review of Forms 10-Q aggregated $1,760,000 and $1,645,000, respectively.

Audit-related fees billed for the fiscal years 2001 and 2002 for assurance and related services aggregated $567,000 and $135,000, respectively. The services for 2001 included internal audit services, special and statutory audits, consent and comfort letters for filings with the Securities and Exchange Commission, staff services, state regulatory reviews, litigation support, accounting consultation and staff services. The services for 2002 included retirement plan audits and services provided in relation to the Sarbanes-Oxley Act of 2002.

Tax fees billed for the fiscal years 2001 and 2002 for tax compliance, tax advice and tax planning aggregated $109,000 and $125,700, respectively.

Fees billed for all other services rendered for fiscal year 2001 aggregated $299,800 for consulting and other tax work, and for fiscal year 2002 aggregated $94,800 for HEDIS audits.

On May 15, 2002, the Board of Directors and its Audit Committee dismissed Arthur Andersen LLP as the Company’s independent public accountants and engaged Ernst & Young LLP to serve as the Company’s independent public accountants for the fiscal year ended December 31, 2002.

Arthur Andersen’s reports on the Company’s consolidated financial statements for each of the years ended December 31, 2000 and December 31, 2001, and for the quarter ended March 31, 2002, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the years ended December 31, 2001 and 2000, and for the quarter ended March 31, 2002, to the date hereof, there were no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company’s consolidated financial statements for such years and interim period; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

During the years ended December 31, 2001 and 2000, and for the quarter ended March 31, 2002, to the date of Ernst & Young’s engagement, the Company did not consult Ernst &Young with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight of the Company’s accounting functions and internal controls and processes for monitoring compliance with laws and regulations and the Company’s established Compliance and Ethics Program. The Audit Committee is composed of independent directors, as defined in Sections 303.01(B)(2)(a) and (3) of the New York Stock Exchange (“NYSE”) listing standards, and acts under a written charter first adopted and approved by the Board of Directors in February 1993, and amended in March 2000, February 2001 and February 2003, in compliance with the Sarbanes-Oxley Act of 2002 and other new regulations adopted by the Securities and Exchange Commission and the NYSE. A copy of the Audit Committee Charter, as amended, is attached to this Proxy Statement as Appendix B.

With respect to the fiscal year ended December 31, 2002, the Audit Committee hereby reports as follows:


	1. The Audit Committee has reviewed and discussed the audited financial statements with the Company’s management.

	2. The Audit Committee has discussed with its independent auditors, Ernst & Young LLP, the matters required to be discussed by Statement on Auditing Standards No. 61 (Codification of Statements on Auditing Standards, AU 380), as may be modified or supplemented.


	3. The Audit Committee has received the written disclosures and the letter from the independent accountants required by the Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), as may be modified or supplemented. In addition, the Audit Committee has discussed and considered whether the provision of non-audit services by the Company’s principal auditor, as described above, is compatible with maintaining auditor independence.

	4. Based on the review and discussion referred to in paragraphs (1) through (3) above, the Audit Committee recommended to the Company’s Board of Directors the inclusion of the audited financial statements in Coventry’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, for filing with the Securities and Exchange Commission.


	COVENTRY HEALTH CARE
	AUDIT COMMITTEE
	Lawrence N. Kugelman, Chairman
	John H. Austin, M.D.
	Elizabeth E. Tallett

The Company’s Bylaws, as amended, provide that the annual meeting of shareholders is to be held on the first Thursday in June, unless the Chairman of the Board designates a different date. The 2004 annual meeting of shareholders is expected to be held on June 3, 2004. Eligible shareholders interested in submitting a proposal for inclusion in the proxy materials for the annual meeting of shareholders in 2004 may do so by following the procedures prescribed in the Company’s Bylaws and Rule 14a-8 enacted by the Securities and Exchange Commission. In order to be considered for inclusion in the Company’s proxy materials for the 2004 annual meeting, shareholder proposals must be received by the Company at 6705 Rockledge Drive, Suite 900, Bethesda, Maryland 20817-1850, addressed to the Secretary of the Company, not later than January 1, 2004.

The Board of Directors of the Company does not know of any other matters that may come before the 2003 Annual Meeting. However, if any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote the proxy in accordance with their judgment on such matters. The enclosed proxy confers discretionary authority to take action with respect to any additional matters that may come before the 2003 Annual Meeting.

A list of shareholders of record entitled to be present and vote at the 2003 Annual Meeting will be available at the offices of the Company in Bethesda, Maryland for inspection by shareholders during regular business hours from May 22, 2003 to the date of the 2003 Annual Meeting. The list will also be available during the 2003 Annual Meeting for inspection by shareholders who are present.

YOUR REPRESENTATION AT THE 2003 ANNUAL MEETING IS IMPORTANT. IN ORDER TO ASSURE THE PRESENCE OF THE NECESSARY QUORUM, PLEASE VOTE. YOU MAY VOTE BY TOLL-FREE TELEPHONE, BY INTERNET OR BY COMPLETING, DATING, SIGNING AND RETURNING THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES. THE SIGNING OF THE PROXY WILL NOT PREVENT YOUR ATTENDING THE MEETING AND VOTING IN PERSON, SHOULD YOU SO DESIRE.


	By Order of the Board of Directors,


	ALLEN F. WISE
	President and Chief Executive Officer

The purpose of the 1998 Stock Incentive Plan (the “Plan”) is to enable Coventry Health Care, Inc., a Delaware corporation (the “Company”), to attract, retain and reward key employees of and consultants to the Company and its Subsidiaries and Affiliates, and directors who are not also employees of the Company, and to strengthen the mutuality of interests between such key employees, consultants, and directors by awarding such key employees, consultants, and directors performance-based stock incentives and/or other equity interests or equity-based incentives in the Company, as well as performance-based incentives payable in cash. The creation of the Plan shall not diminish or prejudice other compensation programs approved from time to time by the Board.

For purposes of the Plan, the following terms shall be defined as set forth below:


	A.	“Affiliate” means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity.

	B.	“Assumed Plans” has the meaning provided in Section 3(a) of the Plan.

	C.	“Assumption Time” means the time that the merger described in the Combination Agreement becomes effective as provided in Section 2.2 of the Combination Agreement.

	D.	“Board” means the Board of Directors of the Company.

	E.	“Cause” has the meaning provided in Section 5(j) of the Plan.

	F.	“Change in Control” has the meaning provided in Section 10(b) of the Plan.

	G.	“Change in Control Price” has the meaning provided in Section 10(d) of the Plan.

	H.	“Code” means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

	I.	“Combination Agreement” has the meaning provided in Section 3(a) of the Plan.

	J.	“Common Stock” means the Company’s Common Stock, par value $.01 per share.

	K.	“Committee” means the Committee referred to in Section 2 of the Plan.

	L.	“Company” means Coventry Health Care, Inc., a corporation organized under the laws of the State of Delaware or any successor corporation.

	M.	“Disability” means disability as determined under the Company’s Group Long Term Disability Insurance Plan.

	N.	“Early Retirement” means retirement, for purposes of this Plan with the express consent of the Company at or before the time of such retirement, from active employment with the Company and any Subsidiary or Affiliate prior to age 65, in accordance with any applicable early retirement policy of the Company then in effect or as may be approved by the Committee.

	O.	“Effective Date” has the meaning provided in Section 14 of the Plan.

	P.	“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto.


	Q.	“Fair Market Value” means with respect to the Common Stock, as of any given date or dates, unless otherwise determined by the Committee in good faith, the reported closing price of a share of Common Stock on the New York Stock Exchange or such other market or exchange as is the principal trading market for the Common Stock, or, if no such sale of a share of Common Stock is reported on the New York Stock Exchange or other exchange or principal trading market on such date, the fair market value of a share of Common Stock as determined by the Committee in good faith.

	R.	“Incentive Stock Option” means any Stock Option intended to be and designated as an “Incentive Stock Option” within the meaning of Section 422 of the Code.

	S.	“Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships.

	T.	“Non-Employee Director” means a member of the Board who is a Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act and an outside director within the meaning of Treasury Regulation Sec. 162-27(e)(3) promulgated under the Code.

	U.	“Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option.

	V.	“Normal Retirement” means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65.

	W.	“Other Stock-Based Award” means an award under Section 8 below that is valued in whole or in part by reference to, or is otherwise based on, the Common Stock.

	X.	“Outside Director” means a member of the Board who is not then (i) an officer or employee of the Company or any Subsidiary or Affiliate of the Company, or (ii) the direct or beneficial owner of five percent (5%) or more of the Common Stock of the Company.

	Y.	“Outside Director Option” means an award to an Outside Director under Section 9 below.

	Z.	“Plan” means this 1998 Stock Incentive Plan, as amended from time to time.

	AA.	“Restricted Stock” means an award of shares of Common Stock that is subject to restrictions under Section 7 of the Plan.

	BB.	“Restriction Period” has the meaning provided in Section 7 of the Plan.

	CC.	“Retirement” means Normal or Early Retirement.

	DD.	“Section 162(m) Maximum” has the meaning provided in Section 3(a) hereof.

	EE.	“Stock Appreciation Right” means the right pursuant to an award granted under Section 6 below to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Common Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof).

	FF.	“Stock Option” or “Option” means any option to purchase shares of Common Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below.

	GG.	“Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

The Plan shall be administered by a Committee of not less than two Non-Employee Directors, who shall be appointed by the Board and who shall serve at the pleasure of the Board. The functions of the Committee specified in the Plan may be exercised by an existing Committee of the Board composed exclusively of Non-Employee Directors. The initial Committee shall be the Compensation Committee of the Board. In the event there are not at least two Non-Employee Directors on the Board, the Plan shall be administered by the Board and all references herein to the Committee shall refer to the Board.

The Committee shall have authority to grant, pursuant to the terms of the Plan, to officers, other key employees, Outside Directors and consultants eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, and/or (iv) Other Stock-Based Awards; provided, however, that the power to grant and establish the terms and conditions of awards to Outside Directors under the Plan other than pursuant to Section 9 shall be reserved to the Board.

In particular, the Committee, or the Board, as the case may be, shall have the authority, consistent with the terms of the Plan:


	(a)	to select the officers, key employees and Outside Directors of and consultants to the Company and its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards may from time to time be granted hereunder;

	(b)	to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible persons;

	(c)	to determine the number of shares to be covered by each such award granted hereunder;

	(d)	to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); and to amend or waive any such terms and conditions to the extent permitted by Section 11 hereof;

	(e)	to determine whether and under what circumstances a Stock Option may be settled in cash or Restricted Stock under Section 5(m) or (n), as applicable, instead of Common Stock;


	(f)	to determine whether, to what extent, and under what circumstances Option grants and/or other awards under the Plan are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan and/or cash awards made outside of the Plan;


	(g)	to determine whether, to what extent, and under what circumstances shares of Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period);

	(h)	to determine whether to require payment of tax withholding requirements in shares of Common Stock subject to the award; and


	(i)	to impose any holding period required to satisfy Section 16 under the Exchange Act.

The Committee shall have the authority to adopt, alter, and repeal such rules, guidelines, and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.

All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee’s sole discretion and shall be final and binding on all persons, including the Company and Plan participants.

(a) As of the Effective Date, an aggregate of 11,000,000 shares of Common Stock may be issued by the Company under the Plan and the other stock option and incentive plans assumed by the Company (the “Assumed Plans”) under the Capital Contribution and Merger Agreement dated as of November 3, 1997 (the “Combination Agreement”) by and among, inter alia, Coventry Corporation, the Company, Principal Health Care, Inc. and Principal Mutual Life Insurance Company. The Assumed Plans are the Principal Health Care, Inc. 1997 Non-Qualified Stock Option Plan, the Coventry Corporation 1997 Stock Incentive Plan, the Coventry Corporation 1993 Stock Option Plan (as amended), the Southern Health Management Corporation 1993 Stock Option Plan, the Coventry Corporation 1993 Outside Directors Stock Option Plan (as amended), the Coventry Corporation Third Amended and Restated 1989 Stock Option Plan, and the Coventry Corporation Amended and Restated 1987 Statutory-Nonstatutory Stock Option Plan. From and after the Assumption Time, no additional shares of Common Stock may be made subject to options or awards under the Assumed Plans.

(b) The shares of Common Stock issuable under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. No officer of the Company or other person whose compensation may be subject to the limitations on deductibility under Section 162(m) of the Code shall be eligible to receive awards pursuant to this Plan relating to in excess of 400,000 shares of Common Stock in any fiscal year (the “Section 162(m) Maximum”).

(c) If any shares of Common Stock that have been optioned hereunder or under any of the Assumed Plans cease to be subject to such option, or if any shares of Common Stock that are subject to any Restricted Stock or Other Stock-Based Award granted hereunder or under any of the Assumed Plans are forfeited prior to the payment of any dividends, if applicable, with respect to such shares of Common Stock, or any such award otherwise terminates without a payment being made to the participant in the form of Common Stock, such shares shall again be available for distribution in connection with future awards under the Plan, so long as the total does not exceed the number specified in 3(a) above.

(d) In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, stock dividend, stock split or other change in corporate structure affecting the Common Stock, an appropriate substitution or adjustment shall be made in the maximum number of shares that may be awarded under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number of shares underlying Outside Director Options to be granted under Section 9 hereof, the Section 162(m) Maximum and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. An adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option.

Officers, other key employees and Outside Directors of and consultants to the Company and its Subsidiaries and Affiliates who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. Outside Directors are eligible to receive awards pursuant to Section 9 and as otherwise determined by the Board.

Stock Options may be granted alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve.

Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may be granted only to individuals who are employees of the Company or any Subsidiary of the Company.

The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights).

Options granted to officers, key employees, Outside Directors and consultants under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable.

(a) Option Price. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% (or, in the case of any employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Subsidiaries, not less than 110%) of the Fair Market Value of the Common Stock at grant, in the case of Incentive Stock Options, and not less than 100% of the Fair Market Value of the Common Stock at grant, in the case of Non-Qualified Stock Options.

(b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years (or, in the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries or parent corporations, more than five years) after the date the Option is granted.

(c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that except as provided in Section 5(g) and (h) and Section 10, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. The Committee may provide that a Stock Option shall vest over a period of future service at a rate specified at the time of grant, or that the Stock Option is exercisable only in installments. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant, in whole or in part, based on such factors as the Committee shall determine in its sole discretion.

(d) Method of Exercise. Subject to whatever installment exercise restrictions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note, or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or (except in the case of an Incentive Stock Option) after grant, payment in full or in part may also be made in the form of shares of Common Stock already owned by the optionee or, in the case of a Non-Qualified Stock Option, shares of Restricted Stock or shares subject to such Option or another award hereunder (in each case valued at the Fair Market Value of the Common Stock on the date the Option is exercised). If payment of the exercise price is made in part or in full with Common Stock, the Committee may award to the employee a new Stock Option to replace the Common Stock which was surrendered. If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Common Stock received upon the exercise shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Common Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 13(a).

(e) Transferability of Options. No Non-Qualified Stock Option shall be transferable by the optionee without the prior written consent of the Committee other than (i) transfers by the optionee to a member of his or her Immediate Family or a trust for the benefit of the optionee or a member of his or her Immediate Family, or (ii) transfers by will or by the laws of descent and distribution. No Incentive Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution and all Incentive Stock Options shall be exercisable, during the optionee’s lifetime, only by the optionee.

(f) Bonus for Taxes. In the case of a Non-Qualified Stock Option or an optionee who elects to make a disqualifying disposition (as defined in Section 422(a)(1) of the Code) of Common Stock acquired pursuant to the exercise of an Incentive Stock Option, the Committee in its discretion may award at the time of grant or thereafter the right to receive upon exercise of such Stock Option a cash bonus calculated to pay part or all of the federal and state, if any, income tax incurred by the optionee upon such exercise.

(g) Termination by Death. Subject to Section 5(k), if an optionee’s employment by the Company and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee) by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter.

(h) Termination by Reason of Disability. Subject to Section 5(k), if an optionee’s employment by the Company and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) one year from the date of termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter, in the case of an Incentive Stock Option; provided, however, that, if the optionee dies within the period specified in (i) above (or other such period as the Committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of any period that would apply if such Stock Option were a Non-Qualified Stock Option, such Stock Option will thereafter be treated as a Non-Qualified Stock Option.

(i) Termination by Reason of Retirement. Subject to Section 5(k), if an optionee’s employment by the Company and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) ninety (90) days from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the event of an Incentive Stock Option; provided however, that, if the optionee dies within the period specified in (i) above (or other such period as the Committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock

(j) Other Termination. Subject to Section 5(k), unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or (except in the case of an Incentive Stock Option) after grant, if an optionee’s employment by the Company and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate is involuntarily terminated for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of ninety (90) days or the balance of such Stock Option’s term if the involuntary termination is without Cause. For purposes of this Plan, “Cause” means (i) a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or (ii) a participant’s willful misconduct or dishonesty, which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. If an optionee voluntarily terminates employment with the Company and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate (except for Disability, Normal or Early Retirement), the Stock Option shall thereupon terminate; provided, however, that the Committee at grant or (except in the case of an Incentive Stock Option) thereafter may extend the exercise period in this situation for the lesser of ninety (90) days or the balance of such Stock Option’s term.

(k) Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. No Incentive Stock Option shall be granted to any participant under the Plan if such grant would cause the aggregate Fair Market Value (as of the date the Incentive Stock Option is granted) of the Common Stock with respect to which all Incentive Stock Options are exercisable for the first time by such participant during any calendar year (under all such plans of the Company and any Subsidiary) to exceed $100,000. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement:


	(i)	if (x) a participant’s employment is terminated by reason of death, Disability, or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Section 5(g), (h) or (i), applied without regard to the $100,000 limitation contained in Section 422(d) of the Code, is greater than the portion of such Option that is immediately exercisable as an “Incentive Stock Option” during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and

	(ii)	if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such Option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option.

(l) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Common Stock, or Restricted Stock an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made.

(m) Settlement Provisions. If the option agreement so provides at grant or (except in the case of an Incentive Stock Option) is amended after grant and prior to exercise to so provide (with the optionee’s consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Restricted Stock determined without regards to the forfeiture restrictions involved.

(n) Performance and Other Conditions. The Committee may condition the exercise of any Option upon the attainment of specified performance goals or other factors as the Committee may determine, in its

(a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised.

(b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:


	(i)	Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan.

	(ii)	Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be calculated on the basis of the Fair Market Value of the Common Stock on the date of exercise.

	(iii)	Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e) of the Plan.


	(iv)	Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Common Stock to be issued under the Plan.

	(v)	The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant.

	(vi)	The Committee may condition the exercise of any Stock Appreciation Right upon the attainment of specified performance goals or other factors as the Committee may determine, in its sole discretion.

(a) Administration. Shares of Restricted Stock may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be

made, the number of shares of Restricted Stock to be awarded to any person, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and the other terms, restrictions and conditions of the awards in addition to those set forth in Section 7(c). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient.

(b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award.


	(i)	The purchase price for shares of Restricted Stock shall be established by the Committee and may be zero.

	(ii)	Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7(b)(i).

	(iii)	Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award.


	(iv)	The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the shares of Common Stock covered by such award.

(c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions:


	(i)	In accordance with the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the “Restriction Period”), the participant shall not be permitted to sell, transfer, pledge, assign, or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance, such other factors or criteria as the Committee may determine in its sole discretion.

	(ii)	Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 13(e), in additional Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. If the Committee so determines, the award agreement may also impose restrictions on the right to vote and the right to receive dividends.

	(iii)	Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant’s employment with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant.


	(iv)	If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant promptly.

(d) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Common Stock to the recipient of a restricted stock award, subject to such performance, future service, deferral, and other terms and conditions as may be specified by the Committee.

(e) Limitation on Number of Shares of Restricted Stock. No more than five percent (5%) of the total number of shares of Common Stock outstanding may be issued as Shares of Restricted Stock under this Plan.

(a) Administration. Other Stock-Based Awards, including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Common Stock awards or options valued by reference to earnings per share or Subsidiary performance, may be granted either alone, in addition to, or in tandem with Stock Options, Stock Appreciation Rights, or Restricted Stock granted under the Plan and cash awards made outside of the Plan; provided that no such Other Stock-Based Awards may be granted in tandem with Incentive Stock Options if that would cause such Stock Options not to qualify as Incentive Stock Options pursuant to Section 422 of the Code. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Common Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee may also provide for the grant of Common Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient.

(b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 8 shall be subject to the following terms and conditions:


	(i)	Subject to the provisions of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 8 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of Common Stock or otherwise reinvested.

	(ii)	Any award under Section 8 and any shares of Common Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee in its sole discretion.

	(iii)	In the event of the participant’s Retirement, Disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 8.


	(iv)	Each award under this Section 8 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and the participant.

(a) Applicability and Administration. The provisions of this Section 9 shall apply only to awards to Outside Directors in accordance with this Section 9. The Committee shall have no authority to determine the timing of or the terms or conditions of any award under this Section 9. Instead, the Board shall have the authority to interpret its provisions and supervise its administration, subject to the provisions provided herein. All decisions made by the Board under this Section 9 shall be made by the affirmative vote of a majority of its members then in office.

(b) Current Directors. On the date of each Annual Meeting of Shareholders of the Company beginning with the year 2001, unless this Plan has been previously terminated, each person who is an Outside Director following such meeting will receive an automatic grant of a non-qualified stock option (an “Outside Director Option”) to purchase 2,000 shares of Common Stock. An Outside Director who is also the Chairman of the Board at such time will instead receive an automatic grant of an Outside Director Option to purchase 6,000 shares of Common Stock. The exercise price of each Outside Director Option granted pursuant to this Section 9(b) shall equal the Fair Market Value of such Common Stock on such option’s date of grant. No Outside Director Option granted pursuant to this Section 9 shall qualify as an Incentive Stock Option.

(c) Exercisability and Method of Exercise. Each Outside Director Option shall become exercisable on the date that is six months after the date of grant. Outside Director Options may be exercised, in whole or in part, only by notice in writing to the Company (i) stating the number of shares as to which such option is to be exercised and the address to which the certificates for such shares are to be sent, accompanied by cash, certified check or bank draft payable to the order of the Company, in an amount equal to such option’s purchase price per share multiplied by the number of shares of the Common Stock as to which such option is then being exercised or (ii) instructing the Company to deliver the shares being purchased to a broker, subject to the broker’s delivery of cash to the Company equal to such option purchase price per share multiplied by the number of shares as to which such Option is then being exercised, or (iii) delivering shares of Common Stock or Restricted Stock already owned by the Outside Director as partial or full payment of the Option in accordance with the terms and restrictions set forth under Section 5(d).

(d) Transferability of Options. Outside Director Options shall not be transferable without the prior written consent of the Board other than (i) transfers by the optionee to a member of his or her Immediate Family or a trust for the benefit of optionee or a member of his or her Immediate Family, or (ii) transfers by will or by the laws of descent and distribution.

(e) Option Agreement. Grantees of Outside Director Options shall enter into a stock option agreement in a form approved by the Board, which shall be subject to the terms and conditions of this Plan. Any agreement may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Board.

(f) Termination. The termination of Outside Director Options shall be governed by the provisions of Sections 5(g), 5(i) and 5(j) hereof as if Outside Directors were employees of the Company, except that any determination to accelerate the vesting of an Outside Director Option will be made by the Board and not by the Committee.

(g) Certain Changes. Outside Director Options shall be subject to Section 10. The number of shares and the exercise price per share of each Outside Director Option shall be adjusted automatically in the same manner as the number of shares and the exercise price for Stock Options under Section 3 hereof at any time that Stock Options are adjusted as provided in Section 3.

(h) Taxes. The Company may make such provision as it deems appropriate for the withholding of any taxes which the Company determines are required in connection with the grant or exercise of any Outside Director Option.

(a) Impact of Event. In the event of: (1) a “Change in Control” as defined in Section 10(b); or (2) a “Potential Change in Control” as defined in Section 10(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination),


	(i)	Subject to the limitations set forth below in this Section 10(a), the following acceleration provisions shall apply:


	(a) Any Stock Appreciation Rights, any Stock Option or Outside Director Option awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested.


	(b) The restrictions applicable to any Restricted Stock and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested.


	(ii)	Subject to the limitations set forth below in this Section 10(a), the value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, Outside Director Options and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined by the Board or by the Committee in its sole discretion prior to any Change in Control, be cashed out on the basis of the “Change in Control Price” as defined in Section 10(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Board or Committee may determine prior to the Change in Control.

	(iii)	The Board or the Committee may impose additional conditions on the acceleration or valuation of any award in the award agreement.

(b) Definition of Change in Control. For purposes of Section 10(a), a “Change in Control” means the happening of any of the following:


	(i)	any person or entity, including a “group” as defined in Section 13(d)(3) of the Exchange Act, other than the Company or a wholly-owned subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiaries, becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business or other than transactions which are approved by a majority of the Board); or

	(ii)	as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transactions are held in the aggregate by the holders of the Company’s securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or

	(iii)	during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company’s shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period.

(c) Definition of Potential Change in Control. For purposes of Section 10(a), a “Potential Change in Control” means the happening of any one of the following:


	(i)	The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 10(b); or

	(ii)	The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee)) of securities of the Company representing 5% or more of the combined voting power of the Company’s outstanding securities and the adoption by the Committee of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan.

(d) Change in Control Price. For purposes of this Section 10, “Change in Control Price” means the highest price per share paid in any transaction reported on the New York Stock Exchange or such other exchange or market as is the principal trading market for the Common Stock, or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Company at any time during the

60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights or, where applicable, the date on which a cash out occurs under Section 10(a)(ii).

The Board may at any time amend, alter or discontinue the Plan; provided, however, that, without the approval of the Company’s shareholders, no amendment or alteration may be made which would (a) except as a result of the provisions of Section 3 (d) of the Plan, increase the maximum number of shares that may be issued under the Plan or increase the Section 162(m) Maximum, (b) change the provisions governing Incentive Stock Options except as required or permitted under the provisions governing incentive stock options under the Code, or (c) make any change for which applicable law or regulatory authority (including the regulatory authority of the New York Stock Exchange or any other market or exchange on which the Common Stock is traded) would require shareholder approval or for which shareholder approval would be required to secure full deductibility of compensation received under the Plan under Section 162(m) of the Code. No amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Restricted Stock, Other Stock-Based Award or Outside Director Option theretofore granted, without the participant’s consent.

The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder’s consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or another basis), provided, however, the Committee may not, without the approval of the Company’s shareholders, modify any outstanding Stock Option so as to specify a lower exercise price or accept the surrender of an outstanding Stock Option and authorize the granting of a new Stock Option in substitution therefor specifying a lower exercise price. Solely for purposes of computing the Section 162(m) Maximum, if any Stock Options or other awards previously granted to a participant are canceled and new Stock Options or other awards having a lower exercise price or other more favorable terms for the participant are substituted in their place, both the initial Stock Options or other awards and the replacement Stock Options or other awards will be deemed to be outstanding (although the canceled Stock Options or other awards will not be exercisable or deemed outstanding for any other purposes).

The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu of or with respect to awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the “unfunded” status of the Plan.

(a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Common Stock is then listed, and any

(b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

(c) The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary or Affiliate any right to continued employment with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time.

(d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. The Committee may require withholding obligations to be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant.

(e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Common Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan awards).

(f) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware.

(g) The members of the Committee and the Board shall not be liable to any employee or other person with respect to any determination made hereunder in a manner that is not inconsistent with their legal obligations as members of the Board. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys’ fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same.

(h) In addition to any other restrictions on transfer that may be applicable under the terms of this Plan or the applicable award agreement, no Stock Option, Stock Appreciation Right, Restricted Stock award, or Other Stock-Based Award or other right issued under this Plan is transferable by the participant without the prior written consent of the Committee, or, in the case of an Outside Director, the Board, other than (i) transfers by an optionee to a member of his or her Immediate Family or a trust for the benefit of the optionee or a member of his or her Immediate Family or (ii) transfers by will or by the laws of descent and distribution. The designation of a beneficiary will not constitute a transfer.

(i) The Committee may, at or after grant, condition the receipt of any payment in respect of any award or the transfer of any shares subject to an award on the satisfaction of a six-month holding period, if such holding period is required for compliance with Section 16 under the Exchange Act.

The Plan shall be effective upon approval by the Board of the Company and by a majority of the votes cast by the holders of the Company’s Common Stock.

No Stock Option, Stock Appreciation Right, Restricted Stock award, Other Stock-Based Award or Outside Director Option award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date of the Plan, but awards granted prior to such tenth anniversary may be extended beyond that date.

There shall be an Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Coventry Health Care, Inc. (the “Company”) to carry out the duties and responsibilities assigned to the Audit Committee under applicable law and regulations and the rules and regulations of the New York Stock Exchange, Inc. and to further assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, and (4) the performance of the Company’s internal audit function and independent auditors.

The Company’s Code of Business Conduct and Ethics cover the Company’s Chief Executive Officer and senior financial officers and the Committee shall monitor compliance with that code. In addition, the Board may adopt further changes or additional policies based on changes in law, regulation or circumstances.

The Committee must be comprised of at least three members and no more than five members of the Board. The members of the Committee shall be appointed by the Board on the recommendation of the Nominating and Governance Committee. A director that serves on the audit committees of more than three public companies (including the Company) may serve on the Committee only if the Board affirmatively determines that the director is able to effectively serve on the Committee.

All members of the Committee shall be independent of the management of the Company and free of any relationship that, in the opinion of the Board, would interfere with their exercise of independent judgment as Committee members.

The Board must also affirmatively determine, considering all relevant facts and circumstances, that the director has no direct or indirect material relationship with the Company and may utilize the standards set out in Exhibit A in that determination. Each member of the Audit Committee must satisfy any other applicable membership requirements set forth in the listing requirements of the New York Stock Exchange.

If there is any basis for believing a Committee member is not independent, the facts and circumstances should be reported to the General Counsel and the Board, and the Committee member shall recuse himself or herself until the Board, or an independent committee thereof, has determined that the Committee member is truly independent.

All members of the Committee shall be able to read and understand fundamental financial statements. At least one member of the Committee shall have accounting or related financial management oversight experience, as the Board interprets such qualification in its business judgment. The Nominating and Governance Committee in nominating, and the Board in appointing, shall consider whether at least one member of the Committee falls within the definition of “financial expert” as defined by the Securities and Exchange Commission, and if not, why not. One member of the Committee shall serve as Chairman.

No Committee member may vote on any matter in which he or she, directly or indirectly, has a material interest.

The Committee shall meet separately at least on a quarterly basis and may from time to time require special meetings, as deemed necessary by the Chairman of the Committee. Management, the external auditors, and the internal auditors shall provide reports and information to the Committee as provided herein


	•	Determining that the Company has in place adequate systems and controls to reasonably assure the fair presentation of the Company’s financial statements and otherwise overseeing the integrity of the Company’s financial statements;

	•	Overseeing the Company’s compliance with legal and regulatory requirements;

	•	Interfacing directly with and overseeing the performance of the external auditors regarding the annual audit and quarterly reviews of the Company’s financial statements;

	•	Interfacing directly with and overseeing the performance of the internal auditors regarding the internal auditing function and the internal controls of the Company;

	•	Appointing, dismissing, overseeing, and determining the compensation paid to the external auditors and internal auditors;

	•	Overseeing the qualifications and independence of the external auditors; and

	•	Preparing the report of the Committee required to be included in the Company’s annual proxy statement.

The responsibilities of a member of the Committee are in addition to those responsibilities set out for a member of the Board. In addition to the matters set forth herein, the Committee shall perform such other functions as required by law, the Company’s Certificate of Incorporation or Bylaws, or the Board.

The Committee does not prepare financial statements on behalf of the Company or perform the Company’s audits, and its members are not the Company’s auditors and do not certify the Company’s financial statements. These functions are performed by the Company’s management and independent auditors.

The Committee shall have overall responsibility for the adequacy and effectiveness of the external and internal audit function. This shall include:


	1.	Reviewing the results of internal audits, management recommendation letters, report of the internal auditors, management’s internal control review and the adequacy and effectiveness of the internal auditing function and the internal controls of the Company, including computerized information system controls and security, the overall control environment and accounting and financial controls;

	2.	Sole authority for selecting and, where appropriate, replacing the independent auditors, approving audit services and any permissible non-audit services prior to commencement, and assuring the independence of the auditors, including the receipt of an annual written statement from the independent auditors setting forth all relationships between the auditor and the Company establishing clear hiring policies for employees and former employees of the independent auditors, and resolving any disagreements between the independent auditor and management;

	3.	Ensuring the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law and considering whether it is appropriate to regularly rotate the audit firm


	4.	Approving the audit scope and audit plan prior to the audit’s commencement and the fees and engagement terms of the independent auditors for its audit services and any permissible non-audit services;

	5.	Reviewing at least annually such information concerning the independent auditors as the Committee may determine appropriate, including a report by the independent auditor describing (1) the auditing firm’s internal quality control procedures and (2) any material issues raised by its most recent quality control review or investigation within the preceding five years and steps taken to resolve those issues;

	6.	Ensuring that the independent accountant provides the Committee with timely reports, which the Committee reviews, of (1) all critical accounting policies and practices, (2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, effects of using such alternatives, and the treatment preferred by the independent auditing firm, and (3) other material written communications between the independent auditor and management;

	7.	Reviewing with management and the independent auditors, the internal audit function and approving the scope, risk assessment and nature of the internal audit plans, any subsequent material changes in internal audit activities for the coming year and the coordination of such activities with the independent auditors;

	8.	Determining whether all or a portion of the Company’s internal audit function will be provided by third parties, and if so, hiring, evaluating and compensating the internal auditors, and assuring their ability to have direct reporting to the Committee;

	9.	Having direct access to the internal or external auditors on both a scheduled and as needed basis;


	10.	Meeting separately and regularly with management, the external auditors, and the internal auditors and discussing with them, as applicable:


	a)	The quarterly and annual financial statements, the related footnotes, disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the quality of the Company’s accounting principles, suggested changes relating to those principles, and the alternatives to those principles, the independent accountant’s audit and report on the annual financial statements, the result of the independent accountant’s review of the quarterly financial statements, the management letter provided by the independent auditor and the Company’s response, financial or non-financial arrangements that do not appear on the financial statements of the Company and their risks, transactions or dealings with parties related to the Company and the procedures used to identify related parties, the clarity of financial disclosures, and any other matter related to the Company’s independent audit;

	b)	Significant findings quarterly and during the year and management’s responses thereto, including the timetable for implementation of the recommendations to correct weaknesses in internal control;

	c)	Any difficulties encountered in the course of their audits, including any restrictions on the scope of their work or access to required information;

	d)	Any changes required in the planned scope of their audit plan;

	e)	the effect of regulatory and accounting initiatives and of any off-balance sheet structures on the Company’s financial statements.


	11.	Periodically reviewing management’s program to monitor, control, and report on compliance with the Company’s established code of conduct and ethics and applicable laws, rules, and regulations. This review shall include:


	a)	Establishing procedures for employees to confidentially and anonymously submit to the Committee concerns or issues regarding the Company’s accounting or auditing matters and procedures for the receipt, retention, and treatment of complaints regarding accounting or auditing matters, including internal controls.

	b)	Periodically reviewing and recommending changes or additions to the Company’s code of business conduct and ethics, and reviewing management recommendations to the Board for changes that reflect changes in law or policy.

	c)	Discussing with management any significant risk exposures and steps taken to monitor and control them.

	d)	Discussing the activities of the compliance and ethics program with the Company’s Compliance Officer.

	e)	Discussing with the external auditors their findings including significant risk exposures and any possible illegalities during the annual audit.


	f)	Discussing with the internal auditors regarding the teams’ findings including significant risk exposures during operational reviews.


	g)	Discussing any legal matters that may have a material impact on the Company’s financial statements or the Company’s compliance policies with legal counsel.

	h)	Considering any emerging issues that the Committee should become involved with in the future.


	12.	Recommending inclusion of the Company’s financial statements in the Annual Report on Form 10-K;

	13.	Conducting or authorizing investigations into any matters within its scope of responsibilities;

	14.	Reviewing and discussing earnings press releases and financial information and earnings guidance provided to analysts and ratings agencies;

	15.	Obtaining reports from the chief executive officer, the chief financial officer, or the chief internal auditor and retaining, at the Company’s expense, experts to advise or assist the Committee, including outside counsel, accountants, financial analysts, consultants or others;

	16.	Taking any other action permitted by applicable laws, rules, and regulations necessary to accomplish any action authorized by this Charter or to further the goals of the Committee as set forth in this Charter;

	17.	Reviewing and reassessing at least annually the adequacy of this Charter and submit it to the Board of Directors for approval;

	18.	Annually evaluating its own performance;

	19.	Preparing the Committee’s annual report for inclusion in the Company’s proxy statement.

The Committee shall maintain minutes of all meetings which shall be made available to the Board of Directors of the Company. The Chairman of the Committee shall report periodically to the Board of Directors on the Committee’s activities and findings.

The Board may use the following standards, as advised by counsel, in considering whether a director is “independent” for purposes of the Company’s Audit Committee. An independent director is a director who:


	(1)	is neither an employee of the Company nor has been an employee of the Company during the past five years;

	(2)	is not receiving compensation from the Company or any of its affiliates, other than compensation for board or committee service;

	(3)	is not affiliated with the Company or its subsidiaries;

	(4)	is not a partner in, controlling shareholder or executive officer of any business organization or executive officer or director of any not for profit corporation to which the Company made or received payments in any of the past three years that exceed 2% of the Company’s consolidated gross revenues for that year or that exceeded 5% of such entity’s consolidated gross revenues for that year or $200,000, whichever is greater;

	(5)	is not and has not been in the past five years part of an interlocking directorate in which any of the Company’s executives serve on the compensation committee of an entity that employs that director;

	(6)	is not and has not been in the past five years affiliated or employed by the current or former auditor of the Company (or auditor of the Company’s affiliate);


	(7)	does not share a home with (other than as an employee) or is not the spouse, parent, sibling, child, mother or father-in-law, brother or sister-in-law, son or daughter-in-law of any person described in (1) through (6).

COVENTRY HEALTH CARE, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 2003

This Proxy is solicited on behalf of the Board of Directors. The undersigned hereby appoints Allen F. Wise and Shirley R. Smith, or either of them, as proxies, each with the power to appoint his or her substitute and hereby authorizes them to represent and to vote, as designated below, all of the shares of common stock of Coventry Health Care, Inc. which the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held on June 5, 2003 at 9:30 a.m., Eastern Daylight Saving Time, at the Bethesda Marriott, 5151 Pooks Hill Road, Bethesda, Maryland 20814, Telephone (301)897-9400, or any adjournment thereof.

The persons named as proxies above are authorized to vote in their discretion on other matters that may properly come before this meeting.

SHAREHOLDERS MAY VOTE BY TOLL FREE TELEPHONE OR INTERNET BY FOLLOWING THE INSTRUCTIONS ON THE REVERSE SIDE OF THIS PROXY OR SHAREHOLDERS MAY VOTE BY COMPLETING, DATING, AND SIGNING THIS PROXY AND RETURNING IT PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE. THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS ONE, TWO AND THREE.

Please read the Company’s 2002 Annual Report and Proxy Statement prior to voting. These documents may be obtained three ways:

	1.		Intranet: These documents are posted on the Company’s internal network, http://cvtynet. All Company employees have computer access to http://cvtynet at their various office locations. If you need instructions on how to access http://cvtynet, please see your local human resources representative.

	2.		Internet: These documents are also posted on the Company’s corporate website, www.cvty.com. Employees may or may not have access to the Internet during office hours.

	3.		Mail: If you would like to have these documents mailed to you at your place of employment, please send your request by e-mail to Investor-Relations@cvty.com.

1. ELECTION OF DIRECTORS. The undersigned casts the number of votes indicated above in favor of the election of each of the nominees indicated below to serve as Class III Directors of the Company until the Annual Meeting of Shareholders in the year 2006.

Nominees for Class III Directors

01 John H. Austin, MD., 02 Rodman W. Moorhead, III and 03 Timothy T. Weglicki


FOR all nominees listed		WITHHOLD AUTHORITY
(except as marked to the contrary)		to vote for all nominees
¨		¨

To withhold authority to vote for one or more nominees, write the name(s) of such nominee(s) in the following space:


		FOR	AGAINST	ABSTAIN
2.	Amendment to 1998 Amended and Restated Stock Incentive Plan.	¨	¨	¨
		FOR	AGAINST	ABSTAIN
3.	Ratification of the appointment of Ernst & Young, LLP, as the Company’s Independent auditors for 2003.	¨	¨	¨


By clicking the box to the right, I consent to view the Annual Reports and Proxy Statements and other shareholder communications electronically via the internet. I understand that the Company may no longer distribute printed materials to me for any future shareholder meetings until my consent is revoked. I understand that I may revoke my consent at any time by contacting the Company’s transfer agent, Mellon Investor Services LLC, Ridgefield Park, NJ. I understand that costs normally associated with electronic access such as usage and telephone charges will be my responsibility.		¨


		Dated:______________________________,2003

		Signature

		Name (Please Print)

		Signature if held jointly

		Name (Please Print)

		Sign exactly as your name or names appear on the first page of this proxy. When shares are held by joint tenants, both parties should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name as specified. If a partnership, please sign in partnership name by authorized person.

Coventry Health Care 401(k) Plan Participants:
As a Plan Participant you have the right to direct the Plan Trustee how to vote the shares of Coventry Health Care common stock that are allocated to your Plan account and shown on the attached voting instruction card. The Trustee will hold your instructions in complete confidence except as may be necessary to meet legal requirements.

It is important that you read and understand the information in the Company’s Annual Report and Proxy Statement before voting. You may view these documents on the Company’s Intranet at http://cvtynet or its corporate internet site at www.cvty.com. You may also request that copies be sent to you by sending an e-mail to Investor-Relations@cvty.com.

The Trustee must receive your voting instructions by June 3, 2003. If the Trustee does not receive your instructions by that date, the Trustee will vote your shares in the same proportion as the shares for which the Trustee has received proper instruction from the other Plan Participants who do vote their shares.

You will receive a separate set of proxy solicitation materials for any shares of common stock that you own other than Plan shares. Your non-Plan shares must be voted separately from your Plan shares.

Internet and telephone voting is available through 11PM Eastern Time the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card.

If you vote your proxy by Internet or by telephone, you do NOT need to mail back your proxy card.

You can view the Annual Report and Proxy Statement
on the Internet at www.cvty.com

COVENTRY HEALTH CARE, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 2003

This Proxy is solicited on behalf of the Board of Directors. The undersigned hereby appoints Allen F. Wise and Shirley R. Smith, or either of them, as proxies, each with the power to appoint his or her substitute and hereby authorizes them to represent and to vote, as designated below, all of the shares of common stock of Coventry Health Care, Inc. which the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held on June 5, 2003 at 9:30 a.m., Eastern Daylight Saving Time, at the Bethesda Marriott, 5151 Pooks Hill Road, Bethesda, Maryland 20814, Telephone (301)897-9400, or any adjournment thereof.

The persons named as proxies above are authorized to vote in their discretion on other matters that may properly come before this meeting.


FOR all nominees listed		WITHHOLD AUTHORITY
(except as marked to the contrary)		to vote for all nominees
¨		¨

To withhold authority to vote for one or more nominees, write the name(s) of such nominee(s) in the following space:


		FOR	AGAINST	ABSTAIN
2.	Amendment to 1998 Amended and Restated Stock Incentive Plan.	¨	¨	¨
		FOR	AGAINST	ABSTAIN
3.	Ratification of the appointment of Ernst & Young, LLP, as the Company’s Independent auditors for 2003.	¨	¨	¨


By clicking the box to the right, I consent to view the Annual Reports and Proxy Statements and other shareholder communications electronically via the internet. I understand that the Company may no longer distribute printed materials to me for any future shareholder meetings until my consent is revoked. I understand that I may revoke my consent at any time by contacting the Company’s transfer agent, Mellon Investor Services LLC, Ridgefield Park, NJ. I understand that costs normally associated with electronic access such as usage and telephone charges will be my responsibility.		¨


		Dated:______________________________,2003

		Signature

		Name (Please Print)

		Signature if held jointly

		Name (Please Print)

		Sign exactly as your name or names appear on the first page of this proxy. When shares are held by joint tenants, both parties should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name as specified. If a partnership, please sign in partnership name by authorized person.

Internet and telephone voting is available through 11PM Eastern Time
the day prior to annual meeting day.

Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.

If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.

You can view the Annual Report and Proxy Statement
on the Internet at www.cvty.com

COVENTRY HEALTH CARE, INC.
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 5, 2003

The persons named as proxies above are authorized to vote in their discretion on other matters that may properly come before this meeting.


FOR all nominees listed		WITHHOLD AUTHORITY
(except as marked to the contrary)		to vote for all nominees
¨		¨

To withhold authority to vote for one or more nominees, write the name(s) of such nominee(s) in the following space:


		FOR	AGAINST	ABSTAIN
2.	Amendment to 1998 Amended and Restated Stock Incentive Plan.	¨	¨	¨
		FOR	AGAINST	ABSTAIN
3.	Ratification of the appointment of Ernst & Young, LLP, as the Company’s Independent auditors for 2003.	¨	¨	¨


By clicking the box to the right, I consent to view the Annual Reports and Proxy Statements and other shareholder communications electronically via the internet. I understand that the Company may no longer distribute printed materials to me for any future shareholder meetings until my consent is revoked. I understand that I may revoke my consent at any time by contacting the Company’s transfer agent, Mellon Investor Services LLC, Ridgefield Park, NJ. I understand that costs normally associated with electronic access such as usage and telephone charges will be my responsibility.		¨


		Dated:______________________________,2003

		Signature

		Name (Please Print)

		Signature if held jointly

		Name (Please Print)

		Sign exactly as your name or names appear on the first page of this proxy. When shares are held by joint tenants, both parties should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name as specified. If a partnership, please sign in partnership name by authorized person.

You can view the Annual Report
and Proxy Statement on the Internet at
www.cvty.com


Filed by the Registrantþ
Filed by a Party other than the Registranto




Check the appropriate box:

o Preliminary Proxy Statement		o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ Definitive Proxy Statement

o Definitive Additional Materials
o Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12


		Number of Shares
		of Common Stock			Percent of
Name and Address of Beneficial Owner		Beneficially Owned			Common Stock

Warburg Pincus(1)			10,127,384			17.2	%
	466 Lexington Avenue New York, NY 10017
Wellington Management Company, LLP(2)			6,908,224			11.7	%
	75 State Street Boston, MA 02109
Vanguard Specialized Funds—Vanguard Health Care Fund(3)			3,585,000			6.1	%
	P.O. Box 2600 Valley Forge, PA 19482-2600
John H. Austin, M.D.			140,559	(4)		*
Joel Ackerman(1)(5)			10,128,848			17.2	%
Emerson D. Farley, Jr., M.D.			82,010	(4)		*
Lawrence N. Kugelman			67,372	(4)		*
Robert W. Morey			117,439	(4)		*
Rodman W. Moorhead, III(1)(5)			10,134,495			17.2	%
Elizabeth E. Tallett			12,200	(4)		*
Timothy T. Weglicki			13,200	(4)		*
Allen F. Wise			890,722	(4)		1.5	%
Harvey C. DeMovick, Jr.			178,392	(4)		*
Bernard J. Mansheim, M.D.			133,621	(4)		*
Thomas P. McDonough			426,168	(4)		*
Dale B. Wolf			423,433	(4)		*
All executive officers and directors as a group (24 persons)			13,438,372	(4)		22.1	%



		Annual Compensation								Long Term Compensation Awards

								Other Annual		Restricted		Underlying		All Other
Name and Principal Position		Year		Salary		Bonus(1)		Compensation(2)		Stock(3)		Options(#)(4)		Compensation(5)(6)

Allen F. Wise			2002	$	892,308	$	2,100,000	$	164,230	$	5,710,000		200,000	$	1,455,826
	President and Chief		2001	$	699,998	$	1,300,000	$	111,116	$	2,767,500		—	$	943,772
	Executive Officer		2000	$	696,152	$	1,000,000		*		—		—	$	535,975
Thomas P. McDonough			2002	$	594,230	$	1,000,000	$	74,450	$	2,141,250		—	$	613,096
	Executive Vice President		2001	$	449,982	$	600,000		*	$	922,500		—	$	435,468
	and Chief Operating		2000	$	448,060	$	500,000		*		—		—	$	291,561
	Officer
Dale B. Wolf			2002	$	544,230	$	1,000,000	$	102,809	$	2,141,250		—	$	585,924
	Executive Vice President		2001	$	399,984	$	600,000	$	73,314	$	1,383,750		—	$	410,231
	Chief Financial Officer		2000	$	398,062	$	500,000		*		—		—	$	272,896
	and Treasurer
Harvey C. DeMovick, Jr.			2002	$	359,231	$	400,000		*	$	285,500		—	$	221,261
	Senior Vice President,		2001	$	298,475	$	330,000		*	$	461,250		—	$	159,190
	Customer Service		2000	$	278,480	$	190,000		*		—			$	118,734
	Operations and Chief Information Officer
Bernard J. Mansheim, M.D.			2002	$	349,231	$	375,000		*	$	428,250		—	$	215,546
	Senior Vice President		2001	$	329,992	$	275,000		*	$	461,250		—	$	154,616
	and Chief Medical Officer		2000	$	328,069	$	220,000		*		—		—	$	139,601




	Dec. 97		Dec. 98		Dec. 99		Dec. 00		Dec. 01		Dec. 02


Coventry Health Care		100.00		57.79		44.26		175.00		130.82		190.36
S&P 500 Index		100.00		128.58		155.63		141.46		124.65		97.10
Peer Group		100.00		114.33		102.02		180.15		164.05		172.49


								(c) Number of securities
								remaining available for future
		(a) Number of securities to						issuance under equity
		be issued upon exercise of			(b) Weighted-average exercise			compensation plans (excluding
		outstanding options,			price of outstanding options,			securities reflected in
Plan Category		warrant and rights			warrants and rights			column (a))

Equity compensation plans approved by security holders (1)(2)			3,800,523	(3)	$	12.22	(3)		1,568,312
Equity compensation plans not approved by security holders (4)(5)			14,450		$	7.63			122,892

	Total		3,814,973			—			1,691,204


About the Meeting		1
Proposal One: Election of Directors		4
Business Experience of Nominees and Continuing Directors		5
Certain Board Information		7
Committees of the Board		7
Voting Stock Ownership of Principal Shareholders, Directors and Executive Officers		8
Executive Compensation		11
	Summary Compensation Table	11
	Option Grants in 2002	12
	Aggregated Option Exercises in 2002 and Option Values at December 31, 2002	12
	Directors Compensation	13
	Employment Contracts, Termination of Employment and Change-in-Control Arrangements	13
	2000 Deferred Compensation Plan	16
Report of the Compensation Committee		17
Performance Graph		21
Compensation Committee Interlocks and Insider Participation		21
Certain Relationships and Related Transactions		22
Section 16(a) Beneficial Ownership Reporting Compliance		23
Proposal Two: Amendments to Amended and Restated 1998 Stock Incentive Plan		23
Equity Compensation Plan Information		29
Description of Equity Compensation Plans Not Approved by Security Holders		29
Proposal Three: Ratification of Independent Auditors		30
Fees Paid to Independent Auditors		30
Change in Independent Public Accountants		31
Report of the Audit Committee		31
Shareholder Proposals		32
Other Matters		32
Appendix A — Amended and Restated 1998 Stock Incentive Plan		A-1
Appendix B — Audit Committee Charter		B-1

1.		ELECTION OF DIRECTORS. The undersigned casts the number of votes indicated above in favor of the election of each of the nominees indicated below to serve as Class III Directors of the Company until the Annual Meeting of Shareholders in the year 2006.

		Nominees for Class III Directors

		01 John H. Austin, MD., 02 Rodman W. Moorhead, III and 03 Timothy T. Weglicki


Internet		Telephone		Mail
http://www.eproxy.com/cvh		1-800-435-6710
Use the Internet to vote your proxy. Have your proxy card in hand when you access the web site. You will be prompted to enter your control number, located in the box below, to create and submit an electronic ballot.	OR	Use any touch-tone telephone to vote your proxy. Have your proxy card in hand when you call. You will be prompted to enter your control number, located in the box below, and then follow the directions given.	OR	Mark, sign and date your proxy card and return it in the enclosed postage-paid envelope.