UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-31719

Molina Healthcare, Inc.

(Exact name of registrant as specified in its charter)


Delaware		13-4204626
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

200 Oceangate, Suite 100
Long Beach, California		90802
(Address of principal executive offices)		(Zip Code)

(562) 435-3666
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero		Accelerated filerþ	Non-accelerated filero (Do not check if a smaller reporting company)			Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

The number of shares of the issuer’s Common Stock, par value $0.001 per share, outstanding as of ~~July 25,~~October 24, 2008, was approximately ~~27,468,000.~~26,926,000.

PART I — FINANCIAL INFORMATION

Item 1:Financial Statements.

MOLINA HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2008 2007
(Unaudited)
(Amounts in thousands, except per-share data)
ASSETS
Current assets:
Cash and cash equivalents $ 425,424 $ 459,064
Investments 196,268 242,855
Receivables 113,597 111,537
Deferred income taxes 11,557 8,616
Prepaid expenses and other current assets 14,484 12,521

Total current assets 761,330 834,593
Property and equipment, net 59,191 49,555
Goodwill and intangible assets, net 204,182 207,223
Investments 66,786 —
Restricted investments 29,875 29,019
Receivable for ceded life and annuity contracts 28,143 29,240
Other assets 22,247 21,675

Total assets $ 1,171,754 $ 1,171,305

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 305,541 $ 311,606
Accounts payable and accrued liabilities 61,872 69,266
Deferred revenue 50,170 40,104
Income taxes payable 11,137 5,946

Total current liabilities 428,720 429,922
Long-term debt 200,000 200,000
Deferred income taxes 5,297 10,136
Liability for ceded life and annuity contracts 28,143 29,240
Other long-term liabilities 17,139 14,529

Total liabilities 679,299 680,827

Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized, outstanding 27,453 shares at June 30, 2008 and 28,444 shares at December 31, 2007 29 28
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding — —
Additional paid-in capital 191,326 185,808
Accumulated other comprehensive (loss) income (2,975 ) 272
Retained earnings 354,431 324,760
Treasury stock, at cost; 2,332 shares at June 30, 2008 and 1,201 shares at December 31, 2007 (50,356 ) (20,390 )

Total stockholders’ equity 492,455 490,478

Total liabilities and stockholders’ equity $ 1,171,754 $ 1,171,305

~~See accompanying notes.~~


	September 30,			December 31,
	2008			2007
	(Unaudited)
	(Amounts in thousands, except per-share data)
ASSETS
Current assets:
Cash and cash equivalents	$	382,436		$	459,064
Investments		163,676			242,855
Receivables		169,760			111,537
Deferred income taxes		14,172			8,616
Prepaid expenses and other current assets		14,402			12,521

Total current assets		744,446			834,593
Property and equipment, net		64,633			49,555
Goodwill and intangible assets, net		200,783			207,223
Investments		63,827			—
Restricted investments		36,510			29,019
Receivable for ceded life and annuity contracts		27,828			29,240
Other assets		19,846			21,675

Total assets	$	1,157,873		$	1,171,305


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable	$	298,787		$	311,606
Accounts payable and accrued liabilities		70,918			69,266
Deferred revenue		19,153			40,104
Income taxes payable		7,755			5,946

Total current liabilities		396,613			426,922
Long-term debt		200,000			200,000
Deferred income taxes		6,598			10,136
Liability for ceded life and annuity contracts		27,828			29,240
Other long-term liabilities		18,740			14,529

Total liabilities		649,779			680,827

Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized, outstanding 27,393 shares at September 30, 2008 and 28,444 shares at December 31, 2007		27			28
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares outstanding		—			—
Additional paid-in capital		163,648			185,808
Accumulated other comprehensive (loss) income		(4,537	)		272
Retained earnings		371,617			324,760
Treasury stock, at cost; 1,292 shares at September 30, 2008 and 1,201 shares at December 31, 2007		(22,661	)		(20,390	)

Total stockholders’ equity		508,094			490,478

Total liabilities and stockholders’ equity	$	1,157,873		$	1,171,305

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(Amounts in thousands, except
net income per share)
(Unaudited)
Revenue:

Premium revenue $ 761,153 $ 607,127 $ 1,490,791 $ 1,163,362
Investment income 5,338 6,761 12,742 13,429

Total revenue 766,491 613,888 1,503,533 1,176,791
Expenses:

Medical care costs 640,829 516,865 1,267,176 993,342
General and administrative expenses 87,074 67,208 165,166 130,596
Depreciation and amortization 8,330 6,749 16,482 13,192
Impairment charge on purchased software — 782 — 782

Total expenses 736,233 591,604 1,448,824 1,137,912

Operating income 30,258 22,284 54,709 38,879
Interest expense (2,307 ) (725 ) (4,579 ) (1,850 )

Income before income taxes 27,951 21,559 50,130 37,029
Provision for income taxes 11,435 8,245 20,459 14,123

Net income $ 16,516 $ 13,314 $ 29,671 $ 22,906

Net income per share:
Basic $ 0.59 $ 0.47 $ 1.05 $ 0.81

Diluted $ 0.59 $ 0.47 $ 1.05 $ 0.81

Weighted average shares outstanding:
Basic 27,997 28,233 28,229 28,192

Diluted 28,044 28,343 28,324 28,309

~~See accompanying notes.~~


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Amounts in thousands, except
				net income per share)
				(Unaudited)
Revenue:
Premium revenue	$	791,554		$	628,402		$	2,282,345		$	1,791,764
Investment income		4,775			7,632			17,517			21,061

Total revenue		796,329			636,034			2,299,862			1,812,825
Expenses:
Medical care costs		669,355			525,902			1,936,531			1,519,244
General and administrative expenses		88,030			74,235			253,196			204,831
Depreciation and amortization		8,515			7,082			24,997			20,274
Impairment charge on purchased software		—			—			—			782

Total expenses		765,900			607,219			2,214,724			1,745,131

Operating income		30,429			28,815			85,138			67,694
Interest expense		(1,980	)		(530	)		(6,559	)		(2,380	)

Income before income taxes		28,449			28,285			78,579			65,314
Provision for income taxes		11,263			10,772			31,722			24,895

Net income	$	17,186		$	17,513		$	46,857		$	40,419

Net income per share:
Basic	$	0.63		$	0.62		$	1.68		$	1.43

Diluted	$	0.62		$	0.62		$	1.67		$	1.43

Weighted average shares outstanding:
Basic		27,449			28,306			27,971			28,229

Diluted		27,582			28,441			28,087			28,356

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended
June 30,
2008 2007
(Amounts in thousands)
(Unaudited)
Operating activities

Net income $ 29,671 $ 22,906
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,482 13,192
Amortization of deferred financing costs 813 475
Deferred income taxes (5,649 ) (4,763 )
Stock-based compensation 3,587 3,644
Changes in operating assets and liabilities:
Receivables (2,060 ) 4,526
Prepaid expenses and other current assets (1,963 ) (1,353 )
Medical claims and benefits payable (6,065 ) 13,191
Deferred revenue 10,066 26,205
Accounts payable and accrued liabilities (10,620 ) 4,619
Income taxes 5,191 5,232

Net cash provided by operating activities 39,453 87,874

Investing activities

Purchases of equipment (17,098 ) (10,440 )
Purchases of investments (163,447 ) (42,816 )
Sales and maturities of investments 137,805 46,117
Increase in restricted cash (856 ) (3,326 )
Cash paid in business purchase transaction (1,000 ) —
Increase in other assets (2,177 ) (864 )
Increase in other long-term liabilities 2,610 4,484

Net cash used in investing activities (44,163 ) (6,845 )

Financing activities

Treasury stock purchases (29,966 ) —
Repayment of amounts borrowed under credit facility — (15,000 )
Payment of credit facility fees — (475 )
Tax (expense) benefit from employee stock compensation recorded as additional paid-in capital (156 ) 642
Proceeds from exercise of stock options and employee stock purchases 1,192 1,656

Net cash used in financing activities (28,930 ) (13,177 )

Net (decrease) increase in cash and cash equivalents (33,640 ) 67,852
Cash and cash equivalents at beginning of period 459,064 403,650

Cash and cash equivalents at end of period $ 425,424 $ 471,502

Supplemental cash flow information

Cash paid during the period for:
Income taxes $ 20,307 $ 9,715

Interest $ 3,892 $ 2,041

Schedule of non-cash investing and financing activities:
Unrealized (loss) gain on investments $ (5,443 ) $ 312
Deferred taxes 2,196 (116 )

Net unrealized (loss) gain on investments $ (3,247 ) $ 196

Retirement of common stock used for stock-based compensation $ (366 ) $ (117 )

Accrued purchases of equipment $ 1,595 $ 354

Cumulative effect of adoption of Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes
$ — $ 445

Details of business purchase transaction:
Fair value of assets acquired $ 2,262 $ —
Common stock issued to seller (1,262 ) —

Net cash paid in business purchase transaction $ 1,000 $ —

Business purchase transactions adjustments:
Accounts payable and accrued liabilities $ 1,265 $ —
Deferred taxes 65 873

Goodwill and intangible assets, net $ 1,330 $ 873

~~See accompanying notes.~~


	Nine Months Ended
	September 30,
	2008			2007
	(Amounts in thousands)
	(Unaudited)
Operating activities
Net income	$	46,857		$	40,419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,997			20,274
Amortization of deferred financing costs		1,219			646
Deferred income taxes		(6,135	)		(4,139	)
Stock-based compensation		5,769			5,238
Tax provision from employee stock compensation recorded as additional paid-in capital		(247	)		—
Changes in operating assets and liabilities:
Receivables		(58,223	)		(13,310	)
Prepaid expenses and other current assets		(1,881	)		(2,161	)
Medical claims and benefits payable		(12,819	)		18,674
Accounts payable and accrued liabilities		(666	)		14,283
Deferred revenue		(20,951	)		23,923
Income taxes		1,809			8,989

Net cash (used in) provided by operating activities		(20,271	)		112,836


Investing activities
Purchases of equipment		(28,314	)		(16,514	)
Purchases of investments		(181,377	)		(85,252	)
Sales and maturities of investments		188,896			59,292
Increase in restricted cash		(7,491	)		(7,608	)
Cash paid in business purchase transaction		(1,000	)		—
Increase in other assets		(578	)		(2,921	)
Increase in other long-term liabilities		4,211			6,569

Net cash used in investing activities		(25,653	)		(46,434	)


Financing activities
Treasury stock purchases		(32,237	)		—
Repayment of amounts borrowed under credit facility		—			(25,000	)
Payment of credit facility fees		—			(551	)
Excess tax benefits from employee stock compensation		43			554
Proceeds from exercise of stock options and employee stock purchases		1,490			2,539

Net cash used in financing activities		(30,704	)		(22,458	)

Net (decrease) increase in cash and cash equivalents		(76,628	)		43,944
Cash and cash equivalents at beginning of period		459,064			403,650

Cash and cash equivalents at end of period	$	382,436		$	447,594


Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	36,127		$	15,003

Interest	$	3,945		$	2,695

Schedule of non-cash investing and financing activities:
Unrealized (loss) gain on investments	$	(7,833	)	$	720
Deferred taxes		3,024			(272	)

Net unrealized (loss) gain on investments	$	(4,809	)	$	448

Retirement of common stock used for stock-based compensation	$	512		$	480

Accrued purchases of equipment	$	541		$	290

Retirement of treasury stock	$	29,966		$	—

Cumulative effect of adoption of Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes	$	—		$	445

Details of business purchase transaction:
Fair value of assets acquired	$	(2,262	)	$	—
Common stock issued to seller		1,262			—

Net cash paid in business purchase transaction	$	(1,000	)	$	—

Business purchase transactions adjustments:
Accounts payable and accrued liabilities	$	1,265		$	—
Deferred taxes		65			2,041

Goodwill and intangible assets, net	$	1,330		$	2,041

MOLINA HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
~~June~~

September 30, 2008

1. Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. (the “Company”) is a multi-state managed care organization participating exclusively in government-sponsored health care programs for low-income persons, such as the Medicaid program and the State Children’s Health Insurance Program, or SCHIP. We also serve a small number of members who are dually eligible under both the Medicaid and the Medicare programs, and commencing in January 2007 we began to serve a small number of low-income Medicare members. We conduct our business primarily through nine licensed health plans in the states of California, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. The health plans are locally operated by our respective wholly owned subsidiaries in those nine states, each of which is licensed as a health maintenance organization, or HMO. See Note 10, “Subsequent Events,” regarding our Florida health plan.

Our results of operations include the results of the November 1, 2007 acquisition of Mercy CarePlus, a Medicaid managed care organization based in St. Louis, Missouri.

Consolidated and Interim Financial Information

The condensed consolidated financial statements include the accounts of the Company and all majority owned subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented, which consist solely of normal recurring adjustments, have been included. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of income for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2008. Financial information related to subsidiaries acquired during any year is included only for the period subsequent to their acquisition.

The unaudited condensed consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, 2007. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2007 audited consolidated financial statements have been omitted. These unaudited condensed consolidated interim financial statements should be read in conjunction with our December 31, 2007 audited financial statements. Certain 2007 amounts in the condensed consolidated statement of cash flows regarding stock-based compensation have been reclassified to conform to the 2008 presentation.

2. Significant Accounting Policies

Earnings Per Share

The denominators for the computation of basic and diluted earnings per share are calculated as follows:


											Three Months Ended September 30,					Nine Months Ended September 30,
	Three Months Ended June 30,					Six Months Ended June 30,					2008			2007		2008			2007
	2008			2007		2008			2007		(in thousands)
Shares outstanding at the beginning of the period		28,479,000			28,199,000		28,444,000			28,119,000		27,453			28,284		28,444			28,119
Weighted average number of treasury shares purchased		(489,000	)		—		(244,000	)		—		(20	)		—		(549	)		—
Weighted average number of shares issued under employee stock plans		7,000			34,000		29,000			74,000		16			22		76			110

Denominator for basic earnings per share		27,997,000			28,233,000		28,229,000			28,193,000		27,449			28,306		27,971			28,229
Dilutive effect of employee stock options and restricted stock		47,000			110,000		95,000			116,000		133			135		116			127

Denominator for diluted earnings per share		28,044,000			28,343,000		28,324,000			28,309,000		27,582			28,441		28,087			28,356

Stock-Based Compensation

At ~~June~~September 30, 2008, we had employee equity incentives outstanding under two plans: (1) the 2002 Equity Incentive Plan; and (2) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). ~~Charged to general and administrative expenses, total stock-based compensation expense (net of tax) for the three and six months ended June 30, 2008 and 2007 was as follows:~~

Three Months Ended Six Months
June 30, Ended June 30,
2008 2007 2008 2007
(in thousands)
Stock options (including shares issued under our employee stock purchase plan) $ 452 $ 567 $ 817 $ 1,086
Restricted stock awards 775 534 1,306 1,173

Total stock-based compensation expense, net of tax $ 1,227 $ 1,101 $ 2,123 $ 2,259

As of June 30, 2008, unrecognized compensation expense related to stock options totaled $2.6 million, which we expect to recognize over a weighted-average period of 2.2 years. Also as of June 30, 2008, unrecognized compensation expense related to restricted stock awards totaled $16.9 million, which we expect to recognize over a weighted-average period of 3.2 years.

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R),Share-Based Payment.Restricted stock awards are valued based on the closing market price of our common stock on the grant date. The Black-Scholes valuation model is used to estimate the fair value of stock options atas of the grant date. The risk-free interest rate is based on the implied yield available at June 30, 2008 on U.S. treasury zero coupon issues for the expected option term. The expected volatility is based on historical volatility levels of our common stock. Beginning in the first quarter of 2008, we used an expected term for each option award based on historical experience of employee post-vesting exercise and termination behavior. Prior to 2008, the expected option term of each award granted was calculated using the “simplified method” in accordance with Staff Accounting Bulletin No. 107. This change did not produce materially different valuation results for the stock options awarded in the first half of 2008. For both restricted stock and stock option awards, the expense is recognized over the vesting period, generally straight-line over four years. ~~The~~

Charged to general and administrative expenses, total stock-based compensation expense (net of tax at the combined federal and state statutory tax rate) for the three and nine months ended September 30, 2008 and 2007 was as follows:


	Three Months Ended				Nine Months
	September 30,				Ended September 30,
	2008		2007		2008		2007
	(in thousands)
Stock options (including shares issued under our employee stock purchase plan)	$	436	$	312	$	1,291	$	1,398
Restricted stock awards		918		677		2,286		1,850

Total stock-based compensation expense, net of tax	$	1,354	$	989	$	3,577	$	3,248

As of September 30, 2008, unrecognized compensation expense related to stock options totaled $2.1 million, which we expect to recognize over a weighted-average period of 1.9 years. Also as of September 30, 2008, unrecognized compensation expense related to restricted stock awards totaled $15.5 million, which we expect to recognize over a weighted-average period of 3.0 years.

We used the following assumptions ~~used~~ in the Black-Scholes valuation model for ~~options awarded in the three and six months ended June 30, 2008 and 2007 were as follows:~~options:


													Three Months Ended					Nine Months Ended
	Three Months Ended June 30,						Six Months Ended June 30,						September 30,					September 30,
	2008			2007			2008			2007			2008⁽¹⁾		2007			2008			2007
Risk-free interest rate		2.9	%		4.7	%		2.5	%		4.5	%		—		4.6	%		2.5	%		4.5	%
Expected volatility		45.7	%		48.7	%		45.3	%		48.8	%		—		38.0	%		45.3	%		48.2	%
Expected option term (in years)		4			6			4			6			—		6			4			6
Expected dividend yield	None			None			None			None				—	None			None			None
Grant date weighted-average fair value per share	$	9.68		$	16.96		$	12.80		$	16.54			—	$	12.05		$	12.80		$	16.30

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(the “FSP”).The FSP requires the proceeds from the issuance of such convertible debt instruments to be allocated between a liability component and an equity component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding, as additional non-cash interest expense. The change in accounting treatment is effective for fiscal years beginning after December 15, 2008, and shall be applied retrospectively to prior periods. The FSP changes the accounting treatment for our $200.0 million 3.75% Convertible Senior Notes due 2014, which were issued in October 2007 (see Note 6, ~~to the condensed consolidated financial statements included in this quarterly report,~~ “Long-Term Debt”). The impact of this new accounting treatment will result in an increase to non-cash interest expense beginning in fiscal year 2009 for financial statements covering past and future periods. Assuming a 7.9% interest rate, we have estimated the incremental impact of the FSP to our results of operations in 2009 to be $3.4 million, or $0.13 per diluted share, net of tax. This estimate assumes a 38% ~~effective~~combined federal and state statutory tax rate and 27 million diluted shares outstanding. We estimate the retroactive adjustment for prior periods will be approximately $0.8 million, or $0.02 per diluted share, net of tax, for 2007, and $2.9 million, or $0.10 per diluted share, net of tax, for 2008.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on our present or future consolidated financial statements.

3. Fair Value Measurements

As of ~~June~~September 30, 2008, we had cash and cash equivalents of ~~$425.4~~$382.4 million, investments totaling ~~$263.1~~$227.5 million, and restricted investments of ~~$29.9~~$36.5 million. The cash equivalents consist of highly liquid securities with original or purchase date remaining maturities of up to three months that are readily convertible into known amounts of cash. Our investments consisted of investment grade debt securities and are designated as available-for-sale. Of the ~~$263.1~~$227.5 million total, ~~$196.3~~$163.7 million are classified as current assets, and ~~$66.8~~$63.8 million are classified as non-current assets (see further discussion below). Our investment policies require that all of our investments have final maturities of ten years or less (excluding auction rate and variable rate securities where interest rates are periodically reset) and that the average maturity be four years or less. The restricted investments, classified as non-current assets and designated as held-to-maturity, consist of interest-bearing deposits and U.S. treasury securities required by the respective states in which we operate. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. All non-restricted investments are reported at fair market value on the balance sheet. All restricted investments are carried at amortized cost, which approximates market value. We have the ability to hold these restricted investments until maturity and, as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates. Declines in interest rates over time will reduce our investment income.

In September 2006, the FASB issued SFAS 157,Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. We adopted the provisions of SFAS 157 as of January 1, 2008 for our financial instruments. Although the adoption of SFAS 157 did not materially impact our financial position, results of operations, or cash flow, we are now required to provide additional disclosures as part of our financial statements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of ~~June~~September 30, 2008, we held investments in auction rate securities, totaling ~~$71.8~~$70.8 million, with a fair value of ~~$66.8~~$63.8 million, which are required to be measured at fair value on a recurring basis. Our auction rate securities are designated as available-for-sale securities and are reflected at fair value. Prior to January 1, 2008, these securities were recorded at fair value based on quoted prices in active markets (i.e., SFAS 157 Level 1 data). Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes, and which resets the applicable interest rate at pre-determined intervals, usually every 7, 28, or 35 days. However, due to recent events in the credit markets, the auction events for some of these instruments failed during the ~~first half of~~nine months ended September 30, 2008. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. Therefore, the fair values of these securities were estimated using a discounted cash flow analysis or other type of valuation model as of ~~June~~September 30, 2008. These analyses considered, among other things, the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would be expected to have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties.

tax at the combined federal and state statutory rate, of $1.2 million and ~~$5.0~~$4.3 million for the three and ~~six~~nine months ended ~~June~~September 30, 2008, respectively, to accumulated other comprehensive (loss) income. Substantially all of the ~~$66.8~~$63.8 million in auction rate security instruments held by us at ~~June~~September 30, 2008 were in securities collateralized by student loans, which loans are guaranteed by the U.S. government. Due to our belief that the market for these student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified these investments as non-current, and have included them in investments on the unaudited condensed consolidated balance sheet at ~~June~~September 30, 2008. As of ~~June~~September 30, 2008, we continue to earn interest on our auction rate security instruments. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss) income. If we determine that any future valuation adjustment was other than temporary, we would record a charge to earnings as appropriate.

Our assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at ~~June~~September 30, 2008, were as follows:


	Fair Value Measurements at Reporting Date Using								Fair Value Measurements at Reporting Date Using
			Quoted								Quoted
			Prices in								Prices in
			Active		Significant						Active		Significant
			Markets for		Other						Markets for		Other
			Identical		Observable		Significant				Identical		Observable		Significant
	June 30,		Assets		Inputs		Unobservable Inputs		September 30,		Assets		Inputs		Unobservable Inputs
	2008		(Level 1)		(Level 2)		(Level 3)		2008		(Level 1)		(Level 2)		(Level 3)
	(in thousands)								(in thousands)
Auction rate securities	$	66,786	$	—	$	—	$	66,786	$	63,827	$	—	$	—	$	63,827
Other available-for-sale securities		196,268		196,268		—		—		163,676		163,676		—		—

Total assets measured at fair value	$	263,054	$	196,268	$	—	$	66,786	$	227,503	$	163,676	$	—	$	63,827

The second significant component of the Ohio receivable is approximately $22.0 million due from a capitated provider group. Although we have a capitation arrangement with this provider group, our agreement with them calls for us to pay for certain medical services incurred by the provider group’s members, and then to deduct the amount of such payments from the monthly capitation paid to the provider group. Of the $22.0 million receivable, approximately $14.8 million represents medical services we have paid on behalf of the provider group, which we will deduct from capitation payments in the months of October and November 2008. The other component of the Ohio receivable includes an estimate of our liability for claims incurred by members of this provider group, not covered by capitation, for which we have not yet made payment. This amount totaled $7.2 million as of September 30, 2008. The offsetting liability for the amount of this receivable established for claims incurred but not paid is included in “Medical claims and benefits payable” in our condensed consolidated balance sheets. As part of the agreement with this provider group, our Ohio health plan has withheld approximately $9.0 million from capitation payments due the group, and placed the funds in an escrow account. The Ohio health plan is entitled to the escrow amount if the provider group is unable to repay amounts owed to us. The escrow account is included in “Restricted investments” in our condensed consolidated balance sheets. During the quarter ended September 30, 2008, our average capitation payment to this provider group was approximately $12 million.

As of June 30, 2008, the receivable due our Ohio health plan included approximately $8.5 million of accrued delivery payments due from the state of Ohio and approximately $21.7 million due from a capitated provider group. Our agreement with that group calls for us to pay for certain medical services incurred by the group’s members, and then to deduct the amount of such payments from the monthly capitation paid to the group. This receivable also includes an estimate of our liability for claims incurred by members of this group for which we have not made payment. The offsetting liability for the amount of this receivable established for claims incurred but not paid is included in “Medical claims and benefits payable” in our condensed consolidated balance sheets. At June 30, 2008, this receivable comprised approximately $14.3 million paid on behalf of the provider group, which will be deducted from capitation payments in the months of July and August 2008. An additional $7.5 million receivable has been recorded to reflect amounts included in “Medical claims and benefits payable” in our condensed consolidated balance sheets that are the responsibility of the capitated provider group. Our Ohio health plan has withheld approximately $9.0 million from capitation payments due this provider group and placed the funds in an escrow account. The Ohio health plan is entitled to the escrow amount if the provider is unable to repay amounts owed to us. The escrow amount is included in “Restricted investments” in our condensed consolidated balance sheets. Monthly gross capitation paid to the provider group is approximately $10.5 million.

6. Long-Term Debt

Convertible Senior Notes

In October 2007, we completed our offering of $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2014 (the “Notes”). The sale of the Notes resulted in net proceeds of $193.4 million. The Notes rank equally in right of payment with our existing and future senior indebtedness, and are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 21.3067 shares of our common stock per one thousand dollar principal amount of the Notes. This represents an initial conversion price of approximately $46.93 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances. Prior to July 2014, holders may convert their Notes only under the following circumstances:

During any fiscal quarter after our fiscal quarter ending December 31, 2007, if the closing sale price per share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the conversion price per share of our common stock;

•		During any fiscal quarter after our fiscal quarter ending December 31, 2007, if the closing sale price per share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the conversion price per share of our common stock;

•		During the five business day period immediately following any five consecutive trading day period in which the trading price per one thousand dollar principal amount of the Notes for each trading day of such period was less than 98% of the product of the closing price per share of our common stock on such day and the conversion rate in effect on such day; or

•		Upon the occurrence of specified corporate transactions or other specified events.

On or after July 1, 2014, holders may convert their Notes at any time prior to the close of business on the scheduled trading day immediately preceding the stated maturity date regardless of whether any of the conditions noted above is satisfied.

We will deliver cash and shares of our common stock, if any, upon conversion of each $1,000 principal amount of the Notes, as follows:

•		An amount in cash equal to the sum of, for each of the 20 Volume-Weighted Average Price (the “VWAP”) trading days during the conversion period, the lesser of the daily conversion value for such VWAP trading day and fifty dollars (representing 1/20th of one thousand dollars); and

•		~~A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any excess of the daily conversion value above fifty dollars.~~

An amount in cash equal to the sum of, for each of the 20 Volume-Weighted Average Price (the “VWAP”) trading days during the conversion period, the lesser of the daily conversion value for such VWAP trading day and fifty dollars (representing 1/20th of one thousand dollars); and

A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any excess of the daily conversion value above fifty dollars.

Credit Facility

In 2005, we entered into the Amended and Restated Credit Agreement, dated as of March 9, 2005, among Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”). Effective May 2007, we entered into a third amendment of the Credit Facility that increased the size of the revolving line of credit to $200.0 million, maturing in May 2012. The Credit Facility is intended to be used for working capital and general corporate purposes, and subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $250.0 million.

Borrowings under the Credit Facility are based, at our election, on the London Interbank Offered Rate, or LIBOR, or the base rate plus an applicable margin. The base rate equals the higher of Bank of America’s prime rate or 0.500% above the federal funds rate. We also pay a commitment fee on the total unused commitments of the lenders under the Credit Facility. The applicable margins and commitment fee are based on our ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA. The applicable margins range between 0.750% and 1.750% for LIBOR loans and between 0.000% and 0.750% for base rate loans. The commitment fee ranges between 0.150% and 0.275%. In addition, we are required to pay a fee for

Our obligations under the Credit Facility are secured by a lien on substantially all of our assets and by a pledge of the capital stock of our Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington health plan subsidiaries. The Credit Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, investments, and a fixed charge coverage ratio. The amended Credit Facility also requires us to maintain a ratio of total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 at any time. At ~~June~~September 30, 2008, we were in compliance with all financial covenants in the Credit Facility.

7. Stockholders’ Equity

In April 2008, our board of directors authorized the repurchase of up to $30 million of our common stock on the open market or through privately negotiated transactions. We used working capital to fund the repurchases under this program. The timing and amount of repurchases were primarily made pursuant to a Rule 10b5-1 trading plan ~~dated~~effective as of ~~May 2, 2008. The trading plan became effective~~ May 5, 2008, and terminated when the aggregate cost of the repurchases totaled $30 million on June 12, 2008. During the quarter ended June 30, 2008, we repurchased approximately 1.1 million shares.

In July 2008, our board of directors authorized the repurchase of up to an additional one million shares of our common stock. We ~~did not repurchase any shares during~~used working capital to fund the repurchases under this program. The timing and amount of repurchases were primarily made pursuant to a Rule 10b5-1 trading plan effective as of August 1, 2008. During the quarter ended ~~March 31, 2008.~~September 30, 2008, we repurchased approximately 91,000 shares for an aggregate purchase price of $2.7 million. See Note 10, “Subsequent ~~Events,~~Events.” ~~regarding the authorization to repurchase additional shares.~~

~~On June 30, 2008, we issued a total of 48,186 shares of our common stock in connection with our acquisition of the assets of The Game of Work, LLC.~~

8. Commitments and Contingencies

Legal

The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines and penalties, exclusion from participating in publicly-funded programs, and the repayment of previously billed and collected revenues.

~~Malpractice Action.~~On February 1, 2007, a complaint was filed in the Superior Court of the State of California for the County of Riverside by plaintiff Staci Robyn Ward through her guardian ad litem, Case No. 465374. The complaint purports to allege claims for medical malpractice against several unaffiliated physicians, medical groups, and hospitals, including Molina Medical Centers and one of its physician employees. The plaintiff alleges that the defendants failed to properly diagnose her medical condition which has resulted in her severe and permanent disability. On July 22, 2007, the plaintiff passed away. The proceeding is in the discovery stage, and no prediction can be made as to the outcome.

~~Starko.~~Our New Mexico HMO is named as a defendant in a class action lawsuit brought by New Mexico pharmacies and pharmacists, Starko, Inc., et al. v. NMHSD, et al., No. CV-97-06599, Second Judicial District Court, State of New Mexico. The lawsuit was originally filed in August 1997 against the New Mexico Human Services Department (“NMHSD”). In February 2001, the plaintiffs named health maintenance organizations participating in the New Mexico Medicaid program as defendants (the “HMOs”), including Cimarron Health Plan, the predecessor of our New Mexico HMO. The plaintiffs assert that NMHSD and the HMOs failed to pay pharmacy dispensing fees under an alleged New Mexico statutory mandate. On July 10, 2007, the court dismissed all damages claims against Molina Healthcare of New Mexico, leaving at that time only a pending action for injunctive and declaratory relief. On August 15, 2007, the court dismissed all remaining claims against Molina Healthcare of New Mexico, including the action for injunctive and declaratory relief. The plaintiffs have filed an appeal with respect to the court’s dismissal orders and the parties have submitted their respective appellate briefs and are awaiting oral argument. Under the terms of the stock purchase agreement pursuant to which we acquired Health Care Horizons, Inc., the parent company to Molina Healthcare of New Mexico, an indemnification escrow account was established and funded with $6.0 million to indemnify Molina Healthcare of New Mexico against the costs of such litigation and any eventual liability or settlement costs. As of June 30, 2008, approximately $4.2 million remained in the indemnification escrow fund.

We are involved in ~~other~~ legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. ~~These~~The outcome of such legal actions ~~individually or in~~is inherently uncertain. Nevertheless, we believe that these actions (including the ~~aggregate,~~previously disclosed Starko and Ward litigation matters), when finally concluded and determined, are not likely ~~in our opinion,~~ to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Provider Claims

Many of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations have led certain medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.

Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our HMO subsidiaries operating in California, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Washington, and Utah. Our HMOs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. The net assets in these subsidiaries (after intercompany eliminations), which may

not be transferable to us in the form of cash dividends, loans, or advances, were ~~$337.0~~$340.1 million at ~~June~~September 30, 2008, and $332.2 million at December 31, 2007. The National Association of Insurance Commissioners, or NAIC, adopted model rules effective December 31, 1998, which, if implemented by a state, set new minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital, or RBC, rules. Michigan, Nevada, New Mexico, Ohio, Texas, Utah, and Washington have adopted these rules, although the rules as adopted may vary somewhat from state to state. California and Missouri have established their own minimum capitalization requirements for insurance companies.

As of ~~June~~September 30, 2008, our HMOs had aggregate statutory capital and surplus of approximately ~~$349.7~~$349.9 million, compared with the required minimum aggregate statutory capital and surplus of approximately ~~$207.6~~$209.2 million. All of our HMOs were in compliance with the minimum capital requirements at ~~June~~September 30, 2008. We have the ability and commitment to provide additional capital to each of our HMOs when necessary to ensure that they continue to meet statutory and regulatory capital requirements.

9. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee in excess of 20%. As of ~~June~~September 30, 2008 and 2007, our carrying amount for this investment totaled $3.6 million and ~~$1.4~~$3.5 million, respectively. ~~Effective July 1,~~During 2007, we paid this provider a $0.9 million network access fee ~~which~~that was fully amortized as of June 30, 2008. ~~Advances outstanding to~~During the second quarter of 2008, we advanced this provider ~~totaling $315,000 were~~$0.3 million, which was fully offset ~~in full to~~against capitation payments ~~during~~owed to the ~~quarter ended~~provider as of June 30, 2008. During the third quarter of 2008, we advanced this provider $0.2 million, which will be offset against capitation payments owed to the provider in 2008. For the three months ended ~~June~~September 30, 2008 and 2007, we paid ~~$3.6~~$4.1 million and ~~$3.1~~$3.4 million, respectively, for medical service fees to this provider. For the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, we paid ~~$7.1~~$11.2 million and ~~$5.9~~$9.2 million, respectively, for medical service fees to this provider.

We are a party to a ~~fee for service~~fee-for-service agreement with Pacific Hospital of Long Beach (“Pacific Hospital”). Pacific Hospital is owned by Abrazos Healthcare, Inc., the shares of which are held as community property by the husband of Dr. Martha Bernadett, our Executive Vice President, Research and Development. Amounts paid under the terms of this ~~fee for service~~fee-for-service agreement were ~~$54,000~~$29,000 and ~~$23,000~~$48,000 for the three months ended ~~June~~September 30, 2008 and 2007,

respectively, and ~~$110,000~~$139,000 and ~~$43,000~~$90,000 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. We ~~believe that the claims submitted to us by Pacific Hospital were reimbursed at prevailing market rates. In 2006, we entered into an additional agreement~~also have a capitation arrangement with Pacific Hospital, ~~as part of a capitation arrangement. Under this arrangement,~~where we pay ~~Pacific Hospital~~ a fixed monthly fee based on member type. We paid Pacific Hospital for capitation services totaling approximately ~~$818,000~~$1.5 million and ~~$1.0~~$1.2 million for the three months ended ~~June~~September 30, 2008 and 2007, respectively, and ~~$1.7~~$3.2 million and ~~$2.1~~$3.3 million for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively. We believe that ~~this agreement~~both arrangements with Pacific Hospital isare based on prevailing market rates for similar services. Also as of ~~June~~September 30, 2008, we had an advance outstanding to ~~this provider~~Pacific Hospital totaling ~~$0.2 million~~$91,000, which is offsetting capitation payments in 2008.

In 2006, we assumed an office lease from Millworks Capital Ventures which at that time had a remaining term of 52 months. Millworks Capital Ventures is owned by John C. Molina, our Chief Financial Officer, and his wife. The monthly base lease payment is approximately $18,000 and is subject to an annual increase. Based on a market report prepared by an independent realtor, we believe the terms and conditions of the assumed lease were at that time at fair market value. We are currently using the office space under the lease for an office expansion. Payments made under this lease totaled ~~$75,000~~$68,000 and ~~$56,000~~$57,000 for the three months ended ~~June~~September 30, 2008 and 2007, respectively, and ~~$132,000~~$200,000 and ~~$131,000~~$188,000 for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

We lease two medical clinics that are owned by the Mary R. Molina Living Trust and the Molina Marital Trust. These leases have 5 five-year renewal options. Rental expense for these leases totaled $16,000 and $24,000 for ~~each of~~ the ~~three-month periods~~three months ended ~~June~~September 30, 2008 and 2007, respectively, and ~~$49,000~~$65,000 and $73,000 for ~~each of~~ the ~~six-month periods~~nine months ended ~~June~~September 30, 2008 and 2007, respectively.

10. Subsequent ~~Event~~Events

Florida subsidiary. In August 2008, we announced our intention to acquire Florida NetPASS, LLC (“NetPASS”), a provider of care management and administrative services to approximately 55,000 Florida MediPass members in South and Central Florida. We expect the closing of the transaction to occur in the first quarter of 2009, at a purchase price of approximately $42 million, subject to adjustments. On October 1, 2008, we completed the initial closing of the transaction, under which we acquired one percent of the ownership interests of

NetPASS for $9 million. Additionally, we deposited $9 million to an escrow account that will be used for the purpose of reimbursing the State of Florida for any sums due under a final settlement agreement with the state.

On ~~July 22,~~October 7, 2008, we announced that our ~~board~~wholly owned subsidiary, Molina Healthcare of ~~directors authorized~~Florida, Inc., was awarded a Medicaid managed care contract by the ~~repurchase~~State of upFlorida. The term of the contract will commence on December 1, 2008, at which time Molina Healthcare of Florida will begin its initial enrollment of NetPASS Medicaid members, with the full transition of NetPASS members expected to ~~one million~~be completed in the first quarter of 2009.

Stock repurchases. From October 1, 2008 through October 30, 2008, we repurchased approximately 722,000 shares of our common ~~stock. The repurchase program will be funded using our working capital, and~~stock for an aggregate purchase price of $17.3 million (average cost of approximately $23.92 per share). These purchases have completed the ~~timing and amount~~Company’s stock purchase plan announced in July 2008. Through October 30, 2008, we have repurchased approximately 1.9 million shares at an aggregate purchase price of ~~any shares repurchased will be made~~$50 million pursuant to ~~a trading plan. The~~the two repurchase ~~program extends through December 31, 2008, but we reserve~~plans announced during the ~~right to suspend or discontinue the program at any time.~~year.


~~Item 2.~~		*Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.***

~~Forward Looking Statements~~

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. All statements, other than statements of historical facts, that we include in this quarterly report may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. We use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from the forward-looking statements that we make. You should read these factors and the other cautionary statements as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated as a result of, but not limited to, the following factors:

	•		~~the achievement of savings from the successful management of the medical care ratio of our health plans;~~

	•		~~an increase in enrollment in both our Medicaid and Medicare populations consistent with our expectations;~~

	•		~~our ability to reduce administrative costs in the event enrollment or revenue is lower than expected;~~

	•		~~increased administrative costs in support of the Company’s efforts to expand Medicare membership;~~

	•		~~our ability to accurately estimate incurred but not reported medical costs;~~

	•		~~the securing of projected premium rate increases under the government contracts of our health plans, in particular in the states of Michigan and Texas and in connection with our Medicare plans;~~

	•		~~the January 1, 2008 increase in Michigan state taxes and the success of our efforts to mitigate the impact of that tax increase;~~

	•		~~the budget crisis in California and the pressure to reduce HMO rates in that state, including current PMPM rates under our existing contracts;~~

	•		~~the final terms as implemented of the Rogers Amendment to the Deficit Reduction Act of 2005 regarding the rates to be paid to non-contracting hospitals by our California health plan;~~

	•		~~changes in market interest rates and actions by the Federal Reserve Bank Board;~~

	•		~~the potential termination or expiration without renewal of the government contracts of our health plans;~~

	•		~~the imposition of fines or assessments by state or federal regulators for perceived operating deficiencies;~~

	•		~~our dependence upon a relatively small number of government contracts and subcontracts for our revenue;~~

	•		~~limitations in our ability to control our medical costs and other operating expenses;~~

	•		risks related to our new Medicare Advantage plans with prescription drug coverage, or MAPD plans, including our lack of operating experience with such plans, compliance issues, and confusion regarding the new plans among Medicare beneficiaries, providers, pharmacists, and regulators;

	•		~~the successful and cost-effective integration of Mercy CarePlus, including risks related to our lack of prior operating experience in Missouri;~~

	•		~~risks related to our lack of experience with members in Ohio, Texas, and Missouri;~~

	•		~~the availability of adequate financing to fund and/or capitalize our acquisitions and start-up activities;~~

	•		~~membership eligibility processes and methodologies;~~

	•		~~unexpected changes in demographics, member utilization patterns, healthcare practices, or healthcare technologies;~~

	•		~~high dollar claims related to catastrophic illness or conditions, increases in respiratory illnesses, or increases in the number of premature infants among our plans’ members;~~

	•		~~risks related to the continued solvency of our major providers and provider groups;~~

	•		~~failure to maintain effective, efficient, and secure information systems and claims processing technology;~~

	•		~~the unfavorable resolution of pending litigation or arbitration;~~

	•		risks associated with the potential negative perception among regulators, governmental representatives, and the public of abuses occurring within the Medicaid or Medicare managed care sectors and the association or general attribution of such negative perceptions to us;

	•		~~funding decreases in the Medicaid, SCHIP, or Medicare programs or the failure to timely renew the SCHIP program;~~

	•		~~risks associated with our $200 million 3.75% Convertible Senior Notes due 2014;~~

	•		~~epidemics such as the avian flu; and~~

	•		~~changes to government laws and regulations or in the interpretation and enforcement of those laws and regulations, including the recently enacted citizenship certification requirements.~~

Investors should refer to Part II, Item 1A of this Quarterly Report, and to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007, for a discussion of certain risk factors which could materially affect our business, financial condition, or future results. Given these risks and uncertainties, we can give no assurances that any results or events projected or contemplated by our forward-looking statements will in fact occur and we caution investors not to place undue reliance on these statements.

This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2007.

1817

Overview

~~Our financial performance for the three and six months~~Summary highlights of our quarter ended ~~June~~September 30, 2008 ~~compared~~include:

•    Net earnings of $0.62 per diluted share, consistent with the ~~same prior year periods is briefly summarized as follows:~~third quarter of 2007.

•    Quarterly premium revenues of $792 million, up 26% over 2007.

•    Aggregate membership up nearly 16% over 2007.

•    Consolidated medical care ratio of 84.6%, up from 83.7% over 2007.


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
	(Dollar amounts in thousands, except per-share data)												(Dollar amounts in thousands, except per-share data)
Earnings per diluted share	$	0.59		$	0.47		$	1.05		$	0.81		$	0.62		$	0.62		$	1.67		$	1.43
Premium revenue	$	761,153		$	607,127		$	1,490,791		$	1,163,362		$	791,554		$	628,402		$	2,282,345		$	1,791,764
Operating income	$	30,258		$	22,284		$	54,709		$	38,879		$	30,429		$	28,815		$	85,138		$	67,694
Net income	$	16,516		$	13,314		$	29,671		$	22,906		$	17,186		$	17,513		$	46,857		$	40,419
Medical care ratio		84.2	%		85.1	%		85.0	%		85.4	%		84.6	%		83.7	%		84.9	%		84.8	%
G&A expenses as a percentage of total revenue		11.4	%		10.9	%		11.0	%		11.1	%		11.1	%		11.7	%		11.0	%		11.3	%
Total ending membership								1,234,000			1,076,000									1,239,000			1,070,000

percentage is measured or the manner of its measurement, or the percentage of revenue required to be spent on the defined medical care costs, may trigger a change in this amount. If the ~~state~~State of New Mexico disagrees with our interpretation of the existing contract terms, an adjustment to this amount may ~~occur.~~be required.

Under our contract with the State of Ohio, up to 1% of our Ohio health plan’s revenue may be refundable to the state if certain performance measures are not met. At September 30, 2008, we believe that we are compliant with all of the performance measures and have not reserved any amounts for potential repayment to the state.

In prior years, we estimated amounts we believed were recoverable under our savings sharing agreement with the ~~state~~State of Utah based on available information and our interpretation of our contract with the ~~state.~~State. The ~~state~~State may not agree with our interpretation or our application of the contract language, and it may also not agree with the manner in which we have processed and analyzed our member claims and encounter records. Thus, the ultimate amount of savings sharing revenue that we realize from prior years may be subject to negotiation with the ~~state.~~State. During 2007, as a result of an ongoing disagreement with the ~~state~~State of Utah, we wrote off the entire receivable, totaling $4.7 million. Our Utah health plan continues to work with the ~~state~~State to assure an appropriate determination of amounts due to us under the savings share agreement. When additional information is known, or agreement is reached with the ~~state~~State regarding the appropriate savings sharing payment amount for prior years, we will adjust the amount of savings sharing revenue recorded in our financial statements as appropriate in light of such new information or agreement.

As of ~~June~~September 30, 2008, we had a liability of approximately ~~$9.0~~$6.6 million accrued pursuant to our profit-sharing agreement with the ~~state~~State of Texas for the 2007 and 2008 contract years ending August 31. During the third quarter of 2008, we paid the State of Texas $1.1 million relating to the 2007 contract year. Because the final settlement calculations include a claims run-out period of nearly one year, the amounts recorded, based on our estimates, may be adjusted. We believe that the ultimate settlement will not differ materially from our estimate.

Historically, membership growth has been the primary reason for our increasing revenues, although more recently our revenues have also grown due to the more care intensive benefits associated with our ABD and Medicare members. We have increased our membership through both internal growth and acquisitions. The following table sets forth the approximate total number of members by state health plan as of the dates indicated:


							As of		As of		As of
	As of		As of		As of		September 30,		December 31,		September 30,
	June 30,		December 31,		June 30,		2008		2007		2007
Total Ending Membership by Health Plan:	2008		2007		2007
California		310,000		296,000		291,000		313,000		296,000		288,000
Michigan		212,000		209,000		217,000		207,000		209,000		211,000
Missouri (1)		76,000		68,000		—		77,000		68,000		—
Nevada (2)		—		—		—		—		—		—
New Mexico		81,000		73,000		66,000		84,000		73,000		69,000
Ohio		173,000		136,000		138,000		179,000		136,000		138,000
Texas		29,000		29,000		30,000		29,000		29,000		30,000
Utah		57,000		55,000		47,000		55,000		55,000		50,000
Washington		296,000		283,000		287,000		295,000		283,000		284,000

Total		1,234,000		1,149,000		1,076,000		1,239,000		1,149,000		1,070,000


Total Ending Membership by State for the Medicare Advantage Plans:
California		1,452		1,115		724		1,560		1,115		875
Michigan		1,469		1,090		459		1,663		1,090		814
Nevada		680		520		9		627		520		178
New Mexico		149		—		—		249		—		—
Texas		430		—		—		458		—		—
Utah		2,056		1,860		1,646		2,162		1,860		1,802
Washington		911		507		413		967		507		446

Total		7,147		5,092		3,251		7,686		5,092		4,115


Total Ending Membership by State for the Aged, Blind or Disabled Population:
California		12,092		11,837		10,728
Michigan		30,896		31,399		31,940
New Mexico		6,716		6,792		6,822
Ohio		15,355		14,887		15,117
Texas		15,999		16,018		16,603
Utah		6,993		6,795		6,876
Washington		3,049		2,814		2,693

Total		91,100		90,542		90,779

			contracts, we remain liable for the provision of certain health care services. Certain of our capitated contracts also contain incentive programs based on service delivery, quality of care, utilization management, and other criteria. Capitation payments are fixed in advance of the periods covered and are not subject to significant accounting estimates. These payments are expensed in the period the providers are obligated to provide services. The financial risk for pharmacy services for a small portion of our membership is delegated to capitated providers.

	•		Pharmacy:Pharmacy costs include all drug, injectibles, and immunization costs paid through our pharmacy benefit managers. As noted above, drugs and injectibles not paid through our pharmacy benefit managers are included in fee-for-service costs, except in those limited instances where we capitate drug and injectible costs.

	•		Other:Other medical care costs include medically related administrative costs, certain provider incentive costs, reinsurance cost, and other health care expense. Medically related administrative costs include, for example, expenses relating to health education, quality assurance, case management, disease management, 24-hour on-call nurses, and a portion of our information technology costs. Salary and benefit costs are a substantial portion of these expenses. For the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007, medically related administrative costs were approximately ~~$36.9~~$56.2 million and ~~$30.8~~$47.9 million, respectively.

The following table provides the details of our consolidated medical care costs for the periods indicated (dollars in thousands except PMPM amounts):


	Three Months Ended June 30,														Three Months Ended September 30,
	2008							2007							2008							2007
					% of							% of							% of							% of
	Amount		PMPM		Total			Amount		PMPM		Total			Amount		PMPM		Total			Amount		PMPM		Total
Fee for service	$	410,619	$	111.65		64.1	%	$	336,654	$	104.41		65.1	%
Fee-for-service															$	439,699	$	118.71		65.7	%	$	339,841	$	106.15		64.6	%
Capitation		117,707		32.00		18.4			92,931		28.82		18.0			113,920		30.76		17.0			95,879		29.95		18.2
Pharmacy		88,676		24.11		13.8			65,930		20.45		12.8			88,414		23.86		13.2			67,844		21.19		12.9
Other		23,827		6.48		3.7			21,350		6.62		4.1			27,322		7.38		4.1			22,338		6.98		4.3

Total	$	640,829	$	174.24		100.0	%	$	516,865	$	160.30		100.0	%	$	669,355	$	180.71		100.0	%	$	525,902	$	164.27		100.0	%

Results of Operations

The following table sets forth selected operating ratios. All ratios with the exception of the medical care ratio are shown as a percentage of total revenue. The medical care ratio is shown as a percentage of premium revenue because there is a direct relationship between the premium revenue earned and the cost of health care.


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2008			2007			2008			2007			2008			2007			2008			2007
Premium revenue		99.3	%		98.9	%		99.2	%		98.9	%		99.4	%		98.8	%		99.2	%		98.8	%
Investment income		0.7			1.1			0.8			1.1			0.6			1.2			0.8			1.2

Total revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Ratio of direct medical care costs to premium revenue		81.9	%		82.5	%		82.5	%		82.7	%		82.1	%		81.0	%		82.4	%		82.1	%
Ratio of administrative costs included in medical care costs to premium revenue		2.3			2.6			2.5			2.7			2.5			2.7			2.5			2.7

Medical care ratio		84.2	%		85.1	%		85.0	%		85.4	%		84.6	%		83.7	%		84.9	%		84.8	%

General and administrative expense ratio, excluding premium taxes		8.2	%		7.7	%		8.0	%		7.8	%		8.0	%		8.4	%		8.0	%		8.0	%
Premium taxes included in general and administrative expenses		3.2			3.2			3.0			3.3			3.1			3.3			3.0			3.3

Total general and administrative expense ratio		11.4	%		10.9	%		11.0	%		11.1	%		11.1	%		11.7	%		11.0	%		11.3	%

Depreciation and amortization expense ratio		1.1	%		1.1	%		1.1	%		1.1	%		1.1	%		1.1	%		1.1	%		1.1	%
Effective tax rate		40.9	%		38.2	%		40.8	%		38.1	%		39.6	%		38.1	%		40.4	%		38.1	%
Operating income		3.9	%		3.6	%		3.6	%		3.3	%		3.8	%		4.5	%		3.7	%		3.7	%
Income before income taxes		3.6	%		3.5	%		3.3	%		3.1	%		3.6	%		4.4	%		3.4	%		3.6	%
Net income		2.2	%		2.2	%		2.0	%		1.9	%		2.2	%		2.8	%		2.0	%		2.2	%

Three Months Ended ~~June~~September 30, 2008 Compared with Three Months Ended ~~June~~September 30, 2007

The following ~~summarizes~~tables summarize premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the three months ended ~~June~~September 30, 2008 and ~~June~~September 30, 2007 (dollars in thousands except PMPM amounts):


	Three Months Ended June 30, 2008														Three Months Ended September 30, 2008
	Premium Revenue				Medical Care Costs				Medical			Premium Tax			Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense			Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	104,136	$	113.00	$	88,449	$	95.98		84.9	%	$	3,242		$	102,383	$	109.37	$	91,224	$	97.45		89.1	%	$	2,995
Michigan		125,382		196.37		100,273		157.05		80.0			6,625			127,535		203.39		101,596		162.03		79.7			6,412
Missouri		54,250		238.84		45,050		198.34		83.0			—			59,223		259.17		47,730		208.88		80.6			—
Nevada		2,243		1,303.04		2,506		1,456.25		111.8			—			2,196		1,053.04		2,499		1198.68		113.8			—
New Mexico		89,279		374.58		69,593		291.99		78.0			4,184			84,386		338.65		73,723		295.86		87.4			2,838
Ohio		147,114		281.73		133,816		256.26		91.0			6,672			162,553		306.74		148,660		280.52		91.5			8,851
Texas		25,742		303.09		19,669		231.58		76.4			460			30,986		357.01		24,730		284.93		79.8			510
Utah		35,385		214.89		31,932		193.92		90.2			—			41,860		260.24		36,012		223.88		86.0			—
Washington		177,619		202.11		145,840		165.95		82.1			2,993			178,639		202.19		136,609		154.62		76.5			2,959
Other⁽¹⁾		3		—		3,701		—		—			(5	)		1,793		—		6,572		—		—			(5	)

Total	$	761,153	$	206.96	$	640,829	$	174.24		84.2	%	$	24,171		$	791,554	$	213.70	$	669,355	$	180.71		84.6	%	$	24,560

Net Income

Net income for the quarter ended September 30, 2008 was $17.2 million, or $0.62 per diluted share, compared with net income of $17.5 million, or $0.62 per diluted share, for the third quarter of 2007.

Premium Revenue

Premium revenue for the third quarter of 2008 was $791.6 million, an increase of $163.2 million, or 26%, over the $628.4 million of premium revenue for the third quarter of 2007. Medicare premium revenue for the third quarter of 2008 was $28.1 million compared with $12.7 million in the third quarter of 2007. Excluding the impact of the November 1, 2007 acquisition of the Missouri plan, consolidated membership increased 8.6% between September 30, 2007 and September 30, 2008. Significant contributors to the $163.2 million increase in quarterly premium revenue included the following:

	•		A $59.2 million increase as a result of the acquisition of the Company’s Missouri health plan on November 1, 2007. The Missouri health plan received a blended rate increase of approximately 8.5% effective July 1, 2008.

	•		A $37.1 million increase at the Ohio health plan due to higher enrollment, particularly in the CFC population. Effective September 1, 2008, the Ohio health plan added approximately 4,000 Aged, Blind or Disabled (ABD) members in the Central and West Central regions.

	•		A $15.4 million increase in Medicare premium revenue across all health plans where we operate Medicare programs, primarily due to increased enrollment and the recognition of $2.6 million in risk adjustment revenue.

	•		An $8.2 million increase in Medicaid revenue at the California health plan, primarily due to increased membership. The California health plan’s Medicaid revenue decreased $1.3 million from the second quarter of 2008. Sequentially, premium revenue on a PMPM basis declined approximately 3%, reflecting the rate cuts implemented by the State of California for the period July 1, 2008 through August 17, 2008. Premium revenue for the California health plan has been recorded at rates in effect immediately prior to July 1, 2008 for the period August 18, 2008 through September 30, 2008 as the result of a court injunction issued on August 18, 2008.

	•		A $4.3 million increase in Medicaid premium revenue at the Michigan health plan, primarily due to $3.7 million in supplemental revenue from the Michigan Department of Community Health. The supplemental revenue is intended to offset the unintended effects of the Michigan Business Tax (MBT) that replaced Michigan’s Single Business Tax (SBT) as of January 1, 2008.

			The unintended effect of the MBT is the taxation of both the premiums and the net income of health plans, driving the effective federal and state combined tax rate on the Michigan health plan to nearly 49%. The $3.7 million in supplemental revenue was intended to offset MBT’s taxation of gross receipts for the nine months ended September 30, 2008.

			Effective October 1, 2008, the Michigan health plan received an estimated blended rate increase of approximately 5.5%, plus an additional increase of approximately 0.9% for ongoing MBT relief. The rate increase is tied to an expansion of benefits and coverage that will result in increased medical care costs for the Michigan health plan in the future.

			After allowing for the supplemental revenue and the aforementioned ongoing MBT relief, we anticipate our 2008 Michigan tax expense will be approximately $0.5 million higher (before federal tax benefit) than the amount computed using the SBT methodology.

Investment Income

Investment income during the third quarter of 2008 totaled $4.8 million compared with $7.6 million in the third quarter of 2007, a decrease of $2.8 million, primarily due to declining interest rates and slightly lower invested balances as a result of cash used in the share repurchase program.

Medical Care Costs

Medical care costs as a percentage of premium revenue (the medical care ratio) increased to 84.6% in the third quarter of 2008 from 83.7% in the third quarter of 2007. Sequentially, the medical care ratio increased from 84.2% for the quarter ended June 30, 2008. Excluding Medicare, our medical care ratio was 84.9% in the third quarter of 2008, 83.8% in the third quarter of 2007, and 84.2% in the second quarter of 2008.

	•		The medical care ratio of the Missouri health plan was 80.6% for the quarter, down from 83.0% in the second quarter of 2008. The 8.5% premium increase discussed above was partially offset by increased unit costs due to revised provider contracts and a fee schedule increase effective July 1, 2008.

	•		The medical care ratio of the California health plan increased to 89.1% in the third quarter of 2008 from 82.1% in the third quarter of 2007 and 84.9% in the second quarter of 2008. The increase in the plan’s medical care ratio was caused primarily by a decrease in premium rates as discussed above and higher fee-for-service and pharmacy costs.

	•		The medical care ratio of the New Mexico health plan increased to 87.4% in the third quarter of 2008 from 78.6% in the third quarter of 2007 and 78.0% in the second quarter of 2008. The sequential increase was primarily due to the reduced benefit from the release of amounts reserved as a result of the minimum medical cost ratio provision in the New Mexico health plan’s state contract. The Company recognized $6.2 million of revenue under this provision in the second quarter of 2008, but none for the third quarter of 2008. Additionally, the New Mexico health plan received a blended rate decrease of approximately 3% effective July 1, 2008 for its non-Medicare programs.

	•		The medical care ratio of the Ohio health plan, by line of business, was as follows:


	Three Months Ended
	Sept. 30, 2008			June 30, 2008			Sept. 30, 2007
Covered Families and Children (CFC)		89.9	%		90.7	%		85.5	%
Aged, Blind or Disabled (ABD)		94.6			91.5			94.4

Aggregate		91.5	%		91.0	%		88.8	%

			Sequentially, the medical care ratio for the CFC line of business decreased 80 basis points primarily due to lower capitation and pharmacy costs. The sequential increase in the medical care ratio for the ABD line of business was primarily due to higher specialist fee-for-service costs.

			Effective September 1, 2008, the Ohio health plan received risk adjustments to its ABD premium rates. We estimate that these adjustments will result in a net increase to premium revenue of approximately $500,000 per month from September 1^st going forward. Additionally, we have re-negotiated certain provider contracts in the Central region of Ohio, which we believe will reduce unit costs beginning in the fourth quarter of 2008.

	•		The medical care ratio of the Texas health plan increased to 79.8% in the third quarter of 2008 from 76.2% in the third quarter of 2007. This increase was primarily due to higher hospital fee-for-service costs. During the third quarter of 2008, the Texas health plan increased its revenue $1.3 million to record adjustments relating to its profit-sharing agreement with the State of Texas.

	•		The medical care ratio of the Washington health plan decreased to 76.5% in the third quarter of 2008 from 79.2% in the third quarter of 2007, primarily due to lower fee-for-service hospital costs.

Days in medical claims and benefits payable were 44 days at September 30, 2008, a 6% decrease from the 47 days reported at June 30, 2008, and a 19% decrease from the 54 days reported at September 30, 2007. As of September 30, 2008, medical claims inventory (measured as the total billed charges of all claims received but not paid as of the reporting date) has decreased approximately 30% since June 30, 2008, and 37% since September 30, 2007. Our reserving methodology is applied consistently across all periods presented.

General and administrative expenses

General and administrative, or G&A, expenses were $88.0 million, or 11.1% of total revenue, for the third quarter of 2008 compared with $74.2 million, or 11.7% of total revenue, for the third quarter of 2007.

Core G&A expenses (defined as G&A expenses less premium taxes) were 8.0% of revenue in the third quarter of 2008 compared with 8.4% in the third quarter of 2007 and 8.2% in the second quarter of 2008. The decrease in core G&A compared with the third quarter of 2007 was primarily due to lower administrative payroll, as indicated in the table below.


	Three Months Ended September 30,
	2008					2007
			% of Total					% of Total
(in thousands)	Amount		Revenue			Amount		Revenue
Medicare-related administrative costs	$	4,112		0.5	%	$	2,330		0.4	%
Non Medicare-related administrative costs:
Administrative payroll, including employee incentive compensation		49,429		6.2			43,326		6.8
Florida health plan start-up expenses		804		0.1			—		—
All other administrative expense		9,125		1.2			7,450		1.2

Core G&A expenses	$	63,470		8.0	%	$	53,106		8.4	%

Depreciation and Amortization

Depreciation and amortization expense increased $1.4 million in the third quarter of 2008 compared with the third quarter of 2007, including a $0.6 million increase in depreciation expense due to investments in infrastructure, and a $0.8 million increase in amortization expense primarily due to the amortization of intangible assets associated with the 2007 Mercy CarePlus acquisition in Missouri.

Interest Expense

Interest expense in the third quarter of 2008 increased $1.5 million compared with the third quarter of 2007, principally due to the issuance of our $200 million of Notes in October 2007.

Income Taxes

Income taxes were recorded at an effective rate of 39.6% in the third quarter of 2008 compared with 38.1% in the third quarter of 2007. The increase in our effective tax rate was primarily the result of a change in Michigan state taxes effective January 1, 2008. We expect our effective tax rate for the fourth quarter of 2008 and all of fiscal year 2008 to be approximately 41%.

Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007

The following tables summarize premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the nine months ended September 30, 2008 and September 30, 2007 (dollars in thousands except PMPM amounts):


	Nine Months Ended September 30, 2008
	Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	308,139	$	111.44	$	269,328	$	97.40		87.4	%	$	9,195
Michigan		377,669		198.36		304,769		160.08		80.7			19,976
Missouri		165,509		244.00		139,462		205.60		84.3			—
Nevada		6,382		1,184.30		6,632		1,230.61		103.9			—
New Mexico		262,314		366.55		215,242		300.77		82.1			8,523
Ohio		434,272		296.40		395,013		269.60		91.0			21,127
Texas		80,159		311.84		62,229		242.08		77.6			1,446
Utah		114,591		237.69		100,935		209.37		88.1			—
Washington		531,457		202.71		426,962		162.85		80.3			8,797
Other⁽¹⁾		1,853		—		15,959		—		—			19

Total	$	2,282,345	$	209.49	$	1,936,531	$	177.75		84.9	%	$	69,083


	Nine Months Ended September 30, 2007
	Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	280,796	$	107.22	$	228,952	$	87.42		81.5	%	$	8,614
Michigan		364,945		185.54		306,163		155.66		83.9	%		21,942
New Mexico		191,073		324.23		159,152		270.07		83.3	%		6,438
Ohio		311,853		270.08		282,164		244.37		90.5	%		14,033
Texas		64,406		260.88		55,163		223.44		85.6	%		1,140
Utah		88,473		201.87		81,535		186.04		92.2	%		—
Washington		489,254		190.36		392,201		152.60		80.2	%		8,117
Other⁽¹⁾		964		—		13,914		—		—			21

Total	$	1,791,764	$	186.93	$	1,519,244	$	158.50		84.8	%	$	60,305


(1)		“Other” medical care costs primarily represent medically related administrative costs at the parent company.

Net Income

Net income for the ~~quarter~~nine months ended ~~June~~September 30, 2008 increased to ~~$16.5~~$46.9 million, or ~~$0.59~~$1.67 per diluted share, compared with net income of ~~$13.3~~$40.4 million, or ~~$0.47~~$1.43 per diluted share, for the ~~quarter~~nine months ended ~~June~~September 30, 2007.

Premium Revenue

Premium revenue for the ~~second quarter of~~nine months ended September 30, 2008 was ~~$761.1~~$2,282.3 million, an increase of ~~$154.0~~$490.5 million, or ~~25.4%~~27.4%, over ~~the $607.1~~$1,791.8 million of premium revenue for the second quarter of 2007. Medicare premium revenue for the second quarter of 2008 was $23.1 million compared with $10.5 million in the second quarter of 2007. Excluding the impact of the November 1, 2007 acquisition of our Missouri health plan, consolidated membership increased 7.6% between June 30, 2008 and Junenine months ended September 30, 2007. Significant contributors to ~~the $154.0~~this $490.5 million increase in ~~quarterly~~ premium revenues included the following:

	•		A ~~$54.3~~$165.5 million increase as a result of the acquisition of Mercy CarePlus in Missouri on November 1, 2007.

	•		A ~~$35.7~~$122.4 million increase at the Ohio health plan due to higher enrollment, particularly in the ~~Covered Families and Children (CFC)~~CFC population.

	•		A ~~$27.9~~$71.2 million increase at the New Mexico health plan due to higher enrollment and higher premium ~~rates, and~~rates. Additionally, the ~~recognition of $6.2~~New Mexico health plan recognized $12.9 million in revenues in the first six months of 2008 due to the release of reserves associated with a minimum medical care ratio contract ~~provision.~~provision under its state contract.

2426

	•		A $42.2 million increase at the Washington health plan due to higher premium rates and slightly higher membership.

	•		Medicare premium revenue increased $40.3 million for the nine months ended September 30, 2008, to $72.4 million from $32.1 million in the same period of 2007 across all states where we operate Medicare programs.

~~A $14.7 million increase at the Washington health plan due to higher premium rates and slightly higher membership.~~

Investment Income

Investment income ~~during~~for the ~~second quarter of~~nine months ended September 30, 2008 totaled ~~$5.3~~$17.5 million compared with ~~$6.7~~$21.1 million earned in the ~~second quarter~~same period of ~~2007, a~~2007. The $3.6 million decrease ~~of $1.4 million,~~was primarily due to ~~declining~~lower interest ~~rates and slightly lower invested balances as a result of cash used in the treasury share repurchase program.~~rates.

Medical Care Costs

~~Medical care costs as a percentage of premium revenue (the medical care ratio) decreased to 84.2% in the second quarter of 2008 from 85.1% in the second quarter of 2007. Sequentially, the~~The medical care ratio ~~decreased from 85.8%~~increased to 84.9% for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2008, ~~a change~~compared with 84.8% for the same period of ~~160 basis points.~~2007. Excluding Medicare, ~~our~~the Company’s medical care ratio was ~~84.2%~~84.9% for the nine months ended September 30, 2008 compared with 85.0% in the ~~second quarter~~same period of ~~2008, 85.4% in the second quarter of 2007, and 85.8% in the first quarter of 2008.~~2007.

	•		The medical care ratio of the Michigan health plan decreased ~~330 basis points~~ to ~~80.0%~~80.7% for the nine months ended September 30, 2008, from 83.9% in the ~~second quarter of 2008, from 83.3% in the second quarter~~same period of 2007. This decrease was due ~~primarily~~in part to lower hospital fee-for-service ~~costs.~~

	•		costs, and to $3.7 million of premium revenue recorded in connection with tax relief provided by the State of Michigan. The ~~medical care ratio~~tax relief was provided as a result of the ~~Missouri health plan was 83.0% for the quarter, down from 89.7% in the first quarter of 2008. The sequential decrease was due primarily to lower hospital fee-for-service costs.~~January 1, 2008 state income tax change discussed above.

	•		The medical care ratio of the California health plan increased as a result of ~~an increase in PMPM medical costs of approximately 10%, chiefly~~increases primarily in pharmacy costs, and secondarily hospital and specialist fee-for-service costs. The California medical care ratio rose to ~~84.9%~~87.4% for the nine months ended September 30, 2008 from 81.5% in the ~~second quarter of 2008 from 80.4% in the second quarter~~same period of 2007.

	•		The medical care ratio of the New Mexico health plan decreased ~~830 basis points~~ to ~~78.0%~~82.1% for the nine months ended September 30, 2008, from 83.3% in the ~~second quarter of 2008, from 86.3% in the second quarter~~same period of 2007. This decrease was primarily due to ~~higher premium rates, particularly under the State Coverage Initiative (SCI) contract, which offset higher medical costs. The medical care ratio decrease also included~~ the impact of the recognition of ~~$6.2~~$12.9 million in revenue resulting from the release of reserves associated with a minimum medical care ratio contract ~~provision.~~provision, as described above. Absent the adjustments made to premium revenue infor the ~~second quarter of~~nine months ended September 30, 2008 and 2007, ~~under this provision,~~ the medical care ratio in New Mexico would have been ~~83.8% in~~86.3% for the ~~second quarter of~~nine months ended September 30, 2008, and ~~82.1% in the second quarter of 2007.~~

	•		~~The medical care ratios of the Ohio health plan, by line of business, were as follows:~~

Three Months Ended
June 30, March 31, June 30,
2008 2008 2007
Covered Families and Children (CFC) 90.7 % 88.9 % 90.6 %
Aged, Blind or Disabled (ABD) 91.5 92.7 92.3

Aggregate 91.0 % 90.3 % 91.1 %

			In total, the medical care ratio decreased 10 basis points year over year and increased 70 basis points sequentially. The sequential increase was due primarily to increased expense due a sub-capitated behavioral health provider under a risk-sharing arrangement with that provider. These amounts added approximately 70 basis points to the aggregate medical care ratio in Ohio when compared with the first quarter of 2008. We are in the process of terminating our contract with this provider and will bring behavioral health care in-house beginning September 1, 2008.

	•		The medical care ratio of the Texas health plan decreased from 91.5% in the second quarter of 2007 to 76.4% in the second quarter of 2008 primarily due to low medical costs for the Star Plus membership. During the second quarter of 2008, the Texas health plan reduced revenue $2.3 million to record amounts due back to the state under a profit-sharing agreement.

	•		The medical care ratio of the Utah health plan increased 180 basis points to 90.2% in the second quarter of 2008, from 88.4% in the second quarter of 2007. This increase was primarily the result of higher medical care ratios in the Utah plan’s SCHIP and Medicare lines of business. The Utah health plan serves the majority of its Medicaid membership under a cost-plus contract with the state of Utah. The Utah health plan’s SCHIP and Medicare lines of business are conducted under “at risk” prepaid capitation contracts.

	•		The medical care ratio reported at the Washington health plan increased to 82.1% in the second quarter of 2008 from 80.2% in the second quarter of 2007, primarily due to higher fee-for-service hospital and specialist costs. The higher fee-for-service costs were driven by increases to the Medicaid in-patient fee schedule that took effect on each of August 1, 2007 and January 1, 2008.

Days in medical claims and benefits payable were 47 days at June 30, 2008, 50 days at March 31, 2008, and 54 days at June 30, 2007. Our reserving methodology is applied consistently across all periods presented. As of June 30, 2008, medical claims inventory (measured as the total billed charges of all claims received but not paid as of the reporting date) has decreased approximately 20% since June 30, 2007, and 4% since March 31, 2008. Additionally, increased capitation and pharmacy expenses (measured as a percentage of total medical costs) reduced days in medical claims payable by approximately one day between June 30, 2008 and March 31, 2008.

~~General and Administrative Expenses~~

General and administrative expenses were $87.1 million, or 11.4% of total revenue, for the second quarter of 2008 compared with $67.2 million, or 10.9% of total revenue, for the second quarter of 2007.

Core G&A expenses (defined as G&A expenses less premium taxes) were 8.2% of revenue in the second quarter of 2008 compared with 7.7% in the second quarter of 2007 and 7.8% in the first quarter of 2008. The increase in core G&A compared with the second quarter of 2007 was primarily due to our continued investment in the administrative infrastructure necessary to support our Medicare product line, and also due to an increase in the accrual for employee incentive compensation, as indicated in the table below.

Three Months Ended June 30,
2008 2007
% of Total % of Total
Amount Revenue Amount Revenue
(in thousands) (in thousands)
Medicare-related administrative costs $ 4,118 0.5 % $ 2,043 0.3 %
Non Medicare-related administrative costs:
Administrative payroll, including employee incentive compensation 48,656 6.3 38,120 6.2
All other administrative expense 10,129 1.4 6,970 1.2

Core G&A expenses $ 62,903 8.2 % $ 47,133 7.7 %

~~Depreciation and Amortization~~

Depreciation and amortization expense increased $1.6 million in the second quarter of 2008 compared with the second quarter of 2007, including a $0.9 million increase in depreciation expense due to investments in infrastructure, and a $0.7 million increase in amortization expense primarily due to intangible assets associated with the 2007 Mercy CarePlus acquisition in Missouri.

~~Impairment Charge on Purchased Software~~

~~During the second quarter of 2007, an impairment charge of $782,000 was recorded related to commercial software no longer used for operations. No such charge occurred in the second quarter of 2008.~~

~~Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007~~

The following summarizes premium revenue, medical care costs, medical care ratio, and premium taxes by health plan for the six months ended June 30, 2008 and June 30, 2007 (dollars in thousands except PMPM amounts):

Six Months Ended June 30, 2008
Premium Revenue Medical Care Costs Medical Premium Tax
Total PMPM Total PMPM Care Ratio Expense
California $ 205,756 $ 112.49 $ 178,103 $ 97.37 86.6 % $ 6,201
Michigan 250,134 195.89 203,173 159.12 81.2 13,565
Missouri 106,286 236.29 91,732 203.93 86.3 —
Nevada 4,187 1,267.13 4,133 1,250.76 98.7 —
New Mexico 177,928 381.45 141,518 303.40 79.5 5,686
Ohio 271,720 290.54 246,354 263.42 90.7 12,277
Texas 49,174 288.81 37,499 220.24 76.3 936
Utah 72,731 226.40 64,923 202.10 89.3 —
Washington 352,817 202.97 290,353 167.03 82.3 5,838
Other⁽¹⁾
58 — 9,388 — — 20

Total $ 1,490,791 $ 207.33 $ 1,267,176 $ 176.23 85.0 % $ 44,523

Six Months Ended June 30, 2007
Premium Revenue Medical Care Costs Medical Premium Tax
Total PMPM Total PMPM Care Ratio Expense
California $ 187,642 $ 106.64 $ 152,509 $ 86.68 81.3 % $ 6,232
Michigan 245,193 184.75 205,785 155.05 83.9 % 14,873
New Mexico 118,530 305.11 102,168 262.99 86.2 % 3,610
Ohio 186,401 252.13 170,777 231.00 91.6 % 8,388
Texas 39,409 250.35 36,122 229.47 91.7 % 690
Utah 60,960 205.88 55,001 185.76 90.2 % —
Washington 324,887 189.33 261,985 152.67 80.6 % 5,369
Other⁽¹⁾
340 — 8,995 — — 14

Total $ 1,163,362 $ 182.23 $ 993,342 $ 155.60 85.4 % $ 39,176


⁽¹⁾		~~“Other” medical care costs represent medically related administrative costs at the parent company.~~

~~Net Income~~

Net income for the six months ended June 30, 2008, increased to $29.7 million, or $1.05 per diluted share, compared with net income of $22.9 million, or $0.81 per diluted share, for the six months ended June 30, 2007.

~~Premium Revenue~~

Premium revenue for the six months ended June 30, 2008, was $1,490.8 million, an increase of $327.4 million, or 28.1%, over $1,163.4 million of premium revenue for the six months ended June 30, 2007. Medicare premium revenue for the first half of 2008 was $44.4 million compared with $19.5 million80.4% in the same period ~~of 2007. Significant contributors to this $327.4 million increase in premium revenues included the following:~~

	•		~~A $106.3 million increase as a result of the acquisition of Mercy CarePlus in Missouri on November 1, 2007.~~

	•		~~An $85.3 million increase at the Ohio health plan due to higher enrollment.~~

	•		A $59.4 million increase at the New Mexico health plan due to higher enrollment, higher premium rates, and the recognition of $12.9 million in revenues associated with a minimum medical care ratio contract provision.

	•		~~A $27.9 million increase at the Washington health plan due to higher premium rates and slightly higher membership.~~

~~Investment Income~~

Investment income for the six months ended June 30, 2008 totaled $12.7 million compared with $13.4 million earned in the same period of 2007. The $0.7 million decrease was primarily due to declining interest rates.

~~Medical Care Costs~~

The medical care ratio decreased to 85.0% in the first half of 2008, compared with 85.4% for the first half of 2007. Excluding Medicare, the Company’s medical care ratio was 85.0% in the first half 2008 compared with 85.7% in the first half of 2007.

	•		The medical care ratio of the Michigan health plan decreased 270 basis points to 81.2% in the first half of 2008, from 83.9% in the first half of 2007. This decrease was due primarily to lower hospital fee-for-service costs.

	•		~~The medical care ratio of the Missouri health plan was 86.3% for the first half of 2008.~~

	•		The medical care ratio of the California health plan increased as a result of an increase in PMPM medical costs of approximately 12%, chiefly in pharmacy costs and hospital and specialist fee-for-service costs. The California medical care ratio rose to 86.6% in the first half of 2008 from 81.3% in the first half of 2007.

	•		The medical care ratio of the New Mexico health plan decreased 670 basis points to 79.5% in the first half of 2008, from 86.2% in the first half of 2007. This decrease was due to higher premium rates, particularly under the State Coverage Initiative (SCI) contract, which more than offset higher medical costs. The MCR decrease also included the impact of the recognition of $12.9 million in revenue associated with a minimum medical care ratio contract provision. Absent the adjustments made to premium revenue in the first half of 2008 and 2007, the medical care ratio in New Mexico would have been 85.8% in the first half of 2008 and 81.0% in the first half of 2007.

	•		~~The medical care ratios of the~~ Ohio health plan, by line of business, ~~were~~was as follows:


	Six Months Ended						Nine Months Ended
	June 30, 2008			June 30, 2007			September 30, 2008			September 30, 2007
Covered Families and Children (CFC)		89.9	%		91.4	%		89.9	%		89.4	%
Aged, Blind or Disabled (ABD)		92.1			92.4			93.0			93.5

Aggregate		90.7	%		91.6	%		91.0	%		90.5	%

			~~In total, the medical care ratio decreased 90 basis points year over year. This decrease was due primarily to lower fee-for-service hospital costs, offset slightly by higher capitation rates.~~

	•		The medical care ratio of the Texas health plan decreased to 77.6% for the nine months ended September 30, 2008 from ~~91.7%~~85.6% in the ~~first half~~same period of 2007 ~~to 76.3% in the first half of 2008~~ primarily due to low medical costs for the Star Plus membership. During the ~~first half of~~nine months ended September 30, 2008, the Texas health plan reduced revenue ~~by $6.8~~$5.5 million to record amounts due the ~~state~~State of Texas under a profit-sharing agreement.

	•		The medical care ratio of the Utah health plan decreased ~~90 basis points~~ to ~~89.3%~~88.1% for the nine months ended September 30, 2008 from 92.2% in the ~~first half of 2008, from 90.2% in the first half~~same period of 2007. This decrease was primarily the result of lower medical care ratios in the Utah health plan’s SCHIP and Medicare lines of business. The Utah health plan serves the majority of its Medicaid membership under a cost-plus contract with the ~~state~~State of Utah. The Utah health plan’s SCHIP and Medicare lines of business are conducted under “at risk” prepaid capitation contracts.

	•		The medical care ratio of the Washington health plan increased to 82.3% in the first half of 2008 from 80.6% in the first half of 2007. Fee-for-service hospital and specialist costs as a percentage of premium revenue were higher in the first half of 2008 than in the first half of 2007. The higher fee-for-service costs were driven by increases to the Medicaid fee schedule that took effect on each of August 1, 2007 and January 1, 2008.

The medical care ratio of the Washington health plan increased slightly to 80.3% for the nine months ended September 30, 2008 from 80.2% in the same period of 2007. Fee-for-service hospital and specialist costs as a percentage of premium revenue were higher for the nine months ended September 30, 2008 than for the same period of 2007. The higher fee-for-service costs were driven by increases to the Medicaid fee schedule that took effect on each of August 1, 2007 and January 1, 2008.

General and Administrative Expenses

General and administrative expenses were ~~$165.2~~$253.2 million, or 11.0% of total revenue, for the ~~first half of~~nine months ended September 30, 2008 compared with ~~$130.6~~$204.8 million, or ~~11.1%~~11.3% of total revenue, ~~for~~in the ~~first half~~same period of 2007. This decrease was due primarily to a reduction in premium taxes in Michigan from 6.0% of premium revenue to 5.5% of premium revenue effective January 1, 2008, and increased credits taken against premium taxes in New Mexico ~~during~~for the ~~first half of~~nine months ended September 30, 2008.

Core G&A expenses ~~increased to~~were 8.0% of revenue infor the ~~first half~~nine months ended September 30, 2008 and 2007, respectively. Key components of ~~2008 compared with 7.8% in the first half of 2007. The increase in core~~Core G&A ~~compared with the first half of 2007 was primarily due to our continued investment in the administrative infrastructure necessary to support our Medicare product line as~~expenses are indicated in the table below.


	Six Months Ended June 30,										Nine Months Ended September 30,
	2008					2007					2008					2007
			% of Total					% of Total					% of Total					% of Total
	Amount		Revenue			Amount		Revenue			Amount		Revenue			Amount		Revenue
	(in thousands)					(in thousands)					(in thousands)					(in thousands)
Medicare-related administrative costs	$	9,410		0.6	%	$	3,679		0.3	%	$	13,522		0.6	%	$	6,008		0.3	%
Non Medicare-related administrative costs:
Administrative payroll, including employee incentive compensation		92,603		6.2			74,901		6.4			141,770		6.2			118,226		6.6
Florida health plan start-up costs												1,495		—			—		—
All other administrative expense		18,630		1.2			12,840		1.1			27,326		1.2			20,292		1.1

Core G&A expenses	$	120,643		8.0	%	$	91,420		7.8	%	$	184,113		8.0	%	$	144,526		8.0	%

Our investment policies are designed to provide liquidity, preserve capital, and maximize total return on invested assets. As of ~~June~~September 30, 2008, we had cash and cash equivalents of ~~$425.4~~$382.4 million, investments totaling ~~$263.1~~$227.5 million, and restricted investments of ~~$29.9~~$36.5 million.

The cash equivalents consist of highly liquid securities with original ~~or purchase date remaining~~ maturities of ~~up to~~no more than three months that are readily convertible into known amounts of cash. Our investments consisted of investment grade debt securities and are designated as available-for-sale. Of the ~~$263.1~~$227.5 million total, ~~$196.3~~$163.7 million are classified as current assets, and ~~$66.8~~$63.8 million are classified as non-current ~~assets (see further discussion below).~~assets. Our investment policies require that all of our investments have final maturities of ten years or less (excluding auction rate and variable rate securities where interest rates are periodically reset) and that the average maturity be four years or less.

The restricted investments, classified as non-current assets and designated as held-to-maturity, consist of interest-bearing deposits and U.S. treasury securities required by the respective states in which we operate. These states also prescribe the types of instruments in which our subsidiaries may invest their funds.

Professional portfolio managers operating under documented investment guidelines manage all of our investments. The average annualized portfolio ~~yield~~yields on our investments for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007 ~~was~~were approximately ~~3.5%~~3.3% and ~~5.1%~~5.2%, respectively.

Cash used in operating activities for the nine months ended September 30, 2008 was $20.3 million compared with cash provided by operating activities ~~for the six months ended June 30, 2008, was $39.5 million compared with $87.9~~of $112.8 million for the same period in 2007, a decrease of ~~$48.4~~$133.1 million. ~~The decline was due primarily~~Significant contributors to this decrease included the following:

	•		A $40.5 million increase in our California health plan receivable as of September 30, 2008 due to the delayed passage of the California state budget for 2008-2009. Until the budget was passed on September 23, 2008, the State of California had ceased paying its vendors for the previous two months’ billings, resulting in our California health plan’s receiving no contemporaneous payments for July and August 2008. Substantially all receivables due our California health plan at September 30, 2008 were collected in October 2008.

	•		The timing of the receipt of premiums recorded as deferred revenue in the Ohio and Utah health plans, netting to a total decline of $44.9 million year-over-year.

	•		In 2007, the ramp up of operations and medical claims and benefits payable of the Texas and Ohio health plans compared with less significant changes in medical claims and benefits payable for these plans in 2008, netting to a decline of $31.5 million year-over-year.

	•		The reversal of $12.9 million of accrued costs relating to the minimum medical care ratio contract provision in New Mexico in the first six months of 2008.

EBITDA⁽¹⁾


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(in thousands)
Operating income	$	30,429	$	28,815	$	85,138	$	67,694
Add back:
Depreciation and amortization expense		8,515		7,082		24,997		20,274

EBITDA	$	38,944	$	35,897	$	110,135	$	87,968


⁽¹⁾		The Company calculates EBITDA by adding back depreciation and amortization expense to operating income. Operating income included interest income of $4.7 million and $7.4 million for the three months end September 30, 2008 and 2007, respectively, and $17.1 million and $20.3 million for the nine months ended September 30, 2008 and 2007, respectively. EBITDA is not prepared in conformity with GAAP since it excludes depreciation and amortization expense, as well as interest expense, and the provision for income taxes. This non-GAAP financial measure should not be considered as an alternative to net income, operating income, operating margin, or cash provided by operating activities. Management uses EBITDA as a supplemental metric in evaluating our financial performance, in

evaluating financing and business development decisions, and in ~~Ohio~~forecasting and ~~Washington netting~~analyzing future periods. For these reasons, management believes that EBITDA is a useful supplemental measure to ~~a $16.1 million decline year over year; the reversal of $12.9 accrued costs relating to the minimum medical care ratio contract provision~~investors in ~~New Mexico in the first half of 2008;~~evaluating our performance and the ~~maturation~~performance of other companies in our operations in Texas and Ohio during the first half of 2008. As enrollment grew at these health plans during 2007, medical expense outpaced claims payments, leading to increased claims liabilities. In the first half of 2008 enrollment has stabilized and medical expenses are no longer outpacing claims payments.industry.

We have a $200 million credit facility. Borrowings under this credit facility are based, at our election, on the London Interbank Offered Rate, or LIBOR, or the base rate (generally Bank of America’s prime rate) plus an applicable margin. As of ~~June~~September 30, 2008, there were no amounts outstanding under ~~this~~our credit facility. See Note 6 to the condensed consolidated financial statements included in this quarterly report for more information regarding our credit facility.

In April 2008, our board of directors authorized the repurchase of up to $30 million of our common stock on the open market or through privately negotiated transactions. We used working capital to fund the repurchases under this program. The timing and amount of repurchases ~~(up to an aggregate repurchase amount of $30 million)~~ were primarily made pursuant to a Rule 10b5-1 trading ~~plan dated as of May 2, 2008.~~plan. The trading plan became effective May 5, 2008, and terminated when the aggregate cost of the repurchases totaled $30 million on June 12, 2008. During the quarter ended June 30, 2008, we repurchased approximately 1.1 million shares. ~~We did not repurchase any shares during the quarter ended March 31, 2008.~~

OnIn July ~~22,~~ 2008, our board of directors authorized the repurchase of up to an additional one million shares of our common stock. ~~The repurchase program will be funded using~~We used our working capital ~~and~~to fund the purchases under this program. The timing and amount of ~~any shares repurchased will be~~repurchases were made pursuant to a Rule 10b5-1 trading ~~plan. The~~plan that was effective as of August 1, 2008. During the quarter ended September 30, 2008, we repurchased approximately 91,000 shares for an aggregate purchase price of $2.7 million.

From October 1, 2008 through October 30, 2008, we repurchased approximately 722,000 shares of our common stock for an aggregate purchase price of $17.3 million (average cost of approximately $23.92 per share). These purchases have completed the Company’s stock purchase plan announced in July 2008. Through October 30, 2008, we have repurchased approximately 1.9 million shares at an aggregate purchase price of $50 million pursuant to the two repurchase ~~program extends through December 31, 2008, but we reserve~~plans announced during the ~~right to suspend or discontinue the program at any time.~~year.

At ~~June~~September 30, 2008, we had working capital of ~~$332.6~~$347.8 million compared with $404.7 million at December 31, 2007. At ~~June~~September 30, 2008, the parent company (Molina Healthcare, Inc.) had cash and investments of approximately ~~$76.1~~$83.4 million, including ~~$19.6~~$18.5 million in auction rate securities. WeBased on current projections for cash activity, we believe that our cash resources, ~~and~~ internally generated funds, and credit resources will be sufficient to support our operations, regulatory requirements, and capital expenditures for at least the next 12 months. Although the Company believes it has adequate sources of liquidity, the ongoing volatility and disruptions in the capital and credit markets could affect the Company’s ability to access those markets for additional borrowings or increase costs associated with borrowing funds.

Regulatory Capital and Dividend Restrictions

Our principal operations are conducted through our nine HMO subsidiaries operating in California, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. The HMOs are subject to state laws that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and may restrict the timing, payment, and amount of dividends and other distributions that may be paid to Molina Healthcare, Inc. as the sole stockholder of each of our HMOs.

The National Association of Insurance Commissioners, or NAIC, has established model rules which, if adopted by a particular state, set minimum capitalization requirements for HMOs and other insurance entities bearing risk for health care coverage. The requirements take the form of risk-based capital, or RBC, rules. These rules, which vary slightly from state to state, have been adopted in Michigan, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. California and Missouri have not adopted RBC rules, but have established their own minimum capitalization requirements.

At ~~June~~September 30, 2008, our HMOs had aggregate statutory capital and surplus of approximately ~~$349.7~~$349.9 million, compared with the required minimum aggregate statutory capital and surplus of approximately ~~$207.6~~$209.2 million. All of our HMOs were in compliance with the minimum capital requirements at ~~June~~September 30, 2008. We have the ability and commitment to provide additional capital to each of our HMOs when necessary to ensure that they continue to meet statutory and regulatory capital requirements.

Contractual Obligations

In our Annual Report on Form 10-K for the year ended December 31, 2007, we reported on our contractual obligations as of that date. There have been no material changes to our contractual obligations since that report.

Critical Accounting Policies

When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. The determination of our liability for claims and medical benefits payable is particularly important to the determination of our financial position and results of operations in any given period. This determination of our liability requires the application of a significant degree of judgment by our management. As a result, the determination of our liability for claims and medical benefits is subject to an inherent degree of uncertainty.

Our medical care costs include amounts that have been paid by us through the reporting date, as well as estimated liabilities for medical care costs incurred but not paid by us as of the reporting date. Such medical care liabilities include, among other items, capitation payments owed providers, unpaid pharmacy invoices, and various medically related administrative costs that have been incurred but not paid. We use judgment to determine the appropriate assumptions for determining the required estimates.

The most important element in estimating our medical care costs is our estimate for fee-for-service claims which have been incurred but not paid by us. These fee-for-service costs that have been incurred but have not been paid at the reporting date are collectively referred to as medical costs that are “Incurred But Not Reported,” or IBNR. Our IBNR liability, as reported in our balance sheet, represents our best estimate of the total amount of claims we will ultimately pay with respect to claims that we have incurred as of the balance sheet date. We estimate our IBNR monthly using actuarial methods based on a number of factors. Our estimated IBNR liability represented ~~$248.7~~$239.0 million of our total medical claims and benefits payable of ~~$305.5~~$298.8 million as of ~~June~~September 30, 2008. Excluding IBNR related to our Utah health plan, where we are primarily reimbursed on a cost-plus basis, our IBNR liability at ~~June~~September 30, 2008 was ~~$231.9~~$222.0 million.

The factors we consider when estimating our IBNR include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, the incidence of high dollar or catastrophic claims, entry into new geographic markets, and modifications and upgrades to our claims processing systems and practices. Our assessment of these factors is then translated into an estimate of our IBNR liability at the relevant measuring point through the calculation of a base estimate IBNR, a further reserve for adverse claims development, and an estimate of the administrative costs of

settling all claims incurred through the reporting date. The base estimate of IBNR is derived through application of claims payment completion factors and trended per member per month (PMPM) cost estimates.

For the fifth month of service prior to the reporting date and earlier, we estimate our outstanding claims liability based on actual claims paid, adjusted for estimated completion factors. Completion factors seek to measure the cumulative percentage of claims expense that will have been paid for a given month of service as of the reporting date, based on historical payment patterns.

The following table reflects the change in our estimate of claims liability as of ~~June~~September 30, 2008 that would have resulted had we changed our completion factors for the fifth through the twelfth months preceding ~~June~~September 30, 2008 by the percentages indicated. A reduction in the completion factor results in an increase in medical claims liabilities. Our Utah health plan is excluded from these calculations because the majority of ~~the Utah~~its business is conducted under a cost-plus reimbursement contract.


	Increase (Decrease) in			Increase (Decrease) in
(Decrease) Increase in Estimated	Medical Claims and			Medical Claims and
Completion Factors	Benefits Payable			Benefits Payable
	(in thousands)			(in thousands)
(6)%	$	50,315		$	52,384
(4)%		33,543			34,923
(2)%		16,772			17,461
2%		(16,772	)		(17,461	)
4%		(33,543	)		(34,923	)
6%		(50,315	)		(52,384	)

For the four months of service immediately prior to the reporting date, actual claims paid are not a reliable measure of our ultimate liability, given the inherent delay between the patient/physician encounter and the actual submission of a claim for payment. For these months of service, we estimate our claims liability based on trended PMPM cost estimates. These estimates are designed to reflect recent trends in payments and expense, utilization patterns, authorized services, and other relevant factors. The following table reflects the change in our estimate of claims liability as of ~~June~~September 30, 2008 that would have resulted had we altered our trended PMPM factors by the percentages indicated. An increase in the PMPM costs results in an increase in medical claims liabilities. Our Utah HMO is excluded from these ~~calculations, because the majority of the Utah business is conducted under a cost-plus reimbursement contract.~~calculations.


(Decrease) Increase in	(Decrease) Increase in			(Decrease) Increase in
Trended Per Member Per Month	Medical Claims and			Medical Claims and
Cost Estimates	Benefits Payable			Benefits Payable
	(in thousands)			(in thousands)
(6)%	$	(26,877	)	$	(26,779	)
(4)%		(17,918	)		(17,853	)
(2)%		(8,959	)		(8,926	)
2%		8,959			8,926
4%		17,918			17,853
6%		26,877			26,779

of net income. Likewise, when completion factors areunderestimated, trended PMPM costs tend to beoverestimated, creating an understatement of net income. In other words, errors in estimates involving both completion factors and trended PMPM costs will act to drive estimates of claims liabilities and medical care costs in the same direction. For example, if completion factors were overestimated by 1%, resulting in an overstatement of net income by ~~$5.0~~$5.4 million, it is likely that trended PMPM costs would be underestimated, resulting in an additional overstatement of net income.

After we have established our base IBNR reserve through the application of completion factors and trended PMPM cost estimates, we then compute an additional liability, which also uses actuarial techniques, to account for adverse developments in our claims payments which the base actuarial model is not intended to and does not account for. We refer to this additional liability as the provision for adverse claims development. The provision for adverse claims development is a component of our overall determination of the adequacy of our IBNR. It is intended to capture the adverse development of factors such as known outbreaks of disease ~~such as~~like influenza, our entry into new geographic markets, our provision of services to new populations such as the aged, blind or disabled (ABD), claims receipt and payment experience, changes in membership, cost trends, changes to Medicaid fee schedules, incidence of high dollar or catastrophic claims, changes in provider billing practices, health care service utilization trends, and modifications and upgrades to our claims processing systems and practices. Because of the complexity of our business, the number of states in which we operate, and the need to account for different health care benefit packages among those states, we make an overall assessment of IBNR after considering the base actuarial model reserves and the provision for adverse claims development. We also include in our IBNR liability an estimate of the administrative costs of settling all claims incurred through the reporting date. The development of IBNR is a continuous process that we monitor and refine on a monthly basis as additional claims payment information becomes available. As additional information becomes known to us, we adjust our actuarial model accordingly to ~~establish~~estimate IBNR.

On a monthly basis, we review and update our estimated IBNR liability and the methods used to determine that liability. Any adjustments, if appropriate, are reflected in the period known. While we believe our current estimates are adequate, we have in the past been required to increase significantly our claims reserves for periods previously reported and may be required to do so again in the future. Any significant increases to prior period claims reserves would materially decrease reported earnings for the period in which the adjustment is made.

In our judgment, the estimates for completion factors will likely prove to be more accurate than trended PMPM cost estimates because estimated completion factors are subject to fewer variables and unknowns in their determination. ~~Specifically, completion~~Completion factors are developed over long periods of time, and are most likely to be affected by changes in claims receipt and payment experience and by provider billing practices. Trended PMPM cost estimates, while affected by the same factors, will also be influenced by health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, outbreaks of disease or increased incidence of illness, provider contract changes, changes to Medicaid fee schedules, the incidence of high dollar or catastrophic claims, changes in membership, entry into new geographic markets, and modifications and upgrades to our claims processing systems and practices. As discussed above, however, errors in estimates involving trended PMPM costs will almost always be accompanied by errors in estimates involving completion factors, and vice versa. In such circumstances, errors in estimation involving both completion factors and trended PMPM costs will act to drive estimates of claims liabilities (and therefore medical care costs) in the same direction.

Assuming that base reserves have been adequately set, we believe that amounts ultimately paid out should generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion in that liability of the allowance for adverse claims development and the accrued cost of settling those claims. However, there can be no assurance that amounts ultimately paid out will not be higher or lower than this 8% to 10% range, as shown by our results in 2007 when the amounts ultimately paid out were less than the amount of our established reserves by approximately 19%. As of ~~June~~September 30, 2008, we estimate that the total payout in satisfaction of the liability established for claims and medical benefits payable at December 31, 2007 will be approximately ~~15%~~19% less than the amount originally recorded. This estimate may change during the course of the year as more information becomes available.

The apparent overestimation of our liability for claims and medical benefits payable at December 31, 2007 led to the recognition of a benefit from prior period claims development infor the ~~first half of~~nine months ended September 30, 2008. The overestimation of

the claims liability at our Michigan and Washington health plans was principally the cause of the recognition of a benefit from prior period claims development. This was partially offset by the underestimation of our claims liability at December 31, 2007 at our Missouri health plan:

	•		In Michigan, we overestimated the upward trend in medical costs in the second half of 2007, principally due to claims processing difficulties during the third quarter of 2007 that exaggerated the upward trend in medical costs.

	•		In Washington, we did not fully account for reduced utilization of medical services in the fourth quarter of 2007, thus overestimating our liability at December 31, 2007.

	•		In Missouri, we underestimated the upward trend in medical costs during the ~~latter~~second half of 2007 that was driven by an increase in the Medicaid fee schedule effective July 1, 2007. Additionally, we underestimated the impact of the underpayment of certain hospital claims in the second half of 2007. Additional payments were made on many of those claims in the first quarter of 2008.

The recognition of a benefit from prior period claims development did not have a material impact on our consolidated results of operations infor the ~~first half of~~nine months ended September 30, 2008.

In estimating our claims liability at ~~June~~September 30, 2008, we adjusted our base calculation to take account of the impact of the following factors which we believe are reasonably likely to change our final claims liability amount (some of the factors listed below were also factors impacting our final claims liability amount at December 31, 2007):

	•		Our assessment regarding the impact of some overpayments made to certain Ohio providers in ~~2007~~2008 and ~~2006~~2007 and the impact of those overpayments on estimated medical cost trends.

	•		The impact of the increased incidence of respiratory illness in the first quarter of 2008 as compared to previous years.

	•		Costs associated with our newly acquired membership in Missouri, as well as the impact of any difference between our claims payment policies and those used by the prior management of our Missouri health plan.

	•		Increases in claims inventory at our ~~California and Michigan~~Ohio health ~~plans~~plan during the ~~second~~third quarter of 2008.

	•		Decreases in claims inventory at our California, Michigan, New Mexico, Ohio, and Washington health plans during the ~~second~~third quarter of 2008.

	•		The addition, effective April 1, 2008, of approximately 35,000 CFC members to our Ohio health plan.

	•		The addition, effective September 1, 2008, of approximately 4,000 ABD members to our Ohio health plan.

	•		Our ability to accurately estimate the ultimate settlement amounts (if any) of certain classes of claims currently in dispute, particularly at our Missouri and New Mexico heath plans.

Any absence of adverse claims development (as well as the expensing of the costs, through general and administrative expense, to settle claims held at the start of the period) will lead to the recognition of a benefit from prior period claims development in the period subsequent to the date of the original estimate. However, that benefit will affect current period earnings only to the extent that the replenishment of the reserve for adverse claims development (and the re-accrual of administrative costs for the settlement of those claims) is less than the benefit recognized from the prior period liability.

We seek to maintain a consistent claims reserving methodology across all periods. Accordingly, any prior period benefit from an un-utilized reserve for adverse claims development would likely be offset by the establishment of a new reserve in an approximately equal amount (relative to premium revenue, medical care costs, and medical claims and benefits payable) in the current period, and thus the impact on earnings for the current period would likely be minimal.

The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The negative amounts displayed for “components of medical care costs related to prior years” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period exceeded the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The benefit of this prior period development may be offset by the addition of a

reserve for adverse claims development when estimating the liability at the end of the period (captured as a “component of medical care costs related to current year”).


							As of and for									As of and for
	As of and for the						the Year Ended			As of and for the						the Year Ended
	Six Months Ended June 30,						December 31,			Nine Months Ended September 30,						December 31,
	2008			2007			2007			2008			2007			2007
	(dollar amounts in thousands)									(dollar amounts in thousands)
Balances at beginning of period	$	311,606		$	290,048		$	290,048		$	311,606		$	290,048		$	290,048
Medical claims and benefits payable from business acquired		—			—			14,876			—			—			14,876
Components of medical care costs related to:
Current year		1,315,469			1,036,378			2,136,381			1,996,385			1,568,949			2,136,381
Prior years		(48,293	)		(43,036	)		(56,298	)		(59,854	)		(49,705	)		(56,298	)

Total medical care costs		1,267,176			993,342			2,080,083			1,936,531			1,519,244			2,080,083
Payments for medical care costs related to:
Current year		1,043,522			764,638			1,851,035			1,721,191			1,278,321			1,851,035
Prior years		229,719			215,513			222,366			228,159			222,249			222,366

Total paid		1,273,241			980,151			2,073,401			1,949,350			1,500,570			2,073,401

Balances at end of period	$	305,541		$	303,239		$	311,606		$	298,787		$	308,722		$	311,606


Benefit from prior period as a percentage of balance at beginning of period		15.5	%		14.8	%		19.4	%		19.2	%		17.1	%		19.4	%
Benefit from prior period as a percentage of premium revenue		3.2	%		3.7	%		2.3	%		2.6	%		2.8	%		2.3	%
Benefit from prior period as a percentage of total medical care costs		3.8	%		4.3	%		2.7	%		3.1	%		3.1	%		2.7	%
Days in claims payable		47			54			52

Number of members at end of period		1,234,000			1,076,000			1,149,000
Number of claims in inventory at end of period		151,500			254,800			161,400
Billed charges of claims in inventory at end of period	$	209,100		$	260,100		$	212,000
Claims in inventory per member at end of period		0.12			0.24			0.14


					As of and for
	As of and for the				the Year Ended
	Nine Months Ended September 30,				December 31,
	2008		2007		2007
	(dollar amounts in thousands)
Days in claims payable		44		54		52
Number of members at end of period		1,239,000		1,070,000		1,149,000
Number of claims in inventory at end of period		131,100		179,200		161,400
Billed charges of claims in inventory at end of period	$	147,100	$	231,800	$	212,000
Claims in inventory per member at end of period		0.11		0.17		0.14
Number of claims received during the period		8,234,500		6,959,000		9,578,900
Billed charges of claims received during the period	$	5,754,700	$	4,477,500	$	6,190,900

Inflation

We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of health care services. Through these contracted providers, our health plans emphasize preventive health care and the appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product introductions, demands from health care providers and customers, applicable regulations, or other factors may affect our ability to control health care costs.

Compliance Costs

Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures, and programs that we have not yet identified.

Forward Looking Statements

	•		the achievement of savings from the successful management of the medical care ratios of our health plans;

	•		an increase in enrollment in both our Medicaid and Medicare populations consistent with our expectations;

	•		our ability to reduce administrative costs in the event enrollment or revenue is lower than expected;

	•		increased administrative costs in support of the Company’s efforts to expand Medicare membership;

	•		our ability to accurately estimate incurred but not reported medical costs;

	•		federal and state budgetary crises and difficulties in funding the government-sponsored health care programs in which we participate due to current economic conditions, particularly in the states of California, Michigan, Missouri, and Ohio;

	•		the impact of the Rogers Amendment to the Deficit Reduction Act of 2005 regarding the rates to be paid to non-contracting hospitals by our California health plan;

	•		the continuation and extension of the injunction regarding provider rate reductions in California;

	•		changes in market interest rates;

	•		disruptions in the credit market and the availability of credit on reasonable terms;

	•		the potential termination or expiration without renewal of the government contracts of our health plans;

	•		the imposition of fines or assessments by state or federal regulators for perceived operating deficiencies;

	•		our dependence upon a relatively small number of government contracts and subcontracts for our revenue;

	•		limitations in our ability to control our medical costs and other operating expenses;

	•		risks related to our new Medicare Advantage plans, including retroactive risk adjustments, governmental funding, compliance issues, and confusion regarding the new plans among Medicare beneficiaries, providers, pharmacists, and regulators;

	•		the successful and cost-effective integration of Florida NetPASS and its members, including risks related to our lack of prior operating experience in Florida;

	•		the availability of adequate financing to fund and/or capitalize our acquisitions and start-up activities, including the current crisis in the credit markets and the resulting inability of companies to borrow funds;

	•		risks related to the liquidity and value of our auction rate securities;

	•		the inability of the reinsurer to pay any of the insurance claims under the life and annuity policies ceded to it by Molina Healthcare Insurance Company;

	•		membership eligibility processes and methodologies;

	•		unexpected changes in demographics, member utilization patterns, healthcare practices, or healthcare technologies;

	•		high dollar claims related to catastrophic illness or conditions, increases in respiratory illnesses, or increases in the number of premature infants among our plans’ members;

	•		risks related to the continued solvency of our major providers and provider groups;

	•		failure to maintain effective, efficient, and secure information systems and claims processing technology;

	•		the unfavorable resolution of pending litigation or arbitration;

	•		risks associated with the potential negative perception among regulators, governmental representatives, and the public of abuses occurring within the Medicaid or Medicare managed care sectors and the association or general attribution of such negative perceptions to us;

	•		risks associated with our $200 million of Notes;

	•		epidemics such as the avian flu;

	•		changes to government laws and regulations or in the interpretation and enforcement of those laws and regulations; and

	•		general economic and market conditions.

securities. Concentration of credit risk with respect to accounts receivable is limited due to payors consisting principally of the governments of each state in which our HMO subsidiaries operate.

As of ~~June~~September 30, 2008, we held investments in auction rate securities, totaling ~~$71.8~~$70.8 million, with a fair value of ~~$66.8~~$63.8 million, which are required to be measured at fair value on a recurring basis. Our auction rate securities are designated as available-for-sale securities and are reflected at fair value. Prior to January 1, 2008, these securities were recorded at fair value based on quoted prices in active markets (i.e., SFAS 157 Level 1 data). Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes, and which resets the applicable interest rate at pre-determined intervals, usually every 7, 28, or 35 days. However, due to recent events in the credit markets, the auction events for some of these instruments failed during for the ~~first half of~~nine months ended September 30, 2008. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. Therefore, the fair values of these securities were estimated using a discounted cash flow analysis or other type of valuation model as of ~~June~~September 30, 2008. These analyses considered, among other things, the collateralization underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would be expected to have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties.

As a result of the declines in fair value for our investments in auction rate securities, which we deem to be temporary and attribute to liquidity issues rather than to credit issues, we have recorded an unrealized loss of ~~$5.0~~$6.9 million to accumulated other comprehensive income for the ~~six~~nine months ended ~~June~~September 30, 2008. Substantially all of the ~~$66.8~~$63.8 million in auction rate security instruments held by us at ~~June~~September 30, 2008 were in securities collateralized by student loans, which loans are guaranteed by the U.S. government. Due to our belief that the market for these student loan collateralized instruments may take in excess of twelve months to fully recover, we have classified these investments as non-current, and have included them in investments on the unaudited condensed consolidated balance sheet at ~~June~~September 30, 2008. As of ~~June~~September 30, 2008, we continue to earn interest on our auction rate security instruments. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive (loss) income. If we determine that any future valuation adjustment was other than temporary, we would record a charge to earnings as appropriate.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures:Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has concluded, based upon its evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting:There has been no change in our internal control over financial reporting during the three months ended ~~June~~September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

~~Starko.~~Our New Mexico HMO is named as a defendant in a class action lawsuit brought by New Mexico pharmacies and pharmacists, Starko, Inc., et al. v. NMHSD, et al., No. CV-97-06599, Second Judicial District Court, State of New Mexico. The lawsuit was originally filed in August 1997 against the New Mexico Human Services Department (“NMHSD”). In February 2001, the plaintiffs named health maintenance organizations participating in the New Mexico Medicaid program as defendants (the “HMOs”), including Cimarron Health Plan, the predecessor of our New Mexico HMO. The plaintiffs assert that NMHSD and the HMOs failed to pay pharmacy dispensing fees under an alleged New Mexico statutory mandate. On July 10, 2007, the court dismissed all damages claims against Molina Healthcare of New Mexico, leaving at that time only a pending action for injunctive and declaratory relief. On August 15, 2007, the court dismissed all remaining claims against Molina Healthcare of New Mexico, including the action for injunctive and declaratory relief. The plaintiffs have filed an appeal with respect to the court’s dismissal orders, and the parties have submitted their respective appellate briefs and are awaiting oral argument. Under the terms of the stock purchase agreement pursuant to which we acquired Health Care Horizons, Inc., the parent company to the Molina Healthcare of New Mexico, an indemnification escrow account was established and funded with $6.0 million to indemnify Molina Healthcare of New Mexico against the costs of such litigation and any eventual liability or settlement costs. As of June 30, 2008, approximately $4.2 million remained in the indemnification escrow fund.

We are involved in ~~other~~ legal actions in the ~~normal~~ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. ~~These~~The outcome of such legal actions ~~individually or in~~is inherently uncertain. Nevertheless, we believe that these actions (including the ~~aggregate,~~previously disclosed Starko and Ward litigation matters), when finally concluded and determined, are not likely ~~in our opinion,~~ to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Item 1A.Risk Factors

~~Our~~
Certain risk factors may have a material adverse effect on our business, financial condition, and results of operations and you should carefully consider them. The following risk factors were identified or reevaluated by the Company during the third quarter and are a supplement to those risk factors included as part of Item 1A., Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission (“SEC”) on March 17, 2008, as updated by Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the SEC on May 8, 2008 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed with the SEC on July 30, 2008.
The value of our investments is influenced by varying economic and market conditions, and a decrease in value could have an adverse effect on our results of operations, liquidity, and financial condition.

As of September 30, 2008, we had investments totaling $227.5 million. Of the $227.5 million total, $163.7 million are classified as current assets, $63.8 million are classified as non-current assets, and all of them are designated as available-for-sale investment ~~portfolio~~securities. Available-for-sale investments are carried at fair value, and the unrealized gains or losses are included in accumulated other comprehensive (loss) income as a separate component of stockholders’ equity, unless the decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such securities until their full cost can be recovered. For our available-for-sale investments and held-to-maturity investments, if a decline in value is deemed to be other-than-temporary and we do not have the intent and ability to hold such security until its full cost can be recovered, the security is deemed to be other-than-temporarily impaired and it is written down to fair value and the loss is recorded as an expense.

In accordance with applicable accounting standards, we review our investment securities to determine if declines in fair value below cost are other-than-temporary. This review is subjective and requires a high degree of judgment. We conduct this review on a quarterly basis, using both quantitative and qualitative factors, to determine whether a decline in value is other-than-temporary. Such factors considered include the length of time and the extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer, recommendations of investment advisors and forecasts of economic, market, or industry trends. This review process also entails an evaluation of our ability and intent to hold individual securities until they mature or full cost can be recovered.

The current economic environment and recent volatility of the securities markets increase the difficulty of assessing investment impairment and the same influences tend to increase the risk of potential impairment of these assets. As a result of the decline in fair value of our investments in auction rate securities, we recorded unrealized losses, net of tax at the combined federal and state statutory rate, of $1.2 million and $4.3 million for the three and nine months ended September 30, 2008, respectively, to accumulated other comprehensive (loss) income. Over time, the economic and market environment may ~~suffer losses from reductions in market interest rates and fluctuations in fixed income~~further deteriorate or provide additional insight regarding the fair value of certain securities, which could ~~materially~~change our judgment regarding impairment. This could result in realized losses relating to other-than-temporary declines recorded as an expense. Given the current market conditions and ~~adversely affect~~the significant judgments involved, there is continuing risk that further declines in fair value may occur and material other-than-temporary impairments may result in realized losses in future periods which could have an adverse effect on our results of operations, liquidity, and financial condition.

Adverse credit market conditions may have a material adverse effect on our liquidity or ~~liquidity.~~our ability to obtain credit on acceptable terms or at all.

AsThe securities and credit markets have been experiencing significant volatility and disruption. In some cases, the markets have exerted downward pressure on the availability of ~~June 30, 2008,~~liquidity and credit capacity. In the event we need access to additional capital to pay our ~~portfolio~~operating expenses, make payments on our indebtedness, pay capital expenditures, or fund acquisitions, our ability to obtain such capital may be limited and the cost of ~~fixed income securities totaled $263.1 million,~~any such capital, if available, may be significant. Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our ~~cash~~industry, our credit ratings and ~~cash equivalents totaled $425.4 million, and restricted investments held~~credit capacity, as ~~collateral totaled $29.9 million. This portfolio of holdings generated investment income totaling approximately 25% and 36%~~well as the possibility that lenders could develop a negative perception of our ~~pretax income for the six months ended June 30, 2008~~long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and ~~2007, respectively. The performance of our portfolio is interest rate driven. Therefore, volatility~~ in ~~interest rates,~~ such ~~as the recent actions by the Federal Reserve Bank Board, affects our returns~~case, we may not be able to successfully obtain additional financing on and the market value of our portfolio. This and any future reductions in the federal funds interest rate or other disruptions in the credit markets could materially and adversely affect our results of operations and liquidity.favorable terms.

3839

~~A mandated retroactive change to~~The re-implementation of the ~~inpatient per diem rates paid by our~~ California ~~health plan to non-contracted hospitals~~provider rate reduction could have ~~a materially~~an adverse effect on our results of ~~operations.~~operations, liquidity, and financial condition.

~~Under~~On July 1, 2008, the so-called Rogers Amendment to the Medicaid provisions of the Deficit Reduction Act of 2005, 42 U.S.C. § 1396u-2(b)(2)(D), a Medicaid provider which does not have a contract with a Medicaid managed care entity must accept as payment the amount otherwise applicable outside of managed care minus any payments for indirect costs of medical education and direct costs of graduate medical education. For purposes of a state where rates paid to hospitals are negotiated by contract and not publicly released, such as in California, the amount applicable under this requirement is the “average contract rate that would apply under the State plan for general acute care hospitals or the average contract rate that would apply under such plan for tertiary hospitals.”

~~There is a disagreement among health plans and hospitals over how this payment language regarding average contract rates should be applied to the Medicaid program in California, known as Medi-Cal. The~~ California Department of Health Care Services ~~known as DHCS, has convened~~(DHCS) implemented a ~~collaborative workgroup~~10 percent payment reduction for providers of ~~health plans, hospitals, industry associations, and government representatives~~various medical services under the Medi-Cal program. On August 18, 2008, the U.S. District Court issued a preliminary injunction to ~~discuss the appropriate application~~halt certain portions of the ~~Rogers Amendment~~rate reduction. As a result of the issuance of the injunction, the payments being made to ~~non-contracted~~these medical providers as of ~~emergency services in California. A recent DHCS proposal~~August 18, 2008 reverted to the ~~workgroup provides for~~rates that were being paid to them prior to July 1st when the ~~creation of weighted average per diem rates for both tertiary and non-tertiary hospitals, and for~~rate reduction was first implemented. Litigation to have the ~~retroactive application of these per diem rates to January 1, 2007,~~rate reduction set aside is currently continuing. In the ~~effective date of~~event such litigation is unsuccessful, the ~~Rogers Amendment. Because~~injunction is lifted, or the ~~proposed per diem rates are materially greater than~~provider rate reduction is otherwise re-implemented, the ~~existing average contract~~resulting impact on the rates paid byto our ~~California health plan to non-contracting hospitals, if this proposal were to become effective, the resulting additional cost to the Company’s~~ California health plan could have ~~a materially~~an adverse effect on our results of ~~operations.~~

~~In addition to the other information~~operations, liquidity, and risk factors set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A — Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2007. The risks described herein and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial ~~condition, and/or operating results.~~condition.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On June 30, 2008, we issued a total of 48,186 shares of our common stock in reliance upon the exemption from securities registration provided by Section 4(2) of the Securities Act of 1933. The shares were issued to a single accredited investor for investment purposes in connection with our acquisition of all of the assets of The Game of Work, LLC, a Utah limited liability company. The total agreed-upon consideration for the assets, including both the unregistered shares issued and cash, was approximately $2.3 million.

Issuer Purchases of Equity Securities

As publicly announced on ~~April 29,~~July 23, 2008, our board of directors authorized the repurchase of up to ~~$30~~one million shares of our common stock on the open market or through privately negotiated transactions. We used working capital to fund the repurchases under this program. The timing and amount of repurchases (up to an aggregate repurchase amount of $30 million) were primarily made pursuant to a Rule 10b5-1 trading plan dated as of May 2, 2008. The Rule 10b5-1 plan became effective May 5, 2008, and terminated when the aggregate cost of the repurchases totaled $30 million on June 12, 2008.stock. Purchases of common stock made by or on behalf of the Company during the quarter ended ~~June~~September 30, 2008 are set forth below:

Total Number of Maximum Number (or
Shares Purchased as Approximate Dollar Value)
Total Number Part of Publicly of Shares That May Yet Be
of Shares Average Price Announced Plans or Purchased Under the Plans
Purchased Paid per Share Programs or Programs
April 1 — April 30, 2008 — — — $ 30,000,000
May 1 — May 31, 2008 731,000 $ 25.3953 731,000 $ 11,414,000
June 1 — June 30, 2008 399,789 $ 28.5203 399,789 —
Total 1,130,789 $ 26.5001 1,130,789 —

~~Item 4.~~~~Submission of Matters to a Vote of Security Holders~~

~~At our 2008 Annual Meeting of Stockholders held on May 15, 2008, our stockholders elected three Class III directors as follows:~~

Director Votes For Votes Withheld
J. Mario Molina 26,166,849 66,103
Steven J. Orlando 26,067,885 165,067
Ronna E. Romney 26,067,470 165,482

~~The three directors’ terms as Class III directors shall continue until the 2011 Annual Meeting of Stockholders. There were no additional matters voted upon at the Annual Meeting.~~

Total Number of Maximum Number (or
Shares Purchased as Approximate Dollar Value)
Total Number Part of Publicly of Shares That May Yet Be
of Shares Average Price Announced Plans or Purchased Under the Plans
Purchased Paid per Share Programs or Programs
July 1— July 31, 2008 — — — $ 15,000,000
August 1 — August 31, 2008 20,402 $ 29.9593 20,402 14,388,159
September 1 — September 30, 2008 70,125 $ 29.9761 70,125 12,283,983

Total 90,527 $ 29.9723 90,527 $ 12,283,983

Item 5.Other Information.

None.

Item 6.Exhibits

A list of exhibits required to be filed as part of this Quarterly Report on Form 10-Q is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by this reference.

4041


Part I — Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2008 (unaudited) and December 31, 2007			3

Consolidated Statements of Income for the three month and ~~six~~nine month periods ended ~~June~~September 30, 2008 and 2007 (unaudited)			4

Consolidated Statements of Comprehensive Income for the three month and ~~six~~nine month periods ended ~~June~~September 30, 2008 and 2007 (unaudited)			5

Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2008 and 2007 (unaudited)			6

Notes to Condensed Consolidated Financial Statements (unaudited)			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17

Item 3. Quantitative and Qualitative Disclosures About Market Risk			3637

Item 4. Controls and Procedures			37

Part II — Other Information

Item 1. Legal Proceedings			38

Item 1A. Risk Factors			3839

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3941

~~Item 4. Submission of Matters to a Vote of Security Holders~~			40

Item 5. Other Information			4041

Item 6. Exhibits			4041

Signatures			4142
~~EXHIBIT 31.1~~EX-31.1
~~EXHIBIT 31.2~~EX-31.2
~~EXHIBIT 32.1~~EX-32.1
~~EXHIBIT 32.2~~EX-32.2


								Weighted-									Weighted-
				Weighted-				Average					Weighted-				Average
				Average		Aggregate		Remaining					Average		Aggregate		Remaining
				Exercise		Intrinsic		Contractual					Exercise		Intrinsic		Contractual
	Options			Price		Value		Term		Options			Price		Value		Term
						(in thousands)		(in years)							(in thousands)		(in years)
Outstanding as of December 31, 2007		733,713		$	30.45						733,713		$	30.45
Granted		12,000			33.57						12,000		$	33.57
Exercised		(6,081	)		28.33	$	31				(16,921	)	$	27.75	$	66

Forfeited		(32,475	)		35.43						(46,653	)	$	34.47

Outstanding as of June 30, 2008		707,157		$	30.30	$	344		7.2
Outstanding as of September 30, 2008											682,139		$	30.30	$	1,748		7.0

Exercisable and expected to vest as of June 30, 2008		652,701		$	30.17	$	344		7.1
Exercisable and expected to vest as of September 30, 2008											638,584		$	30.19	$	1,736		6.9

Exercisable as of June 30, 2008		423,110		$	29.07	$	344		6.5
Exercisable as of September 30, 2008											430,454		$	29.77	$	1,568		6.3


				Weighted-							Weighted-
				Average		Aggregate					Average		Aggregate
				Grant Date		Market					Grant Date		Market
	Shares			Fair Value		Value		Shares			Fair Value		Value
						(in thousands)							(in thousands)
Unvested balance as of December 31, 2007		235,413		$	34.14				235,413		$	34.14
Granted		374,000			31.02	$	11,601		383,500			30.96	$	11,872

Vested		(52,061	)		30.92	$	1,524		(76,571	)		32.25	$	2,237

Forfeited		(29,235	)		34.62				(53,662	)		33.66

Unvested balance as of June 30, 2008		528,117		$	32.22
Unvested balance as of September 30, 2008									488,680		$	31.99


	Fair Value			Fair Value
	Measurements			Measurements
	Using Significant			Using Significant
	Unobservable Inputs			Unobservable Inputs
	(Level 3)			(Level 3)
Auction Rate Securities	(in thousands)			(in thousands)
Balance at December 31, 2007	$	—		$	—
Transfers to Level 3		82,150			82,150
Total losses (realized or unrealized):
Included in earnings		—			—
Included in other comprehensive income		(4,964	)		(6,923	)
Purchases (settlements), net		(10,400	)
Settlements					(11,400	)

Balance at June 30, 2008	$	66,786
Balance at September 30, 2008				$	63,827

The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized losses relating to assets still held at June 30, 2008	$	(4,964	)
The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized losses relating to assets still held at September 30, 2008				$	(6,923	)


	June 30,		December 31,		September 30,		December 31,
	2008		2007		2008		2007
	(in thousands)				(in thousands)
California	$	18,773	$	23,046	$	63,583	$	23,046
Michigan		7,892		6,419		10,511		6,419
Missouri		18,228		15,986		22,714		15,986
Ohio		30,752		28,522		34,196		28,522
Utah		23,997		23,987		20,205		23,987
Washington		8,535		8,308		9,679		8,308
Others		5,420		5,269		8,872		5,269

Total receivables	$	113,597	$	111,537	$	169,760	$	111,537


	Three Months Ended				Six Months
	June 30,				Ended June 30,
	2008		2007		2008		2007
	(in thousands)
Stock options (including shares issued under our employee stock purchase plan)	$	452	$	567	$	817	$	1,086
Restricted stock awards		775		534		1,306		1,173

Total stock-based compensation expense, net of tax	$	1,227	$	1,101	$	2,123	$	2,259


(1)		There were no stock options awarded in the three months ended September 30, 2008; 12,000 stock options have been awarded during the nine months ended September 30, 2008.


(1)		We acquired our Missouri health plan effective as of November 1, 2007.

(2)		Less than 1,000 members.


(1)		We acquired our Missouri health plan effective as of November 1, 2007.

(2)		Our Nevada health plan became operational on ~~June~~September 1, 2007, serving only Medicare members.

			are recorded in the period in which the related services are dispensed. The costs of drugs administered in a physician or hospital setting that are not billed through our pharmacy benefit managers are included in fee-for-service costs.

	•		Capitation:Many of our primary care physicians and a small portion of our specialists and hospitals are paid on a capitation basis. Under capitation contracts, we typically pay a fixed PMPM payment to the provider without regard to the frequency, extent, or nature of the medical services actually furnished. Under capitated


	Three Months Ended June 30, 2007														Three Months Ended September 30, 2007
	Premium Revenue				Medical Care Costs				Medical			Premium Tax			Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense			Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	94,710	$	108.43	$	76,185	$	87.22		80.4	%	$	3,202		$	93,154	$	108.39	$	76,443	$	88.95		82.1	%	$	2,382
Michigan		121,427		184.43		101,184		153.68		83.3			7,364			119,752		187.19		100,378		156.90		83.8			7,069
New Mexico		61,337		312.44		52,949		269.71		86.3			1,394			72,543		361.23		56,984		283.76		78.6			2,828
Ohio		111,457		279.18		101,515		254.28		91.1			5,016			125,452		302.02		111,387		268.16		88.8			5,645
Texas		24,953		273.48		22,774		249.59		91.3			433			24,997		279.39		19,041		212.82		76.2			450
Utah		30,033		206.15		26,535		182.14		88.4			—			27,513		193.52		26,534		186.63		96.4			—
Washington		162,905		189.45		130,726		152.02		80.2			2,685			164,367		192.43		130,216		152.45		79.2			2,748
Other⁽¹⁾		305		—		4,997		—		—			(19	)		624		—		4,919		—		—			7

Total	$	607,127	$	188.30	$	516,865	$	160.30		85.1	%	$	20,075		$	628,402	$	196.29	$	525,902	$	164.27		83.7	%	$	21,129


⁽¹⁾		“Other” medical care costs represent primarily medically related administrative costs at the parent company.


	Three Months Ended
	June 30,			March 31,			June 30,
	2008			2008			2007
Covered Families and Children (CFC)		90.7	%		88.9	%		90.6	%
Aged, Blind or Disabled (ABD)		91.5			92.7			92.3

Aggregate		91.0	%		90.3	%		91.1	%


	Six Months Ended June 30, 2008
	Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	205,756	$	112.49	$	178,103	$	97.37		86.6	%	$	6,201
Michigan		250,134		195.89		203,173		159.12		81.2			13,565
Missouri		106,286		236.29		91,732		203.93		86.3			—
Nevada		4,187		1,267.13		4,133		1,250.76		98.7			—
New Mexico		177,928		381.45		141,518		303.40		79.5			5,686
Ohio		271,720		290.54		246,354		263.42		90.7			12,277
Texas		49,174		288.81		37,499		220.24		76.3			936
Utah		72,731		226.40		64,923		202.10		89.3			—
Washington		352,817		202.97		290,353		167.03		82.3			5,838
Other⁽¹⁾		58		—		9,388		—		—			20

Total	$	1,490,791	$	207.33	$	1,267,176	$	176.23		85.0	%	$	44,523


	Six Months Ended June 30, 2007
	Premium Revenue				Medical Care Costs				Medical			Premium Tax
	Total		PMPM		Total		PMPM		Care Ratio			Expense
California	$	187,642	$	106.64	$	152,509	$	86.68		81.3	%	$	6,232
Michigan		245,193		184.75		205,785		155.05		83.9	%		14,873
New Mexico		118,530		305.11		102,168		262.99		86.2	%		3,610
Ohio		186,401		252.13		170,777		231.00		91.6	%		8,388
Texas		39,409		250.35		36,122		229.47		91.7	%		690
Utah		60,960		205.88		55,001		185.76		90.2	%		—
Washington		324,887		189.33		261,985		152.67		80.6	%		5,369
Other⁽¹⁾		340		—		8,995		—		—			14

Total	$	1,163,362	$	182.23	$	993,342	$	155.60		85.4	%	$	39,176


	Three Months Ended
	June 30,							Three Months Ended
					% of Increase			September 30,				% of Increase
	2008		2007		(Decrease)			2008		2007		(Decrease)
California		921,000		874,000		5.4	%		936,000		859,000		9.0	%
Michigan		639,000		658,000		(2.9	)		627,000		640,000		(2.0	)
Missouri (1)		227,000		—		—			228,000		—		—
Nevada		2,000		—		—
Nevada (2)									2,000		—		—
New Mexico		239,000		197,000		21.3			249,000		200,000		24.5
Ohio		522,000		399,000		30.8			530,000		416,000		27.4
Texas		85,000		91,000		(6.6	)		87,000		90,000		(3.3	)
Utah		164,000		145,000		13.1			161,000		142,000		13.4
Washington		879,000		860,000		2.2			884,000		854,000		3.5

Total		3,678,000		3,224,000		14.1	%		3,704,000		3,201,000		15.7	%


	Six Months Ended							Nine Months Ended
	June 30,				% of Increase			September 30,				% of Increase
	2008		2007		(Decrease)			2008		2007		(Decrease)
California		1,829,000		1,760,000		3.9	%		2,765,000		2,619,000		5.6	%
Michigan		1,277,000		1,327,000		(3.8	)		1,904,000		1,967,000		(3.2	)
Missouri(1)		450,000		—		—			678,000		—		—
Nevada (2)		4,000		—		—			6,000		—		—
New Mexico		467,000		389,000		20.1			716,000		589,000		21.6
Ohio		935,000		739,000		26.5			1,465,000		1,155,000		26.8
Texas		170,000		157,000		8.3			257,000		247,000		4.0
Utah		321,000		296,000		8.4			482,000		438,000		10.0
Washington		1,738,000		1,716,000		1.3			2,622,000		2,570,000		2.0

Total		7,191,000		6,384,000		12.6	%		10,895,000		9,585,000		13.7	%

Certain risk factors may have a material adverse effect on our business, financial condition, and results of operations and you should carefully consider them. The following risk factors were identified or reevaluated by the Company during the third quarter and are a supplement to those risk factors included as part of Item 1A., Risk Factors, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission (“SEC”) on March 17, 2008, as updated by Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the SEC on May 8, 2008 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, filed with the SEC on July 30, 2008.

The value of our investments is influenced by varying economic and market conditions, and a decrease in value could have an adverse effect on our results of operations, liquidity, and financial condition.


					Total Number of		Maximum Number (or
					Shares Purchased as		Approximate Dollar Value)
	Total Number				Part of Publicly		of Shares That May Yet Be
	of Shares		Average Price		Announced Plans or		Purchased Under the Plans
	Purchased		Paid per Share		Programs		or Programs
April 1 — April 30, 2008		—		—		—	$	30,000,000
May 1 — May 31, 2008		731,000	$	25.3953		731,000	$	11,414,000
June 1 — June 30, 2008		399,789	$	28.5203		399,789		—
Total		1,130,789	$	26.5001		1,130,789		—


Director	Votes For		Votes Withheld
J. Mario Molina		26,166,849		66,103
Steven J. Orlando		26,067,885		165,067
Ronna E. Romney		26,067,470		165,482


		MOLINA HEALTHCARE, INC. (Registrant)
	~~/s/JOSEPH M. MOLINA, M.D.~~
		/s/Joseph M. Molina, M.D.

		Joseph M. Molina, M.D.
		Chairman of the Board,
		Chief Executive Officer and President ~~(Principal Executive Officer)~~
		(Principal Executive Officer)


		/s/~~JOHN~~John C. ~~MOLINA,~~Molina, J.D.

		John C. Molina, J.D.
	Chief Financial Officer and Treasurer (Principal Financial Officer)


Exhibit No.		Title
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.