UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

OR

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

UICI

Registrant’s telephone number, including area code (817) 255-5200

Not Applicable

     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. Yes [X]     No [   ].

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]     No [   ].

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value, 45,728,018 shares as of October 28, 2004.

INDEX

UICI AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UICI AND SUBSIDIARIES

NOTE: The balance sheet data as of December 31, 2003 have been derived from the audited financial statements at that date.

See Notes to Consolidated Condensed Financial Statements.

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UICI AND SUBSIDIARIES

See Notes to Consolidated Condensed Financial Statements.

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UICI AND SUBSIDIARIES

See Notes to Consolidated Condensed Financial Statements.

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UICI AND SUBSIDIARIES

See Notes to Consolidated Condensed Financial Statements.

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UICI AND SUBSIDIARIES

September 30, 2004

NOTE A – BASIS OF PRESENTATION

     The accompanying unaudited consolidated condensed financial statements for UICI and its subsidiaries (the “Company” or “UICI”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments, except as otherwise described herein, consist of normal recurring accruals. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

     Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 financial statement presentation.

Recently Issued Accounting Pronouncements

     On October 13, 2004, the Financial Accounting Standards Board (“FASB”) concluded that Statement 123R, Share-Based Payment, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies (except small business issuers, as defined in SEC Regulation S-B) for interim or annual periods beginning after June 15, 2005. The FASB also concluded that retroactive application of the requirements of Statement 123 (not Statement 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required. A calendar-year company therefore will be required to apply Statement 123R beginning July 1, 2005 and could choose to apply Statement 123 retroactively from January 1, 2005 to June 30, 2005. The cumulative effect of adoption, if any, would be measured and recognized on July 1, 2005. Further, a company could choose to early adopt the proposed Statement at the beginning of the quarter ended March 31, 2005 (or even in the fourth quarter of 2004 if the FASB issues the final Statement prior to the issuance of those financial statements – the FASB’s current plan is to issue a final Statement on or around December 15, 2004). The Company believes the adoption of this pronouncement will not have a material effect upon the financial condition or results of operations of the Company.

     Emerging Issue Task Force (“EITF”) Issue No. 03-1 provides guidance on the meaning of the phrase “other-than-temporary” impairment and its application to several types of investments, including debt securities classified as held-to-maturity and available-for-sale under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. On September 30, 2004, the FASB issued FASB Staff Position (“FSP”) Issue 03-1-1, which delayed the effective date of paragraphs 10-20 of EITF Issue No. 03-1. Paragraphs 10-20 of EITF Issue No. 03-1 give guidance on how to evaluate and recognize impairment loss that is other than temporary (i.e., steps 2 and 3 of the impairment model). Application of those paragraphs is deferred pending issuance of proposed FSP EITF Issue No. 03-1-a. EITF Issue No. 03-1-a addresses the application of EITF Issue No. 03-1 to debt securities that are impaired solely because of interest-rate and/or sector-spread increases and that are analyzed for impairment under paragraph 16 of EITF Issue No. 03-1. The guidance in paragraphs 6-9 of EITF Issue No. 03-1 (i.e., step 1 of the impairment model), as well as the disclosure requirements in paragraphs 21 and 22, have not been deferred and should be applied based on the transition provisions in EITF Issue No. 03-1. The Company believes the adoption of this pronouncement will not have a material effect upon the financial condition or results of operations of the Company.

     In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FASB Interpretation No. 46 provides that, when voting interests are not effective in identifying whether an entity is controlled by another party, the economic risks and rewards inherent in the entity’s assets and liabilities and the way in which the various parties that have involvement with the entity share in those economic risks and rewards should be used to determine whether the entity should be consolidated. Effective January 1, 2004, the Company adopted

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this pronouncement. Adoption of this pronouncement did not have a material effect upon the financial condition or results of operations of the Company.

     On July 7, 2003, the AICPA issued SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. This SOP provides guidance on accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. This SOP requires, among other things, the following: separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation return based on a contractually referenced pool of assets or index, determining the significance of mortality and morbidity risk and classification of contracts that contain death or other insurance benefit features, accounting for contracts that contain death or other insurance benefit features, accounting for reinsurance and other similar contracts, accounting for annuitization benefits, sales inducements to contract holders and related disclosures. Effective January 1, 2004, the Company adopted this pronouncement. Adoption of this pronouncement did not have a material effect upon the financial condition or results of operations of the Company.

     On March 14, 2003, the AICPA’s Accounting Standards Executive Committee issued an exposure draft Statement of Position (SOP), Accounting by Insurance Enterprises for Deferred Acquisition Costs on Internal Replacements Other Than Those Specifically Described in FASB Statement No. 97. The exposure draft provides guidance on accounting by insurance enterprises for deferred acquisition costs (DAC) on internal replacements other than those specifically described in FASB Statement No. 97, including definition of an internal replacement, determining “not substantially different” internal replacements, accounting for internal replacements that are substantially different, accounting for internal replacements that are not substantially different, sales inducements offered in conjunction with an internal replacement, costs and assessments related to internal replacements, and recoverability.

     A final SOP would be effective for internal replacements occurring in fiscal years beginning after December 15, 2004, with earlier adoption encouraged. Restatement of previously issued annual financial statements is not permitted. Initial application of this SOP should be as of the beginning of an entity’s fiscal year (that is, if the SOP is adopted prior to the effective date and during an interim period, all prior interim periods of the year of adoption should be restated). The impact of implementation of the SOP, Accounting by Insurance Enterprises for Deferred Acquisition Costs on Internal Replacements Other Than Those Specifically Described in FASB Statement No. 97 on the Company’s financial position or results of operations is not expected to be material.

     On January 1, 2003, the Company adopted Statement No. 123 for all employee awards granted or modified on or after January 1, 2003, and began measuring the compensation cost of stock-based awards under the fair value method. The Company adopted the transition provisions that require expensing options prospectively in the year of adoption. Existing awards at January 1, 2003 will continue to follow the intrinsic value method prescribed by APB 25.

     The following table illustrates the effect on net income (loss) as if the fair-value-based method had been applied to all outstanding and unvested option awards in each period.

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NOTE B – DEBT

Corporate Debt

     At September 30, 2004 and December 31, 2003, the Company had outstanding consolidated short- and long-term indebtedness (exclusive of indebtedness secured by student loans) in the amount of $15.5 million and $19.0 million, respectively, all of which constituted indebtedness of the holding company.

Trust Preferred Securities

     On April 29, 2004, the Company through a newly formed Delaware statutory business trust (the “Trust”) completed the private placement of $15.0 million aggregate issuance amount of floating rate trust preferred securities with an aggregate liquidation value of $15.0 million (the “Trust Preferred Securities”). The Trust invested the $15.0 million proceeds from the sale of the Trust Preferred Securities, together with the proceeds from the issuance to the Company by the Trust of its floating rate common securities in the amount of $470,000 (the “Common Securities” and, collectively with the Trust Preferred Securities, the “Trust Securities”), in an equivalent face amount of the Company’s Floating Rate Junior Subordinated Notes due 2034 (the “Notes”). The Notes will mature on April 29, 2034, which date may be accelerated to a date not earlier than April 29, 2009. The Notes may be prepaid prior to April 29, 2009, at 107.5% of the principal amount thereof, upon the occurrence of certain events, and thereafter at 100.0% of the principal amount thereof. The Notes, which constitute the sole assets of the Trust, are subordinate and junior in right of payment to all senior indebtedness (as defined in the Indenture, dated April 29, 2004, governing the terms of the Notes) of the Company. The Notes accrue interest at a floating rate equal to three-month LIBOR plus 3.50%, payable quarterly on February 15, May 15, August 15, and November 15 of each year. The quarterly distributions on the Trust Securities are paid at the same interest rate paid on the Notes.

     The Company has fully and unconditionally guaranteed the payment by the Trust of distributions and other amounts payable under the Trust Preferred Securities. The Trust must redeem the Trust Securities when the Notes are paid at maturity or upon any earlier prepayment of the Notes. Under the provisions of the Notes, the Company has the right to defer payment of the interest on the Notes at any time, or from time to time, for up to twenty consecutive quarterly periods. If interest payments on the Notes are deferred, the distributions on the Trust Securities will also be deferred.

     The Company received proceeds from the transaction in the amount of $14.6 million, net of issuance costs in the amount of $423,500, which cost is carried in “other assets” on the Company’s consolidated balance sheet and is being amortized over five years as interest expense.

     In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, the accounts of the Trust have not been consolidated with those of the Company and its consolidated subsidiaries. The Company’s $470,000 investment in the common equity of the Trust has been reflected on the Company’s consolidated balance sheet as “short term and other investments,” and the income paid to the Company by the Trust with respect to the Common Securities, and interest received by the Trust from the Company with respect to the $15.5 million principal amount of the Notes, has been reflected in the Company’s consolidated statement of income as interest income and interest expense, respectively. The increase to interest income and interest expense was $6,000 and $195,000, respectively, for the three months ended September 30, 2004.

Senior Notes

     On June 1, 2004, the Company paid in full the final payment due in the amount of $4.0 million plus interest of $173,000, on its 8.75% Senior Notes due June 2004, which the Company had issued on June 22, 1994, in the original aggregate issuance amount of $27.7 million. In accordance with the agreement governing the terms of the senior notes (the “Note Agreement”), commencing on June 1, 1998 and on each June 1 thereafter to and including June 1, 2003, the Company was required to pay approximately $4.0 million aggregate principal together with accrued interest thereon to the date of such repayment. The Company incurred $144,000 of interest expense in 2004 through date of repayment, and $403,000 of interest expense on the notes in the nine months ended September 30, 2003. At December 31, 2003, the senior notes were outstanding in the aggregate principal amount of $4.0 million.

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Bank Credit Facility

     Effective November 1, 2004, the Company has terminated its bank credit facility with Bank of America, NA and JP Morgan Chase Bank. The bank credit facility was otherwise scheduled to mature in January 2005. Under the facility, the Company was able to borrow from time to time up to $30.0 million on a revolving, unsecured basis. At September 30, 2004, the Company had no borrowings outstanding under the facility.

Student Loan Debt

     At each of September 30, 2004 and December 31, 2003, the Company had an aggregate of $150.0 million of indebtedness outstanding under a secured student loan credit facility, which indebtedness was issued by a bankruptcy-remote special purpose entity (the “SPE”). At September 30, 2004 and December 31, 2003, indebtedness outstanding under the secured student loan credit facility was secured by alternative (i.e., non-federally guaranteed) student loans and accrued interest in the carrying amount of $111.5 million and $111.8 million, respectively, and by a pledge of cash, cash equivalents and other qualified investments in the amount of $40.8 million and $40.4 million, respectively. At September 30, 2004, $32.8 million of such cash, cash equivalents and other qualified investments was available to fund the purchase from the Company of additional student loans generated under the Company’s College First Alternative Loan program, which purchases may be made in accordance with the terms of the agreements governing the securitization until February 2006.

     All such indebtedness issued under the secured student loan credit facility is reflected as student loan indebtedness on the Company’s consolidated balance sheet; all such student loans pledged to secure such facility are reflected as student loan assets on the Company’s consolidated balance sheet; and all such cash, cash equivalents and qualified investments specifically pledged under the student loan credit facility are reflected as restricted cash on the Company’s consolidated balance sheet. The notes represent obligations solely of the SPE and not of the Company or any other subsidiary of the Company. For financial reporting and accounting purposes, this structured finance facility has been classified as a financing. Accordingly, in connection with the financing the Company recorded and will in the future record no gain on sale of the assets transferred to the SPE.

     During the nine months ended September 30, 2004 and 2003, the Company incurred total interest on borrowings associated with the College Fund Life Division securitization in the amount of $1.5 million and $1.5 million, respectively.

NOTE C – INCOME TAXES

     The Company’s effective tax rate on continuing operations for the nine-month period ended September 30, 2004 was 33.9% compared to 34.5% for the corresponding 2003 period.

     For the nine-month period ended September 30, 2004, the Company realized a tax benefit of 6.9% on income from discontinued operations as a result of the reduction of a tax reserve and the release of a portion of the valuation allowance on the capital loss carryover due primarily to the realization of capital gains during 2004. The Company’s tax benefit on losses from discontinued operations for the three and nine months ended September 30, 2003 reflected an effective tax rate of 13.7% and 15.7%, respectively, which varied from the expected benefit (at the statutory rate of 35%) primarily as a result of the non-deductible portion of the impairment charge recorded by the Company in the three months ended September 30, 2003 associated with the Company’s investment in its former subsidiary, Academic Management Services Corp.

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NOTE D – EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted earnings (loss) per share:

NOTE E — COMMITMENTS AND CONTINGENCIES

     The Company is a party to the following material legal proceedings:

Academic Management Services Corp. - Related Litigation

     UICI and certain of its current and former directors and officers have been named as defendants in multiple lawsuits arising out of UICI’s announcement in July 2003 of a shortfall in the type and amount of collateral supporting securitized student loan financing facilities of Academic Management Services Corp. (“AMS”), formerly a wholly-owned subsidiary of UICI until its disposition in November 2003.

     UICI and certain officers and current and former directors of UICI have been named as defendants in four purported class action suits that are currently pending in federal court in Texas (Dolores Miele, on behalf of herself and all others similarly situated, v. UICI, Gregory T. Mutz, Ronald L. Jensen, et al, filed on May 26, 2004 and pending in the United States District Court, Northern District of Texas, Dallas Division as Case No. 3-04-CV-1149-P; Lois Johnston, v. UICI, Gregory T. Mutz, Ronald L. Jensen, et al, filed on June 3, 2004 and pending in the United States District Court for the Northern District of Texas, Fort Worth Division, as Case No. 04-CV-418-Y; Mohammad A. Chaudhry, individually and on behalf of all others similarly situated, v. UICI, Inc., Gregory T. Mutz, Ronald L. Jenson, et al, filed July 1, 2004 and pending in the United States District Court for the Northern District of Texas, Fort Worth Division, as Case No. 04-CV-484-Y; and Ronald Antosko v. UICI, Gregory T. Mutz, Ronald L. Jenson, et al, filed July 20, 2004 and pending in the United States District Court for the Northern District of Texas, Dallas Division, as Case No. 304CV1575-D). The Johnston and Chaudry cases have been transferred to the United States District Court for the Northern District of Texas, Dallas Division, and the Court is considering consolidation of the four cases into a single action. In each of the cases, plaintiffs, on behalf of themselves and a purported class of similarly situated individuals, have alleged that, among other things, UICI failed to disclose all material facts relating to the condition of the Company’s former AMS subsidiary, in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. UICI has entered into stipulations governing the time to respond in the actions. UICI has not otherwise pleaded or responded in the cases.

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     UICI has also been named as a nominal defendant in two shareholder derivative suits arising out of the July 2003 AMS announcement (Bodenhorn v. Gregory T. Mutz, Ronald L. Jensen, et al, filed June 15, 2004 in the District Court of Tarrant County, Texas, Case No. 048-206108-04; and Suprina v. Gregory T. Mutz, Ronald L. Jensen, et al, filed June 15, 2004 in the District Court of Tarrant County, Texas, Case No. 352-206106-04). In each of the cases, the plaintiffs seek a recovery on behalf of UICI and have alleged that the individual defendants violated Texas state law by concealing the true condition of Academic Management Services Corp. prior to the July 2003 announcement. UICI has filed motions attacking the petitions for, among other things, failing to satisfy the shareholder demand requirement.

     Based upon the Company’s initial reading of the complaints, the Company believes that the allegations are without merit, and the Company intends to conduct a vigorous defense in the matter. UICI has agreed to advance the expenses of the individual defendants incurred in connection with the defense of the cases, subject to the defendants’ undertaking to repay such advances unless it is ultimately determined that they are or would have been entitled to indemnification by UICI under the terms of the Company’s bylaws.

Association Group Litigation

Introduction

     The health insurance products issued by the Company’s insurance subsidiaries in the self-employed market are primarily issued to members of various membership associations that make available to their members the health insurance and other insurance products issued by the Company’s insurance subsidiaries. The associations provide their membership with a number of benefits and products, including the opportunity to apply for health insurance underwritten by the Company’s health insurance subsidiaries. The Company and/or its insurance company subsidiaries are a party to several lawsuits challenging the nature of the relationship between the Company’s insurance companies and the associations that have made available to their members the insurance companies’ health insurance products.

Nationwide Class Action Litigation

     As previously disclosed, the Company, The MEGA Life and Health Insurance Company (“MEGA”) and UICI Marketing, Inc. were named in a purported nationwide class action suit filed on October 30, 2003 (Eugene A. Golebiowski, individually and on behalf of others similarly situated, v. MEGA, UICI, the National Association for the Self-Employed, et al.) in the United States District Court for the Northern District of Mississippi, Eastern Division. Plaintiff alleged, among other things, that the relationship between the Company, MEGA, and the National Association for the Self-Employed (the “NASE”) constitutes an improper marketing scheme devised by the defendants to sell insurance and that the “scheme” involves the non-disclosure of relationships between the defendants, the undisclosed transfer of association membership dues and fees to the Company, and the utilization of “teaser rates” that are artificially low and established at an amount below that which would be actuarially recommended. Plaintiff, individually and on behalf of similarly situated class members, asserted several causes of action, including fraudulent concealment, breach of contract, common law liability for non-disclosure, breach of fiduciary and trust duties, civil conspiracy, unjust enrichment, and violation of state deceptive and trade practice acts. Plaintiff sought declaratory judgments, injunctive, and other equitable relief.

     UICI, MEGA and Mid-West National Life Insurance Company of Tennessee (“Mid-West”) were also named as defendants in an action filed on April 22, 2003 (Lacy v. The MEGA Life and Health Insurance Company, et al.) in the Superior Court of California, County of Alameda, Case No. RG03-092881. Plaintiff, purportedly on behalf of the “general public” of California, alleged that all of the defendants are under common control and operate as a unified business arrangement established for the purpose of, among other things, generating profits through association dues and bypassing and circumventing more stringent state insurance regulations applicable to other California insurance companies. Plaintiff further alleged that defendants have knowingly and intentionally failed to disclose the common ownership and control of the defendant group, the amount and character of association dues, administrative fees, and costs of obtaining insurance from MEGA and Mid-West, and that initial premium rates are below the amount actuarially calculated for the purpose of inducing purchases of MEGA and Mid-West policies. Plaintiff asserted that defendants’ actions constitute a violation of California Business and Professions Code § 17200, for which plaintiff and the California general public are entitled to injunctive, disgorgement, and monetary relief in an unspecified amount.

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     The Judicial Panel on Multidistrict Litigation subsequently transferred the Lacy and Golebiowski cases to the United States District Court for the Northern District of Texas, Dallas Division (In re UICI “Association-Group” Insurance Litigation, MDL Docket No. 1578).

     On May 14, 2004, the Company, MEGA, and Mid-West executed a definitive Stipulation of Settlement and Release agreement contemplating, among other things, the full and final settlement of the Golebiowski and Lacy cases. Pursuant to the terms of the settlement, MEGA and Mid-West have agreed to include enhanced disclosures in their marketing and sales materials with respect to the contractual relationships between UICI and the insurance companies, on the one hand, and the associations, on the other hand, and MEGA and Mid-West have also agreed to enter into an injunction with respect to certain business practices. In addition, members of a nationwide class consisting of current and former MEGA and Mid-West insureds will be entitled to relief in the form of free insurance coverage for a period of months under a personal accident policy to be issued by a UICI subsidiary, and members of a nationwide class consisting of current and former members of the associations will be eligible to receive discounts on association membership fees. The settlement also contemplates the payment of attorneys’ fees to counsel for the plaintiffs’ class. The proposed settlement does not contemplate a release of specific claims by individuals for insurance coverage benefits. The Company believes that the terms of the settlement as contemplated by the Stipulation of Settlement and Release will not have a material adverse effect upon the financial condition or results of operations of the Company.

     Following a final approval hearing held on October 5, 2004, the U.S. District Court for the Northern District of Texas on October 15, 2004 issued a final order and judgment certifying a nationwide settlement class of current and former MEGA and Mid-West insureds and current and former members of the associations. In addition, the Court approved the terms of the previously announced settlement as fair, reasonable and adequate and in the best interest of the settlement class, dismissed the cases with prejudice, and entered an injunction with respect to certain business practices.

California Litigation

     UICI and MEGA have been named as defendants in a suit filed on August 31, 2004 (Merriam, individually and as Trustee v. UICI, The MEGA Life and Health Insurance Company, et al.) in the Superior Court for the State of California, County of Los Angeles, Case No. BC320850. Plaintiffs have alleged that the defendants are engaged in an illegal marketing scheme in violation of California common law and have asserted several causes of action, including breach of contract, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount.

     UICI and MEGA have been named as defendants in a suit filed on August 6, 2004 (Martin v. UICI, The MEGA Life and Health Insurance Company, et al.) in the Superior Court for the State of California, County of Los Angeles, Case No. BC319669. Plaintiffs have alleged that the defendants are engaged in an illegal marketing scheme in violation of California common law and have asserted several causes of action, including breach of contract, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount.

     UICI and MEGA have been named as defendants in a suit filed on April 26, 2004 (Jung v. UICI, The MEGA Life and Health Insurance Company, et al.) in the Superior Court for the State of California, County of Nevada, Case No. 69745. Plaintiffs have alleged that the defendants are engaged in a deceptive marketing practice and have asserted several causes of action, including breach of contract, breach of implied covenant of good faith and fair dealing, fraud, fraudulent business practice, professional negligence and negligent misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. Neither UICI nor MEGA has responded or otherwise pled in the case.

     As previously disclosed, UICI and MEGA were named as defendants in a purported class action suit filed on May 6, 2004 (Diaz v. The MEGA Life and Health Insurance Company, UICI, et al.) in the Superior Court for the State of California, County of San Bernardino, Rancho, Case No. RCV–080379. Plaintiffs have alleged, on behalf of themselves and as representatives of all other policyholders of MEGA in California, that the defendants are engaged in an illegal and fraudulent marketing scheme in violation of California common law and the California Business and Professions Code §17200. Plaintiffs also have alleged that defendants (i) “maintain NASE to illegally avoid premium rate regulation,” (ii) fail to issue insurance coverage to members of the NASE on a guaranteed issue basis in violation of California law, (iii) and rescind certificates in violation of California law. Plaintiffs seek

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injunctive relief and monetary damages in an unspecified amount. The Diaz case was removed to the United States District Court for the Central District of California, Eastern Division on July 8, 2004. On August 12, 2004, the Judicial Panel on Multidistrict Litigation issued a conditional transfer order transferring the Diaz matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578). Plaintiffs oppose such transfer, and a hearing on Plaintiffs’ Motion to Vacate the conditional transfer order is set for November 18, 2004.

     As previously disclosed, UICI and MEGA were named as defendants in a purported class action filed on May 14, 2004 (Joyce, et al. v. UICI, MEGA, the National Association for the Self-Employed, et al.) in the Superior Court for the State of California, County of Los Angeles, Case No. BC315580. Plaintiffs have alleged that defendants breached the implied covenant of good faith and fair dealing and committed fraud, professional negligence, and negligent misrepresentation. In addition, Plaintiffs have alleged, on behalf of themselves and persons similarly situated in the state of California, that defendants violated the unfair competition restrictions of California Business and Professions Code §17200. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. On June 21, 2004, defendants removed the Joyce case to the United States District Court for the Central District of California. On August 12, 2004, the Judicial Panel on Multidistrict Litigation conditionally transferred the Joyce matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578). Plaintiffs have opposed such transfer, and a hearing on Plaintiffs’ Opposition to the Transfer is set for November 18, 2004. All pending matters have been adjourned by Court order until the Judicial Panel on Multidistrict Litigation decides the issue of transfer.

     As previously disclosed, UICI and MEGA were named as defendants in a suit filed on May 13, 2004 (Armistead, et al. v. The MEGA Life and Health Insurance Company, UICI, et al.) in the Superior Court for the State of California, County of San Bernardino, Case No. SCVSS 115480. Plaintiffs have alleged, among other things, that the defendants breached the duty of good faith and fair dealing, breached a contract of insurance and are engaged in an illegal and fraudulent marketing scheme in violation of California common law and the California Business and Professions Code § 17200. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. On September 3, 2004, the Judicial Panel on Multidistrict Litigation issued an order transferring the Armistead matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578).

     As previously disclosed, UICI and Mid-West were named as defendants in a suit filed on April 2, 2003 (Correa v. UICI, et al.) in the Superior Court for the State of California, County of Los Angeles, in which plaintiff alleged, among other things, that defendants engaged in illegal marketing practices in connection with the sale of health insurance. The lawsuit asserted several causes of action, including breach of contract, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. On July 3, 2003, the Correa case was removed to the United States District Court for the Central District of California. On February 20, 2004, the Judicial Panel on Multidistrict Litigation transferred the Correa matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578). On May 7, 2004, the Company agreed, without admitting liability, to finally and fully settle the Correa matter on terms that did not have a material adverse effect on the Company’s financial condition or results of operations.

     As previously disclosed, UICI and Mid-West were named in a lawsuit filed on May 28, 2003 (Startup, et al. v. UICI, et al.) in the Superior Court for the State of California, County of Los Angeles, Case No. BC296476. Plaintiffs have alleged, among other things, that UICI and Mid-West breached their duty of good faith and fair dealing in failing to pay medical claims submitted under a Mid-West policy issued to plaintiffs. Plaintiffs also alleged that the relationship between the Alliance for Affordable Services (the “Alliance”) and Mid-West constitutes an illegal marketing “scheme” and asserted several causes of action, including breach of contract, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. On October 28, 2003, the Court granted defendants’ motion to compel arbitration and stayed the case pending arbitration.

     As previously disclosed, UICI and Mid-West were named as defendants in a lawsuit filed on July 25, 2003 (Portune, et al. v. UICI, et al.) in the Superior Court of the State of California, County of San Bernardino, Case No. RCV 074062. Plaintiffs have alleged, among other things, that UICI and Mid-West breached their duty of good faith and fair dealing in failing to pay medical claims submitted under a Mid-West policy issued to plaintiffs. Plaintiffs also alleged that the relationship between the Alliance and Mid-West constitutes an illegal marketing

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“scheme” and asserted several causes of action, including breach of contract, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. UICI and Mid-West removed the Portune case to the United States District Court for the Central District of California, Eastern Division, and the case has been subsequently transferred to the United States District Court for the Central District of California, Western Division. All pending matters in the case have been adjourned by Court order. On February 20, 2004, the Judicial Panel on Multidistrict Litigation transferred the Portune matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578).

     As previously disclosed, on September 26, 2003, UICI and MEGA were named as cross-defendants in a lawsuit initially filed on July 30, 2003 (Retailers’ Credit Association of Grass Valley, Inc. v. Henderson, et al. v. UICI, et al.) in the Superior Court of the State of California for the County of Nevada, Case No. L69072. In the suit, cross-plaintiffs have asserted several causes of action, including breach of the implied covenant of good faith and fair dealing, fraud, violation of California Business and Professions Code § 17200, and negligent misrepresentation. Cross-plaintiffs seek injunctive relief and monetary damages in an unspecified amount. On October 15, 2004 MEGA and UICI filed an answer to the complaint, in which they denied all allegations.

     As previously disclosed, UICI and Mid-West were named as defendants in an action filed on December 30, 2003 (Montgomery v. UICI, et al.) in the Superior Court of the State of California, County of Los Angeles, Case No. BC308471. Plaintiff alleged that the relationship between the Alliance and Mid-West constitutes an illegal marketing “scheme” and asserted several causes of action, including breach of contract, breach of the duty of good faith and fair dealing, violation of California Business and Professions Code § 17200, false advertising, and negligent and intentional misrepresentation. Plaintiff seeks injunctive relief and monetary damages in an unspecified amount. On April 23, 2004, the Judicial Panel on Multidistrict Litigation issued a conditional transfer order transferring the Montgomery matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578). Plaintiff has opposed the transfer.

     As previously disclosed, UICI and MEGA were named as defendants in an action filed on January 2, 2004 (Orallo v. UICI, et al.) in the Superior Court of the State of California, County of Los Angeles, Case No. BC308683. Plaintiff has alleged that the undisclosed relationship between MEGA and the NASE constituted “fraudulent and deceptive sales and advertising” practices and asserted several causes of action, including breach of contract, breach of the duty of good faith and fair dealing, violation of California Business and Professions Code § 17200, fraud, and negligent and intentional misrepresentation. Plaintiff seeks injunctive relief and monetary damages in an unspecified amount. On August 27, 2004, MEGA filed a demurrer to the Complaint and a Motion to Strike. On September 3, 2004, UICI filed a Motion to Quash the Summons and Complaint for lack of personal jurisdiction.

     As previously disclosed, UICI and MEGA were named as defendants in an action filed on January 20, 2004 (Springer, et al. v. UICI, et al.) pending in the Superior Court of the State of California, County of Monterey, Case No. M68493. Plaintiff has alleged that the undisclosed relationship between MEGA and the NASE constituted “fraudulent and deceptive sales and advertising” practices and asserted several causes of action, including breach of contract, breach of the duty of good faith and fair dealing, violation of California Business and Professions Code § 17200, fraud, and negligent misrepresentation. Plaintiff seeks injunctive relief and monetary damages in an unspecified amount. The Springer matter was removed to the United States District Court for the Northern District of California, San Jose Division on May 12, 2004. On July 1, 2004, the Judicial Panel on Multidistrict Litigation issued an order transferring the Springer matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association-Group” Insurance Litigation, MDL Docket No. 1578). UICI and MEGA filed motions to dismiss, strike and for a more definite statement.

     As previously disclosed, UICI and MEGA were named as defendants in an action filed on January 22, 2004 (Mendoza, et al. v. UICI, et al) in the Superior Court for the State of California, County of Kern, Case No. S-1500-CV-251813-RJA. Plaintiffs have alleged breach of contract, breach of implied covenant of good faith and fair dealing, fraud, violation of California Business and Professions Code §17200, professional negligence, and negligent misrepresentation. Plaintiffs seek injunctive relief and monetary damages in an unspecified amount. On September 3, 2004, MEGA filed a demurrer and motion to strike the complaint. The demurrer and motion to strike are set for hearing November 9, 2004. UICI has not yet been served with process.

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     As previously disclosed, UICI and MEGA were named as defendants in an action filed on December 5, 2003 (Valenzuela v. UICI, MEGA, the National Association for the Self-Employed, et al.) in the Superior Court for the State of California, County of San Diego, Case No. GINO34307. Plaintiff has alleged breach of contract, breach of implied covenant of good faith and fair dealing, fraud, violation of California Business and Professions Code § 17200, professional negligence, and negligent misrepresentation. Plaintiff seeks injunctive relief and monetary damages in an unspecified amount. The case was removed to the United States District Court for the Southern District of California on March 29, 2004. On August 5, 2004, the Judicial Panel on Multidistrict Litigation issued an order transferring the matter to the United States District Court for the Northern District of Texas for coordinated pretrial purposes (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578).

Oklahoma Litigation

     As previously disclosed, MEGA was named as a defendant in a lawsuit filed on April 22, 2004 (Verrill, et al. v. The MEGA Life and Health Insurance Company, et al.) in the District Court of Cleveland County, Oklahoma, Case No. CJ-04-670W. Plaintiffs have alleged that defendants breached a duty of good faith owed to plaintiffs, and that defendants engaged in fraudulent, deceptive or predatory practices in the marketing of health insurance and association memberships. Plaintiffs seek monetary relief for alleged actual, exemplary and punitive damages. The Court dismissed plaintiffs’ fraud claim on June 28, 2004. On July 8, 2004, plaintiffs filed an Amended Petition, and on August 4, 2004, MEGA filed an answer to the Amended Petition. MEGA anticipates that discovery will commence shortly.

     As previously disclosed, UICI and MEGA were named as defendants in a lawsuit filed on May 2, 2003 (Grigsby, et al. v. The MEGA Life and Health Insurance Company, et al.) in the District Court of Oklahoma County, Oklahoma, Case No. CJ-2003-3759. Plaintiffs alleged that the defendants defrauded them into purchasing a health insurance policy and an association membership and that MEGA acted in bad faith and in breach of its contractual obligations in processing their health claims. Plaintiffs further alleged that the defendants knowingly misrepresented, among other things, their relationship with the NASE and that plaintiffs were purchasing “true group insurance.” Plaintiffs sought actual and punitive damages. On September 10, 2004, the Company agreed, without admitting liability, to finally and fully settle the Grigsby matter on terms that would not have a material adverse effect on the Company’s financial condition or results of operations.

     As previously disclosed, UICI and MEGA were named as defendants in a lawsuit filed on November 20, 2003 (Thomas, et al. v. The MEGA Life and Health Insurance Company, et al.), in the District Court of Cleveland County, Oklahoma, Case No. CJ-2003-1965. Plaintiffs alleged that defendants defrauded them into purchasing a health insurance policy and acted in bad faith and in breach of their contractual obligations in processing plaintiffs’ health claims. On October 11, 2004, the Company agreed, without admitting liability, to finally and fully settle the Thomas matter on terms that would not have a material adverse effect on the Company’s financial condition or results of operations.

Arkansas Litigation

     As previously disclosed, on January 21, 2004, MEGA, UICI, and UICI Marketing Inc. were named as defendants in a purported class action suit (Tremor v. The MEGA Life and Health Insurance Company, et al.) filed in the Circuit Court of Saline County, Arkansas, Case No. CV 2004-41-3. The suit alleges that the defendants knowingly misrepresented, among other things, the relationships of the defendants, and brings claims for fraudulent concealment, breach of contract, common law liability for actual and punitive damages for non-disclosure, breach of fiduciary and trust duties, civil conspiracy, unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and declaratory and injunctive relief. The Tremor case was removed to the United States District Court for the Eastern District of Arkansas, Western Division on February 23, 2004. On April 23, 2004, the Judicial Panel on Multidistrict Litigation issued an order transferring the matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association Group” Insurance Litigation, MDL Docket No. 1578).

     As previously disclosed, in an action filed on April 5, 2004, MEGA, UICI, and UICI Marketing Inc. were named as defendants in a purported class action suit (Jessie Powell v. The MEGA Life and Health Insurance Company, et al.) pending in the Circuit Court of Phillips County, Arkansas, Case No. CV 2004-106. The suit alleges that the defendants knowingly misrepresented, among other things, the relationships of defendants, and brings claims for fraudulent concealment, breach of contract, common law liability for actual and punitive damages for non-disclosure, breach of fiduciary and trust duties, civil conspiracy, unjust enrichment, violation of the Arkansas

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Deceptive Trade Practices Act, and declaratory and injunctive relief. The Powell case was removed to the United States District Court for the Eastern District of Arkansas, Eastern Division on May 11, 2004. On July 1, 2004 the Judicial Panel on Multidistrict Litigation issued an order transferring the matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association -Group” Insurance Litigation, MDL Docket No. 1578).

Idaho Litigation

     The Company and Mid-West are currently defendants in six pending suits in Idaho state court (Skinner, et al. v. Mid-West, UICI, et al., and Hansen v. Mid-West, UICI, et al., each filed on August 22, 2002 and pending in the District Court for the County of Lemhi, Idaho; Petersen, et al. v. Mid-West, et al., filed on August 2, 2002, Murphy, et al. v. Mid-West, et al., filed January 25, 2002, Graybeal, et al. v. Mid-West, et al., filed December 20, 2002, each pending in the District Court for the County of Twin Falls, Idaho, and Taylor v. Mid-West, et al., filed August 16, 2004 in the District Court for the County of Teton, Idaho and now pending in the United States District Court for the District of Idaho).

     Plaintiffs in the Skinner and Hansen cases alleged that the insurance products they purchased were more expensive and provided less coverage than represented by the agent who sold the policies, and that they have not been paid on health claims submitted pursuant to those certificates. Plaintiffs in Skinner and Hansen claim damages, including punitive damages, and attorneys’ fees. On October 4, 2004, the Company agreed, without admitting liability, to finally and fully settle the Skinner and Hansen matters on terms that would not have a material adverse effect on the Company’s financial condition or results of operations.

     Plaintiffs in Petersen, Murphy and Graybeal alleged, among other things, that the Mid-West certificates that they purchased were of a lesser quality than represented, and that they have not been paid for certain claims submitted under the certificates. Plaintiffs in Petersen purport to represent a class of similarly situated persons. Plaintiffs in each of the actions claim damages, including punitive damages, and attorneys’ fees. The trial in Petersen is scheduled to begin in July 2005, and the trial in Graybeal is scheduled to begin in January 2006. On October 4, 2004, the Company agreed, without admitting liability, to finally and fully settle the Murphy matter on terms that would not have a material adverse effect on the Company’s financial condition or results of operations.

     The plaintiff in Taylor has alleged, among other things, that the health insurance coverage she purchased was expensive and of lesser quality than the insurance policy she previously held. The Plaintiff further contends that she has not been paid for a claim submitted under her certificate of health insurance coverage. On October 4, 2004, the Company agreed, without admitting liability, to finally and fully settle the Taylor matter on terms that would not have a material adverse effect on the Company’s financial condition or results of operations.

Other Association Group Litigation

     UICI and MEGA have been named as defendants in a suit filed on August 24, 2004 (Goodman v. UICI, The MEGA Life and Health Insurance Company, et al.) in the District Court for the State of Colorado, Denver County, Case No. 2004CV5455. Plaintiffs have asserted several causes of action, including breach of contract, violation of the Colorado Consumer Protection Act, bad faith denial of insurance benefits, fraudulent concealment, and negligent and intentional misrepresentation. Plaintiffs seek monetary damages in an unspecified amount. On September 10, 2004, MEGA removed the Goodman matter to the United States District Court for the District of Colorado. On September 12, 2004, the Judicial Panel on Multidistrict Litigation issued a conditional transfer order transferring the matter to the United States District Court for the Northern District of Texas for coordinated pretrial proceedings (In re UICI “Association—Group” Insurance Litigation, MDL Docket No. 1578).

     As previously disclosed, UICI and MEGA were named as defendants in an action filed on February 11, 2002 (Martha R. Powell and Keith P. Powell v. UICI, MEGA, the National Association for the Self-Employed, et al.) pending in the Second Judicial District Court for the County of Bernalillo, New Mexico, Cause No. CV-2 002-1156. Plaintiffs have alleged breach of contract, fraud, negligent misrepresentation, civil conspiracy breach of third-party beneficiary contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, negligence, and violations of the New Mexico Insurance Practices Act, the New Mexico Insurance Code and the New Mexico Unfair Practices Act. Plaintiff seeks injunctive relief and monetary damages in an unspecified amount. A special master has been appointed for discovery purposes and defendants are currently in the process of responding to discovery requests.

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     Mid-West has been named as a defendant in a suit filed on October 5, 2004 (Tanner v. Mid-West et al.) in the State Court of Fulton County, Georgia, Case No. 04ES073111D. Plaintiff has asserted several causes of action, including breach of fiduciary duties, fraudulent suppression, unjust enrichment, civil conspiracy, fraud, breach of an implied contract to procure insurance, negligence, negligence per se, wantonness, conversion, and breach of contract. Plaintiff seeks monetary damages in an unspecified amount.

     The Company currently believes that resolution of the above proceedings will not have a material adverse effect on the Company’s financial condition or results of operations.

Other Litigation Matters

     The Company and its subsidiaries are parties to various other pending legal proceedings arising in the ordinary course of business, including some asserting significant damages arising from claims under insurance policies, disputes with agents and other matters. Based in part upon the opinion of counsel as to the ultimate disposition of such lawsuits and claims, management believes that the liability, if any, resulting from the disposition of such proceedings will not be material to the Company’s financial condition or results of operations.

NOTE F – SEGMENT INFORMATION

     The Company’s business segments are: (i) Insurance, which includes the businesses of the Self-Employed Agency Division, the Group Insurance Division, the Life Insurance Division and Other Insurance; and (ii) Other Key Factors. The Other Key Factors segment includes investment income not allocated to the Insurance segment, realized gains or losses on sale of investments, the operations of the Company’s AMLI Realty Co. subsidiary, certain other general expenses related to corporate operations, the Company’s investment in Healthaxis, Inc. until sold on September 30, 2003, minority interest, interest expense on corporate debt and variable stock-based compensation.

     Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business segments reported operating results would change if different methods were applied. Certain assets are not individually identifiable by segment and, accordingly, have been allocated by formulas. Segment revenues include premiums and other policy charges and considerations, net investment income, fees and other income. Management does not allocate income taxes to segments. Transactions between reportable operating segments are accounted for under respective agreements, which provide for such transactions generally at cost.

     Revenues from continuing operations, income from continuing operations before federal income taxes, and assets by operating segment are set forth in the tables below:

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NOTE G – AGENT STOCK ACCUMULATION PLANS

     The Company sponsors a series of stock accumulation plans (the “Agent Plans”) established for the benefit of the independent insurance agents and independent sales representatives associated with its field force agencies, including UGA — Association Field Services, New United Agency and Cornerstone America.

     The Agent Plans generally combine an agent-contribution feature and a Company-match feature. The agent-contribution feature generally provides that eligible participants are permitted to allocate a portion (subject to prescribed limits) of their commissions or other compensation earned on a monthly basis to purchase shares of UICI common stock at the fair market value of such shares at the time of purchase. Under the Company-match feature of the Agent Plans, participants are eligible to have posted to their respective Agent Plan accounts book credits in the form of equivalent shares based on the number of shares of UICI common stock purchased by the participant under the agent-contribution feature of the Agent Plans. The “matching credits” vest over time (generally in prescribed increments over a ten-year period, commencing the plan year following the plan year during which contributions are first made under the agent-contribution feature), and vested matching credits in a participant’s plan account in January of each year are converted from book credits to an equivalent number of shares of UICI common stock. Matching credits forfeited by participants no longer eligible to participate in the Agent Plans are reallocated each year among eligible participants and credited to eligible participants’ Agent Plan accounts.

     The Agent Plans do not constitute qualified plans under Section 401(a) of the Internal Revenue Code of 1986 or employee benefit plans under the Employee Retirement Income Security Act of 1974 (“ERISA”), and the Agent Plans are not subject to the vesting, funding, nondiscrimination and other requirements imposed on such plans by the Internal Revenue Code and ERISA.

     For financial reporting purposes, the Company accounts for the Company-match feature of its Agent Plans by recognizing compensation expense over the vesting period in an amount equal to the fair market value of vested shares at the date of their vesting and distribution to the participants. At each quarter-end, the Company estimates its

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current liability for unvested matching credits by reference to the number of unvested credits, the current market price of the Company’s common stock, and the Company’s estimate of the percentage of the vesting period that has elapsed up to the current quarter end. Changes in the liability from one quarter to the next, other than changes due to vesting, are accounted for as an increase in, or decrease to, compensation expense, as the case may be. Upon vesting, the Company releases the accrued liability (equal to the market value of the vested shares at date of vesting) with a corresponding increase to paid-in capital. Unvested matching credits are considered share equivalents outstanding for purposes of the computation of earnings per share. For the nine months ended September 30, 2004 and 2003, the Company recorded total compensation expense associated with these agent plans in the amount of $24.6 million and $5.8 million, respectively, of which an expense (benefit) of $8.3 million and $(1.7) million, respectively, recorded in the Other Key Factors segment represents the non-cash stock based compensation associated with the adjustment to the liability for future unvested benefits.

     At December 31, 2003, the Company had recorded approximately 1.8 million unvested matching credits associated with the Agent Plans, of which approximately 700,000 vested in January 2004. At September 30, 2004, the Company had recorded approximately 1.8 million unvested matching credits.

     The accounting treatment of the Company’s Agent Plans will result in unpredictable stock-based compensation expense charges, dependent generally upon fluctuations in the quoted price of UICI common stock. These unpredictable fluctuations in stock based compensation charges may result in material non-cash fluctuations in the Company’s results of operations. In periods of general decline in the quoted price of UICI common stock, if any, the Company will recognize less stock based compensation expense than in periods of general appreciation in the quoted price of UICI common stock. In addition, in circumstances where increases in the quoted price of UICI common stock are followed by declines in the quoted price of UICI common stock, negative compensation expense may result as the Company adjusts the cumulative liability for unvested stock-based compensation expense.

NOTE H – DISCONTINUED OPERATIONS

     The Company has reflected as discontinued operations for financial reporting purposes the results of its former Academic Management Services Corp. subsidiary (which the Company sold on November 18, 2003), its former Senior Market Division and its former Special Risk Division.

     In the three and nine months ended September 30, 2004, the Company recorded income from discontinued operations in the amount of $1.6 million, net of tax, and $13.8 million, net of tax, respectively, compared to losses from discontinued operations in the amount of $(67.1) million, including tax benefit and $(72.7) million, including tax benefit, respectively, recorded in the three and nine months ended September 30, 2003.

     Results from discontinued operations for the nine months ended September 30, 2004 reflected a favorable resolution of a dispute relating to its former Special Risk Division (which resulted in pre-tax income in the amount of $10.7 million recorded in the second quarter of 2004), a tax benefit associated with the reduction of a tax reserve and the release of a portion of the valuation allowance on the capital loss carryover due to the realization of capital gains during 2004, and a pre-tax gain recorded in the first quarter of 2004 in the amount of $7.7 million generated from the sale of the remaining uninsured student loan assets formerly held by the Company’s former Academic Management Services Corp subsidiary. These assets had been retained by the Company at the November 18, 2003 sale of Academic Management Services Corp. and reflected as held-for-sale assets on the Company’s consolidated balance sheet. These favorable factors were offset by the recording in the second quarter of 2004 of a loss accrual with respect to multiple lawsuits that were filed arising out of UICI’s announcement in July 2003 of a shortfall in the type and amount of collateral supporting securitized student loan financing facilities of the Company’s former Academic Management Services Corp subsidiary. See Note E.

     The Company’s results in the three and nine months ended September 30, 2003 from discontinued operations reflected a loss consisting of an estimated loss upon disposal of AMS and AMS’ operating results in the periods in the amount $(66.9) million and $(65.6) million, net of tax, respectively. The 2003 discontinued operations results also reflected losses from the Company’s former Senior Market Division, which the Company closed down in the quarter ended June 30, 2003. In the three and nine months ended September 30, 2003, the Company reported losses associated with the former Senior Market Division in the amount of $(161,000) and $(9.1) million, net of tax.

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NOTE I – STOCKHOLDERS’ EQUITY

     On August 18, 2004, the Company’s Board of Directors adopted a policy of issuing a regular semi-annual cash dividend on shares of its common stock. The amount of the dividend, record date and payment date will be subject to approval every six months by the Company’s Board of Directors. Subject to future analyses of the Company’s cash resources and projected cash needs, the Board of Directors intends to continue in the future to consider and reassess from time to time the Company’s dividend policy.

     In accordance with the new dividend policy, on August 18, 2004, the Company’s Board of Directors declared a regular semi-annual cash dividend of $0.25 on each share of Common Stock ($11.5 million), which dividend was paid on September 15, 2004 to shareholders of record at the close of business on September 1, 2004.

NOTE J – SUBSEQUENT EVENT

     On October 8, 2004, the Company completed the acquisition of substantially all of the operating assets of HealthMarket, Inc., a Norwalk, Connecticut-based provider of consumer driven health plans (CDHPs) to the small business (2 to 250 employees) marketplace. In the acquisition, UICI’s wholly owned insurance subsidiary, The MEGA Life and Health Insurance Company, acquired HealthMarket’s administrative platform and substantially all of HealthMarket’s CDHP technology, fixed assets and personnel. In the transaction, HealthMarket retained ownership of American Travelers Assurance Company, a wholly owned insurance subsidiary of HealthMarket. Subject to applicable regulatory approvals, UICI intends to market and sell HealthMarket’s Consumer Driven Health Plan products to the individual and micro-small group (2-15 members) markets through MEGA and Chesapeake Life Insurance Company. The transaction did not constitute the acquisition of a “significant amount of assets,” as such term is defined in applicable rules adopted under the Securities Exchange Act of 1934, as amended.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

     The Company’s business segments include: (i) Insurance (which includes the businesses of the Self-Employed Agency Division, the Group Insurance Division, the Life Insurance Division and Other Insurance), and (ii) Other Key Factors (which includes investment income not allocated to the other business segments, realized gains or losses on sale of investments, the operations of the Company’s AMLI Realty Co. subsidiary, certain other general expenses related to corporate operations, the Company’s investment in Healthaxis, Inc. until sold on September 30, 2003, minority interest, interest expense on corporate debt and variable stock-based compensation).

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Results of Operations

     The table below sets forth certain summary information about the Company’s operating results for the three and nine months ended September 30, 2004 and 2003:

     Revenues and income from continuing operations before federal income taxes (“operating income”) by business segment are summarized in the tables below:

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     UICI’s results of operations for the three and nine months ended September 30, 2004 were particularly impacted by the following factors:

Self- Employed Agency Division

     Set forth below is certain summary financial and operating data for the Company’s Self-Employed Agency (“SEA”) Division for the three and nine months ended September 30, 2004 and 2003:

(1)

Allocations of investment income and certain general expenses are based on a number of assumptions and estimates, and the business segments’ reported operating results would change if different methods were applied.

(2)

Defined as total benefits expenses as a percentage of earned premium revenue.

(3)

Defined as total underwriting and policy acquisition expenses as a percentage of earned premium revenue.

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(4)

Submitted annualized premium volume in any period is the aggregate annualized premium amount associated with health insurance applications submitted by the Company’s agents in such period for underwriting by the Company.

     The SEA Division reported operating income of $71.5 million and $186.1 million in the three and nine-month periods ended September 30, 2004, compared to operating income of $32.5 million and $80.8 million in the corresponding 2003 periods. Operating income at the SEA Division in the 2004 periods was positively impacted by an increase in earned premium revenue, reduced administrative, commission and marketing expenses as a percentage of earned premium, and a decrease in loss ratio resulting from favorable claims experience. Earned premium revenue at the SEA Division increased to $340.0 million in the third quarter of 2004 from $306.8 million in the third quarter of 2003 and to $1.0 billion in the first nine months of 2004 from $877.4 million in the first nine months of 2003.

     Operating income at the SEA Division as a percentage of earned premium revenue (i.e., operating margin) in the three and nine-month periods ended September 30, 2004 was 21.0% and 18.6%, respectively, compared to 10.6% and 9.2%, respectively, in the corresponding periods of the prior year. The significant period-over-period increase in operating margin in the third quarter of 2004 was attributable primarily to a decrease in the loss ratio, a decrease in general administrative expenses as a percentage of earned premium revenue and a decrease in the effective commission rate (due to a decrease in the amount of first year premium relative to renewal premium, which carries a lower commission rate compared to commissions on first year premium). The decrease in loss ratio (from 61.2% in the third quarter of 2003 to 54.7% in the third quarter of 2004) was due in significant part to the reduction of claim reserves established in 2003 in response to a build up of an excess pending claims inventory followed by a rapid pay down. The actual claim payment experience in the three months ended September 30, 2004 with respect to prior periods was lower than originally estimated when the claim reserves were established in 2003. The decrease in loss ratio was also due in part to lower levels of incurred claims in the current 2004 period compared to the corresponding period of the prior year. The Company currently anticipates that loss ratios at the SEA Division will begin over time to trend upward to historical levels.

     Submitted annualized premium volume (i.e., the aggregate annualized premium amount associated with health insurance applications submitted by the Company’s agents for underwriting by the Company) decreased 3% in the nine months ended September 30, 2004 compared to submitted annualized premium volume in the corresponding period in 2003 ($669.2 million in the 2004 nine-month period and $691.4 million in the 2003 nine-month period). The majority of the decrease in submitted annualized premium volume can be attributed to reduced production at one of the Company’s agencies. The Company has made management changes at this agency, which it believes will result in increased production over the longer term.

     On October 15, 2004, the Company announced that the U.S. District Court for the Northern District of Texas had issued a final order and judgment approving the Company’s previously announced settlement of litigation challenging the relationship between UICI’s insurance companies and the membership associations that make available to their members the Company’s health insurance products. See Note E

     As previously disclosed, the terms of the settlement of the association group class action cases will not have a material adverse effect upon the financial condition or results of operations of the Company. UICI, MEGA and Mid-West continue to be parties to certain other pending “association group” cases in other states, and the Company continues its ongoing efforts to bring such cases to a successful resolution. The Company currently believes that resolution of those cases will not have a material adverse effect on the Company’s financial condition or results of operations.

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Group Insurance Division

     Set forth below is certain summary financial and operating data for the Company’s Group Insurance Division (consisting of the Company’s Student Insurance and Star HRG business units) for the three and nine months ended September 30, 2004 and 2003: