ANTHEM INC - 10-Q Quarterly Report

INDIANA (State or other jurisdiction of incorporation or organization)		35-2145715 (I.R.S. Employer Identification Number)
120 MONUMENT CIRCLE, INDIANAPOLIS, INDIANA (Address of principal executive offices)		46204-4903 (Zip Code)

Registrant's telephone number, including area code (317) 488-6000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Title of Each Class		Outstanding at July 30, 2002
Common Stock, $0.01 par value		102,894,923 shares

Anthem, Inc.

Quarterly Report on Form 10-Q
For the Period Ended June 30, 2002

Table of Contents

				Page
PART I. FINANCIAL INFORMATION
ITEM 1.		Financial Statements		1
	Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001		1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001 (Unaudited)		2
	Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2002 and 2001 (Unaudited)		3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited)		4
	Notes to Consolidated Financial Statements (Unaudited)		5
ITEM 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		19
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk		39
PART II. OTHER INFORMATION
ITEM 1.		Legal Proceedings		40
ITEM 2.		Changes in Securities and Use of Proceeds		44
ITEM 3.		Defaults Upon Senior Securities		45
ITEM 4.		Submission of Matters to a Vote of Security Holders		45
ITEM 5.		Other Information		46
ITEM 6.		Exhibits and Reports on Form 8-K		46
SIGNATURES		47

Anthem, Inc.

Consolidated Statements of Shareholders' Equity

(Unaudited)
(In Millions, Except Share Data)

Anthem, Inc.

Notes to Consolidated Financial Statements

(Unaudited)
June 30, 2002
(Dollars in Millions, Except Share Data)

On November 2, 2001, Anthem Insurance Companies, Inc. ("Anthem Insurance") converted from a mutual insurance company to a stock insurance company in a process known as a demutualization. Concurrent with the demutualization, Anthem Insurance became a wholly-owned subsidiary of Anthem, Inc. ("Anthem"). Effective with the demutualization, Anthem completed an initial public offering of 55,200,000 shares of common stock. The shares issued in the initial public offering are in addition to 48,095,675 shares of common stock (which will ultimately vary slightly as all distribution issues are finalized) distributed to eligible statutory members in the demutualization.

The accompanying unaudited consolidated financial statements of Anthem Inc. and its subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including only normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements as of and for the three and six month periods ended June 30, 2002 and 2001 have been recorded. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2001 included in Anthem's Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to current year presentation.

On April 29, 2002, Anthem and Trigon Healthcare, Inc. ("Trigon") announced that they entered into an agreement and plan of merger pursuant to which Trigon will become a wholly-owned subsidiary of Anthem. Trigon is Virginia's largest health care company and is the Blue Cross and Blue Shield licensee in the Commonwealth of Virginia, excluding the northern Virginia suburbs of Washington, D.C.

On July 31, 2002, Anthem completed its purchase of 100% of Trigon's outstanding stock. The merger provides the Company with a new geographic segment ("Anthem Southeast") and is expected to provide further economies of scale. Trigon's shareholders each received thirty dollars in cash and 1.062 shares of Anthem common stock for each Trigon share outstanding. The purchase price was approximately $4.2 billion and included the issuance of an estimated 39,007,625 shares of Anthem common stock, valued at $2.7 billion, cash of $1.1 billion and approximately $0.4 billion of other transaction costs. On July 31, 2002, the Company issued $950.0 of long term unsecured and unsubordinated notes which were used along with the sale of investment securities and available cash to fund the cash portion of the purchase price. In accordance with FAS 141, Business Combinations, Anthem will be required to allocate the purchase price to the fair value of assets acquired and liabilities assumed, including identifiable intangible assets. The excess of purchase price over the fair

value of net assets acquired will be assigned to goodwill. The Company has not yet completed its fair value analysis, but estimates that approximately $2.8 billion of goodwill and non-amortizable intangible assets and $0.3 billion of amortizable intangible assets will result from this purchase.

The results of operations for Trigon will be included in Anthem's consolidated income statement in periods after the completion of the acquisition. The following unaudited pro forma summary presents revenues, net income and per share data of Anthem as if the Trigon acquisition had occurred on January 1, 2001. The pro forma information includes the results of operations for Trigon for the periods prior to the acquisition, adjusted for interest expense on long term debt and reduced investment income related to the cash used to fund the acquisition, amortization of amortizable intangible assets associated with the purchase and the related income tax effects.

The diluted pro forma earnings per share for the three and six months ended June 30, 2001 were not calculated as such amounts would not be meaningful as no stock or dilutive securities existed for the majority of the year and a relevant market price for the entire year does not exist. There were no dilutive securities outstanding prior to November 2, 2001, the effective date of the demutualization. The pro forma basic earnings per share for the three and six months ended June 30, 2001 were calculated using the weighted average shares outstanding for the period from November 2, 2001 to December 31, 2001.

Effective June 1, 2002, the Company completed its purchase of Pro Behavioral Health ("Pro"), a Denver, Colorado-based behavioral health care company. The Company will use Pro's capabilities and experience to build a foundation for an internal behavioral health division, Anthem Behavioral, and will seek opportunities to convert its health members to this division. The purchase price was $4.5 and resulted in $4.2 of tax deductible goodwill assigned to the Specialty reportable segment. The Company is in the process of valuing certain other identifiable intangible assets, which primarily consist of covenants not to compete, subscriber lists and provider contracts; thus, the allocation of the purchase price is subject to refinement.

In accordance with a purchase agreement dated October 17, 1999, a portion of the purchase price of Matthew Thornton Health Plan, Inc., an indirect subsidiary of Anthem Insurance, is contingent on

the financial performance of Anthem Health Plans of New Hampshire, Inc. During May 2002, a $3.0 payment was made in accordance with the purchase agreement, resulting in $3.0 of tax deductible goodwill for the East reportable segment. Future contingent purchase price payments for 2003 through 2005 can not be estimated at this time but will not exceed $12.0 in the aggregate.

On February 28, 2002, a subsidiary of Anthem Insurance, Anthem Health Plans of Maine, Inc. completed its purchase of the remaining 50% ownership interest in Maine Partners Health Plan, Inc. ("MPHP") in accordance with a stock purchase agreement dated January 17, 2002. Full ownership of MPHP, an HMO serving southern Maine, is expected to result in expanded member service capabilities. The purchase price was $10.6 and resulted in $4.7 of non-tax deductible goodwill and $0.1 of other identifiable intangible assets for the East reportable segment. The Company previously consolidated the financial results of MPHP in its consolidated financial statements and recorded minority interest for the percentage not owned.

The pro forma effects of the acquisitions on results for periods prior to the purchase date are not material to the Company's consolidated financial statements.

On May 31, 2001, Anthem Insurance and Blue Cross and Blue Shield of Kansas ("BCBS-KS") announced they had signed a definitive agreement pursuant to which BCBS-KS would become a wholly-owned subsidiary of Anthem Insurance. Under the proposed transaction, BCBS-KS would demutualize and convert to a stock insurance company. The agreement calls for Anthem Insurance to pay $190.0 in exchange for all of the shares of BCBS-KS. On February 11, 2002, the Kansas Insurance Commissioner disapproved the proposed transaction, which had been previously approved by the BCBS-KS policyholders in January 2002. On February 19, 2002, the board of directors of BCBS-KS voted unanimously to appeal the Kansas Insurance Commissioner's decision and BCBS-KS sought to have the decision overturned in Shawnee County District Court. The Company joined BCBS-KS in the appeal, which was filed on March 7, 2002. On June 7, 2002, the Shawnee County District Court ruled on the BCBS-KS appeal. The Court ruled in favor of Anthem and BCBS-KS, vacating the Commissioner's decision and remanding the matter to the Commissioner for further proceedings not inconsistent with the Court's order. On June 10, 2002, the Kansas Insurance Commissioner appealed the Court's ruling to the Kansas Supreme Court.

On January 1, 2002, the Company adopted FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets. FAS 141 requires business combinations completed after June 30, 2001 to be accounted for using the purchase method of accounting. Under FAS 142, goodwill and other intangible assets (with indefinite lives) will not be amortized but will be tested for impairment at least annually. The Company completed its transitional impairment test of existing goodwill during the second quarter of 2002. This test involved the use of estimates related to the fair value of the business with which the goodwill is allocated. There were no impairment losses as a result of this test.

Following is a summary of the change in the carrying amount of goodwill by reportable segment for the period ended June 30, 2002:

The following table reflects the components of other intangible assets as of June 30, 2002 and December 31, 2001:

With the adoption of FAS 142 on January 1, 2002, the Company ceased amortization of goodwill. The intangible asset established for Blue Cross and Blue Shield trademarks is deemed to have an

indefinite life and beginning January 1, 2002 is no longer amortized. The following table presents net income and earnings per share on a comparable basis as if FAS 142 had been adopted January 1, 2001:

Aggregate amortization expense for the three months and six months ended June 30, 2002 was $4.1 and $7.4, respectively. As of June 30, 2002, estimated amortization expense for each of the five calendar years ending December 31, is as follows:

Effective July 31, 2002, as partial consideration for the purchase of Trigon, the Company issued 1.062 shares of Anthem common stock for each Trigon share outstanding, resulting in estimated

additional outstanding shares of 39,007,625. The aggregate fair value of $2.7 billion will be recorded as par value of common stock and additional paid in capital.

Anthem's Board of Directors approved a common stock repurchase program under which the Company may purchase up to $400.0 of shares from time to time, subject to business and market conditions. Subject to applicable law, shares may be repurchased in the open market and in negotiated transactions for a period of twelve months beginning February 6, 2002. As of June 30, 2002, the Company had repurchased 557,500 shares at a cost of $37.5. The excess of cost of the repurchased shares over par value is charged on a pro rata basis to additional paid in capital and retained earnings.

On May 3, 2002, pursuant to the Company's 2001 Stock Incentive Plan ("Stock Plan"), the Company granted 1,549,720 stock options to purchase shares of the Company's common stock to certain eligible executives, employees and non-employee directors. The exercise price of these options is $71.86 per share, the fair value of the stock on the grant date. These options will vest and expire over terms set by the Compensation Committee of the Board of Directors.

On May 3, 2002, pursuant to the Stock Plan, the Company granted 93,600 shares of the Company's common stock as restricted stock awards to certain eligible executives at $71.86 per share, the fair value of the stock on the grant date. The shares vest on a pro-rata basis over the periods ending December 31, 2004 and 2005. None of the shares of restricted stock may be transferred or encumbered, except as provided for in the award agreements, until the restrictions on such shares lapse or are removed. For grants of restricted stock, unearned compensation equivalent to the fair market value of the shares at the date of grant is recorded as a separate component of shareholders' equity and subsequently amortized to compensation expense over the vesting period. Amortization expense of $0.3 was recorded since the issue date.

Stock options and restricted stock awards are not considered outstanding in computing the weighted-average number of shares outstanding for basic earnings per share, but are included, from the grant date, in determining diluted earnings per share using the treasury stock method. The stock options are dilutive in periods when the average market price exceeds the grant price. The restricted stock awards are dilutive when the aggregate fair value exceeds the amount of unearned compensation remaining to be amortized.

The Company has registered 3,000,000 shares of common stock for the Employee Stock Purchase Plan ("Stock Purchase Plan") which is intended to provide a means to encourage and assist employees in acquiring a stock ownership interest in Anthem. The Stock Purchase Plan was initiated in June 2002. Any employee that meets the eligibility requirements, as defined, may participate. No employee will be permitted to purchase more than $25,000 (actual dollars) worth of stock in any calendar year.

Employees become participants by electing payroll deductions from 1% to 15% of gross compensation. Payroll deductions are accumulated during each plan quarter and applied toward the purchase of stock on the last trading day of each plan quarter. Once purchased, the stock is accumulated in the employee's investment account. The purchase price per share is 85% of the lower of the fair market value of a share of common stock on (i) the first trading day of the plan quarter, or (ii) the last trading day of the plan quarter. As of June 30, 2002, payroll deductions of $0.9 had been accumulated toward purchases for the plan quarter ending August 31, 2002.

The following sets forth the denominator for basic and diluted earnings per share for the three and six months ended June 30, 2002. Weighted average shares used for basic earnings per share assumes that the adjustment to common stock distributed in the demutualization occurred at the beginning of the quarter in which changes were identified.

There were no shares or dilutive securities outstanding prior to the demutualization and initial public offering. For comparative pro forma earnings per share presentation, the weighted average shares outstanding and the effect of dilutive securities for the period from November 2, 2001 to December 31, 2001, as shown below, was used to calculate pro forma earnings per share for the three and six months ended June 30, 2001.

Anthem had cash requirements of approximately $1.2 billion for the acquisition of Trigon, including both the cash portion of the purchase price and certain transaction costs.

On May 29, 2002, Anthem entered into a bridge loan agreement to borrow up to $1.2 billion; however, on July 2, 2002, Anthem requested the bridge loan amount to be reduced to $600.0. Immediately following the acquisition of Trigon on July 31, 2002, Anthem terminated the bridge facility.

On July 31, 2002, Anthem issued $950.0 of long-term unsecured and unsubordinated notes ($150.0 of 4.875% notes due 2005, and $800.0 of 6.800% notes due 2012). The proceeds from the note offering were used to pay a portion of the approximately $1.2 billion of cash merger consideration and expenses associated with Anthem's acquisition of Trigon.

On July 2, 2002, Anthem amended and restated its revolving lines of credit with its lender group to make Anthem the borrower and to increase the available borrowings to $1.0 billion. Under one facility, which expires on November 5, 2006, Anthem may borrow up to $400.0. Under the other facility, which expires July 1, 2003, Anthem may borrow up to $600.0. Any amounts outstanding under this facility at July 1, 2003 (except amounts which bear interest rates determined by a competitive bidding process) convert to a one-year term loan at Anthem's option. Borrowings under both credit facilities bear interest at rates determined under two interest rate options or through a competitive bid process. The first option is a floating rate equal to the greater of the prime rate or the federal funds rate plus one-half percent. The second option is a floating rate equal to LIBOR plus a margin determined by reference to the ratings of Anthem's senior, unsecured debt. Under the competitive bid process, borrowings may bear interest at floating rates determined by reference to LIBOR, or at fixed rates. Anthem's ability to borrow under these credit facilities is subject to typical conditions and to compliance with certain financial ratios. Anthem's two previous revolving credit facilities totaling $800.0 were terminated on July 2, 2002 as well as the two credit agreements entered into in February 2002, allowing for $135.0 of additional borrowings. Anthem Insurance's commercial paper program has been discontinued as of July 2, 2002. No amounts were outstanding under the current or prior facilities as of June 30, 2002 or December 31, 2002.

The following table shows comprehensive income for the three months and six months ended June 30, 2002 and 2001:

The following tables show financial data by segment for the three and six months ended June 30, 2002 and 2001:

A reconciliation of reportable segment operating gain to income before income taxes and minority interest included in the consolidated statements of income for the three and six months ended June 30, 2002 and 2001 is as follows:

coverage for medically necessary prescription drugs and misrepresenting or failing to disclose essential information to enrollees. The complaint contends that these alleged policies and practices are a violation of ERISA. A second proceeding, brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, seeks injunctive relief to preclude the Company from allegedly making coverage decisions relating to medical necessity without complying with the express terms of the policy documents, and unspecified monetary damages (both compensatory and punitive).

In addition, the Company's Connecticut subsidiary is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. The suits allege that the Connecticut subsidiary has breached its contracts by, among other things, failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. Two of the suits seek injunctive relief and monetary damages (both compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks injunctive relief only.

On October 10, 2001, the Connecticut State Dental Association and five dental providers filed suit against the Company's Connecticut subsidiary. The suit alleged breach of contract and violation of the Connecticut Unfair Trade Practices Act. The suit was voluntarily withdrawn on November 9, 2001. The claims were refiled on April 15, 2002, as two separate suits, one by the Connecticut State Dental Association, and the second by two dental providers, purportedly on behalf of a class of dental providers. Both suits seek injunctive relief, and unspecified monetary damages (both compensatory and punitive).

The Company intends to vigorously defend these proceedings. All of the proceedings are in the early stages of litigation, and their ultimate outcomes cannot presently be determined.

Following the purchase of Blue Cross and Blue Shield of Maine ("BCBS-ME"), appeals were filed by two parties that intervened in the administrative proceedings before Maine's Superintendent of Insurance (the "Superintendent"), challenging the Superintendent's decision approving the conversion of BCBS-ME to a stock insurer, which was a required step before the acquisition. In one appeal, Maine's Attorney General requested the Court to modify the Superintendent's decision, by requiring BCBS-ME to submit an update to the statutorily mandated appraisal of its fair market value and to deposit into the charitable foundation the difference between the net proceeds that have been transferred to the foundation and the final value of BCBS-ME, if greater. In the other appeal, a consumers' group also challenged that portion of the Superintendent's decision regarding the value of BCBS-ME. On December 21, 2001, the Court issued an opinion affirming the decision of the Superintendent of Insurance approving the conversion of BCBS-ME and the subsequent acquisition by Anthem Insurance. The Consumers for Affordable Health Care have appealed this decision to the Maine Supreme Judicial Court. The Attorney General did not appeal the decision, and the appeals time has passed. The Company does not believe that the Consumers' appeal will have a material adverse effect on its consolidated financial position or results of operations.

On March 11, 1998, Anthem Insurance and its Ohio subsidiary, Community Insurance Company ("CIC") were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of the Company's denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 (actual dollars) for compensatory damages, $2.5 for bad faith in claims handling and appeals processing, $49.0 for punitive damages and unspecified attorneys' fees in an amount to be determined by the court. The court later granted attorneys' fees of $0.8. An appeal of the verdict was filed by the defendants on November 19, 1999. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 (actual dollars) for breach of contract against CIC, affirmed the award of $2.5 compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem Insurance. The court also reversed the award of $49.0 in punitive damages against both Anthem Insurance and CIC, and remanded the question of punitive damages against CIC to the trial court for a new trial. Anthem Insurance and CIC, as well as the plaintiff, appealed certain aspects of the decision of the Ohio Court of Appeals. On October 10, 2001, the Supreme Court of Ohio agreed to hear the plaintiff's appeal, including the question of punitive damages, and denied the cross-appeals of Anthem Insurance and CIC. In December 2001, CIC paid the award of $2.5 compensatory damages for bad faith and $1,350 (actual dollars) for breach of contract, plus accrued interest. On April 24, 2002 the Supreme Court of Ohio held oral arguments. The ultimate outcome of the matters that are the subject of the pending appeal cannot be determined at this time.

Anthem's primary Ohio subsidiary and primary Kentucky subsidiary were sued on June 27, 2002, in their respective state courts. The suits were brought by the Academy of Medicine of Cincinnati, as well as individual physicians, and purport to be class action suits brought on behalf of all physicians practicing in the greater Cincinnati area and in the Northern Kentucky area, respectively. In addition to the Anthem subsidiaries, both suits name Aetna, United Healthcare and Humana as defendants.The first suit, captioned Academy of Medicine of Cincinnati and Luis Pagani, M.D. v. Aetna Health, Inc., Humana Health Plan of Ohio, Inc., Anthem Blue Cross and Blue Shield, and United Health Care of Ohio, Inc., No. 02004947 was filed on June 27, 2002 in the Court of Common Pleas, Hamilton County, Ohio. The second suit, captioned Academy of Medicine of Cincinnati and A. Lee Greiner, M.D., Victor Schmelzer, M.D., and Karl S. Ulicny, Jr., M.D. v. Aetna Health, Inc., Humana, Inc., Anthem Blue Cross and Blue Shield, and United Health Care, Inc., No. 02-CI-903 was filed on June 27, 2002 in the Boone County, Kentucky Circuit Court.

violate the respective state's antitrust and unfair competition laws, and each suit seeks class certification, compensatory damages, attorneys' fees, and injunctive relief to prevent the alleged anti-competitive behavior against the class in the future. These suits are in the preliminary stages. We intend to vigorously defend the suits and believe that any liability from these suits will not have a material adverse effect on our consolidated financial position or results of operations.

In addition to the lawsuits described above, the Company is also involved in other pending and threatened litigation of the character incidental to the business transacted, arising out of its insurance and investment operations, and is from time to time involved as a party in various governmental and administrative proceedings. The Company believes that any liability that may result from any one of these actions is unlikely to have a material adverse effect on its consolidated results of operations or financial position.

The Company, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary for Medicare Parts A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which is subject to adjustment upon audit by the federal Centers for Medicare and Medicaid Services, formerly the Health Care Financing Administration. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits and reviews. These payments have ranged from $0.7 to $51.6, plus a payment by one company of $144.0. While the Company believes it is currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of the Company's activities under certain of its Medicare fiscal intermediary contracts.

AdminaStar Federal, Inc. ("AdminaStar"), a subsidiary of Anthem Insurance, has received several subpoenas prior to May 2000 from the Office of Inspector General ("OIG") and the U.S. Department of Justice, one seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and the others requesting certain financial records and information of AdminaStar and Anthem Insurance related to the Company's Medicare fiscal intermediary (Part A) and carrier (Part B) operations. The Company has made certain disclosures to the government relating to its Medicare Part B operations in Kentucky. The Company was advised by the government that, in conjunction with its ongoing review of these matters, the government has also been reviewing separate allegations made by individuals against AdminaStar, which are included within the same timeframe and involve issues arising from the same nucleus of operative facts as the government's ongoing review. The Company is not in a position to predict either the ultimate outcome of these reviews or the extent of any potential exposure should claims be made against the Company. However, the Company believes any fines or penalties that may arise from these reviews would not have a material adverse effect on the consolidated financial position or results of operations.

As a Blue Cross Blue Shield Association licensee, the Company participates in the Federal Employee Program ("FEP"), a nationwide contract with the Federal Office of Personnel Management to provide coverage to federal employees and their dependents. On July 11, 2001, the Company received a subpoena from the OIG, Office of Personnel Management, seeking certain financial documents and information, including information concerning intercompany transactions, related to operations in Ohio, Indiana and Kentucky under the FEP contract. The government has advised the Company that, in conjunction with its ongoing review, the government is also reviewing a separate allegation made by an individual against the Company's FEP operations, which is included within the same timeframe and involves issues arising from the same nucleus of operative facts as the government's ongoing review. The Company is currently cooperating with the OIG and the U.S. Department of Justice on these matters. The ultimate outcome of these reviews cannot be determined at this time.

Anthem Insurance guaranteed certain financial contingencies of its subsidiary, Anthem Alliance Health Insurance Company ("Alliance"), under a contract between Alliance and the United States Department of Defense. Under that contract, Alliance managed and administered the TRICARE Managed Care Support Program for military families from May 1, 1998 through May 31, 2001. There was no call on the guarantee for the period from May 1, 1998 to April 30, 1999 (which period is now "closed"), and the Company does not anticipate a call on the guarantee for the periods beginning May 1, 1999 through May 31, 2001 (which periods remain "open" for possible review by the Department of Defense).

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We are one of the nation's largest health benefits companies and an independent licensee of the Blue Cross Blue Shield Association, or BCBSA. We offer Blue Cross Blue Shield branded products to over eight million members throughout Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Maine, Colorado, and Nevada. As of August 1, 2002, with the acquisition of Trigon described below, we offer Blue Cross Blue Shield branded products to over two million members in the Commonwealth of Virginia, excluding the northern Virginia suburbs of Washington, D.C.

Our health business segments are strategic business units delineated by geographic areas within which we offer similar products and services. We manage our business units with a local focus to address each geographic region's unique market, regulatory and healthcare delivery characteristics. Our geographic health segments are: Midwest, which includes Indiana, Kentucky and Ohio; East, which includes Connecticut, New Hampshire and Maine; and West, which includes Colorado and Nevada. As of August 1, 2002, we also operate a Southeast segment, which includes the Commonwealth of Virginia excluding the northern Virginia suburbs of Washington, D.C.

In addition to our three geographic health segments, our reportable segments include a Specialty segment that contains business units providing group life and disability insurance benefits, pharmacy benefit management, dental and vision administration services, behavioral health benefits and third party occupational health services. Our Other segment is comprised of AdminaStar Federal, intersegment revenue and expense eliminations and corporate expenses not allocated to reportable segments. AdminaStar Federal is a subsidiary that administers Medicare programs in Indiana, Illinois, Kentucky and Ohio. In 2001, our Other segment also contained Anthem Alliance Health Insurance Company, or Anthem Alliance. Anthem Alliance was a subsidiary that primarily provided health care benefits and administration in nine states for the Department of Defense's TRICARE Program for military families. We sold our TRICARE operations on May 31, 2001.

We offer our health benefits customers traditional indemnity products and a diversified mix of managed care products, including health maintenance organizations or HMOs, preferred provider organizations or PPOs, and point of service or POS plans. We also provide a broad array of managed care services and partially insured products to self-funded employers, including underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, claims processing and other administrative services. Our operating revenue consists of premiums, administrative service fees and other revenue. The premiums come from fully or partially insured contracts where we indemnify our policyholders against loss. The administrative fees come from self-funded contracts where our contract holders are wholly or partially self-insured and from the administration of Medicare programs. Other revenue is principally generated by our pharmacy benefit management company and is associated with the sale of mail order drugs.

Our benefit expense consists mostly of four cost of care components: outpatient and inpatient care costs, physician costs and pharmacy benefit costs. All four components are affected both by unit costs and utilization rates. Unit costs, for example, are the cost of outpatient medical procedures, inpatient hospital stays, physician fees for office visits and prescription drug prices. Utilization rates represent the volume of consumption of health services and vary with the age and health of our members and broader social and lifestyle factors in the population as a whole.

This management's discussion and analysis should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2001 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, and in

conjunction with our unaudited consolidated financial statements and accompanying notes for the three and six-month periods ended June 30, 2002 and 2001 included in this Form 10-Q.

On April 29, 2002, we and Trigon Healthcare, Inc., or Trigon, announced that we entered into an agreement and plan of merger pursuant to which Trigon will become our wholly-owned subsidiary. Trigon is Virginia's largest health care company and is the Blue Cross and Blue Shield licensee for the Commonwealth of Virginia, excluding the northern Virginia suburbs of Washington, D.C.

On July 31, 2002, we completed our purchase of 100% of Trigon's outstanding stock. The merger provides us with a new geographic segment, Anthem Southeast, and is expected to provide further economies of scale. Trigon's shareholders received thirty dollars in cash and 1.062 shares of Anthem common stock for each Trigon share outstanding. The purchase price was approximately $4.2 billion and included the issuance of an estimated 39,007,625 shares of Anthem common stock, valued at $2.7 billion, cash of $1.1 billion, and approximately $0.4 billion of other transaction costs. Refer to the Liquidity and Capital Resources section of this discussion for more information related to the sources of funds for this acquisition.

The results of operations for Trigon will be included in our consolidated income statement beginning August 1, 2002. Trigon reported the following unaudited financial results for the six-month and three-month periods ended June 30, 2002 and 2001:

As of June 30, 2002, Trigon reported total assets of $2.5 billion, total liabilities of $1.4 billion and total shareholders' equity of $1.1 billion.

We sold our TRICARE operations on May 31, 2001. The results of our TRICARE operations during 2001 were reported in our Other segment. The results of our TRICARE operations for the second quarter of 2001 were $116.3 million in operating revenue and $3.1 million in operating gain, and for the five months ended May 31, 2001 were $263.2 million in operating revenue and $4.2 million in operating gain.

On May 31, 2001, we and Blue Cross and Blue Shield of Kansas, or BCBS-KS, announced that they had signed a definitive agreement pursuant to which BCBS-KS would become our wholly owned subsidiary. Under the proposed transaction, BCBS-KS would demutualize and convert to a stock insurance company. The agreement calls for us to pay $190.0 million in exchange for all of the shares of BCBS-KS. On February 11, 2002, the Kansas Insurance Commissioner disapproved the proposed transaction, which had been previously approved by the BCBS-KS policyholders in January 2002. On February 19, 2002, the board of directors of BCBS-KS voted unanimously to appeal the Kansas Insurance Commissioner's decision and BCBS-KS sought to have the decision overturned in Shawnee County District Court. We joined BCBS-KS in the appeal, which was filed on March 7, 2002. On June 7, 2002, the Court ruled in favor of us and BCBS-KS, vacating the Commissioner's disapproval and remanding the matter to the Commissioner for further proceedings not inconsistent with the Court's order. On June 10, 2002, the Kansas Insurance Commissioner appealed the Court's ruling to the Kansas Supreme Court.

We categorize our membership into seven different customer types: Local Large Group, Small Group, Individual, National Accounts, Medicare + Choice, Federal Employee Program and Medicaid.

Our BlueCard membership is calculated based on the amount of BlueCard administrative fees we receive from the BlueCard members' home plans. Generally, the administrative fees we receive are based on the number and type of claims processed and a portion of the network discount on those claims. The administrative fees are then divided by an assumed per member per month, or PMPM, factor to calculate the number of members. The assumed PMPM factor is based on an estimate of our experience and BCBSA guidelines.

In addition to categorizing our membership by customer type, we categorize membership by funding arrangement according to the level of risk we assume in the product contract. Our two funding arrangement categories are fully insured and self-funded. Self-funded products are offered to customers, generally larger employers, with the ability and desire to retain some or all of the risk associated with their employees' health care costs.

The following table presents our membership count by segment, customer type and funding arrangement as of June 30, 2002 and 2001. The membership data presented are unaudited and in

certain instances include our estimates of the number of members represented by each contract at the end of the period, rounded to the nearest thousand.

During the twelve months ended June 30, 2002, total membership increased 542,000, or 7%, primarily in National Accounts and Individual businesses. National Accounts membership increased 378,000, or 13%, primarily due to a significant increase in BlueCard activity. Individual membership increased 81,000, or 12%, with the majority of this growth resulting from higher sales in our under 65 business in all segments.

Medicaid membership increased 26,000, or 24%, primarily due to the State of Connecticut's broadening of eligibility standards and increased promotion of its Medicaid product to its residents. Medicare + Choice membership increased 2,000, or 2%. Excluding our withdrawal from the Medicare + Choice market in Colorado as of January 1, 2002, Medicare + Choice membership increased 12,000, or 13%. This increase was primarily due to new business in certain counties in Ohio, where many competitors have left the market, leaving us as one of the few remaining companies offering this product. Our Medicare + Choice membership in Colorado was approximately 10,000 at June 30, 2001.

Local Large Group membership increased 21,000 or 1%, as we experienced favorable sales and retention in fully insured business, primarily in our Midwest segment, which was partially offset by the anticipated decrease in our self-funded business. Local Large Group self-funded membership fell primarily as a result of pricing actions taken in the Midwest to better align revenue with costs.

Self-funded membership increased 341,000, or 8%, primarily due to an increase in National Accounts BlueCard membership. Fully insured membership grew by 201,000 members, or 5%, from June 30, 2001, primarily in Individual, Medicaid and Local Large Group businesses, as explained above.

Cost increases have varied among regions and products. Overall, our cost of care trends have been approximately 13%, using a rolling 12-month calculation through June 2002. For the 12-month period ended June 30, 2002 compared to the 12-month period ended June 30, 2001, outpatient cost increases were approximately 13% while professional services cost increases were approximately 11%. These increases resulted from both increased utilization and higher unit costs. Increased outpatient utilization reflects an industry-wide trend toward a broader range of medical procedures being performed without overnight hospital stays, as well as an increasing customer awareness of and demand for diagnostic procedures such as magnetic resonance imagings, or MRIs. In addition, improved medical technology has allowed more complicated medical procedures, such as colonoscopies and cardiac services, to be performed on an outpatient basis rather than on an inpatient or hospitalized basis, increasing both outpatient utilization rates and unit costs. We are addressing these cost increases through contracting with providers and the use of disease and advanced care management programs.

Prescription drug cost increases for the 12-month period ended June 30, 2002 compared to the 12-month period ended June 30, 2001 varied among regions and products, averaging approximately 18%. These cost increases resulted from increases in brand name drug prices, the introduction of new, higher cost drugs and higher overall utilization. In response to increasing prescription drug costs, we have and continue to implement three-tiered drug programs for our members. Three-tiered drug programs reflect benefit designs that have three co-payment levels, which depend on the drug selected. Generic drugs have the lowest co-payment, brand name drugs included in the drug formulary have a higher co-payment and brand name drugs omitted from the drug formulary have the highest co-payment. Drug formularies are a list of prescription drugs that have been reviewed and selected for their quality and efficacy by a committee of practicing physicians and clinical pharmacists. Through our pharmacy benefit design, we encourage use of these listed brand name and generic drugs to ensure members receive quality and cost-effective medication. However, the favorable impact of three-tier drug programs on prescription drug cost trends is most significant in the first year of implementation.

Growth in inpatient costs was approximately 9% for the 12-month period ended June 30, 2002 compared to the 12-month period ended June 30, 2001 and has decreased from the previous quarter's 12-month trend of approximately 11%. This lower trend growth is primarily due to lower utilization. The overall growth in inpatient costs is primarily due to higher unit costs as a result of re-negotiation of provider contracts. Hospitals have taken a more aggressive stance in their contracting with health insurance companies as a result of reduced hospital reimbursements from Medicare and pressure to recover the costs of additional investments in new medical technology and facilities.

Results of Operations for the Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001

The following table presents our consolidated results of operations for the three months ended June 30, 2002 and 2001:

The following definitions are also applicable to all other tables and schedules in this discussion:

Premiums increased $328.0 million, or 14%, to $2,601.9 million in 2002. Excluding our TRICARE business from 2001, premiums increased $415.4 million, or 19%, primarily due to premium rate increases which averaged 14%, particularly in our Local Large Group and Small Group businesses, and higher membership in all of our business segments.

Administrative fees decreased $1.2 million, or 1%, from $217.3 million in 2001 to $216.1 million in 2002 primarily due to the sale of our TRICARE business. Excluding our TRICARE business from 2001, administrative fees increased $27.7 million, or 15%, primarily from membership growth in National Accounts self-funded business. Excluding our TRICARE business from 2001, other revenue, which is comprised principally of Anthem Prescription Management's, or APM's, sale of mail order drugs, increased $8.7 million, or 78%. APM, which is included in our Specialty business segment, is our pharmacy benefit manager and provides its services principally to other Anthem affiliates. Mail order revenue increased primarily due to additional volume and from the introduction of APM as the pharmacy benefit manager at Blue Cross and Blue Shield of Maine, or BCBS-ME, in the second quarter of 2001.

Benefit expense increased $238.1 million, or 12%, in 2002. Excluding our TRICARE business from 2001, benefit expense increased $326.5 million, or 18%, due to cost of care trends and higher average membership. Cost of care trends were driven primarily by higher utilization of outpatient services and higher prescription drug costs. Our benefit expense ratio decreased 160 basis points from 85.2% in 2001 to 83.6% in 2002 in part due to the sale of our TRICARE business. Excluding our TRICARE business from 2001, our benefit expense ratio decreased 90 basis points from 84.5% in 2001 to 83.6% in 2002, primarily due to better than expected claims experience, particularly in our East segment.

Administrative expense increased $52.2 million, or 11%, for the three months ended June 30, 2002. Excluding our TRICARE business from 2001, administrative expense increased $76.9 million, or 16%, primarily due to higher employment costs and other additional costs associated with higher membership as well as higher commissions and premium taxes, which vary with premium. Excluding our TRICARE business from 2001, our administrative expense ratio, calculated using operating revenue and premium equivalents, decreased 10 basis points to 13.7% primarily due to operating revenue growth and continued focus on cost containment efforts.

Net investment income increased $4.6 million, or 8%, primarily due to our higher average investment portfolio balances for the first three months of 2002, as compared to the average for the first three months of 2001. The higher portfolio balances included net cash generated from operations and the impact of increasing fixed income securities as a percentage of our investment portfolio in August 2001. As returns on fixed maturity portfolios are dependent on market interest rates and changes in interest rates are unpredictable, there is no certainty that past investment performance will be repeated in the future.

Net realized gains on investments of $2.6 million for the three months ended June 30, 2002 are compared to net realized losses on investments of $24.1 million for the three months ended June 30,

2001, resulting in an increase of $26.7 million. Included in net realized losses on investments for the three months ended June 30, 2002, is $1.2 million in unrealized losses on a limited partnership being recognized as other than temporary, and for the three months ended June 30, 2001 is $28.9 million in unrealized losses on equity securities being recognized as other than temporary. Net realized capital gains from sale of equities for the three months ended June 30, 2002 were $0.0 million compared to $3.7 million for the three months ended June 30, 2001. Net realized capital gains from sale of fixed income securities increased $2.7 million to $3.8 million in 2002 from $1.1 million in 2001. Net gains or losses on investments are influenced by market conditions when or if an investment is sold, and will vary from period to period.

The gain on sale of subsidiary operations of $25.0 million in the three months ended June 30, 2001 relates to the sale of our TRICARE business on May 31, 2001.

Interest expense increased $3.9 million, or 29%, primarily reflecting the issuance of our 6.00% Equity Security Units, or Units, on November 2, 2001.

Amortization of goodwill and other intangible assets decreased $3.9 million, or 49%, from the three months ended June 30, 2001 to the three months ended June 30, 2002, primarily due to adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," or FAS 142, on January 1, 2002. See Note 3 to our June 30, 2002 unaudited consolidated financial statements for additional information.

Demutualization expenses associated with our conversion from a mutual insurance company to a stockholder owned insurance company on November 2, 2001 totaled $2.4 million in the three months ended June 30, 2001.

Income tax expense increased by $18.6 million, or 54%, primarily due to increased income before taxes. Our effective income tax rate increased to 33.1% in the second quarter of 2002 from 32.4% in the second quarter of 2001. The 70 basis point increase in effective income tax rate is primarily due to the impact of higher taxable income on consistent amounts of net deductible permanent tax differences and a small increase in the state income tax expense partially offset by the impact of FAS 142.

As taxable income increases, if permanent differences remain at a constant dollar amount, the effective tax rate will move toward the statutory rate of 35% for large corporate United States taxpayers. FAS 142, effective January 1, 2002, eliminated amortization of goodwill for financial statement reporting, a portion of which was non-tax deductible goodwill. Deductible permanent differences are items that are deductible for income tax purposes and not deductible for financial reporting purposes.

Net income increased $33.8 million, or 47%, primarily due to the improvement in our operating results, higher net investment income and lower amortization of goodwill and other intangible assets resulting from the adoption of FAS 142 on January 1, 2002. Assuming FAS 142 had been in effect for the quarter ended June 30, 2001, our net income would have increased $30.0 million, or 39%.

Our Midwest segment is comprised of health benefit and related business for members in Indiana, Kentucky and Ohio. The following table presents our Midwest segment's summarized results of operations for the three months ended June 30, 2002 and 2001:

	Three Months Ended June 30
	% Change
	2002		2001
	($ in Millions)
Operating Revenue	$	1,508.6		$	1,246.8		21	%
Operating Gain	$	61.5		$	42.2		46	%
Operating Margin		4.1	%		3.4	%	70	bp
Membership (in 000s)		5,132			4,826		6	%

Operating revenue increased $261.8 million, or 21%, in 2002 primarily due to premium rate increases, membership increases, particularly in Local Large Group fully insured business, Individual and Medicare + Choice, and overall good service that contributed to retention of over 90% of our membership from June 30, 2001.

Operating gain increased $19.3 million, or 46%, in 2002 primarily due to revenue growth, effective expense control and better underwriting results in our Local Large group fully insured and Individual businesses. Administrative expense increased at a slower rate than premiums as we gained operating efficiencies and leveraged our fixed costs over higher membership. These improvements in our operating gain resulted in a 70 basis point increase in operating margin to 4.1% in 2002.

Membership increased 306,000, or 6%, primarily due to growth in National Accounts business and additional sales in Individual business. Individual sales benefited from the introduction of lower cost products. Retention of members was favorable in all lines of business other than Local Large Group self-funded business. The anticipated decrease in Local Large Group self-funded membership was a result of pricing actions designed to better align revenue with costs.

Our East segment is comprised of health benefit and related business for members in Connecticut, New Hampshire and Maine. The following table presents our East segment's summarized results of operations for the three months ended June 30, 2002 and 2001.

	Three Months Ended June 30
	% Change
	2002		2001
	($ in Millions)
Operating Revenue	$	993.8		$	883.8		12	%
Operating Gain	$	52.9		$	25.8		105	%
Operating Margin		5.3	%		2.9	%	240	bp
Membership (in 000s)		2,346			2,216		6	%

Operating revenue increased $110.0 million, or 12%, in 2002 primarily due to premium rate increases, particularly in Local Large Group and Small Group businesses, and higher membership in Small Group, Individual and Medicaid. In addition, retention of membership exceeded 90% as a result of good service.

Operating gain increased $27.1 million, or 105% to $52.9 million in 2002 primarily due to favorable overall claims experience, particularly in Local Large Group fully-insured and Medicare Supplement businesses. These improvements in our operating gain resulted in a 240 basis point increase in operating margin to 5.3% in 2002.

Membership increased 130,000, or 6%, primarily in National Accounts and Medicaid businesses. National Accounts membership increased primarily due new sales and increased BlueCard activity,

while Medicaid membership increased primarily as a result of the State of Connecticut's broadening of eligibility standards and increased promotion of its Medicaid product to its residents.

Our West segment is comprised of health benefit and related business for members in Colorado and Nevada. The following table presents our West segment's summarized results of operations for the three months ended June 30, 2002 and 2001:

	Three Months Ended June 30
	% Change
	2002		2001
	($ in Millions)
Operating Revenue	$	236.0		$	180.4		31	%
Operating Gain	$	10.1		$	2.9		248	%
Operating Margin		4.3	%		1.6	%	270	bp
Membership (in 000s)		843			737		14	%

Operating revenue increased $55.6 million, or 31%, primarily due to higher premium rates, particularly in Local Large Group fully-insured business and higher membership in Individual, Local Large Group and Small Group businesses.

Operating gain increased $7.2 million to $10.1 million in 2002, primarily due to higher administrative fees associated with our National Accounts business, improved underwriting performance, and higher average membership, particularly in our Small Group and Individual businesses. In addition, we were able to leverage our fixed costs over a significantly increased membership base. These improvements in our operating gain resulted in a 270 basis point increase in operating margin to 4.3% in 2002.

Membership increased 106,000, or 14%, to 843,000, due to increased National Accounts business, primarily BlueCard activity and higher sales in Individual and Small Group businesses. We exited the Medicare + Choice market in Colorado effective January 1, 2002. At June 30, 2001, our Medicare + Choice membership in Colorado was approximately 10,000.

Our Specialty segment includes our group life and disability, pharmacy benefit management, dental and vision administration services, behavioral health benefits and third party occupational health services. On June 1, 2002, we acquired certain assets of PRO Behavioral Health, or Pro, a Denver, Colorado-based behavioral health company in order to broaden our specialty product offerings. Results from this acquisition are included from that date, but are not material. The following table presents our Specialty segment's summarized results of operations for the three months ended June 30, 2002 and 2001:

	Three Months Ended June 30
	% Change
	2002		2001
	($ in Millions)
Operating Revenue	$	126.9		$	96.4		32	%
Operating Gain	$	12.8		$	8.4		52	%
Operating Margin		10.1	%		8.7	%	140	bp

Operating revenue increased $30.5 million, or 32%, primarily due to higher revenue at APM. APM's operating revenue grew primarily due to increased mail order prescription volume and the implementation of APM's pharmacy benefit programs in the second quarter of 2001 by BCBS-ME. On August 31, 2001, APM's contract with TRICARE terminated as we sold TRICARE on May 31, 2001. Excluding our TRICARE business from 2001, mail service membership increased 17%, while retail

service membership increased 12%. Excluding our TRICARE business from 2001, mail service prescription volume increased 31% and retail prescription volume increased 18%.

Operating gain increased $4.4 million, or 52%, primarily due to increased mail order prescription volume at APM and the leveraging of our fixed costs over increased membership. These improvements in our operating gain resulted in a 140 basis point increase in our operating margin to 10.1% in 2002.

Our Other segment includes AdminaStar Federal, a subsidiary that administers Medicare Parts A and B programs in Indiana, Illinois, Kentucky and Ohio, intersegment revenue and expense eliminations and corporate expenses not allocated to operating segments. In 2001, our Other segment also contained Anthem Alliance, a subsidiary that provided the health care benefits and administration in nine states for active and retired military employees and their dependents under the Department of Defense's TRICARE program for military families. Our TRICARE business was sold on May 31, 2001. The following table presents the summarized results of operations for our Other segment, including elimination of intersegment revenue, for the three months ended June 30, 2002 and 2001:

	Three Months Ended June 30
	% Change
	2002		2001
	($ in Millions)
Operating Revenue	$	(27.5	)	$	94.9		NM
Operating Loss	$	(18.7	)	$	(5.9	)	(217	%)

Operating revenue decreased $122.4 million to $(27.5) million in 2002. Excluding intersegment operating revenue eliminations of $71.1 million in 2002 and $50.9 million in 2001, operating revenue decreased $102.2 million, or 70%, primarily due to the sale of our TRICARE operations. Excluding our TRICARE business from 2001 and intersegment operating revenue eliminations, operating revenue increased $14.1 million, or 48%, primarily due to additional revenue at AdminaStar Federal.

Operating loss increased $12.8 million primarily due to higher unallocated corporate expenses and the absence of TRICARE operating income. These unallocated expenses accounted for $23.1 million for the three months ended June 30, 2002 and $6.9 million for the three months ended June 30, 2001. This increase in unallocated expenses is primarily related to higher incentive compensation costs as a result of better than planned operating results.

Results of Operations For the Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001

The following table presents our consolidated results of operations for the six months ended June 30, 2002 and 2001:

Premiums increased $588.6 million, or 13%, to $5,131.4 million in 2002. Excluding our TRICARE business from 2001, premiums increased $785.1 million, or 18%, primarily due to premium rate increases, particularly in our Local Large Group and Small Group businesses, and higher membership in all of our business segments.

Administrative fees decreased $13.2 million, or 3%, from $430.3 million in 2001 to $417.1 million in 2002 primarily due to the sale of our TRICARE business. Excluding our TRICARE business from 2001, administrative fees increased $53.5 million, or 15%, primarily from membership growth in National Accounts self-funded business. Excluding our TRICARE business from 2001, other revenue,

which is comprised principally of APM's sale of mail order drugs, increased $15.3 million, or 68%. Mail order revenues increased primarily due to additional volume and from the introduction of APM as the pharmacy benefit manager at Blue Cross and Blue Shield of Colorado and Nevada, or BCBS-CO/NV and BCBS-ME, in the first six months of 2001.

Benefit expense increased $440.4 million, or 11%, in 2002. Excluding our TRICARE business from 2001, benefit expense increased $637.8 million, or 17%, due to higher cost of care trends and higher average membership. Cost of care trends were driven primarily by higher utilization of outpatient services and higher prescription drug costs. Our benefit expense ratio decreased 120 basis points from 85.2% in 2001 to 84.0% in 2002 primarily due to the sale of our TRICARE business. Excluding our TRICARE business from 2001, our benefit expense ratio decreased 50 basis points from 84.5% in 2001 to 84.0% in 2002, primarily due to better than expected claims experience in our East and West segments.

Administrative expense increased $58.4 million, or 6%, for the six months ended June 30, 2002. Excluding our TRICARE business from 2001, administrative expense increased $119.9 million, or 13%, primarily due to higher employment costs and other additional costs associated with higher membership as well as higher commissions and premium taxes, which vary with premium. Excluding our TRICARE business from 2001, our administrative expense ratio, calculated using operating revenue and premium equivalents, decreased 60 basis points to 13.5% primarily due to operating revenue growth and continued focus on cost containment efforts.

Net investment income increased $11.2 million, or 10%, primarily due to our higher average investment portfolio balances for the first six months of 2002, as compared to the average for the first six months of 2001. The higher portfolio balances included net cash generated from operations and the impact of increasing fixed income securities as a percentage of our investment portfolio in August 2001. As returns on fixed maturity portfolios are dependent on market interest rates and changes in interest rates are unpredictable, there is no certainty that past investment performance will be repeated in the future.

Net realized gains on investments of $5.9 million for the six months ended June 30, 2002 are compared to net realized losses on investments of $10.9 million for the six months ended June 30, 2001, resulting in an increase of $16.8 million. Included in net realized losses on investments for the six months ended June 30, 2002, is $1.2 million in unrealized losses on a limited partnership being recognized as other than temporary, and for the six months ended June 30, 2001 is $28.9 million in unrealized losses on equity securities being recognized as other than temporary. Net realized capital gains from sale of equities for the six months ended June 30, 2002 decreased $6.3 million, or 95%, to $0.3 million in 2002 from $6.6 million in 2001. Net realized capital gains from sale of fixed income securities decreased $4.6 million, or 40%, to $6.8 million in 2002 from $11.4 million in 2001. Net gains or losses on investments are influenced by market conditions when or if an investment is sold, and will vary from period to period.

The gain on sale of subsidiary operations of $25.0 million in the six months ended June 30, 2001 relates to the sale of our TRICARE business on May 31, 2001.

Interest expense increased $7.1 million, or 25%, primarily reflecting the issuance of our 6.00% Equity Security Units on November 2, 2001.

Amortization of goodwill and other intangible assets decreased $8.3 million, or 53%, from the six months ended June 30, 2001 to the six months ended June 30, 2002, primarily due to adoption of FAS 142 on January 1, 2002. See Note 3 to our June 30, 2002 unaudited consolidated financial statements for additional information.

Demutualization expenses associated with our conversion from a mutual insurance company to a stockholder owned insurance company on November 2, 2001 totaled $3.0 million in the six months ended June 30, 2001.

Income tax expense increased $33.4 million, or 49%, primarily due to increased income before taxes. Our effective income tax rate increased to 33.0% in the first six months of 2002 from 32.7% in the first six months of 2001. The 30 basis point increase in effective income tax rate is primarily due to the impact of higher taxable income on consistent amounts of net deductible permanent tax differences and a small increase in the state income tax expense partially offset by the impact of FAS 142.

Net income increased $63.0 million, or 44%, primarily due to the improvement in our operating results, higher net investment income and lower amortization of goodwill and other intangible assets resulting from the adoption of FAS 142 on January 1, 2002. Assuming FAS 142 had been in effect for the six months ended June 30, 2001, our net income would have increased $55.2 million, or 37%.

	Six Months Ended June 30
	Six Months Ended June 30						% Change
	2002			2001			% Change
	($ in Millions)
Operating Revenue	$	2,960.4		$	2,466.7		20	%
Operating Gain	$	115.6		$	85.0		36	%
Operating Margin		3.9	%		3.4	%	50	bp

Operating revenue increased $493.7 million, or 20%, in 2002 primarily due to premium rate increases, membership increases, particularly in Local Large Group fully insured business, Small Group and Medicare + Choice, and overall good service that contributed to retention of over 90% of our membership from June 30, 2001.

Operating gain increased $30.6 million, or 36%, in 2002 primarily due to revenue growth, effective expense control and better underwriting results in our Local Large group fully insured, Individual and Small Group businesses. Administrative expense increased at a slower rate than premiums as we gained operating efficiencies and leveraged our fixed costs over higher membership. These improvements in our operating gain resulted in a 50 basis point increase in operating margin to 3.9% in 2002.

	Six Months Ended June 30
	Six Months Ended June 30						% Change
	2002			2001			% Change
	($ in Millions)
Operating Revenue	$	1,979.1		$	1,758.7		13	%
Operating Gain	$	95.1		$	48.4		96	%
Operating Margin		4.8	%		2.8	%	200	bp

Operating revenue increased $220.4 million, or 13%, in 2002 primarily due to premium rate increases, particularly in Local Large Group and Small Group businesses, and higher membership in Small Group, Individual and Medicaid. In addition, retention of membership exceeded 90% as a result of good service.

Operating gain increased $46.7 million, or 96%, primarily due to favorable overall claims experience, particularly in Local Large Group fully-insured, Individual and Medicare Supplement businesses. These improvements in our operating gain resulted in a 200 basis point increase in operating margin to 4.8% in 2002.

On February 28, 2002, a subsidiary of Anthem Insurance, Anthem Health Plans of Maine, Inc., completed its purchase of the remaining 50% ownership interest in Maine Partners Health Plan, Inc. for an aggregate purchase price of $10.6 million. We had previously consolidated the financial results of this entity in our consolidated financial statements and recorded minority interest for the percentage we did not own.

	Six Months Ended June 30
	Six Months Ended June 30						% Change
	2002			2001			% Change
	($ in Millions)
Operating Revenue	$	457.2		$	356.9		28	%
Operating Gain	$	17.6		$	3.1		NM
Operating Margin		3.8	%		0.9	%	290	bp

Operating revenue increased $100.3 million, or 28%, primarily due to higher premium rates, particularly in Local Large Group fully-insured and Small Group businesses and higher membership in Individual, Local Large Group and Small Group businesses.

Operating gain increased $14.5 million to $17.6 million in 2002, primarily due to higher administrative fees associated with our National Accounts business, improved underwriting performance and higher membership in our Small Group business and higher average membership in our Local Large Group and Individual businesses. In addition, we were able to leverage our fixed costs over a significantly increased membership base. These improvements in our operating gain resulted in a 290 basis point increase in operating margin to 3.8% in 2002.

	Six Months Ended June 30
	Six Months Ended June 30						% Change
	2002			2001			% Change
	($ in Millions)
Operating Revenue	$	247.0		$	185.5		33	%
Operating Gain	$	25.2		$	15.9		58	%
Operating Margin		10.2	%		8.6	%	160	bp

Operating revenue increased $61.5 million, or 33%, primarily due to higher revenue at APM. APM's operating revenue grew primarily due to increased mail order prescription volume and the implementation of APM's pharmacy benefit programs in the first six months of 2001 by BCBS-CO/NV and BCBS-ME. Excluding our TRICARE business from 2001, mail service membership increased 17%, while retail service membership increased 12%. Excluding our TRICARE business from 2001, mail service prescription volume increased 31% and retail prescription volume increased 20%.

Operating gain increased $9.3 million, or 58%, primarily due to increased mail order prescription volume at APM and the leveraging of our fixed costs over increased membership. These improvements in our operating gain resulted in a 160 basis point increase in operating margin to 10.2% in 2002.

	Six Months Ended June 30
	Six Months Ended June 30						% Change
	2002			2001			% Change
	($ in Millions)
Operating Revenue	$	(57.3	)	$	227.9		NM
Operating Loss	$	(28.3	)	$	(19.1	)	(48	%)

Operating revenue decreased $285.2 million to $(57.3) million for the six months ended June 30, 2002 from $227.9 million for the six months ended June 30, 2001. Excluding intersegment operating revenue eliminations of $137.3 million in 2002 and $97.5 million in 2001, operating revenue decreased $245.4 million, or 75%, primarily due to the sale of our TRICARE operations. Excluding our TRICARE business from 2001 and intersegment operating revenue eliminations, operating revenue increased $17.8 million, or 29%, primarily due to additional revenue at AdminaStar Federal.

Operating loss increased $9.2 million primarily due to higher unallocated corporate expenses and the absence of TRICARE operating income. These unallocated expenses accounted for $42.2 million for the six months ended June 30, 2002 and $23.6 million for the six months ended June 30, 2001. This increase in unallocated corporate expenses is primarily related to higher incentive compensation costs as a result of better than planned operating results.

We consider some of our most important accounting policies to be those policies with respect to liabilities for unpaid life, accident and health claims, income taxes, goodwill and other intangible assets and our investment portfolio. Application of these and other accounting policies requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes and this discussion.

The most significant accounting estimate in our consolidated financial statements is our liability for unpaid life, accident and health claims. We establish liabilities for pending claims and claims incurred but not reported. We determine the amount of this liability for each of our business segments by following a detailed process that entails using both historical claim payment patterns as well as emerging medical cost trends to project claim liabilities. We also look back to assess how our prior year's estimates developed and to the extent appropriate, incorporate those findings in our current year projections. Since the average life of a claim is just a few months, current medical cost trends and utilization patterns are very important in establishing this liability.

In addition, the liability for unpaid life, accident and health claims includes reserves for premium deficiency losses which we recognize when it is probable that expected claims and loss adjustment expenses will exceed future premiums on existing health and other insurance contracts without consideration of investment income. For purposes of premium deficiency losses, contracts are deemed to be either short or long duration and are grouped in a manner consistent with our method of acquiring, servicing and measuring the profitability of such contracts.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires, among other things, the separate recognition, measured at currently enacted tax rates, of deferred tax assets and deferred tax liabilities for the tax effect of temporary differences between financial reporting and tax reporting. A valuation allowance must be established for deferred tax assets if it is "more likely than not" that all or a portion may be unrealized. See Note 13 to our December 31, 2001 audited consolidated financial statements for additional information.

We believe that our valuation allowance is sufficient and at each quarterly financial reporting date, we evaluate each of our gross deferred tax assets based on each of the five key elements that follow:

Further, because of challenges including industry-wide issues regarding both the timing and the amount of deductions, we have recorded reserves for possible exposure. To the extent we prevail in matters we have accrued for or are required to pay more than reserved, our future effective tax rate in any given period could be materially impacted. In addition, the Internal Revenue Service is currently examining two of our five open tax years.

On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 141, "Business Combinations," and Statement of Accounting Standards No. 142, "Goodwill and Other Intangible Assets." FAS 141 requires business combinations completed after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Under FAS 142, goodwill and other intangible assets (with indefinite lives) will not be amortized but will be tested for impairment at least annually. We completed our transitional impairment test of existing goodwill during the second quarter of 2002. This test involved the use of estimates related to the fair value of the business in which the goodwill had been allocated. There were no impairment losses as a result of this test. See Note 3 to our June 30, 2002 unaudited consolidated financial statements for additional information.

Our investment portfolio is carried at fair value. As a result, we evaluate our investment securities on a quarterly basis, using both quantitative and qualitative factors, to determine whether a decline in value is other than temporary. If any declines are determined to be other than temporary, we charge the losses to income.

Our cash receipts consist primarily of premiums and administrative fees, investment income and proceeds from the sale or maturity of our investment securities. Cash disbursements result mainly from policyholder benefit payments, administrative expenses and taxes. We also use cash for purchases of investment securities, capital expenditures and acquisitions. Cash outflows fluctuate because of uncertainties regarding the amount and timing of settlement of our liabilities for benefit claims and the timing of payments of operating expenses. Our investment strategy is to make prudent investments, consistent with insurance statutes and other regulatory requirements, with the intention of preserving our asset base. Cash flows could be adversely impacted by general business conditions including health care costs increasing more than premium rates, our ability to maintain favorable provider agreements, reduction in enrollment, changes in federal and state regulation, litigation risks and competition. We believe that cash flow from operations, together with the investment portfolio, will continue to provide sufficient liquidity to meet general operational needs, special needs arising from changes in financial position and changes in financial markets. We also have lines of credit totaling $1.0 billion to provide additional liquidity. We have made no borrowings under these facilities.

Cash Flow for the Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001

Net cash flow provided by operating activities was $243.4 million for the six months ended June 30, 2002 and $261.1 million for the six months ended June 30, 2001, a decrease of $17.7 million. This decrease is generally associated with the timing of receivables and disbursements, and it more than offset the increase in net income.

Net cash flow provided by investing activities was $53.2 million for the six months ended June 30, 2002 and net cash flow used in investing activities was $225.5 million for the six months ended June 30, 2001, an increase of $278.7 million. This increase was due primarily to higher cash balances held by our investment managers at June 30, 2002. Additionally, in 2002, we purchased the remaining 50% interest of Maine Partners Health Plan and we purchased Pro Behavioral Health, a Denver, Colorado-based behavioral health care company. These and other acquisitions resulted in cash used in investing activities of $18.1 million during 2002 compared to the $42.3 million cash provided by investing activities resulting primarily from the sale of our TRICARE operations during 2001.

Net cash flow used in financing activities was $37.3 million for the six months ended June 30, 2002. This activity was principally the result of our re-purchase of our common stock. There were no financing activities that impacted cash flow for the six months ended June 30, 2001.

We incurred cash requirements of approximately $1.2 billion for the Trigon merger, including both the cash portion of the purchase price and certain of our transaction costs. To fund this transaction, we issued $950.0 million of unsecured and unsubordinated notes with a weighted coupon of 6.50% on July 31, 2002 (see Note 6 to our June 30, 2002 unaudited consolidated financial statements). We also used available cash and sold investments to generate the remaining cash to complete the transaction. The total purchase price paid for the Trigon transaction was approximately $4.2 billion and included the issuance of approximately 39,007,625 shares of Anthem common stock, valued at $2.7 billion.

On May 29, 2002, we entered into a bridge loan agreement under which we could borrow up to $1.2 billion to fund the transaction with Trigon. We reduced the amount available under this bridge loan to $600.0 million effective July 2, 2002 when we amended and restated our revolving credit facilities. Immediately following the Trigon acquisition, we terminated this bridge facility.

On July 2, 2002 we amended and restated revolving credit facilities of up to $1.0 billion with our lender group. Under one facility, which expires on November 5, 2006, we may borrow up to $400.0 million. Under the other facility, which expires July 1, 2003, we may borrow up to $600.0 million. Any amounts outstanding under this facility at July 1, 2003 (except amounts which bear interest rates determined by a competitive bidding process) convert to a one-year term loan at our option. Borrowings under both credit facilities bear interest at rates determined under two interest rate options or through a competitive bid process. The first option is a floating rate equal to the greater of the prime rate or the federal funds rate plus one-half percent. The second option is a floating rate equal to LIBOR plus a margin determined by reference to the ratings of our senior unsecured debt. Under the competitive bid process, borrowings may bear interest at floating rates determined by reference to LIBOR, or at fixed rates. Our ability to borrow under these credit facilities is subject to typical conditions and to compliance with certain financial ratios. We terminated our previous revolving credit facilities totaling $800.0 million and our two additional agreements for aggregate additional borrowings of $135.0 million on July 2, 2002. Anthem Insurance Companies, Inc.'s, or Anthem Insurance's, commercial paper program has been discontinued as of July 2, 2002. No amounts were outstanding under the current or prior facilities as of June 30, 2002 or December 31, 2001.

Additional future liquidity needs may include acquisitions, operating expenses, common stock repurchases and capital contributions to our subsidiaries and will include interest and contract fee payments on our debt. We anticipate that we will purchase BCBS-KS with cash from current operations, pending the ultimate outcome of the appeal of the Kansas Insurance Commissioner's decision (see Note 2 to our June 30, 2002 unaudited consolidated financial statements). We plan to use all or any combination of the following to fund our liquidity needs: cash from operations, our investment portfolio, new borrowings under our credit facilities and future equity and debt offerings. Our source of liquidity would be determined at the time of need, based on market conditions at that time.

Generally, dividends paid by a regulated insurance company in any 12-month period are limited to the greater or lesser (depending on state statute) of the prior year's statutory net income or 10% of statutory surplus. Dividends in excess of this amount are classified as extraordinary and require prior approval of the respective departments of insurance.

We are the parent company of Anthem Insurance and the newly formed entity Anthem Southeast. Among our sources of liquidity are dividends from Anthem Insurance and Anthem Southeast. In 2001, Anthem Insurance received $368.1 million in dividends from its operating subsidiaries. Then in April 2002, Anthem Insurance paid us an ordinary dividend of $400.0 million. Anthem Southeast will pay us dividends of $125.0 million during the third quarter of 2002. In addition, we expect dividends of approximately $300.0 million to be available to be paid to us from Anthem Insurance in 2003.

Our board of directors approved a common stock repurchase program under which we may purchase up to $400.0 million of shares from time to time, subject to business and market conditions. Subject to applicable law, shares may be repurchased in the open market and in negotiated transactions for a period of twelve months beginning February 6, 2002. Through August 5, 2002, we had repurchased 557,500 shares at a cost of $37.5 million.

Our subsidiaries' states of domicile have statutory risk-based capital, or RBC, requirements for health and other insurance companies based on the RBC Model Act. These RBC requirements are intended to assess the capital adequacy of life and health insurers, taking into account the risk characteristics of an insurer's investments and products. The RBC Model Act sets forth the formula for calculating the RBC requirements which are designed to take into account asset risks, insurance risks, interest rate risks and other relevant risks with respect to an individual insurance company's business. In general, under these laws, an insurance company must submit a report of its RBC level to the state insurance department or insurance commissioner, as appropriate, as of the end of the previous calendar year.

Risk-based capital standards will be used by regulators to set in motion appropriate regulatory actions relating to insurers that show indications of weak or deteriorating conditions. It also provides an additional standard for minimum capital requirements that companies should meet to avoid being placed in rehabilitation or liquidation.

Our risk based capital as of December 31, 2001, which was the most recent date for which compliance was required, was substantially in excess of all mandatory RBC thresholds.

This management's discussion and analysis contains certain forward-looking information. Words such as "expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)", "estimate(s)", "should", "intend(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties may include: trends in healthcare costs and utilization rates; our ability to secure sufficient premium rate increases; competitor pricing below market trends of increasing costs; increased government regulation of health benefits and managed care; significant acquisitions or divestitures by major competitors; introduction and utilization of new prescription drugs and technology; a downgrade in our financial strength ratings; litigation targeted at health benefits companies; our ability to contract with providers consistent with past practice; our ability to achieve expected synergies and operating efficiencies in the Trigon acquisition and to successfully integrate our operations; our expectations regarding the accounting and tax treatments of the transaction and the value of the transaction consideration; and general economic downturns. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The primary objective of our investment strategy is the preservation of our asset base and the maximization of portfolio income given an acceptable level of risk. Our portfolio is exposed to three primary sources of risk: interest rate risk, credit risk and market valuation risk. No material changes to any of these risks have occurred since December 31, 2001. For a more detailed discussion of market risk, refer to Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2001.

A number of managed care organizations have been sued in class action lawsuits asserting various causes of action under federal and state law. These lawsuits typically allege that the defendant managed care organizations employ policies and procedures for providing health care benefits that are inconsistent with the terms of the coverage documents and other information provided to their members, and because of these misrepresentations and practices, a class of members has been injured in that they received benefits of lesser value than the benefits represented to and paid for by such members. Two such proceedings which allege various violations of the Employee Retirement Income Security Act of 1974 ("ERISA") have been filed in Connecticut against Anthem and/or our Connecticut subsidiary. One proceeding, The State of Connecticut v. Anthem Blue Cross and Blue Shield of Connecticut, Anthem Health Plans, Inc., et al., No. 3:00 CV 1716 (AWT), filed on September 7, 2000 in the United States District Court, District of Connecticut, was brought by the Connecticut Attorney General on behalf of a purported class of HMO and Point of Service members in Connecticut. No monetary damages are sought, although the suit does seek injunctive relief from the court to preclude us from allegedly utilizing arbitrary coverage guidelines, making late payments to providers or members, denying coverage for medically necessary prescription drugs and misrepresenting or failing to disclose essential information to enrollees. The complaint contends that these alleged policies and practices are a violation of ERISA. A second proceeding, William Strand v. Anthem Blue Cross and Blue Shield of Connecticut, Anthem Health Plans, Inc., et al., No. 3:00 CV 2037 (SRU), filed on October 20, 2000 in the United States District Court, District of Connecticut, was brought on behalf of a purported class of HMO and Point of Service members in Connecticut and elsewhere, and seeks injunctive relief to preclude us from allegedly making coverage decisions relating to medical necessity without complying with the express terms of the policy documents, and unspecified monetary damages (both compensatory and punitive).

In addition, our Connecticut subsidiary is a defendant in three class action lawsuits brought on behalf of professional providers in Connecticut. Edward Collins, M.D., et al. v. Anthem Health Plans, Inc., No. CV-99 0156198 S, was filed on December 14, 1999, in the Superior Court Judicial District of Waterbury, Connecticut. Stephen R. Levinson, M.D., Karen Laugel, M.D. and J. Kevin Lynch, M.D. v. Anthem Health Plans, Inc. d/b/a Anthem Blue Cross and Blue Shield of Connecticut, No. 3:01 CV 426 (JBA), was filed on February 14, 2001 in the Superior Court Judicial District of New Haven, Connecticut. Connecticut State Medical Society v. Anthem Health Plans, Inc., No. 3:01 CV 428 (JBA) was filed on February 14, 2001 in the Superior Court Judicial District of New Haven, Connecticut. The suits allege that the Connecticut subsidiary has breached its contracts by, among other things, allegedly failing to pay for services in accordance with the terms of the contracts. The suits also allege violations of the Connecticut Unfair Trade Practices Act, breach of the implied duty of good faith and fair dealing, negligent misrepresentation and unjust enrichment. The Collins and Levinson suits seek injunctive relief. Collins seeks an accounting under the terms of the provider agreements and injunctive relief prohibiting us from continuing the unfair actions alleged in the complaint and violating its agreements. Levinson seeks permanent injunctive relief prohibiting us from, among other things, utilizing methods to reduce reimbursement of claims, paying claims in an untimely fashion and providing inadequate communication with regards to denials and appeals. Both of the suits seek unspecified monetary damages (both compensatory and punitive). The third suit, brought by the Connecticut State Medical Society, seeks the same injunctive relief as the Levinson case, but no monetary damages.

On July 19, 2001, the court in the Collins suit certified a class as to three of the plaintiff's fifteen allegations. The class is defined as those physicians who practice in Connecticut or group practices

which are located in Connecticut that were parties to either a Participating Physician Agreement or a Participating Physicians Group Agreement with Anthem and/or its Connecticut subsidiary during the period from 1993 to the present, excluding risk-sharing arrangements and certain other contracts. The claims which were certified as class claims are: Anthem's alleged failure to provide plaintiffs and other similarly situated physicians with consistent medical utilization/quality management and administration of covered services by paying financial incentive and performance bonuses to providers and Anthem staff members involved in making utilization management decisions; an alleged failure to maintain accurate books and records whereby improper payments to the plaintiffs were made based on claim codes submitted; and an alleged failure to provide senior personnel to work with plaintiffs and other similarly situated physicians. We have appealed the class certification decision.

We intend to vigorously defend these proceedings. Anthem denies all the allegations set forth in the complaints and has asserted defenses, including improper standing to sue, failure to state a claim and failure to exhaust administrative remedies. All of the proceedings are in the early stages of litigation, and their ultimate outcomes cannot presently be determined.

On October 10, 2001, the Connecticut State Dental Association along with five dental providers filed suit against our Connecticut subsidiary. Connecticut State Dental Association, Dr. Martin Rutt, Dr. Michael Egan, Dr. Sheldon Natkin, Dr. Suzanna Nemeth, and Dr. Bruce Tandy v. Anthem Health Plans, Inc. d/b/a Anthem Blue Cross and Blue Shield of Connecticut was filed in the Superior Court Judicial District of Hartford, Connecticut. On November 9, 2001, this suit was, with the consent of the parties, voluntarily withdrawn without prejudice. The suit alleged that our Connecticut subsidiary violated the Connecticut Unfair Trade Practices Act by allegedly unilaterally altering fee schedules without notice or a basis to do so, instituting unfair and deceptive cost containment measures and refusing to enroll new providers unless they agreed to participate in all available networks. The plaintiffs sought declaratory relief that the practices alleged in the complaint constituted deceptive and unfair trade practices. A permanent injunction was also sought prohibiting us from, among other things, failing and refusing to inform network providers of the methodology supporting our fee schedules and substituting our medical judgment for that of dental providers. The suit requested costs and attorney fees, but no other specified monetary damages. Anthem denied the allegations set forth in this complaint and vigorously defended this suit.

On April 15, 2002, the Connecticut State Dental Association and two dental providers re-filed the claims as two separate suits. Connecticut State Dental Association v. Anthem Health Plans, Inc. d/b/a Anthem Blue Cross Blue Shield of Connecticut was filed in the Superior Court Judicial District of New Haven, Connecticut. Martin Rutt, D.D.S and Michael Egan, D.D.S, et al., v. Anthem Health Plans, Inc. d/b/a Anthem Blue Cross Blue Shield of Connecticut was also filed in the Superior Court Judicial District of New Haven, Connecticut. The suits make many of the same allegations as the prior withdrawn suit. The Rutt suit is filed as a purported class action. Both suits seek injunctive relief, as well as unspecified monetary damages (both compensatory and punitive), along with costs and attorneys' fees. Anthem denies the allegations set forth in these complaints and intends to vigorously defend these suits.

Following our purchase of BCBS-ME, the Attorney General of Maine and Consumers for Affordable Health Care filed administrative appeals challenging the Superintendent of Insurance's (the "Superintendent") decision approving the conversion of BCBS-ME to a stock insurer, which was a required step before the acquisition. Both the Attorney General and the consumers group filed a petition for administrative review seeking, among other things, a determination that the decision of the Superintendent in regard to the application of BCBS-ME to convert to a stock insurer was in violation of statute or unsupported by substantial evidence on the record. Consumers for Affordable Health Care, et al. v. Superintendent of Insurance, et al., Nos. AP-00-37, AP-00-42 (Consolidated). On December 21, 2001, the court issued an opinion affirming the decision of the Superintendent approving the conversion of BCBS-ME and the subsequent acquisition by Anthem. The Consumers for Affordable Health Care have appealed this decision to the Maine Supreme Judicial Court. The Attorney General

did not appeal the decision, and the appeals time has passed. We do not believe that the Consumers' appeal will have a material adverse effect on our consolidated financial position or results of operations.

On March 11, 1998, Anthem and its Ohio subsidiary, Community Insurance Company ("CIC") were named as defendants in a lawsuit, Robert Lee Dardinger, Executor of the Estate of Esther Louise Dardinger v. Anthem Blue Cross and Blue Shield, et al., filed in the Licking County Court of Common Pleas in Newark, Ohio. The plaintiff sought compensatory damages and unspecified punitive damages in connection with claims alleging wrongful death, bad faith and negligence arising out of our denial of certain claims for medical treatment for Ms. Dardinger. On September 24, 1999, the jury returned a verdict for the plaintiff, awarding $1,350 (actual dollars) for compensatory damages, $2.5 million for bad faith in claims handling and appeals processing, $49.0 million for punitive damages and unspecified attorneys' fees in an amount to be determined by the court. The court later granted attorneys' fees of $0.8 million. Both companies filed an appeal of the verdict on November 19, 1999. On May 22, 2001, the Ohio Court of Appeals (Fifth District) affirmed the jury award of $1,350 for breach of contract against CIC, affirmed the award of $2.5 million compensatory damages for bad faith in claims handling and appeals processing against CIC, but dismissed the claims and judgments against Anthem. The court also reversed the award of $49.0 million in punitive damages against both Anthem and CIC, and remanded the question of punitive damages against CIC to the trial court for a new trial. Anthem and CIC, as well as the plaintiff, appealed certain aspects of the decision of the Ohio Court of Appeals. On October 10, 2001, the Supreme Court of Ohio agreed to hear the plaintiff's appeal, including the question of punitive damages, and denied the cross-appeals of Anthem and CIC. In December 2001, CIC paid the award of $2.5 million compensatory damages for bad faith and the award of $1,350 for breach of contract, plus accrued interest. On April 24, 2002 the Supreme Court of Ohio held oral arguments. The ultimate outcome of the matters that are the subject of the pending appeal cannot be determined at this time.

Anthem's primary Ohio subsidiary and primary Kentucky subsidiary were sued on June 27, 2002, in their respective state courts. The suits were brought by the Academy of Medicine of Cincinnati, as well as individual physicians, and purport to be class action suits brought on behalf of all physicians practicing in the greater Cincinnati area and in the Northern Kentucky area, respectively. In addition to the Anthem subsidiaries, both suits name Aetna, United Healthcare and Humana as defendants. The first suit, captioned Academy of Medicine of Cincinnati and Luis Pagani, M.D. v. Aetna Health, Inc., Humana Health Plan of Ohio, Inc., Anthem Blue Cross and Blue Shield, and United Health Care of Ohio, Inc.,No. A02004947 was filed on June 27, 2002 in the Court of Common Pleas, Hamilton County, Ohio. The second suit, captioned Academy of Medicine of Cincinnati and A. Lee Greiner,M.D., Victor Schmelzer, M.D., and Karl S. Ulicny, Jr., M.D. v. Aetna Health, Inc., Humana, Inc., Anthem Blue Cross and Blue Shield, and United Health Care, Inc.,No. 02-CI-903 was filed on June 27, 2002 in the Boone County, Kentucky Circuit Court.

Both suits allege that the four companies acted in combination and collusion with one another to enter into illegal agreements with hospitals in the area, under which the defendants agreed to reduce the reimbursement rates paid to physicians practicing medicine at these hospitals and to physicians in the area. The suits allege that as a direct result of the defendants' alleged anticompetitve actions, health care in the area has suffered, namely: that there are fewer hospitals; physicians are rapidly leaving the area; medical practices are unable to hire new physicians; and, from the perspective of the public, the availability of health care has been significantly reduced. Each suit alleges that these actions violate the respective state's antitrust and unfair competition laws, and each suit seeks class certification, compensatory damages, attorneys' fees, and injunctive relief to prevent the alleged anti-competitive behavior against the class in the future. These suits are in the preliminary stages. We intend to vigorously defend the suits and believe that any liability from these suits will not have a material adverse effect on our consolidated financial position or results of operations.

On October 25, 1995, Anthem Insurance and two Indiana affiliates were named as defendants in a lawsuit titled Dr. William Lewis, et al. v. Associated Medical Networks, Ltd., et al., that was filed in the Superior Court of Lake County, Indiana. The plaintiffs are three related health care providers. The health care providers assert that we failed to honor contractual assignments of health insurance benefits and violated equitable liens held by the health care providers by not paying directly to them the health insurance benefits for medical treatment rendered to patients who had insurance with us. We paid our customers' claims for the health care providers' services by sending payments to our customers as called for by their insurance policies, and the health care providers assert that the patients failed to use the insurance benefits to pay for the health care providers' services. The plaintiffs filed the case as a class action on behalf of similarly situated health care providers and seek compensatory damages in unspecified amounts for the insurance benefits not paid to the class members, plus prejudgment interest. The case was transferred to the Superior Court of Marion County, Indiana, where it is now pending. On December 3, 2001, the Court entered summary judgment for us on the health care providers' equitable lien claims. The Court also entered summary judgment for us on the health care providers' contractual assignments claims to the extent that the health care providers do not hold effective assignments of insurance benefits from patients. On the same date, the Court certified the case as a class action. As limited by the summary judgment order, the class consists of health care providers in Indiana who (1) were not in one of our networks, (2) did not receive direct payment from us for services rendered to a patient covered by one of our insurance policies that is not subject to ERISA, (3) were not paid by the patient (or were otherwise damaged by our payment to our customer instead of to the health care provider), and (4) had an effective assignment of insurance benefits from the patient. We filed a motion seeking an interlocutory appeal of the class certification order in the Indiana Court of Appeals. On May 20, 2002 the Indiana Court of Appeals granted our motion seeking an interlocutory appeal of the class certification order. In any event, we intend to continue to vigorously defend the case and believe that any liability that may result from the case will not have a material adverse effect on our consolidated financial position or results of operations.

In addition to the lawsuits described above, we are involved in other pending and threatened litigation of the character incidental to our business or arising out of our insurance and investment operations, and are from time to time involved as a party in various governmental and administrative proceedings. We believe that any liability that may result from any one of these actions is unlikely to have a material adverse effect on our financial position or results of operations.

Anthem, like a number of other Blue Cross and Blue Shield companies, serves as a fiscal intermediary providing administrative services for Medicare Parts A and B. The fiscal intermediaries for these programs receive reimbursement for certain costs and expenditures, which are subject to adjustment upon audit by the federal Centers for Medicare and Medicaid Services. The laws and regulations governing fiscal intermediaries for the Medicare program are complex, subject to interpretation and can expose an intermediary to penalties for non-compliance. Fiscal intermediaries may be subject to criminal fines, civil penalties or other sanctions as a result of such audits or reviews. In the last five years, at least eight Medicare fiscal intermediaries have made payments to settle issues raised by such audits and reviews. These payments have ranged from $0.7 million to $51.6 million, plus a payment by one company of $144.0 million. While we believe we are currently in compliance in all material respects with the regulations governing fiscal intermediaries, there are ongoing reviews by the federal government of Anthem's activities under certain of its Medicare fiscal intermediary contracts.

AdminaStar Federal, Inc., one of our subsidiaries, has received several subpoenas prior to May 2000 from the Office of Inspector General, or OIG, and the U.S. Department of Justice, seeking documents and information concerning its responsibilities as a Medicare Part B contractor in its Kentucky office, and requesting certain financial records from AdminaStar Federal, Inc. and from us

related to our Medicare fiscal intermediary Part A and Part B operations. We have made certain disclosures to the government relating to our Medicare Part B operations in Kentucky. We were advised by the government that, in conjunction with its ongoing review of these matters, the government has also been reviewing separate allegations made by individuals against AdminaStar, which are included within the same timeframe and involve issues arising from the same nucleus of operative facts as the government's ongoing review. We are not in a position to predict either the ultimate outcome of these reviews or the extent of any potential exposure should claims be made against us. However, we believe any fines or penalties that may arise from these reviews would not have a material adverse effect on our consolidated financial position or results of operations of the Company.

As a BCBSA licensee, we participate in a nationwide contract with the federal Office of Personnel Management to provide coverage to federal employees and their dependents in our core eight-state area. The program is called the Federal Employee Program, or FEP. On July 11, 2001, we received a subpoena from the OIG, Office of Personnel Management, seeking certain financial documents and information, including information concerning intercompany transactions, related to our operations in Ohio, Indiana and Kentucky under the FEP contract. The government has advised us that, in conjunction with its ongoing review, the government is also reviewing a separate allegation made by an individual against our FEP operations, which is included within the same timeframe and involves issues arising from the same nucleus of operative facts as the government's ongoing review. We are currently cooperating with the OIG and the U.S. Department of Justice on these matters. The ultimate outcome of these reviews can not be determined at this time.

We guaranteed certain financial contingencies of our subsidiary, Anthem Alliance Health Insurance Company ("Anthem Alliance"), under a contract between Anthem Alliance and the United States Department of Defense. Under that contract, Anthem Alliance managed and administered the TRICARE Managed Care Support Program for military families from May 1, 1998 through May 31, 2001. The contract required Anthem Alliance, as the prime contractor, to assume certain risks in the event, and to the extent, the actual cost of delivering health care services exceeded the health care cost proposal submitted by Anthem Alliance (the "Health Care Risk"). The contract has a five-year term, but was transferred to a third party, effective May 31, 2001. We guaranteed Anthem Alliance's assumption of the Health Care Risk, which is capped by the contract at $20.0 million annually and $75.0 million cumulatively over the contract period. Through December 31, 2000, Anthem Alliance had subcontracts with two other BCBS companies not affiliated with us by which the subcontractors agreed to provide certain services under the contract and to assume approximately 50% of the Health Care Risk. Effective January 1, 2001, one of those subcontracts terminated by mutual agreement of the parties, which increased Anthem Alliance's portion of the Health Care Risk to 90%. Effective May 1, 2001, the other subcontract was amended to eliminate the Health Care Risk sharing provision, which resulted in Anthem Alliance assuming 100% of the Health Care Risk for the period from May 1, 2001 to May 31, 2001. There was no call on the guarantee for the period from May 1, 1998 to April 30, 1999 (which period is now "closed"), and we do not anticipate a call on the guarantee for the periods beginning May 1, 1999 through May 31, 2001 (which periods remain "open" for possible review by the Department of Defense).

On October 29, 2001, the Securities and Exchange Commission declared effective (i) the Registration Statement on Form S-1 (Registration No. 333-67714) of the Company with respect to the Company's Common Stock; and (ii) the Registration Statement on Form S-1 (Registration No. 333-70566) of the Company with respect to the Company's 6.00% Equity Security Units (the "Units"). In addition, on October 29, 2001, the Company filed a Registration Statement on Form S-1

pursuant to Rule 462(b) of the Securities Act of 1933 (Registration No. 333-72438) to increase the amount of the Common Stock offering, which was effective upon filing.

The offering of the Common Stock closed on November 2, 2001 and resulted in gross proceeds of $1,987.2 million (including $259.2 million of gross proceeds attributable to the shares of Common Stock sold pursuant to exercise of the underwriters' over-allotment option), of which $91.4 million was applied to the underwriting discount. The proceeds to the Company equaled $1,895.8 million. Of such amount, $28.9 million was contributed to Anthem Insurance and $5.4 million has been used to pay additional expenses of the Common Stock offering and the demutualization. Of the resulting net proceeds to the Company from the Common Stock offering, $1,843.8 million has been used to fund payments to eligible statutory members of Anthem Insurance who received cash instead of shares of Common Stock in the demutualization of Anthem Insurance (including payments to eligible statutory members pursuant to the "top up provision" of the plan of conversion), and the remaining net proceeds of $17.7 million retained by the Company will be available for general corporate purposes. In February 2002, $3.9 million of the $17.7 million remaining net proceeds was used for interest payments on the Units. In May 2002, an additional $3.4 million of net proceeds was used for interest payments on the Units. The $10.4 million remaining balance of net proceeds was applied toward the repurchase of shares of common stock by the Company during May 2002.

The offering of the Units closed on November 2, 2001 and resulted in gross proceeds of $230.0 million (including $30.0 million of gross proceeds attributable to the Units sold pursuant to exercise of the underwriters' over-allotment option), $8.6 million of which was applied to the underwriting discount and $1.6 million for other expenses related to the Units offering. The net proceeds to the Company equaled $219.8 million which was used to fund payments to eligible statutory members of Anthem Insurance who received cash instead of shares of Common Stock in the demutualization of Anthem Insurance.

At the Company's Annual Meeting of Shareholders held on May 13, 2002, the following persons were elected to the Board of Directors:

	Votes For	Votes Withheld
Susan B. Bayh	64,556,783	283,208
Allan B. Hubbard	64,629,443	210,548
William G. Mays	64,629,077	210,914
Donald W. Riegle, Jr.	64,553,468	286,523
William J. Ryan	64,630,034	209,957

The following directors' term of office continued after the Annual Meeting of Shareholders:

Larry C. Glasscock, William B. Hart, Victor S. Liss, L. Ben Lytle, James W. McDowell, Jr., B. LaRae Orullian, George A. Schaefer, Jr., Dennis J. Sullivan, Jr.

The matters voted upon at the Annual Meeting of Shareholders and the results of the voting were as follows:

Votes For		63,768,000
Votes Against		855,546
Votes Abstained		215,557

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.

b) Current Reports on Form 8-K filed during the quarter covered by this Form 10-Q are as follows:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			June 30, 2002			December 31, 2001
			(Unaudited)
Assets
Current assets:
	Investments available-for-sale, at fair value:
		Fixed maturity securities	$	3,831.5		$	3,882.7
		Equity securities		168.5			189.1

				4,000.0			4,071.8
	Cash and cash equivalents			665.7			406.4
	Premium and self funded receivables			596.1			544.7
	Reinsurance receivables			77.3			76.7
	Other receivables			272.6			169.1
	Other current assets			58.5			31.2

Total current assets				5,670.2			5,299.9
Restricted cash and investments				40.4			39.6
Property and equipment				396.5			402.3
Goodwill				350.0			338.1
Other intangible assets				121.9			129.3
Other noncurrent assets				62.4			67.4

Total assets			$	6,641.4		$	6,276.6

Liabilities and shareholders' equity
Liabilities
Current liabilities:
	Policy liabilities:
		Unpaid life, accident and health claims	$	1,517.5		$	1,411.3
		Future policy benefits		255.5			247.9
		Other policyholder liabilities		56.6			57.3

	Total policy liabilities			1,829.6			1,716.5
	Unearned income			302.7			320.6
	Accounts payable and accrued expenses			247.3			331.0
	Bank overdrafts			304.7			310.7
	Income taxes payable			30.5			52.4
	Other current liabilities			377.3			231.4

Total current liabilities				3,092.1			2,962.6
Long term debt, less current portion				819.3			818.0
Retirement benefits				98.4			96.1
Other noncurrent liabilities				400.9			339.9

Total liabilities				4,410.7			4,216.6
Shareholders' equity
Preferred stock, without par value, shares authorized—100,000,000; shares issued and outstanding—none				—			—
Common stock, par value $0.01, shares authorized—900,000,000; shares issued and outstanding: 2002, 102,892,103; 2001, 103,295,675				1.1			1.1
Additional paid in capital				1,957.1			1,960.8
Retained earnings				234.8			55.7
Unearned restricted stock compensation				(6.4	)		—
Accumulated other comprehensive income				44.1			42.4

Total shareholders' equity				2,230.7			2,060.0

Total liabilities and shareholders' equity			$	6,641.4		$	6,276.6

		Three Months Ended June 30					Six Months Ended June 30
		2002		2001			2002		2001
Revenues
Premiums		$	2,601.9	$	2,273.9		$	5,131.4	$	4,542.8
Administrative fees			216.1		217.3			417.1		430.3
Other revenue			19.8		11.1			37.9		22.6

	Total operating revenue		2,837.8		2,502.3			5,586.4		4,995.7
Net investment income			59.7		55.1			120.2		109.0
Net realized gains (losses) on investments			2.6		(24.1	)		5.9		(10.9	)
Gain on sale of subsidiary operations			—		25.0			—		25.0

			2,900.1		2,558.3			5,712.5		5,118.8

Expenses
Benefit expense			2,174.8		1,936.7			4,311.2		3,870.8
Administrative expense			544.4		492.2			1,050.0		991.6
Interest expense			17.5		13.6			35.1		28.0
Amortization of goodwill and other intangible assets			4.1		8.0			7.4		15.7
Demutualization expenses			—		2.4			—		3.0

			2,740.8		2,452.9			5,403.7		4,909.1

Income before income taxes and minority interest			159.3		105.4			308.8		209.7
Income taxes			52.8		34.2			102.0		68.6
Minority interest (credit)			0.3		(1.2	)		0.8		(1.9	)

Net income		$	106.2	$	72.4		$	206.0	$	143.0

Net income per share(1)
Basic		$	1.03	$	0.70		$	2.00	$	1.38

Diluted		$	1.01	$	0.70		$	1.96	$	1.38

	Common Stock
	Common Stock										Unearned Restricted Stock Compensation			Accumulated Other Comprehensive Income
	Number of Shares		Par Value		Additional Paid in Capital			Retained Earnings			Unearned Restricted Stock Compensation			Accumulated Other Comprehensive Income		Total Shareholders' Equity (1)
Balance at December 31, 2001	103,295,675		$	1.1	$	1,960.8		$	55.7		$	—		$	42.4	$	2,060.0
Net income	—			—		—			206.0			—			—		206.0
Change in net unrealized gains on investments	—			—		—			—			—			1.7		1.7

Comprehensive income																	207.7
Repurchase and retirement of common stock	(557,500	)		—		(10.6	)		(26.9	)		—			—		(37.5	)
Issuance of common stock for restricted stock awards, net of amortization, and stock options exercised	93,700			—		6.7			—			(6.4	)		—		0.3
Adjustments related to the demutualization	60,228			—		0.2			—			—			—		0.2

Balance at June 30, 2002	102,892,103		$	1.1	$	1,957.1		$	234.8		$	(6.4	)	$	44.1	$	2,230.7

Balance at December 31, 2000	—		$	—	$	—		$	1,848.6		$	—		$	71.2	$	1,919.8
Net income	—			—		—			143.0			—			—		143.0
Change in net unrealized gains on investments	—			—		—			—			—			1.1		1.1

Comprehensive income																	144.1

Balance at June 30, 2001	—		$	—	$	—		$	1,991.6		$	—		$	72.3	$	2,063.9

			Six Months Ended June 30
			2002			2001
Operating activities
Net income			$	206.0		$	143.0
Adjustments to reconcile net income to net cash provided by operating activities:
	Net realized (gains) losses on investments			(5.9	)		10.9
	Gain on sale of subsidiary operations			—			(25.0	)
	Depreciation, amortization and accretion			55.9			61.2
	Deferred income taxes			29.9			16.9
	Loss on sale of assets			—			2.9
	Changes in operating assets and liabilities, net of effect of purchases and divestitures:
		Restricted cash and investments		(0.8	)		(3.3	)
		Receivables		(67.8	)		12.2
		Other assets		(13.3	)		(3.7	)
		Policy liabilities		113.2			27.0
		Unearned income		(17.9	)		64.7
		Accounts payable and accrued expenses		(83.7	)		6.7
		Other liabilities		58.5			(63.4	)
		Income taxes		(30.7	)		12.5

	Net cash provided by continuing operations			243.4			262.6
	Net cash used in discontinued operations			—			(1.5	)

Cash provided by operating activities				243.4			261.1
Investing activities
Purchases of investments				(1,446.3	)		(1,957.9	)
Sales or maturities of investments				1,559.0			1,721.4
Purchases of subsidiaries, net of cash acquired				(18.1	)		(2.7	)
Sale of subsidiaries, net of cash sold				—			45.0
Proceeds from sale of property and equipment				1.5			0.9
Purchases of property and equipment				(42.9	)		(32.2	)

Cash provided by (used in) investing activities				53.2			(225.5	)
Financing activities
Repurchase and retirement of common stock				(37.5	)		—
Adjustment to payments to eligible statutory members in the demutualization				0.2			—

Cash used in financing activities				(37.3	)		—

Change in cash and cash equivalents				259.3			35.6
Cash and cash equivalents at beginning of period				406.4			203.3

Cash and cash equivalents at end of period			$	665.7		$	238.9

		Three Months Ended June 30				Six Months Ended June 30
		2002		2001		2002		2001
Revenues		$	3,731.6	$	3,284.3	$	7,376.1	$	6,575.8
Net income			118.4		80.8		235.8		166.2
Pro forma earnings per share:
	Basic	$	0.83	$	0.57	$	1.66	$	1.17
	Diluted		0.81		N/A		1.61		N/A
Pro forma shares outstanding:
	Basic		142,035,386		142,303,300		142,182,339		142,303,300
	Diluted		146,608,036		N/A		146,262,144		N/A

	Midwest		East		West		Specialty		Total
Balance as of January 1, 2002	$	133.6	$	121.5	$	74.9	$	8.1	$	338.1
Goodwill acquired		—		7.7		—		4.2		11.9

Balance as of June 30, 2002	$	133.6	$	129.2	$	74.9	$	12.3	$	350.0

		June 30, 2002							December 31, 2001
		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with finite lives:
	Subscriber base	$	64.8	$	(35.3	)	$	29.5	$	64.7	$	(29.7	)	$	35.0
	Provider and hospital networks		24.2		(6.2	)		18.0		24.2		(5.0	)		19.2
	Other		10.8		(3.9	)		6.9		10.8		(3.2	)		7.6

			99.8		(45.4	)		54.4		99.7		(37.9	)		61.8
Intangible asset with indefinite life:
	Blue Cross and Blue Shield trademarks		67.5		—			67.5		67.5		—			67.5

		$	167.3	$	(45.4	)	$	121.9	$	167.2	$	(37.9	)	$	129.3

	Three Months Ended June 30, 2002	Six Months Ended June 30, 2002
Denominator for basic earnings per share—weighted average shares	103,027,761	103,174,714
Effect of dilutive securities—employee stock options	650,550	567,932
Effect of dilutive securities—incremental shares from conversion of Equity Security Unit purchase contracts	1,832,413	1,422,186

Denominator for diluted earnings per share	105,510,724	105,164,832

	Reportable Segments
	Midwest		East		West		Specialty		Other and Eliminations			Total
Three Months Ended June 30, 2002
Operating revenue from external customers	$	1,508.6	$	993.8	$	236.0	$	55.8	$	43.6		$	2,837.8

Intersegment revenues	$	—	$	—	$	—	$	71.1	$	(71.1	)	$	—

Operating gain (loss)	$	61.5	$	52.9	$	10.1	$	12.8	$	(18.7	)	$	118.6

		June 30
		June 30			% Change
		2002	2001	Change	% Change
		(In Thousands)
Segment
Midwest		5,132	4,826	306	6	%
East		2,346	2,216	130	6
West		843	737	106	14

	Total	8,321	7,779	542	7	%

Customer Type
Local Large Group		2,807	2,786	21	1	%
Small Group		820	807	13	2
Individual		755	674	81	12
National Accounts (1)		3,255	2,877	378	13
Medicare + Choice		103	101	2	2
Federal Employee Program		447	426	21	5
Medicaid		134	108	26	24

	Total	8,321	7,779	542	7	%

Funding Arrangement
Self-funded		4,380	4,039	341	8	%
Fully insured		3,941	3,740	201	5

	Total	8,321	7,779	542	7	%

		Three Months Ended June 30						Change
		2002			2001			$			%
		($in Millions)
Operating revenue and premium equivalents(1)		$	3,961.9		$	3,493.0		$	468.9		13	%

Premiums		$	2,601.9		$	2,273.9		$	328.0		14	%
Administrative fees			216.1			217.3			(1.2	)	(1)
Other revenue			19.8			11.1			8.7		78

	Total operating revenue		2,837.8			2,502.3			335.5		13
Benefit expense			2,174.8			1,936.7			238.1		12
Administrative expense			544.4			492.2			52.2		11

	Total operating expense		2,719.2			2,428.9			290.3		12

Operating gain			118.6			73.4			45.2		62
Net investment income			59.7			55.1			4.6		8
Net realized gains (losses) on investments			2.6			(24.1	)		26.7		NM	(2)
Gain on sale of subsidiary operations (TRICARE)			—			25.0			(25.0	)	NM	(2)
Interest expense			17.5			13.6			3.9		29
Amortization of goodwill and other intangible assets			4.1			8.0			(3.9	)	(49)
Demutualization expenses			—			2.4			(2.4	)	NM	(2)

Income before taxes and minority interest			159.3			105.4			53.9		51
Income taxes			52.8			34.2			18.6		54
Minority interest (credit)			0.3			(1.2	)		1.5		NM	(2)

Net income		$	106.2		$	72.4		$	33.8		47	%

Benefit expense ratio(3)			83.6	%		85.2	%				(160) bp	(4)
Administrative expense ratio:(5)
	Calculated using total operating revenue(6)		19.2	%		19.7	%				(50) bp	(4)
	Calculated using operating revenue and premium equivalents(7)		13.7	%		14.1	%				(40) bp	(4)
Operating margin(8)			4.2	%		2.9	%				130 bp	(4)

		ANTHEM, INC. Registrant
Date: August 5, 2002		By:		/s/ MICHAEL L. SMITH Michael L. Smith Executive Vice President and Chief Financial and Accounting Officer (Principal Financial Officer, Chief Accounting Officer and Duly Authorized Officer)

Exhibit Number		Document
4.11	(i)	First Amendment, dated as of July 2, 2002, to the Five-Year Credit Agreement, dated as of November 5, 2001, among Anthem Insurance Companies, Inc., Anthem, Inc., the bank's party thereto, J.P. Morgan Chase Bank, as Administrative Agent, Fleet National Bank, as Documentation Agent, and Bank of America, N.A., as Syndication Agent. (The copy of this exhibit filed as exhibit number 4.11(i) to Anthem, Inc.'s Registration Statement on Form S-1 (Registration No. 333-90478) as filed with the Commission is incorporated herein by reference.)
4.12		364-Day Credit Agreement, dated as of July 2, 2002, among Anthem, Inc., the Lenders party thereto, and J.P. Morgan Chase Bank, as Administrative Agent, Bank of America, N.A., as Co-Syndication Agent, Wachovia Bank, N.A., as Co-Syndication Agent, and Fleet National Bank, as Documentation Agent. (The copy of this exhibit filed as exhibit number 4.12 to Anthem, Inc.'s Registration Statement on Form S-1 (Registration No. 333-90478) as filed with the Commission is incorporated herein by reference.)
4.13		Indenture, dated as of July 31, 2002, between Anthem, Inc. and The Bank of New York, as Trustee.
4.14		First Supplemental Indenture, dated as of July 31, 2002, by and between Anthem, Inc. and The Bank of New York, as Trustee.
10.1	(i)	Amendment to Anthem's 2001 Stock Incentive Plan, dated April 25, 2002.
10.18	(i)	Amendment to Anthem's 2001-2003 Long-Term Incentive Plan, dated April 25, 2002.
10.28		Credit Agreement, dated as of May 29, 2002, by and among Anthem, Inc., Goldman Sachs Credit Partners L.P., as Administrative Agent, Sole Lead Arranger and Bookrunner, Bank of America, N.A. and J.P. Morgan Chase Bank, Inc., as Co-Syndication Agents, and Fleet National Bank, as Documentation Agent. (The copy of this exhibit filed as exhibit number 10.28 to Anthem, Inc.'s Registration Statement on Form S-4 (Registration No. 333-88776) as filed with the Commission is incorporated herein by reference.)
99.1		Anthem's 401(k) Long-Term Savings Investment Plan, dated to be effective as of January 1, 1997.
99.2		Amendment to Anthem's 401(k) Long-Term Savings Investment Plan, dated June 1, 2002.
99.3		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.
99.4		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.

2002	$	12.9
2003		9.9
2004		9.0
2005		7.3
2006		6.4