CENTENE CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K

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

For the fiscal year ended December 31, 2002

or

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

For the transition period from to

COMMISSION FILE NUMBER: 000-33395
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CENTENE CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 04-1406317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

7711 CARONDELET AVENUE, SUITE 800 63105
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code:
(314) 725-4477

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the last reported sale price of the common stock on
the Nasdaq National Market on February 20, 2003, was $244,209,190.

As of February 20, 2003, the registrant had 10,932,442 shares of common
stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 2003 annual meeting of
stockholders are incorporated by reference in Part II, Item 5 and Part III,
Items 10, 11, 12 and 13.
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TABLE OF CONTENTS

PART I

Item 1. Business.................................................... 3

Item 2. Properties.................................................. 14

Item 3. Legal Proceedings........................................... 14

Item 4. Submission of Matters to a Vote of Security Holders......... 15

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15

Item 6. Selected Financial Data..................................... 16

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17

Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34

Item 8. Financial Statements and Supplementary Data................. 34

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 35

Item 11. Executive Compensation...................................... 38

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 38

Item 13. Certain Relationships and Related Transactions.............. 38

Item 14. Controls and Procedures..................................... 38

Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 39

Signatures............................................................ 71

"CENTENE," "NURSEWISE" and "START SMART FOR YOUR BABY" are our registered
service marks, and "CONNECTIONS" is our trademark. This report also contains
trademarks, service marks and trade names of other companies.

2

PART I

ITEM 1. BUSINESS

OVERVIEW

We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income, or
SSI, and the State Children's Health Insurance Program, or SCHIP. We have health
plans in Wisconsin, Texas, Indiana and New Jersey. We believe our local approach
to managing our health plans, including provider and member services, enables us
to provide accessible, high quality, culturally-sensitive healthcare services to
our members. Our disease management, educational and other initiatives are
designed to help members best utilize the healthcare system to ensure they
receive appropriate, medically necessary services and effective management of
routine health problems, as well as more severe acute and chronic conditions. We
combine our decentralized local approach with centralized finance, information
systems, claims processing and medical management support functions.

We were organized in Wisconsin in 1993 as Coordinated Care Corporation. We
initially were formed to serve as a holding company for a Medicaid managed care
line of business that has been operating in Wisconsin since 1984. We changed our
corporate name to Centene Corporation in 1997 and reincorporated in Delaware in
November 2001.

We maintain a website with the address www.centene.com. We are not
including the information contained on our website as part of, or incorporating
it by reference into, this report. We make available free of charge through our
website our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to these reports, as soon as
reasonably practicable after we electronically file such material with, or
furnish such material to, the SEC.

OUR APPROACH

Our approach to managed care is based on the following key attributes:

- Medicaid Expertise. Over the last 19 years, we have developed a
specialized Medicaid expertise that has helped us establish and maintain
strong relationships with our constituent communities of members,
providers and state governments. We have implemented programs developed
to achieve savings for state governments and improve medical outcomes for
members by reducing inappropriate emergency room use, inpatient days and
high cost interventions, as well as by managing care of chronic
illnesses. We do this primarily by providing nurse case managers who
support our physicians in implementing disease management programs and by
providing incentives for our physicians to provide preventive care on a
regular basis. We recruit and train staff and providers who are attentive
to the needs of our members and who are experienced in working with
culturally diverse, low-income Medicaid populations. Our experience in
working with state regulators helps us to implement and deliver our
programs and services efficiently and affords us opportunities to provide
input on Medicaid industry practices and policies in the states in which
we operate.

- Localized Services, Support and Branding. We provide access to
healthcare services through local networks of providers and staff that
focus on the cultural norms of their individual communities. Our systems
and procedures have been designed to address these community-specific
challenges through outreach, education, transportation and other member
support activities. For example, our community outreach program employs
several former Medicaid recipients to work with our members and their
communities to promote health, and to promote self-improvement through
employment and education. We use locally recognized plan names, and we
tailor our materials and processes to meet the needs of the communities
and the state programs we serve. Our approach to community-based service
results in local accountability and solidifies our decentralized
management and operational structure.

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- State Budget Deficits. Our approach in these difficult economic times
for states is to work with state agencies on redefining benefit levels,
eligibility requirements and provider fee schedules in order to maximize
the number of uninsured individuals covered through Medicaid and SCHIP
while maintaining adequate levels of provider compensation.

- Physician-Driven Approach. We have implemented a physician-driven
approach in which our physicians are actively engaged in developing and
implementing our healthcare delivery policies and strategies. Our local
boards of directors, which help shape the character and quality of our
organization, have significant provider representation in each of our
principal geographic markets. This approach is designed to eliminate
unnecessary costs, improve service to our members and simplify the
administrative burdens on our providers. It has enabled us to strengthen
our provider networks through improved physician recruitment and
retention that, in turn, have helped to increase our membership base.

- Efficiency of Business Model. We have designed our business model to
allow us to readily add new members in our existing markets and expand
into new regions in which we may choose to operate. The combination of
our decentralized local approach to operating our health plans and our
centralized finance, information systems, claims processing and medical
management support functions allows us to quickly and economically
integrate new business opportunities. Because of our business model, we
believe we would be able to quickly recover from a disaster in one of our
plan locations by moving member and physician services to one of our
other locations.

- Specialized Systems and Technology. Through our specialized information
systems, we are able to strengthen our relationships with providers and
states, which help us to grow our membership base. These systems also
help us identify needs for new healthcare programs. Physicians can use
our claims, utilization and membership data to manage their practices
more efficiently, and they benefit from our timely and accurate payments.
State agencies can use data from our information systems to demonstrate
that their Medicaid populations are receiving quality healthcare in an
efficient manner.

- Complementary Business Lines. We have begun to broaden our service
offerings to address areas that we believe have been traditionally
underserved by Medicaid managed care organizations. We believe other
business lines, such as our NurseWise triage program, will allow us to
expand our services and diversify our sources of revenue.

OUR STRATEGY

Our objective is to become the leading national Medicaid managed care
organization. We intend to achieve this objective by implementing the following
key components of our strategy:

- Increase Penetration of Existing State Markets. We intend to continue to
increase our membership in states in which we currently operate through
alliances with key providers, outreach efforts, development and
implementation of community-specific products and acquisitions. For
example, in Indiana, where the state assigns members to physicians, we
increased our membership in 2002 by recruiting additional physicians. We
may also increase membership by acquiring Medicaid businesses, contracts
and other related assets from our competitors in our existing markets,
such as our purchase of Texas Universities Health Plan's SCHIP contracts
in 2002.

- Develop and Acquire Additional State Markets. We continue to leverage
our experience in identifying and developing new markets by seeking both
to acquire existing businesses and to build our own operations. We expect
to focus our expansion on states where Medicaid recipients are mandated
to enroll in managed care organizations. For example, we entered the New
Jersey market by acquiring 80% of the equity of University Health Plans,
Inc., or UHP, on December 1, 2002.

- Address Emerging State Needs. We are working to assist the states in
which we operate in addressing the financial and other challenges they
face in these difficult economic times. We seek to assist the states in
balancing premium rates, benefit levels, member eligibility, policies and
practices, and provider compensation. By helping states structure an
appropriate level and range of Medicaid and
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SCHIP services, we seek to ensure that we are able to continue to provide
those services on terms that protect our targeted gross margins and
provide an acceptable return to our stockholders.

- Diversify Our Business Lines. We seek to broaden our business lines into
areas that complement our business to enable us to grow our revenue
stream and decrease our dependence on Medicaid reimbursement. In addition
to NurseWise, we are considering services such as behavioral health,
disease management and other Medicaid related, fee-for-service lines of
business that would complement our core business. We believe we may have
opportunities to offer these services to other managed care organizations
and states.

- Leverage Our Information Technologies to Enhance Operating
Efficiencies. We intend to continue to invest in our centralized
information systems to further streamline our processes and drive
efficiencies in our operations and to add functionality to improve the
service we provide to our members. Our information systems enable us to
add members and markets quickly and economically. For example, we began
paying claims for UHP out of our centralized claims facility within the
first week after we acquired an 80% equity interest in the New Jersey
health plan.

MEDICAID AND SCHIP

Medicaid is a health insurance program for low-income families and
individuals with disabilities. Each state establishes its own eligibility
standards, benefit packages, payment rates and program administration within
federal standards. As a result, there are 56 Medicaid programs -- one for each
state, each territory and the District of Columbia. Medicaid eligibility is
based on a combination of income and asset requirements subject to federal
guidelines. Financial requirements are most often determined by an income level
relative to the federal poverty level. Historically, children have represented
the largest eligibility group for Medicaid.

SSI covers low-income aged, blind and disabled persons. SSI beneficiaries
represent a growing portion of all Medicaid recipients, and SSI recipients
typically utilize more services because of their more critical health issues.

SCHIP was established to provide coverage for low-income children not
otherwise covered by Medicaid or other insurance programs. All states have
adopted SCHIP.

Since the early 1980s, increasing healthcare costs combined with
significant growth in the number of Medicaid recipients have led many states to
establish Medicaid managed care initiatives. State premium payments to managed
care plans are financed in part by the federal government. In recent years, a
growing number of states, including each of the states in which we operate, have
mandated that their Medicaid recipients enroll in managed care plans.

MEMBER PROGRAMS AND SERVICES

We recognize the importance of member-focused services in the delivery of
quality managed care services. Our locally based staff assists members in
accessing care, coordinating referrals to related health and social services,
and addressing member concerns and questions. While covered healthcare benefits
vary from state to state, our health plans generally provide the following
services:

- primary and specialty physician care;

- inpatient and outpatient hospital care;

- emergency and urgent care;

- prenatal care;

- laboratory and x-ray services;

- home health and durable medical equipment;

- behavioral health and substance abuse services;
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- after hours nurse advice line;

- transportation assistance;

- health status calls to coordinate care;

- vision care;

- dental care;

- immunizations; and

- prescriptions and limited over-the-counter drugs.

We also provide the following education and outreach programs to inform and
assist members in accessing quality, appropriate healthcare services in an
efficient manner:

- CONNECTIONS is designed to create a link between the member and the
provider and help identify potential challenges or risk elements to a
member's health, such as abuse risks, nutritional challenges and health
education shortcomings. CONNECTIONS representatives, some of whom are
former Medicaid enrollees, also contact new members by phone or mail to
discuss managed care, the Medicaid program and our services. They make
home visits, conduct educational programs and represent the plan at
community events such as health fairs.

- NurseWise provides a toll-free nurse triage line 24 hours per day, 7 days
per week, 52 weeks per year. Our members call one number and reach
customer service representatives and bilingual nursing staff who provide
health education, triage advice and offer continuous access to
health-plan functions. Additionally, our representatives verify
eligibility, confirm primary care provider assignments and provide
benefit and network referral coordination for members and providers after
business hours. Our staff can arrange for urgent pharmacy refills,
transportation and contact qualified behavioral health professionals for
crisis stabilization assessments. Currently, NurseWise is receiving over
18,000 inbound calls and making over 3,000 outbound calls per month.

- Start Smart For Your Baby is a prenatal and infant health program
designed to increase the percentage of pregnant women receiving early
prenatal care, reduce the incidence of low birth weight babies, identify
high risk pregnancies, increase participation in the federal Women,
Infant, and Children program, and increase well-child visits. The program
includes risk assessments, education through face-to-face meetings and
materials, behavior modification plans and assistance in selecting a
provider for the infant and scheduling newborn follow-up visits.

- EPSDT Case Management is a preventive care program designed to educate
our members on the benefits of Early and Periodic Screening, Diagnosis
and Treatment, or EPSDT, services. We have a systematic program of
communication, tracking, outreach, reporting, and follow-through that
promotes state EPSDT programs.

- Disease Management Programs are designed to help members understand their
disease and treatment plan, and improve or maintain their quality of
life. These programs address medical conditions that are common within
the Medicaid population such as asthma, diabetes and prenatal care.

PROVIDERS

For each of our service areas, we establish a provider network consisting
of primary and specialty care physicians, hospitals and ancillary providers. As
of January 31, 2003, our health plans had the following numbers of physicians
and hospitals:

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The primary care physician is a critical component in care delivery, and
also in the management of costs and the attraction and retention of new members.
Primary care physicians include family and general practitioners, pediatricians,
internal medicine physicians and OB/GYNs. Specialty care physicians provide
medical care to members generally upon referral by the primary care physicians.

We work with physicians to help them operate efficiently by providing
financial and utilization information, physician and patient educational
programs and disease and medical management programs, as well as adhering to a
prompt payment policy. Our programs are also designed to help the physicians
coordinate care outside of their offices.

We believe our collaborative approach with physicians gives us a
competitive advantage in entering new markets. Our physicians serve on local
committees that assist us in implementing preventive care programs, managing
costs and improving the overall quality of care delivered to our members, while
assuming responsibility for medical policy decision making. The following are
among the services we provide to support physicians:

- Customized Utilization Reports provide our contracted physicians with
information that enables them to run their practices more efficiently and
focuses them on specific patient needs. For example, quarterly fund
detail reports update physicians on their status within their risk pools.
Equivalency reports provide physicians with financial comparisons of
capitated versus fee-for-service arrangements.

- Case Management Support helps the physician coordinate specialty care and
ancillary services for patients with complex conditions and direct
members to appropriate community resources to address both their health
and socio-economic needs.

- Web-based Claims and Eligibility Resources have been implemented in
selected markets to provide physicians with on-line access to perform
claims and eligibility inquiries.

Our physicians also benefit from several of the services offered to our
members, including the CONNECTIONS, EPSDT case management and disease management
programs. For example, the CONNECTIONS staff facilitate doctor/patient
relationships by connecting members with physicians, the EPSDT programs
encourage routine checkups for children with their physicians and the disease
management programs assist physicians in managing their patients with chronic
disease.

We provide access to healthcare services for our members primarily through
non-exclusive contracts with our providers. Our contracts with primary and
specialty care physicians and hospitals usually are for one to two-year periods
and renew automatically for successive one-year terms, but generally are subject
to termination by either party upon 90 to 120 days' prior written notice. In the
absence of a contract, we typically pay providers at state Medicaid
reimbursement levels. We pay physicians under a capitated or fee-for-service
arrangement.

- Under our capitated contract, primary care physicians are paid a monthly
capitation rate for each of our members assigned to his or her practice
and are at risk for all costs related to primary and specialty physician
and emergency room services. In return for this payment, these physicians
provide all primary care and preventive services, including primary care
office visits and EPSDT services. If these physicians also provide
non-capitated services to their assigned members, they may bill and be
paid under fee-for-service arrangements at Medicaid rates.

- Under our fee-for-service contracts with physicians, particularly
specialty care physicians, we pay the physicians a negotiated fee for
covered services. This model is characterized as having no financial risk
for the physician.

We also contract with ancillary providers on a negotiated fee arrangement
for physical therapy, mental health and chemical dependency care, home
healthcare, vision care, diagnostic laboratory tests, x-ray examinations,
ambulance services and durable medical equipment. Additionally, we contract with
dental vendors in markets where routine dental care is a covered benefit. In
Wisconsin and Indiana, where prescription and limited over-the-counter drugs are
a covered benefit, we have a capitated arrangement with a national pharmacy
vendor that provides a pharmacy network.
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HEALTH PLANS

We have four health plan subsidiaries offering healthcare services in
Wisconsin, Texas, Indiana and New Jersey. We have never been denied a contract
renewal from a state in which we do business. The table below provides summary
data for the markets we currently serve.

We acquired 80% of the equity of University Health Plans on December 1,
2002, and we will acquire the remaining equity of UHP by no later than December
1, 2005, as described below under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Overview." For additional
information about UHP, see Note 21 to our consolidated financial statements.

STATES

Our ability to establish and maintain our position as a leader in the
markets we serve results primarily from our demonstrated success in providing
quality care while reducing and managing costs for, and our customer-focused
approach to working with, state governments. Among the benefits we are able to
provide to the states with which we contract are:

- expertise in Medicaid managed care;

- improved medical outcomes;

- timely payment of provider claims;

- timely and accurate reporting;

- cost saving outreach and disease management programs; and

- responsible collection and dissemination of encounter data.

QUALITY MANAGEMENT

Our medical management program focuses on improving quality of care in
areas that have the greatest impact on our members. We employ strategies
including disease management and complex case management that are fine-tuned for
implementation in our individual markets by a system of physician committees
chaired by local physician leaders. This process promotes physician
participation and support, both critical factors in the success of any clinical
quality improvement program.

We have implemented specialized information systems to support our medical
quality management activities. Information is drawn from our data warehouse, the
clinical databases and AMISYS as sources to identify opportunities to improve
care and to track the outcomes of the interventions implemented to achieve those
improvements. Some examples of these intervention programs include:

- a prenatal case management program to help women with high-risk
pregnancies deliver full-term, healthy infants;

- a program to reduce the number of inappropriate emergency room visits;
and

- a disease management program to decrease the need for emergency room
visits and hospitalizations for asthma patients.

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Additionally, we provide reporting on a regular basis using our data
warehouse. State and Health Employer Data and Information Set, or HEDIS,
reporting constitutes the core of the information base that drives our clinical
quality performance efforts. This reporting is monitored by Plan Quality
Improvement Committees and our corporate medical management team.

In order to ensure the quality of our provider networks, we verify the
credentials and background of our providers using standards that are supported
by the National Committee for Quality Assurance.

MANAGEMENT INFORMATION SYSTEMS

The ability to access data and translate them into meaningful information
is essential to operating across a multi-state service area in a cost-effective
manner. Our centralized information systems located in Saint Louis, Missouri,
support our core processing functions under a set of integrated databases and
are designed to be both replicable and scalable to accommodate internal growth
and growth from acquisitions. We have the ability to leverage the platform we
have developed for one state for configuration into new states or health plan
acquisitions. This integrated approach helps to assure that consistent sources
of claim and member information are provided across all of our health plans. The
system is currently configured and is supporting claims automatic adjudication
rates of approximately 84% in all markets. Our AMISYS production system is
capable of supporting over one million members.

We have a disaster recovery and business resumption plan developed and
implemented in conjunction with a third party. This plan allows us complete
access to the business resumption centers and hot-site facilities provided by
it. We have contracted with the third party to provide us with annual plan
updates through 2005.

CORPORATE COMPLIANCE

Our Corporate Ethics and Compliance Programs were first established in 1998
and provide methods by which we further enhance operations, safeguard against
fraud and abuse, improve access to quality care, and help assure that our values
are reflected in everything we do.

The two primary standards by which corporate compliance programs in the
health care industry are measured are the 1991 Federal Organizational Sentencing
Guidelines and the "Compliance Program Guidance" issued by the Office of the
Inspector General, or OIG, of the Department of Health and Human Services.

Our program contains each of the seven elements suggested by the Sentencing
Guidelines and the OIG Guidance. These key components are:

- written standards of conduct;

- designation of a corporate compliance officer and compliance committee;

- effective training and education;

- effective lines for reporting and communication;

- enforcement of standards through disciplinary guidelines and actions;

- internal monitoring and auditing; and

- prompt response to detected offenses and development of corrective action
plans.

Our internal Corporate Compliance website, accessible by all employees,
contains our Business Ethics and Conduct Policy; our Mission, Values and
Philosophies and Compliance Programs, a company-wide policy and procedure
database and our toll-free hotline to allow employees or other persons to report
anonymously suspected incidents of fraud, abuse or other violations of our
corporate compliance program.

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COMPETITION

In the Medicaid business, our principal competitors for state contracts,
members and providers consist of the following types of organizations:

- Primary Care Case Management Programs are programs established by the
states through contracts with primary care providers. Under these
programs, physicians provide primary care services to Medicaid
recipients, as well as limited medical management oversight.

- National and Regional Commercial Managed Care Organizations have Medicaid
and Medicare members in addition to members in private commercial plans.

- Medicaid Managed Care Organizations focus solely on providing healthcare
services to Medicaid recipients, the vast majority of which operate in
one city or state. Providers, especially hospitals, own many of these
plans. Their membership is small relative to the infrastructure that is
required for them to do business. There are a few multi-state
Medicaid-only organizations that tend to be larger in size and therefore
are able to leverage their infrastructure over larger memberships.

We will continue to face varying levels of competition as we expand in our
existing service areas or enter new markets as federal regulations require at
least two competitors in each service area. Healthcare reform proposals may
cause a number of commercial managed care organizations already in our service
areas to decide to enter or exit the Medicaid market. However, the licensing
requirements and bidding and contracting procedures in some states present
barriers to entry into the Medicaid managed healthcare industry.

We compete with other managed care organizations for state contracts. In
order to win a bid for or be awarded a state contract, state governments
consider many factors, which include providing quality care, satisfying
financial requirements, demonstrating an ability to deliver services, and
establishing provider networks and infrastructure. Some of the factors may be
outside our control.

We also compete to enroll new members and retain existing members. People
who wish to enroll in a managed healthcare plan or to change healthcare plans
typically choose a plan based on the quality of care and service offered, ease
of access to services, a specific provider being part of the network and the
availability of supplemental benefits.

We also compete with other managed care organizations to enter into
contracts with physicians, physician groups and other providers. We believe the
factors that providers consider in deciding whether to contract with us include
existing and potential member volume, reimbursement rates, medical management
programs, timeliness of reimbursement and administrative service capabilities.

REGULATION

Our healthcare operations are regulated at both state and federal levels.
Government regulation of the provision of healthcare products and services is a
changing area of law that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have discretion to issue regulations and interpret and
enforce laws and rules. Changes in applicable laws and rules also may occur
periodically.

MANAGED CARE ORGANIZATIONS

Our four health plan subsidiaries are licensed to operate as health
maintenance organizations in each of Wisconsin, Texas, Indiana, and New Jersey.
In each of the jurisdictions in which we operate, we are regulated by the
relevant health, insurance and/or human services departments that oversee the
activities of managed care organizations providing or arranging to provide
services to Medicaid enrollees.

The process for obtaining authorization to operate as a managed care
organization is lengthy and involved and requires demonstration to the
regulators of the adequacy of the health plan's organizational structure,
financial resources, utilization review, quality assurance programs and
complaint procedures. Under both state managed care organization statutes and
state insurance laws, our health plan subsidiaries must comply with minimum
statutory capital requirements and other financial requirements, such as minimum
capital, deposit
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and reserve requirements. Insurance regulations may also require the prior state
approval of acquisitions of other managed care organizations' businesses and the
payment of dividends, as well as notice requirements for loans or the transfer
of funds. Our subsidiaries are also subject to periodic reporting requirements.
In addition, each health plan must meet numerous criteria to secure the approval
of state regulatory authorities before implementing operational changes,
including the development of new product offerings and, in some states, the
expansion of service areas.

MEDICAID

In order to be a Medicaid managed care organization in each of the states
in which we operate, we must operate under a contract with the state's Medicaid
agency. States generally use either a formal proposal process, reviewing a
number of bidders, or award individual contracts to qualified applicants that
apply for entry to the program.

We have entered into a contract with the Wisconsin Department of Health and
Family Services to provide Medicaid services. The contract commenced January 1,
2002 and has a scheduled termination of December 31, 2003. We expect to renew
this contract for an additional two-year term prior to its expiration. The
contract can be terminated if a change in state or federal laws, rules or
regulations materially affects either party's rights or responsibilities under
the contract. We receive monthly payments under the contract based on specified
capitation rates calculated on an actuarial basis.

We have also entered into an agreement with Network Health Plan of
Wisconsin, Inc. pursuant to which Network Health Plan subcontracts to us their
Medicaid services under their contract with the State of Wisconsin. The
agreement commenced January 1, 2001 and has a scheduled termination of December
31, 2006. The agreement renews automatically for successive five-year terms and
can be terminated by either party upon two years notice prior to the end of the
then current term. The agreement may also be terminated if a change in state or
federal laws, rules or regulations materially affects either party's rights or
responsibilities under the contract, or if Network Health Plan's contract with
the State of Wisconsin is terminated. We receive a monthly payment based on a
percentage of all premium and supplemental payments and other compensation
received by Network Health Plan from the State of Wisconsin.

We presently are party to several contracts with the Texas Health and Human
Services Commission to provide Medicaid and SCHIP managed care services in our
Texas markets through our Superior HealthPlan, Inc. subsidiary. Our Texas
Medicaid contracts commenced September 1, 2001 and have scheduled termination
dates of August 31, 2003. Each Medicaid contract is renewable for an additional
one-year period. The SCHIP contracts began on October 1, 2002 and are scheduled
to end on August 31, 2003. The contracts generally may be terminated upon any
event of default or in the event state or federal funding for Medicaid programs
is no longer available. We receive monthly payments under each of our Texas
contracts based on specified capitation rates calculated on an actuarial basis.

We have entered into a contract with the State of Indiana to provide
Indiana Medicaid and Indiana Children's Health Insurance Program services. The
contract commenced January 1, 2003 and has a scheduled termination of December
31, 2004. This contract may be terminated by the state without cause upon sixty
days prior written notice. We are paid based on specified capitation rates for
our services.

As part of the acquisition of UHP, we obtained a contract with the State of
New Jersey Department of Human Services to provide Medicaid and SCHIP services.
The contract commenced on July 1, 2002 and has a scheduled termination date of
June 30, 2003. The agreement is renewable annually for successive twelve-month
periods. The contract may be terminated by the state for event of default or
significant change in circumstances. We receive monthly payments based on
specified capitation rates for our services.

Our contracts with the states and regulatory provisions applicable to us
generally set forth in great detail the requirements for operating in the
Medicaid sector, including provisions relating to:

- eligibility, enrollment and disenrollment processes;

- covered services;

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- eligible providers;

- subcontractors;

- record-keeping and record retention;

- periodic financial and informational reporting;

- quality assurance;

- marketing;

- financial standards;

- timeliness of claims payment;

- health education and wellness and prevention programs;

- safeguarding of member information;

- fraud and abuse detection and reporting;

- grievance procedures; and

- organization and administrative systems.

A health plan's compliance with these requirements is subject to monitoring
by state regulators and by the federal government's Centers for Medicare and
Medicaid Services, or CMS. A health plan is also subject to periodic
comprehensive quality assurance evaluations by a third party reviewing
organization and generally by the insurance department of the jurisdiction that
licenses the health plan. A health plan must also submit many reports to various
regulatory agencies, including quarterly and annual statutory financial
statements and utilization reports.

HIPAA

In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. The Act is designed to improve the
portability and continuity of health insurance coverage and simplify the
administration of health insurance claims. One of the main requirements of HIPAA
is the implementation of standards for the processing of health insurance claims
and for the security and privacy of individually identifiable health
information.

In August 2000, the Department of Health and Human Services, or HHS, issued
new standards for submitting electronic claims and other administrative
healthcare transactions. The new standards were designed to streamline the
processing of claims, reduce the volume of paperwork and provide better service.
The administrative and financial healthcare transactions covered include:

- health claims and equivalent encounter information;

- enrollment and disenrollment in a health plan;

- eligibility for a health plan;

- healthcare payment and remittance advice;

- health plan premium payments;

- coordination of benefits;

- healthcare claim status; and

- referral certification and authorization.

Health plans other than certain smaller health plans were required to
comply with the new standards by October 2002, but the deadline was extended to
October 2003 for health plans that submitted a written compliance plan to CMS by
October 2002. The regulation's requirements apply to transactions conducted

12

using "electronic media." Because "electronic media" is defined broadly to
include "transmissions that are physically moved from one location to another
using magnetic tape, disk or compact disk media," many communications will be
considered electronically transmitted. In addition, health plans will be
required to have the capacity to accept and send all standard transactions in a
standardized electronic format. The regulation sets forth other rules that apply
specifically to health plans as follows:

- a plan may not delay processing of a standard transaction (that is, it
must complete transactions using the new standards at least as quickly as
it had prior to implementation of the new standards);

- there should be "no degradation in the transmission of, receipt of,
processing of, and response to" a standard transaction as compared to the
handling of a non-standard transaction;

- if a plan uses a healthcare clearinghouse to process a standard request,
the other party to the transaction may not be charged more or otherwise
disadvantaged as a result of using the clearinghouse;

- a plan may not reject a standard transaction on the grounds that it
contains data that is not needed or used by the plan;

- a plan may not adversely affect (or attempt to adversely affect) the
other party to a transaction for requesting a standard transaction; and

- if a plan coordinates benefits with another plan, then upon receiving a
standard transaction, it must store the coordination of benefits data
required to forward the transaction to the other plan.

In addition, on August 14, 2002, HSS published modifications to the final
privacy regulations which addressed the implementation concerns of the
healthcare industry.

On December 28, 2000, HHS published a final regulation setting forth new
standards for protecting the privacy of individually identifiable health
information in any medium. Compliance with these rules will be required by April
2003, except for certain small health plans which will have until April 2004.
The new regulation is designed to protect medical records and other personal
health information maintained and used by healthcare providers, hospitals,
health plans and health insurers, and healthcare clearinghouses. Among numerous
other requirements, the new standards:

- limit certain non-consensual uses and disclosures of private health
information, and require patient authorizations for such uses and
disclosures of private health information;

- give patients new rights to access their medical records and to know who
else has accessed them;

- limit most disclosure of health information to the minimum needed for the
intended purpose;

- establish procedures to ensure the protection of private health
information;

- establish new requirements for access to records by researchers and
others; and

- establish new criminal and civil sanctions for improper use or disclosure
of health information.

The preemption provisions of HIPAA provide that the federal standards will
not preempt state laws that are more stringent than the related federal
requirements. The Secretary of HHS may grant exceptions allowing state laws to
prevail if one or more of a number of conditions are met, including but not
limited to the following:

- the state law is necessary to prevent fraud and abuse related to the
provision of and payment for healthcare;

- the state law is necessary to ensure appropriate state regulation of
insurance and health plans;

- the state law is necessary for state reporting on healthcare delivery or
costs; or

- the state law addresses controlled substances.

In addition, on August 12, 1998, HHS published proposed regulations
relating to the security of individually identifiable health information. These
rules would require healthcare providers, health plans and

13

healthcare clearinghouses to ensure the privacy and confidentiality of such
information when it is electronically stored, maintained or transmitted through
such devices as user authentication mechanisms and system activity audits. The
final security regulations were released on February 20, 2003. The compliance
deadline for the security regulations is April 20, 2005. The security
regulations require health plans, health care clearinghouses and certain
providers to implement administrative physical and technical safeguards to
protect electronic protected health information.

PATIENTS' RIGHTS LEGISLATION

The United States Senate and House of Representatives passed different
versions of patients' rights legislation in June and August 2001, respectively.
Both versions included provisions that specifically apply protections to
participants in federal healthcare programs, including Medicaid beneficiaries.
This type of legislation could expand our potential exposure to lawsuits and
increase our regulatory compliance costs. Depending on the final form of any
patients' rights legislation, such legislation could, among other things, expose
us to liability for economic and punitive damages for making determinations that
deny benefits or delay beneficiaries' receipt of benefits as a result of our
medical necessity or other coverage determinations. The differences include such
matters as the amount of allowable damages, whether cases would be governed by
federal or state law, and whether such actions could be brought in federal or
state courts. We cannot predict when or whether patients' rights legislation
will be enacted into law or, if enacted, what final form such legislation might
take.

OTHER FRAUD AND ABUSE LAWS

Investigating and prosecuting healthcare fraud and abuse became a top
priority for law enforcement entities in the last decade. The focus of these
efforts has been directed at participants in public government healthcare
programs such as Medicaid. The laws and regulations relating to Medicaid fraud
and abuse and the contractual requirements applicable to plans participating in
these programs are complex and changing and will require substantial resources.

EMPLOYEES

As of January 31, 2003, we had 593 employees, of whom 241 were employed at
our St. Louis headquarters and Farmington claims center, 2 in our Washington,
D.C. office, 72 by our Indiana plan, 99 by our Wisconsin plan, 102 by our Texas
plan and 77 by our New Jersey plan. Our employees are not represented by a
union. We believe our relationships with our employees are good.

ITEM 2. PROPERTIES

Our headquarters occupy approximately 40,000 square feet of office space in
St. Louis, Missouri under a lease expiring in 2010. Our claims center currently
occupies 13,000 square feet of office space in Farmington, Missouri. During
2002, we entered into a new lease agreement for a ten-year period to support the
expansion of our claims facility. This lease adds an additional 25,000 square
feet to our existing facility. We also lease space in Wisconsin, Texas, Indiana,
and New Jersey where our health plans are located, as well as Washington, D.C.
We are required by various insurance and Medicaid regulatory authorities to have
offices in the service areas where we provide Medicaid benefits. We believe our
current facilities are adequate to meet our operational needs for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of our business, we may be a party to legal
proceedings. We are not currently a party to any material legal proceedings.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK; DIVIDENDS

Our common stock has been traded and quoted on the Nasdaq National Market
under the symbol "CNTE" since December 13, 2001. The reported high and low last
sale prices for our common stock on the Nasdaq National Market between January
1, 2002 and December 31, 2002 were $35.48 and $18.10, respectively. On February
20, 2003, the last reported sale price for our common stock was $23.64. As of
February 20, 2003, there were 28 holders of record of our common stock.

We have never declared or paid any cash dividends on our capital stock, and
currently anticipate that we will retain any future earnings for the
development, operation and expansion of our business.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Information concerning our equity compensation plans will appear in our
Proxy Statement for our 2003 annual meeting of stockholders under "Equity
Compensation Plan Information." This portion of the proxy statement is
incorporated herein by reference.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

In our initial public offering, we sold an aggregate of 3,250,000 shares of
our common stock at a price of $14.00 per share on December 13, 2001. Our net
proceeds after deduction of underwriting discounts and commissions of $3.2
million and expenses of $1.3 million, were $41.0 million. In December 2001, we
used $4.0 million of our net proceeds to repay the entire principal amount of
our outstanding subordinated notes. In December 2002, we used $10.6 million to
purchase 80% of the equity of University Health Plans. The balance of our net
proceeds has been added to our working capital.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
connection with, and are qualified by reference to, the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report. The data for the years ended December 31, 2002, 2001 and 2000 and as of
December 31, 2002 and 2001 are derived from consolidated financial statements
included elsewhere in this filing. The data for the years ended December 31,
1999 and 1998 and as of December 31, 2000, 1999 and 1998 are derived from
audited consolidated financial statements not included in this filing. The pro
forma share information included in the consolidated statement of earnings data
assumes that as of the first day of the period, (1) our initial public offering
was completed, (2) all classes of our preferred and common stock were converted
into a single class of common stock, (3) our subordinated notes of $4.0 million
were repaid with a portion of the net proceeds of $41.0 million from our initial
public offering and (4) the balance of the net proceeds were invested in short-
term instruments bearing interest of 3.5%.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We provide managed care programs and related services to individuals
receiving benefits under Medicaid, including Supplemental Security Income, or
SSI, and the State Children's Health Insurance Program, or SCHIP. We have health
plans in Wisconsin, Texas, Indiana and New Jersey.

On December 1, 2002, we acquired 80% of the outstanding capital stock of
University Health Plans, or UHP, from University of Medicine and Dentistry of
New Jersey, or UMDNJ, which continues to own the remaining capital stock of UHP.
UHP is a managed health plan operating in 15 counties in New Jersey. We paid an
aggregate purchase price of approximately $10.6 million for our interest in UHP.
We entered into an investor rights agreement with UMDNJ providing that, among
other things:

- We have the right, exercisable at any time prior to September, 1, 2003,
to purchase the remaining shares of UHP held by UMDNJ for a cash purchase
price of $2.6 million.

- If we do not exercise the right described above, the remaining shares of
UHP held by UMDNJ will be exchanged on December 1, 2005 for a purchase
price payable in either, at our election, shares of our common stock or
cash. The purchase price would equal the greater of (a) $2.6 million or
(b) the product of (1) the enterprise value of UHP as of December 1, 2005
and (2) the percentage of the outstanding UHP common stock (on a fully
diluted basis) then represented by the shares owned by UMDNJ.

In June 2002, Superior HealthPlan entered into an agreement with Texas
Universities Health Plan Inc. to purchase the SCHIP contracts in three Texas
service areas. Effective September 1, October 1 and November 1, 2002, the state
of Texas approved the contract sales between Superior and Texas Universities
Health Plan, thereby adding approximately 24,000 members to our Texas health
plan. As a result of this transaction, $595 was recorded as an intangible asset,
purchased contract rights. We are amortizing the contract rights on a
straight-line basis over five years, the period expected to be benefited.

REVENUES

We generate revenues primarily from premiums we receive from the states in
which we operate to provide health benefits to our members. We receive a fixed
premium per member per month pursuant to our state contracts. We generally
receive premiums during the month we provide services and recognize premium
revenue during the period in which we are obligated to provide services to our
members. We also generate administrative services fees for providing services to
SSI members on a non-risk basis.

Premiums collected in advance are recorded as unearned premiums. Premiums
due to us are recorded as premium and related receivables and are recorded net
of an allowance based on historical trends and our management's judgement on the
collectibility of these accounts. As we generally receive premiums during the
month in which services are provided, the allowance is typically not significant
in comparison to total premium revenue and does not have a material impact on
the presentation of our financial condition, changes in financial position or
results of operations. From 1998 to 2000, however, we provided Medicaid services
in certain regions of Indiana as a subcontractor with Maxicare Indiana, Inc. In
June 2001, the Insurance Commissioner of the Indiana Department of Insurance
declared Maxicare insolvent and ordered Maxicare into liquidation. As a result,
we recorded an allowance for uncollectible receivables in the amount of $2.7
million to fully reserve for all receivables from Maxicare as of December 31,
2001. In 2002, subsequent to a release and settlement agreement with Maxicare
and the Indiana Insurance Commissioner which requires no payment by either
Maxicare or us, we wrote off the entire balance of the receivable from Maxicare
as uncollectible and reduced the related allowance for doubtful accounts.

17

The primary driver of our increasing revenues has been membership growth.
We have increased our membership through both internal growth and acquisitions.
From December 31, 2000 to December 31, 2002, we increased our membership by
111%. The following table sets forth our membership by state:

The following table sets forth our membership by line of business:

In 2002, our membership increased by 24,000 members in Texas due to the
purchase of SCHIP contract rights from Texas University Health Plan. In
addition, two smaller plans exited the Austin, Texas market. As a result, our
Texas plan increased its membership by 28,000 lives. This increase includes
12,000 lives that we are managing for the state of Texas on an interim basis and
that will become part of a reprocurement process scheduled for mid 2003. We
entered the New Jersey market through our acquisition of 80% of the equity of
UHP. Membership increases in our Wisconsin and Indiana markets resulted from
additions to our provider network and growth in the number of Medicaid
beneficiaries.

In 2001, our membership in Indiana declined due to a subcontracting
provider organization terminating a percent-of-premium arrangement, which was
our only contract of that type. Separately, we entered into agreements with
Humana that resulted in the transfer to us of 35,000 members in Wisconsin and
30,000 members in Texas.

In 2000, a competitor in our Wisconsin market terminated its participation
in the Medicaid program benefiting our enrollment growth. Our membership growth
in the northern and central regions of Indiana was offset by our decision to
reduce our participation in the southern region. Our El Paso health plan
achieved sizable growth because we were named the default health plan in this
area and enrolled a majority of the members who failed to select a specific
plan.

OPERATING EXPENSES

Our operating expenses include medical services costs and general and
administrative expenses.

Our medical services costs include payments to physicians, hospitals, and
other providers for healthcare and specialty product claims. Medical service
costs also include estimates of medical expenses incurred but not yet reported,
or IBNR. Monthly, we estimate our IBNR based on a number of factors, including
inpatient hospital utilization data and prior claims experience. As part of this
review, we also consider the costs to process medical claims and estimates of
amounts to cover uncertainties related to fluctuations in physician billing
patterns, membership, products and inpatient hospital trends. These estimates
are adjusted as more information becomes available. We utilize the services of
consultants who are contracted to review our estimates quarterly. While we
believe that our process for estimating IBNR is actuarially sound, we cannot
assure you that healthcare claim costs will not exceed our estimates.

18

Our results of operations depend on our ability to manage expenses related
to health benefits and to predict accurately costs incurred. The table below
depicts our health benefits ratio, which represents medical services costs as a
percentage of premium revenues and reflects the direct relationship between the
premium received and the medical services provided. Our stabilization in the
ratio primarily reflects improved provider contract terms, premium rate
increases in our markets served and member reductions in our southern Indiana
market.

Our general and administrative expenses primarily reflect wages and
benefits and other administrative costs related to our employee base, including
those fees incurred to provide services to our members. Some of these services
are provided locally, while others are delivered to our health plans from a
centralized location. This approach provides the opportunity to control both
direct and indirect costs. The major centralized functions are claims
processing, information systems, finance, medical management support and
administration. The following table sets forth the general and administrative
expense ratio, which represents general and administrative expenses as a percent
of total revenues and reflects the relationship between revenues earned and the
costs necessary to drive those revenues.

The improvement in the general and administrative expenses ratio reflects
growth in membership and leveraging of our overall infrastructure. For example,
the decrease in our general and administrative ratio over the past two years in
part reflects our efforts to increase claims processing efficiencies through our
centralized support functions. As a result, our days in claims payable, which is
a calculation of medical claims liabilities at the end of the quarter divided by
average claims expense per calendar day for such quarter, decreased from 73.4
days at December 31, 2001 to 71.8 at December 31, 2002. Net of the effects of
our acquisition of 80% of the capital stock of UHP on December 1, 2002, our days
in claims payable at December 31, 2002 would have been 64.5 days.

OTHER INCOME (EXPENSE)

Other income (expense) consists principally of investment and other income,
interest expense and equity in earnings (losses) from joint ventures.

- Investment income is derived from our cash, cash equivalents and
investments. Information about our investments is presented below under
"Liquidity and Capital Resources."

- Interest expense reported in 2002 represents commitment fees paid to a
bank in conjunction with our undrawn credit facility. Interest expense
reported in 2001 and 2000 primarily reflected interest paid on our
subordinated notes, which we repaid in full in December 2001.

- Equity in earnings (losses) from joint ventures principally represented
our share of operating results from Superior HealthPlan, which we formed
with Community Health Centers Network in 1997. From 1998 through 2000, we
owned 39% of Superior, and therefore accounted for the investment under
the equity method of accounting. Effective January 1, 2001, we entered
into an agreement to purchase an additional 51% of Superior. We also
agreed to purchase from TACHC GP, Inc. a term note pursuant to which
Superior owed TACHC $160,000. As a result of entering into this
agreement, we began accounting for our investment in Superior using
consolidation accounting. We therefore no longer reflect any operations
of Superior in equity in earnings (losses) from joint ventures and we
eliminate in consolidation all administrative fees from Superior. In
addition, in December 2001 we acquired the remaining 10% equity interest
in Superior in exchange for 7,143 shares of our common stock.

19

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are more fully described in Note 3 to
our consolidated financial statements. Two of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result they are subject to an inherent degree of uncertainty.

MEDICAL CLAIMS LIABILITIES

Our medical services costs include estimates for claims received but not
yet adjudicated, estimates for claims incurred but not yet received and
estimates for the costs necessary to process unpaid claims. We, together with
our independent actuaries, estimate medical claims liabilities using actuarial
methods based upon historical data for payment patterns, cost trends, product
mix, seasonality, utilization of healthcare services and other relevant factors.
These estimates are continually reviewed and adjustments, if necessary, are
reflected in the period known.

In applying this policy, our management uses its judgment to determine the
assumptions to be used in the determination of the required estimates. While we
believe these estimates are appropriate, it is possible future events could
require us to make significant adjustments for revisions to these estimates. The
estimates are based on our historical experience, terms of existing contracts,
our observance of trends in the industry, information provided by our customers
and information available from other outside sources, as appropriate.

The change in medical claims liabilities is summarized as follows:

Acquisitions in 2002 include reserves acquired in connection with our
acquisition of 80% of the outstanding capital stock of UHP. Acquisitions in 2001
include reserves acquired in connection with our acquisition of the remaining
shares of Superior HealthPlan.

Changes in estimates of incurred claims for prior years recognized during
2002, 2001 and 2000 were attributable to favorable development in all of our
markets, including lower than anticipated utilization of medical services.

INTANGIBLE ASSETS

We have made several acquisitions over the past two years that collectively
have resulted in our recording of a significant amount of intangible assets.
These intangible assets represent the excess of cost over the fair market value
of net assets acquired in purchase transactions and consist of purchased
contract rights, provider contracts and goodwill. Purchased contract rights are
amortized using the straight-line method over periods ranging from 60 to 120
months. Provider contracts are amortized using the straight-line method over 120
months.

20

Our management evaluates whether events or circumstances have occurred that
may affect the estimated useful life or the recoverability of the remaining
balance of goodwill and other identifiable intangible assets. Impairment of an
intangible asset is triggered when the estimated future undiscounted cash flows
(excluding interest charges) do not exceed the carrying amount of the intangible
asset and related goodwill. If the events or circumstances indicate that the
remaining balance of the intangible asset and goodwill may be permanently
impaired, the potential impairment will be measured based upon the difference
between the carrying amount of the intangible asset and goodwill and the fair
value of such asset determined using the estimated future discounted cash flows
(excluding interest charges) generated from the use and ultimate disposition of
the respective acquired entity. Our management must make assumptions and
estimates, such as the discount factor, in determining the estimated fair
values. While we believe these assumptions and estimates are appropriate, other
assumptions and estimates could be applied and might produce significantly
different results.

Effective January 1, 2002, we ceased to amortize goodwill in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill is reviewed
at least annually for impairment. In addition, we will perform an impairment
analysis of intangible assets more frequently based on other factors. These
factors would include significant changes in membership, state funding, medical
contracts and provider networks and contracts. We did not recognize any
impairment losses during 2000, 2001 or 2002.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

REVENUES

Premiums for the year ended December 31, 2002 increased $134.8 million, or
41.3%, to $461.0 million from $326.2 million in 2001. This increase was due to
organic growth in our existing markets, the purchase of the Texas SCHIP
contracts and the inclusion of one month of revenues of UHP. In addition, we
received premium rate increases ranging from 1.5% to 10.7%, or 5.1% on composite
basis across our markets.

Administrative services fees for the year ended December 31, 2002 increased
$72,000, or 18.7%, to $457,000 from $385,000 in 2001. This increase resulted
from increases in our non-risk SSI membership in our Texas market.

OPERATING EXPENSES

Medical services costs for the year ended December 31, 2002 increased
$109.3 million, or 40.5%, to $379.5 million from $270.2 million in 2001. This
increase reflected the growth in our membership.

General and administrative expenses for the year ended December 31, 2002
increased $12.5 million, or 32.9%, to $50.4 million from $37.9 million in 2001.
This increase reflected a higher level of wages and related expenses for
additional staff to support our membership growth.

OTHER INCOME

Other income for the year ended December 31, 2002 increased $6.0 million,
or 168.1%, to $9.5 million from $3.6 million in 2001. A majority of the increase
is due to the receipt of a one-time dividend of $5.1 million from a captive
insurance company in which we maintained an investment. In addition, investment
income increased due to a larger amount of dollars invested, and interest
expense decreased year over year due to the repayment of our subordinated debt
in December 2001.

INCOME TAX EXPENSE

For the year ended December 31, 2002 we recorded income tax expense of
$15.6 million, or an effective tax rate of 38.0%. This compares to $9.1 million,
or an effective tax rate of 41.5%, for the year ended December 31, 2001. Our
effective tax rate decreased year over year due to our investment in
tax-advantaged securities and our implementation of state tax saving strategies
during 2002.
21

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES

Premiums for the year ended December 31, 2001 increased $109.8 million, or
50.7%, to $326.2 million from $216.4 million in 2000. This increase was due to
the Humana contract purchases, the consolidation of our El Paso market and
membership growth, net of the termination of our Indiana sub-contract
arrangement.

Administrative services fees for the year ended December 31, 2001 decreased
$4.6 million, or 92.2%, to $385,000 from $4.9 million in 2000 as a result of our
acquisition of a majority share of Superior HealthPlan, as described above.

OPERATING EXPENSES

Medical services costs for the year ended December 31, 2001 increased $87.7
million, or 48.0%, to $270.2 million from $182.5 million in 2000. This increase
was due to the Humana contract purchases, the consolidation of our El Paso
market and membership growth, net of the termination of our Indiana sub-
contract arrangement.

General and administrative expenses for the year ended December 31, 2001
increased $5.6 million, or 17.4%, to $37.9 million from $32.3 million in 2000.
This increase primarily was due to a higher level of wages and related expenses
for additional staff to support our membership growth.

OTHER INCOME

Other income for the year ended December 31, 2001 increased $2.9 million,
or 434.4%, to $3.6 million from $665,000 in 2000. This primarily reflected a
significant increase in investment income due to an increase in cash, cash
equivalents and investments. The increase also reflected the consolidation of
our El Paso market due to our increased ownership.

INCOME TAX EXPENSE

For the year ended December 31, 2001, we recorded income tax expense of
$9.1 million based on a 41.5% effective tax rate. For the year ended December
31, 2000, we recorded an income tax benefit of $543,000 primarily as a result of
the reversal of our valuation allowance related to deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

On May 22, 2002, we closed a follow-on public offering of 5,000,000 shares
of common stock at $24.75 per share. Of the 5,000,000 shares, 4,600,000 shares
were offered by selling stockholders and 400,000 by us. On June 5, 2002, the
underwriters of our follow-on public offering exercised their over-allotment
option to purchase 679,505 additional shares from selling stockholders and
70,495 shares from us. We received net proceeds of $10.3 million from the two
closings of the follow-on offering.

On December 18, 2001, we closed our initial public offering of 3,250,000
shares of common stock at $14.00 per share. We received net proceeds of $41.0
million. Prior to this offering, we financed our operations and growth through
private equity and debt financings and internally generated funds, raising $22.4
million between 1993 and 1998. This consisted of $18.4 million through the
issuance of equity securities and $4.0 million through subordinated debt
financing.

Our operating activities provided cash of $13.5 million in 2000, $30.2
million in 2001 and $39.7 million in 2002. The increases in 2001 and 2002 were
due to further improved profitability, an increase in membership and the timing
of capitation payments.

Our investing activities used cash of $14.6 million in 2000, provided cash
of $2.7 million in 2001 and used cash of $79.7 million in 2002. Our investment
policies are designed to provide liquidity, preserve capital and maximize total
return on invested assets within our investment guidelines. Net cash provided by
and used in
22

investing activities will fluctuate from year to year due to the timing of
investment purchases, sales and maturities. As of December 31, 2002, our
investment portfolio consisted primarily of fixed-income securities with an
average duration of 3.3 years. Cash is invested in investment vehicles such as
municipal bonds, commercial paper, U.S. government-backed agencies and U.S.
Treasury instruments. The states in which we operate prescribe the types of
instruments in which our subsidiaries may invest their cash. The average
portfolio yield was 5.6% as of December 31, 2001 and 6.9% as of December 31,
2002, exclusive of a one-time dividend of $5.1 million from a captive insurance
company in which we maintained an investment.

Our financing activities used cash of $2.4 million in 2000 and provided
cash of $37.0 million in 2001 and $10.8 million in 2002. During 2000, financing
cash flows consisted of borrowings and repayments under a credit facility and
issuances of preferred stock. During 2001, financing cash flows primarily
consisted of the issuance of common stock through our initial public offering
net of the repayment of subordinated notes with $4.0 million of our proceeds.
During 2002, financing cash flows primarily consisted of the issuance of common
stock through our follow-on offering, the exercise of the over-allotment and
proceeds received from the exercise of stock options.

We may use our existing funds, including proceeds from our two public
offerings, to make strategic acquisitions including Medicaid and SCHIP
businesses, contract rights and related assets to increase our membership and to
expand our business into new service areas. In 2002, we purchased the capital
stock of Bankers Reserve Life Insurance Company of Wisconsin for $479,000, net
of assets and liabilities acquired, and the rights to Texas Universities Health
Plan's SCHIP contracts for $595,000. In addition, we purchased 80% of the
outstanding capital stock of UHP for $10.6 million. In 2001, we purchased the
rights to the Humana Medicaid contracts with the states of Texas and Wisconsin
for $1.2 million. In 2002, we spent $3.9 million on capital assets consisting
primarily of new software, software and hardware upgrades, furniture, equipment
and leasehold improvements related to office and market expansions. In 2001, we
purchased $3.6 million of furniture, equipment and leasehold improvements due to
the addition of the Austin and San Antonio markets and the expansion of the
Wisconsin market. We anticipate spending $7.3 million on additional capital
expenditures in 2003 related to office and market expansions and system
upgrades.

Our principal contractual obligations at December 31, 2002 consisted of
obligations under operating leases. The significant annual noncancelable lease
payments over the next five years and beyond are as follows (in thousands):

In addition, we will acquire the remaining equity of UHP by no later than
December 1, 2005, as described under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Overview."

In May 2002, we entered into a $25 million revolving line of credit
facility with LaSalle Bank N.A. The line of credit has a term of one year and
has interest rates based on prime, floating and LIBOR rates. We granted a
security interest in the common stock of our subsidiaries. The facility includes
financial covenants, including requirements of minimum EBITDA and minimum
tangible net worth. We are required to obtain LaSalle's consent of any proposed
acquisition that would result in a violation of any of the covenants contained
in the line of credit. As of December 31, 2002, we were in compliance with all
covenants and no funds had been drawn on the facility.

23

At December 31, 2002, we had working capital of $(8.8) million as compared
to $35.7 million at December 31, 2001 and $(5.3) million at December 31, 2000.
Our working capital is negative at times due to our efforts to increase
investment returns through purchases of long-term investments, which have
maturities of greater than one year and, therefore, are classified as long-term.
Our investment policies are also designed to provide liquidity and preserve
capital. We manage our short-term and long-term investments to ensure that a
sufficient portion is held in investments that are highly liquid and can be sold
to fund working capital as needed.

Cash, cash equivalents and short-term investments were $69.2 million at
December 31, 2002 and $90.0 million at December 31, 2001. Long-term investments
were $95.4 million at December 31, 2002 and $22.3 million at December 31, 2001,
including restricted deposits of $15.8 million and $1.2 million, respectively.
Cash and investments held by our unregulated entities totaled $52.0 million at
December 31, 2002. Based on our operating plan, we expect that our cash, cash
equivalents and investments, cash from our operations and cash available under
our credit facility will be sufficient to finance our operations and capital
expenditures for at least 12 months from the date of this report.

REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS

Our operations are conducted through our subsidiaries, most of which are
subject to state regulations that, among other things, require the maintenance
of minimum levels of statutory capital, as defined by each state, additional
regulations and restrict the timing, payment and amount of dividends and other
distributions that may be paid to us.

Our subsidiaries are required to maintain minimum capital requirements
prescribed by various regulatory authorities in each of the states in which we
operate. As of December 31, 2002, our subsidiaries had aggregate statutory
capital and surplus of $36.9 million, compared with the required minimum
aggregate statutory capital and surplus of $22.0 million.

The National Association of Insurance Commissioners adopted guidelines
which set minimum risk-based capital requirements for insurance companies,
managed care organizations and other entities bearing risk for healthcare
coverage. Wisconsin and Texas adopted various forms of the rules as of December
31, 1999. As of December 31, 2002 our Wisconsin and Texas health plans were in
compliance with risk-based capital requirements. The managed care organization
rules, if adopted by Indiana and New Jersey, may increase the minimum capital
required for these subsidiaries. We continue to monitor these requirements and
do not expect that they will have a material impact on earnings or cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued which requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested at least annually for
impairment. We have adopted SFAS No. 142 effective January 1, 2002, and goodwill
amortization was discontinued. For the year ended December 31, 2001, this
adjustment would have added $471,000 in net earnings, or $0.06 per diluted share
and $0.34 per basic share. For the year ended December 31, 2000, this adjustment
would have added $224,000 in net earnings, or $0.03 per diluted share and $0.25
per basic share. Goodwill is reviewed at least annually for impairment. In
addition, we will perform an impairment analysis of intangible assets more
frequently based on other factors. Such factors would include, but would not be
limited to, significant changes in membership, state funding, Medicaid contracts
and provider networks and contracts. We did not recognize any impairment losses
for the periods presented.

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. It also expands the scope of a discontinued
operation to include a component of an entity. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those years. The adoption of the provisions of SFAS
No. 144 did not have a material impact on our results of operations, financial
position or cash flows.
24

In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections as of April
2002," was issued. As a result of the rescission of SFAS No. 4, gains and losses
related to the extinguishment of debt should be classified as extraordinary only
if they meet the criteria outlined under APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-
Fund Requirements," was an amendment to SFAS No. 4 and is no longer necessary.
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," defined
accounting requirements for the effects of the transition to the Motor Carrier
Act of 1980. The transitions are complete and SFAS No. 44 is no longer
necessary. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," requiring
that any capital lease that is modified resulting in an operating lease should
be accounted for under the sale-leaseback provisions of SFAS No. 98 or SFAS No.
28, as applicable. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The adoption of the provisions of SFAS No. 145 is not expected to
have a material impact on our results of operations, financial position or cash
flows.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 is not expected to have a material impact on our
results of operations, financial position or cash flows.

In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," was issued. This Statement amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 and
APB Opinion No. 28, "Interim Financial Reporting," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years ending
after December 15, 2002 and for interim periods beginning after December 15,
2002. The adoption of the provisions of SFAS No. 148 did not have a material
impact on our results of operations, financial position or cash flows.

In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of SFAS No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34," was issued. FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees.

We have adopted the disclosure requirements of FIN 45 as required for
fiscal years ending after December 15, 2002 and will adopt the provisions for
initial recognition and measurement for all guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 related to initial recognition and
measurement of guarantees is not expected to have a significant impact on our
net income or equity. We have completed an inventory of potential contingencies
and noted one potential guarantee that would require the following disclosure in
our financial statement footnotes per FIN 45:

"Within the Company's Medicaid contract with the state of Wisconsin, the
Company is required to pay a fee if its contracted physicians do not
provide an adequate number of healthy examinations to certain member
groups. This agreement constitutes a performance guarantee. At the end of
each fiscal year, the Company performs an analysis to estimate the amount
owed to the state of Wisconsin, if any, under the performance guarantees.
The state of Wisconsin, however, does not calculate or request payment for
the amount owed until at least thirteen months subsequent to each year end.
As such, the Company has recorded a current payable for any portions owed
within one year and a long-term liability for portions

25

owed for a period greater than one year from the balance sheet date. As of
December 31, 2002 and 2001, the Company recorded $2.0 million and $829,000,
respectively, of accounts payable and other accrued expenses for the
current portions of the fees owed and $1.0 million at both year ends of
other long-term liabilities for the long-term portions."

On January 17, 2003, FIN 46, "Consolidation of Variable Interest Entities,
an interpretation of ARB 51," was issued. The primary objectives of FIN 46 are
to provide guidance on the identification and consolidation of variable interest
entities, or VIE, which are entities for which control is achieved through means
other than through voting rights. Our management has completed an analysis of
FIN 46 and has determined that we do not have any VIEs.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that relate to future
events or our future financial performance. We have attempted to identify these
statements by terminology including "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "seek," "goal," "may," "will," "should," "can," "continue"
or the negative of these terms or other comparable terminology. These statements
include statements about our market opportunity, our growth strategy,
competition, expected activities and future acquisitions and investments, and
the adequacy of our available cash resources. These statements may be found in
the sections of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." Readers are
cautioned that matters subject to forward-looking statements involve known and
unknown risks and uncertainties, including economic, regulatory, competitive and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions.

Actual results may differ from projections or estimates due to a variety of
important factors. Our results of operations and projections of future earnings
depend in large part on accurately predicting and effectively managing health
benefits and other operating expenses. A variety of factors, including
competition, changes in health care practices, changes in federal or state laws
and regulations or their interpretations, inflation, provider contract changes,
new technologies, government-imposed surcharges, taxes or assessments, reduction
in provider payments by governmental payers, major epidemics, disasters and
numerous other factors affecting the delivery and cost of healthcare, such as
major healthcare providers' inability to maintain their operations, may in the
future affect our ability to control our medical costs and other operating
expenses. Governmental action or business conditions could result in premium
revenues not increasing to offset any increase in medical costs and other
operating expenses. Once set, premiums are generally fixed for one year periods
and, accordingly, unanticipated costs during such periods cannot be recovered
through higher premiums. The expiration, cancellation or suspension of our
Medicaid managed care contracts by the state governments would also negatively
impact us. Due to these factors and risks, we cannot give assurances with
respect to our future premium levels or our ability to control our future
medical costs.

FACTORS THAT MAY AFFECT FUTURE RESULTS

RISKS RELATED TO BEING A REGULATED ENTITY

REDUCTIONS IN MEDICAID FUNDING COULD SUBSTANTIALLY REDUCE OUR PROFITABILITY.

Nearly all of our revenues come from Medicaid premiums. The base premium
rate paid by each state differs, depending on a combination of factors such as
defined upper payment limits, a member's health status, age, gender, county or
region, benefit mix and member eligibility categories. Future levels of Medicaid
premium rates may be affected by continued government efforts to contain medical
costs and may further be affected by state and federal budgetary constraints.
Changes to Medicaid programs could reduce the number of persons enrolled or
eligible, reduce the amount of reimbursement or payment levels, or increase our

26

administrative or healthcare costs under those programs. States periodically
consider reducing or reallocating the amount of money they spend for Medicaid.
We believe that additional reductions in Medicaid payments could substantially
reduce our profitability. Further, our contracts with the states are subject to
cancellation by the state immediately or after a short notice period in the
event of unavailability of state funds.

IF OUR MEDICAID AND SCHIP CONTRACTS ARE TERMINATED OR ARE NOT RENEWED, OUR
BUSINESS WILL SUFFER.

We provide managed care programs and select services to individuals
receiving benefits under Medicaid, including SSI and SCHIP. We provide these
healthcare services under contracts with regulatory entities in the areas in
which we operate. The contracts expire on various dates between June 30, 2003
and December 31, 2003. Our contracts with the states of Indiana and Wisconsin
accounted for 73% of our revenues for the year ended December 31, 2002. Our
contracts may be terminated if we fail to perform up to the standards set by
state regulatory agencies. In addition, the Indiana contract under which we
operate can be terminated by the state without cause. Our contracts are
generally intended to run for two years and may be extended for one or two
additional years if the state or its contractor elects to do so. When our
contracts expire, they may be opened for bidding by competing healthcare
providers. There is no guarantee that our contracts will be renewed or extended.
If any of our contracts is terminated, not renewed, or renewed on less favorable
terms, our business will suffer, and our operating results may be materially
affected.

CHANGES IN GOVERNMENT REGULATIONS DESIGNED TO PROTECT PROVIDERS AND MEMBERS
RATHER THAN OUR STOCKHOLDERS COULD FORCE US TO CHANGE HOW WE OPERATE AND COULD
HARM OUR BUSINESS.

Our business is extensively regulated by the states in which we operate and
by the federal government. The applicable laws and regulations are subject to
frequent change and generally are intended to benefit and protect health plan
providers and members rather than stockholders. Changes in existing laws and
rules, the enactment of new laws and rules, and changing interpretations of
these laws and rules could, among other things:

- force us to restructure our relationships with providers within our
network;

- require us to implement additional or different programs and systems;

- mandate minimum medical expense levels as a percentage of premiums
revenues;

- restrict revenue and enrollment growth;

- require us to develop plans to guard against the financial insolvency of
our providers;

- increase our healthcare and administrative costs; impose additional
capital and reserve requirements; and

- increase or change our liability to members in the event of malpractice
by our providers.

For example, Congress has considered various forms of patient protection
legislation commonly known as Patients' Bills of Rights. We cannot predict the
impact of this legislation, if adopted, on our business.

REGULATIONS MAY DECREASE THE PROFITABILITY OF OUR HEALTH PLANS.

Our Texas plans are required to pay a rebate to the state in the event
profits exceed established levels. To date no rebates have been required. This
regulatory requirement, changes in this requirement or the adoption of similar
requirements by our other regulators may limit our ability to increase our
overall profits as a percentage of revenues. The State of Texas has implemented
and is enforcing a penalty provision for failure to pay claims in a timely
manner. Failure to meet this requirement can result in financial fines and
penalties. In addition, states may attempt to reduce their contract premium
rates if regulators perceive our medical loss ratio as too low. Any of these
regulatory actions could harm our operating results.

Also, on January 18, 2002, CMS published a final rule that removed an
exception contained in the federal Medicaid reimbursement regulations permitting
states to reimburse non-state government-owned or operated hospitals for
inpatient and outpatient hospital services at amounts up to 150 percent of a
reasonable estimate
27

of the amount that would be paid for the services furnished by these hospitals
under Medicaid payment principles. This development in federal law could
decrease the profitability of our health plans.

FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD SUBJECT US TO CIVIL AND
CRIMINAL PENALTIES.

Federal and state governments have enacted fraud and abuse laws and other
laws to protect patients' privacy and access to healthcare. Violation of these
and other laws or regulations governing our operations or the operations of our
providers could result in the imposition of civil or criminal penalties, the
cancellation of our contracts to provide services, the suspension or revocation
of our licenses or our exclusion from participating in the Medicaid, SSI and
SCHIP programs. Because of these potential sanctions, we seek to monitor our
compliance and that of our providers with federal and state fraud and abuse and
other healthcare laws on an ongoing basis. These penalties or exclusions, were
they to occur as the result of our actions or omissions, or our inability to
monitor the compliance of our providers, would negatively impact our ability to
operate our business. For example, failure to pay our providers promptly could
result in the imposition of fines and other penalties. In some states, we may be
subject to regulation by more than one governmental authority, which may impose
overlapping or inconsistent regulations.

HIPAA broadened the scope of fraud and abuse laws applicable to healthcare
companies. HIPAA created civil penalties for, among other things, billing for
medically unnecessary goods or services. HIPAA established new enforcement
mechanisms to combat fraud and abuse, including a whistle blower program.
Further, HIPAA imposes civil and, in some instances, criminal penalties for
failure to comply with specific standards relating to the privacy, security and
electronic transmission of individually-identifiable health information.
Congress may enact additional legislation to increase penalties and to create a
private right of action under HIPAA, which would entitle patients to seek
monetary damages for violations of the privacy rules.

COMPLIANCE WITH NEW GOVERNMENT REGULATIONS MAY REQUIRE US TO MAKE SIGNIFICANT
EXPENDITURES.

In August 2000, HHS issued a new regulation under HIPAA requiring the use
of uniform electronic data transmission standards for healthcare claims and
payment transactions submitted or received electronically. We are required to
comply with the new regulation by October 2003, and Texas has indicated that it
may impose an earlier compliance deadline. In August 1998, HHS proposed a
regulation that would require healthcare participants to implement
organizational and technical practices to protect the security of electronically
maintained or transmitted health-related information. In December 2000, HHS
issued a new regulation mandating heightened privacy and confidentiality
protections under HIPAA that became effective on April 14, 2001. Compliance with
this regulation will be required by April 14, 2003.

The Bush Administration's issuance of new regulations and its review of
existing regulations, the states' ability to promulgate stricter rules, and
uncertainty regarding many aspects of the regulations may make compliance with
the relatively new regulatory landscape difficult. Our existing programs and
systems may not enable us to comply in all respects with these new regulations.
In order to comply with the regulatory requirements, we will be required to
employ additional or different programs and systems, the costs of which are not
expected to exceed $500,000 in 2003. Further, compliance with these regulations
would require changes to many of the procedures we currently use to conduct our
business, which may lead to additional costs that we have not yet identified. We
do not know whether, or the extent to which, we will be able to recover our
costs of complying with these new regulations from the states. The new
regulations and the related compliance costs could have a material adverse
effect on our business.

CHANGES IN HEALTHCARE LAW MAY REDUCE OUR PROFITABILITY.

Numerous proposals relating to changes in healthcare law have been
introduced, some of which have been passed by Congress and the states in which
we operate or may operate in the future. Changes in applicable laws and
regulations are continually being considered, and interpretations of existing
laws and rules may also change from time to time. We are unable to predict what
regulatory changes may occur or what effect any particular change may have on
our business. These changes could reduce the number of persons

28

enrolled or eligible for Medicaid and reduce the reimbursement or payment levels
for medical services. More generally, we are unable to predict whether new laws
or proposals will favor or hinder the growth of managed healthcare.

We cannot predict the outcome of these legislative or regulatory proposals
or the effect that they will have on us. Legislation or regulations that require
us to change our current manner of operation, provide additional benefits or
change our contract arrangements may seriously harm our operations and financial
results.

CHANGES IN FEDERAL FUNDING MECHANISMS MAY REDUCE OUR PROFITABILITY.

In February 2003, the Bush Administration proposed a major long-term change
in the way Medicaid and SCHIP are funded. The proposal, if adopted, would allow
states to elect to receive combined Medicaid-SCHIP "allotments" for acute and
long-term health care for low-income, uninsured persons. Participating states
would be given flexibility in designing their own health insurance programs,
subject to federally-mandated minimum coverage requirements. It is uncertain
whether this proposal will be enacted, or if so, how it may change from the
initial proposal. Accordingly, it is unknown whether or how many states might
elect to participate or how their participation may affect the net amount of
funding available for Medicaid and SCHIP programs. If such a proposal is adopted
and decreases the number of persons enrolled in Medicaid or SCHIP in the states
in which we operate or reduces the volume of health care services provided, our
growth, operations and financial performance could be adversely affected.

IF WE ARE UNABLE TO PARTICIPATE IN SCHIP PROGRAMS, OUR GROWTH RATE MAY BE
LIMITED.

SCHIP is a relatively new federal initiative designed to provide coverage
for low-income children not otherwise covered by Medicaid or other insurance
programs. The programs vary significantly from state to state. Participation in
SCHIP programs is an important part of our growth strategy. If states do not
allow us to participate or if we fail to win bids to participate, our growth
strategy may be materially and adversely affected.

IF STATE REGULATORS DO NOT APPROVE PAYMENTS OF DIVIDENDS AND DISTRIBUTIONS BY
OUR SUBSIDIARIES TO US, WE MAY NOT HAVE SUFFICIENT FUNDS TO IMPLEMENT OUR
BUSINESS STRATEGY.

We principally operate through our health plan subsidiaries. If funds
normally available to us become limited in the future, we may need to rely on
dividends and distributions from our subsidiaries to fund our operations. These
subsidiaries are subject to regulations that limit the amount of dividends and
distributions that can be paid to us without prior approval of, or notification
to, state regulators. If these regulators were to deny our subsidiaries' request
to pay dividends to us, the funds available to our company as a whole would be
limited. This could harm our ability to implement our business strategy.

RISKS RELATED TO OUR BUSINESS

RECEIPT OF INADEQUATE PREMIUMS WOULD NEGATIVELY AFFECT OUR REVENUES AND
PROFITABILITY.

Nearly all of our revenues are generated by premiums consisting of fixed
monthly payments per member. These premiums are fixed by contract, and we are
obligated during the contract periods to provide healthcare services as
established by the state governments. We use a large portion of our revenues to
pay the costs of healthcare services delivered to our customers. If premiums do
not increase when expenses related to medical services rise, our earnings would
be affected negatively. In addition, our actual medical services costs may
exceed our estimates, which would cause our health benefits ratio, or our
expenses related to medical services as a percentage of premium revenues, to
increase and our profits to decline. In addition, it is possible for a state to
increase the rates payable to the hospitals without granting a corresponding
increase in premiums to us. If this were to occur in one or more of the states
in which we operate, our profitability would be harmed.

29

FAILURE TO EFFECTIVELY MANAGE OUR MEDICAL COSTS OR RELATED ADMINISTRATIVE
COSTS WOULD REDUCE OUR PROFITABILITY.

Our profitability depends, to a significant degree, on our ability to
predict and effectively manage expenses related to health benefits. We have less
control over the costs related to medical services than we do over our general
and administrative expenses. Historically, our health benefits ratio has varied.
For example, our health benefits ratio was 82.3% for 2002, 82.8% for 2001 and
84.3% for 2000, but was 88.9% for 1999 and 88.4% for 1998. Because of the narrow
margins of our health plan business, relatively small changes in our health
benefits ratio can create significant changes in our financial results. Changes
in healthcare regulations and practices, the level of use of healthcare
services, hospital costs, pharmaceutical costs, major epidemics, new medical
technologies and other external factors, including general economic conditions
such as inflation levels, are beyond our control and could reduce our ability to
predict and effectively control the costs of providing health benefits. We may
not be able to manage costs effectively in the future. If our costs related to
health benefits increase, our profits could be reduced or we may not remain
profitable.

FAILURE TO ACCURATELY PREDICT OUR MEDICAL EXPENSES COULD NEGATIVELY AFFECT OUR
REPORTED RESULTS.

Our medical expenses include estimates of IBNR. We estimate our IBNR
medical expenses monthly based on a number of factors. Adjustments, if
necessary, are made to medical expenses in the period during which the actual
claim costs are ultimately determined or when criteria used to estimate IBNR
change. We cannot be sure that our IBNR estimates are adequate or that
adjustments to those estimates will not harm our results of operations. From
time to time in the past, our actual results have varied from our estimates,
particularly in times of significant changes in the number of our members. Our
failure to accurately estimate IBNR may also affect our ability to take timely
corrective actions, further harming our results.

DIFFICULTIES IN EXECUTING OUR ACQUISITION STRATEGY COULD ADVERSELY AFFECT OUR
BUSINESS.

Historically, the acquisition of Medicaid businesses, contract rights and
related assets of other health plans both in our existing service areas and in
new markets, has accounted for a significant amount of our growth. For example,
our acquisition of 80% of the equity of UHP on December 1, 2002, accounted for
30.3% of the increase in our membership for the year ended December 31, 2002
compared to 2001. Many of the other potential purchasers of Medicaid assets have
greater financial resources than we have. In addition, many of the sellers are
interested either in (1) selling, along with their Medicaid assets, other assets
in which we do not have an interest or (2) selling their companies, including
their liabilities, as opposed to the assets of their ongoing businesses.

We generally are required to obtain regulatory approval from one or more
state agencies when making acquisitions. In the case of an acquisition of a
business located in a state in which we do not currently operate, we would be
required to obtain the necessary licenses to operate in that state. In addition,
even if we may already operate in a state in which we acquire a new business, we
would be required to obtain additional regulatory approval if the acquisition
would result in our operating in an area of the state in which we did not
operate previously. We cannot assure you that we would be able to comply with
these regulatory requirements for an acquisition in a timely manner, or at all.
In deciding whether to approve a proposed acquisition, state regulators may
consider a number of factors outside our control, including giving preference to
competing offers made by locally owned entities or by not-for-profit entities.
Furthermore, our credit facility may prohibit some acquisitions without the
consent of our bank lender.

In addition to the difficulties we may face in identifying and consummating
acquisitions, we will also be required to integrate and consolidate any acquired
business or assets with our existing operations. This may include the
integration of:

- additional personnel who are not familiar with our operations and
corporate culture;

- existing provider networks, which may operate on different terms than our
existing networks;

30

- existing members, who may decide to switch to another healthcare plan;
and

- disparate administrative, accounting and finance, and information
systems.

Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. We also
may be unable to obtain sufficient additional capital resources for future
acquisitions. If we are unable to effectively execute our acquisition strategy,
our future growth will suffer and our results of operations could be harmed.

FAILURE TO ACHIEVE TIMELY PROFITABILITY IN ANY BUSINESS WOULD NEGATIVELY
AFFECT OUR RESULTS OF OPERATIONS.

Start-up costs associated with a new business can be substantial. For
example, in order to obtain a certificate of authority in most jurisdictions, we
must first establish a provider network, have systems in place and demonstrate
our ability to obtain a state contract and process claims. If we were
unsuccessful in obtaining the necessary license, winning the bid to provide
service or attracting members in numbers sufficient to cover our costs, any new
business of ours would fail. We also could be obligated by the state to continue
to provide services for some period of time without sufficient revenue to cover
our ongoing costs or recover start-up costs. In addition, we may not be able to
effectively commercialize any new programs or services we seek to market to
third parties. The expenses associated with starting up a new business could
have a significant impact on our results of operations if we are unable to
achieve profitable operations in a timely fashion.

WE DERIVE ALL OF OUR REVENUES FROM OPERATIONS IN FOUR STATES, AND OUR
OPERATING RESULTS WOULD BE MATERIALLY AFFECTED BY A DECREASE IN REVENUES OR
PROFITABILITY IN ANY ONE OF THOSE STATES.

Operations in Wisconsin, Indiana, Texas and New Jersey account for all of
our revenues. If we were unable to continue to operate in each of those states
or if our current operations in any portion of one of those states were
significantly curtailed, our revenues would decrease materially. In the first
half of 2001, our membership in Indiana declined by approximately 46,000 due to
a subcontracting provider organization terminating a percent-of-premium
arrangement. In 2000, we reduced our service area in Wisconsin from 36 to 18
counties. Our reliance on operations in a limited number of states could cause
our revenue and profitability to change suddenly and unexpectedly, depending on
legislative actions, economic conditions and similar factors in those states.
Our inability to continue to operate in any of the states in which we operate
would harm our business.

COMPETITION MAY LIMIT OUR ABILITY TO INCREASE PENETRATION OF THE MARKETS THAT
WE SERVE.

We compete for members principally on the basis of size and quality of
provider network, benefits provided and quality of service. We compete with
numerous types of competitors, including other health plans and traditional
state Medicaid programs that reimburse providers as care is provided. Subject to
limited exceptions by federally approved state applications, the federal
government requires that there be choices for Medicaid recipients among managed
care programs. Voluntary programs and mandated competition may limit our ability
to increase our market share.

Some of the health plans with which we compete have greater financial and
other resources and offer a broader scope of products than we do. In addition,
significant merger and acquisition activity has occurred in the managed care
industry, as well as in industries that act as suppliers to us, such as the
hospital, physician, pharmaceutical, medical device and health information
systems industries. To the extent that competition intensifies in any market
that we serve, our ability to retain or increase members and providers, or
maintain or increase our revenue growth, pricing flexibility and control over
medical cost trends may be adversely affected.

In addition, in order to increase our membership in the markets we
currently serve, we believe that we must continue to develop and implement
community-specific products, alliances with key providers and localized outreach
and educational programs. If we are unable to develop and implement these
initiatives, or

31

if our competitors are more successful than we are in doing so, we may not be
able to further penetrate our existing markets.

IF WE ARE UNABLE TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR PROVIDER
NETWORKS, OUR PROFITABILITY WILL BE HARMED.

Our profitability depends, in large part, upon our ability to contract
favorably with hospitals, physicians and other healthcare providers. Our
provider arrangements with our primary care physicians, specialists and
hospitals generally may be cancelled by either party without cause upon 90 to
120 days' prior written notice. We cannot guarantee that we will be able to
continue to renew our existing contracts or enter into new contracts enabling us
to service our members profitably.

From time to time providers assert or threaten to assert claims seeking to
terminate noncancelable agreements due to alleged actions or inactions by us.
Even if these allegations represent attempts to avoid or renegotiate contractual
terms that have become economically disadvantageous to the providers, it is
possible that in the future a provider may pursue such a claim successfully.
Regardless of whether any claims brought against us are successful or have
merit, they will still be time-consuming and costly and could distract our
management's attention. As a result, we may incur significant expenses and may
be unable to operate our business effectively.

We will be required to establish acceptable provider networks prior to
entering new markets. We may be unable to enter into agreements with providers
in new markets on a timely basis or under favorable terms. If we are unable to
retain our current provider contracts or enter into new provider contracts
timely or on favorable terms, our profitability will be harmed.

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL.

We are highly dependent on our ability to attract and retain qualified
personnel to operate and expand our Medicaid managed care business. If we lose
one or more members of our senior management team, including our chief executive
officer, Michael F. Neidorff, who has been instrumental in developing our
mission and forging our business relationships, our business and operating
results could be harmed. We do not have an employment agreement with Mr.
Neidorff, and we cannot assure you that we will be able to retain his services.
Our ability to replace any departed members of our senior management or other
key employees may be difficult and may take an extended period of time because
of the limited number of individuals in the Medicaid managed care industry with
the breadth of skills and experience required to operate and expand successfully
a business such as ours. Competition to hire from this limited pool is intense,
and we may be unable to hire, train, retain or motivate these personnel.

NEGATIVE PUBLICITY REGARDING THE MANAGED CARE INDUSTRY MAY HARM OUR BUSINESS
AND OPERATING RESULTS.

Recently, the managed care industry has received negative publicity. This
publicity has led to increased legislation, regulation, review of industry
practices and private litigation in the commercial sector. These factors may
adversely affect our ability to market our services, require us to change our
services, and increase the regulatory burdens under which we operate. Any of
these factors may increase the costs of doing business and adversely affect our
operating results.

CLAIMS RELATING TO MEDICAL MALPRACTICE COULD CAUSE US TO INCUR SIGNIFICANT
EXPENSES.

Our providers and employees involved in medical care decisions may be
subject to medical malpractice claims. Some states, including Texas, have
adopted legislation that permits managed care organizations to be held liable
for negligent treatment decisions or benefits coverage determinations. In
addition, plaintiffs in cases pending in federal courts are seeking to hold
managed care organizations liable for denying medically necessary treatment and
denying or delaying payments for services performed. Claims of this nature, if
successful, could result in substantial damage awards against us and our
providers that could exceed the limits of any applicable insurance coverage.
Therefore, successful malpractice or tort claims asserted against us, our
32

providers or our employees could adversely affect our financial condition and
profitability. Even if any claims brought against us are unsuccessful or without
merit, they would still be time-consuming and costly and could distract our
management's attention. As a result, we may incur significant expenses and may
be unable to operate our business effectively.

GROWTH IN THE NUMBER OF MEDICAID-ELIGIBLE PERSONS DURING ECONOMIC DOWNTURNS
COULD CAUSE OUR OPERATING RESULTS AND STOCK PRICES TO SUFFER IF STATE AND
FEDERAL BUDGETS DECREASE OR DO NOT INCREASE.

Less favorable economic conditions may cause our membership to increase as
more people become eligible to receive Medicaid benefits. During such economic
downturns, however, state and federal budgets could decrease, causing states to
attempt to cut healthcare programs, benefits and rates. In particular, we cannot
predict the impact of acts of terrorism or related military action on federal or
state funding of healthcare programs or on the size of the Medicaid-eligible
population. If federal funding were decreased or unchanged while our membership
was increasing, our results of operations would suffer.

GROWTH IN THE NUMBER OF MEDICAID-ELIGIBLE PERSONS MAY BE COUNTERCYCLICAL,
WHICH COULD CAUSE OUR OPERATING RESULTS TO SUFFER WHEN GENERAL ECONOMIC
CONDITIONS ARE IMPROVING.

Historically, the number of persons eligible to receive Medicaid benefits
has increased more rapidly during periods of rising unemployment, corresponding
to less favorable general economic conditions. Conversely, this number may grow
more slowly or even decline if economic conditions improve. Therefore,
improvements in general economic conditions may cause our membership levels to
decrease, thereby causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock prices in general are
increasing.

WE INTEND TO EXPAND PRIMARILY INTO MARKETS WHERE MEDICAID RECIPIENTS ARE
REQUIRED TO ENROLL IN MANAGED CARE PLANS.

We expect to continue to focus our business in states in which Medicaid
enrollment in managed care is mandatory. Currently, approximately two-thirds of
the states require health plan enrollment for Medicaid eligible participants in
all or a portion of their counties. The programs are voluntary in other states.
Because we concentrate on markets with mandatory enrollment, we expect the
geographic expansion of our business to be limited to those states.

IF WE ARE UNABLE TO INTEGRATE AND MANAGE OUR INFORMATION SYSTEMS EFFECTIVELY,
OUR OPERATIONS COULD BE DISRUPTED.

Our operations depend significantly on effective information systems. The
information gathered and processed by our information systems assists us in,
among other things, monitoring utilization and other cost factors, processing
provider claims, and providing data to our regulators. Our providers also depend
upon our information systems for membership verifications, claims status and
other information.

Our information systems and applications require continual maintenance,
upgrading and enhancement to meet our operational needs. Moreover, our
acquisition activity requires frequent transitions to or from, and the
integration of, various information systems. We regularly upgrade and expand our
information systems capabilities. If we experience difficulties with the
transition to or from information systems or are unable to properly maintain or
expand our information systems, we could suffer, among other things, from
operational disruptions, loss of existing members and difficulty in attracting
new members, regulatory problems and increases in administrative expenses. In
addition, our ability to integrate and manage our information systems may be
impaired as the result of events outside our control, including acts of nature,
such as earthquakes or fires, or acts of terrorists.

WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN ADEQUATE INSURANCE.

We maintain liability insurance, subject to limits and deductibles, for
claims that could result from providing or failing to provide managed care and
related services. These claims could be substantial. We
33

believe that our present insurance coverage and reserves are adequate to cover
currently estimated exposures. We cannot assure you that we will be able to
obtain adequate insurance coverage in the future at acceptable costs or that we
will not incur significant liabilities in excess of policy limits.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INVESTMENTS

As of December 31, 2002, we had short-term investments of $9.6 million and
long-term investments of $95.4 million, including restricted deposits of $15.8
million. The short-term investments consist of highly liquid securities with
maturities between three and 12 months. The long-term investments consist of
municipal bonds, U.S. government-backed agencies and U.S. Treasury investments,
and have original maturities greater than one year. Restricted deposits consist
of investments required by various state statutes to be deposited or pledged to
state agencies. These investments are classified as long-term regardless of the
contractual maturity date due to the nature of the state's requirements. These
investments are subject to interest rate risk and will decrease in value if
market rates increase. We have the ability to hold these short-term investments
to maturity, and as a result, we would not expect the value of these investments
to decline significantly as a result of a sudden change in market interest
rates. Assuming a hypothetical and immediate 1% increase in market interest
rates at December 31, 2002, the fair value of our fixed income investments would
decrease by approximately $2.6 million. Similarly, a 1% decrease in market
interest rates at December 31, 2002 would result in an increase of the fair
value of our investments of approximately $2.6 million. Declines in interest
rates over time will reduce our investment income.

INFLATION

Although the general rate of inflation has remained relatively stable and
healthcare cost inflation has stabilized in recent years, the national
healthcare cost inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of healthcare cost
inflation. Specifically, our health plans try to control medical and hospital
costs through contracts with independent providers of healthcare services.
Through these contracted care providers, our health plans emphasize preventive
healthcare and appropriate use of specialty and hospital services.

While we currently believe our strategies to mitigate healthcare cost
inflation will continue to be successful, competitive pressures, new healthcare
and pharmaceutical product introductions, demands from healthcare providers and
customers, applicable regulations or other factors may affect our ability to
control the impact of healthcare cost increases.

COMPLIANCE COSTS

Federal and state regulations governing standards for electronic
transactions, data security and confidentiality of patient information have been
issued recently. Due to the uncertainty surrounding the regulatory requirements,
we cannot be sure that the systems and programs that we have implemented will
comply adequately with the regulations that are ultimately adopted.
Implementation of additional systems and programs will be required, the cost of
which we estimate not to exceed $500,000 in 2003. Further, compliance with these
regulations would require changes to many of the procedures we currently use to
conduct our business, which may lead to additional costs that we have not yet
identified. We do not know whether, or the extent to which, we will be able to
recover our costs of complying with these new regulations from the states.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and related notes thereto required by
this item are set forth on the pages indicated in Item 15.

34

CENTENE CORPORATION

QUARTERLY SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA AND MEMBERSHIP DATA)
(UNAUDITED)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) DIRECTORS

Information concerning our directors will appear in our Proxy Statement for
our 2003 annual meeting of stockholders under "Election of Directors." This
portion of the Proxy Statement is incorporated herein by reference.

35

(b) EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information regarding our executive officers
and key employees, including their ages at January 31, 2003:

Michael F. Neidorff has served as our President, Chief Executive Officer
and as a member of our board of directors since May 1996. From May 1996 to
November 2001, Mr. Neidorff also served as our Treasurer. From 1995 to 1996, Mr.
Neidorff served as a Regional Vice President of Coventry Corporation, a publicly
traded managed care organization, and as the President and Chief Executive
Officer of one of its subsidiaries, Group Health Plan, Inc. From 1985 to 1995,
Mr. Neidorff served as the President and Chief Executive Officer of Physicians
Health Plan of Greater St. Louis, a subsidiary of United Healthcare Corp., a
publicly traded managed care organization now known as UnitedHealth Group
Incorporated.

Joseph P. Drozda, Jr., M.D. has served as our Senior Vice President,
Medical Affairs since November 2000 and served as our part-time Medical Director
from January 2000 through October 2000. From June 1999 to October 2000, Dr.
Drozda was self-employed as a consultant to managed care organizations,
physician groups, hospital networks and employer groups on a variety of managed
care delivery and financing issues. From 1996 to April 1999, Dr. Drozda served
as the Vice President of Medical Management of SSM Health Care, a health
services network. From 1994 to 1996, Dr. Drozda was the Vice President and Chief
Medical Officer of PHP, Inc., a health maintenance organization based in North
Carolina. From 1987 until 1994, Dr. Drozda served as Medical Director of
Physicians Health Plan of Greater St. Louis, a health plan that he co-founded.

Carol E. Goldman has served as Senior Vice President, Chief Administration
Officer since July 2002. From September 2001 to June 2002, Ms. Goldman served as
our Plan Director of Human Resources. From July 1998 to August 2001, Ms. Goldman
was Human Resources Manager at Mallinckrodt Inc., a medical device and
pharmaceutical company. From June 1996 to June 1998, Ms. Goldman served as
Compensation Analyst for Mallinckrodt.

Catherine M. Halverson has served as our Senior Vice President, Business
Development since September 2001. From March 2001 to September 2001, Ms.
Halverson was self-employed as a consultant to a pharmaceutical benefit
management company and Medicaid managed care plans. From 1993 to March 2001, Ms.
Halverson was the Vice President and Director of Medicaid Programs of
UnitedHealth Group Incorporated.

36

Daniel R. Paquin has served as our Senior Vice President, Health Plan
Business Group since January 2003. From January 2002 to December 2002, Mr.
Paquin served as Regional President, Midwest/Medicaid for UnitedHealth Group.
From February 1999 to January 2002, Mr. Paquin served as Senior Vice President,
Operations at AmeriChoice Health Services, a managed care organization. From
April 1997 to February 1999, Mr. Paquin was the Regional Vice President,
Northeast Region of Comprehensive Care Corporation, a managed care organization.

Brian G. Spanel has served as our Senior Vice President and Chief
Information Officer since December 1996. From 1988 to 1996, Mr. Spanel served as
President of GBS Consultants, a healthcare consulting and help desk software
developer. From 1987 to 1988, Mr. Spanel was Director of Information Services
for CompCare, a managed care organization. From 1984 to 1987, Mr. Spanel was
Director of Information Services for Peak Health Care, a managed care
organization.

John D. Tadich has served as our Senior Vice President, Specialty Companies
since November 2002. From September 1997 to October 2002, Mr. Tadich was a
private investor and consultant in the healthcare industry. From January 1992 to
September 1997, Mr. Tadich served as President of United Behavioral Health, a
specialty company within UnitedHealth Group.

Karey L. Witty has served as our Senior Vice President and Chief Financial
Officer since August 2000, as our Secretary since February 2000 and as our
Treasurer since November 2001. From March 1999 to August 2000, Mr. Witty served
as our Vice President of Health Plan Accounting. From 1996 to March 1999, Mr.
Witty was Controller of Heritage Health Systems, Inc., a healthcare company in
Nashville, Tennessee. From 1994 to 1996, Mr. Witty served as Director of
Accounting for Healthwise of America, Inc., a publicly traded managed care
organization. Mr. Witty is a Certified Public Accountant.

Christopher D. Bowers has served as the President and Chief Executive
Officer of Superior HealthPlan, our health plan in Texas, since April 2002. From
October 2000 to March 2002, Mr. Bowers was the Vice President of Operations for
Physicians Health Plan of Southwest Michigan, Inc. (PHP) and IBA Health & Life
Assurance Company, which are wholly owned subsidiaries of the Bronson Healthcare
Group. From 1996 to September 2000, Mr. Bowers served as the Director of
Government Programs, Kalamazoo, Michigan, for UnitedHealth Group. While directly
working for Bronson Healthcare Group, Mr. Bowers served as the Assistant Vice
President of Community Relations and the Assistant Vice President of Strategic
Planning and Development.

Kathleen R. Crampton has served as the President and Chief Executive
Officer of Managed Health Services Insurance Corp., our health plan in
Wisconsin, since June 2000. From November 1999 to May 2000, Ms. Crampton was a
Senior Consultant for PricewaterhouseCoopers LLC. From June 1996 to October
1999, Ms. Crampton served as Vice President of the Patterson Group, a private
consulting firm serving health maintenance organizations and their service
providers and medical manufacturers. From 1993 to 1996, Ms. Crampton served as
Vice President of Marketing for Healthtech Services Corporation, a home care
robotics and telemedicine information systems company.

Rita Johnson-Mills has served as the President and Chief Executive Officer
of Coordinated Care Corporation, our health plan in Indiana, since April 2001.
From March 2000 to April 2001, Ms. Johnson-Mills served as the Chief Operating
Officer of Coordinated Care Corporation. From July 1999 to March 2000, Ms.
Johnson-Mills was a Senior Vice President and the Chief Operating Officer of
Coordinated Care Corporation. From 1995 to March 1999, Ms. Johnson-Mills served
as Senior Vice President and Chief Operating Officer of DC Chartered Health
Plan, Inc., a health maintenance organization.

Alexander H. McLean has served as the President and Chief Executive Officer
of University Health Plans, a health plan in New Jersey of which we acquired
control in December 2002, since May 1999. From October 1997 to May 1999, Mr.
McLean served as the Chief Operating Officer of UHP. From February 1995 to
October 1997, Mr. McLean was employed by Ernst & Young LLP as a Senior
Consultant in Ernst & Young's healthcare practices.

Information concerning our executive officers' compliance with Section
16(a) of the Securities Exchange Act will appear in our Proxy Statement for our
2003 annual meeting of stockholders under "Section 16(a)
37

Beneficial Ownership Reporting Compliance." This portion of our Proxy Statement
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation will appear in our Proxy
Statement for our 2003 annual meeting of stockholders under "Executive
Compensation" and "Employment Agreements." This portion of the Proxy Statement
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information concerning the security ownership of certain beneficial owners
and management and our equity compensation plans will appear in our Proxy
Statement for our 2003 annual meeting of stockholders under "Principal
Stockholders "and "Equity Plan Information." These portions of the Proxy
Statement are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning certain relationships and related transactions will
appear in our Proxy Statement for our 2003 annual meeting of stockholders under
"Transactions with Management." This portion of our Proxy Statement is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on their
evaluations as of a date within 90 days of the filing date of this report, our
principal executive officer and principal financial officer, with the
participation of our full management team, have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.

Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

38

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. CONSOLIDATED FINANCIAL STATEMENTS

3. EXHIBITS

The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.

(b) Reports on Form 8-K.

On June 20, 2002, we filed a current report on Form 8-K with respect to
our engagement of PricewaterhouseCoopers LLP as our independent accounts
succeeding Arthur Andersen LLP.

On August 30, 2002, we filed a current report on Form 8-K with respect
to our adoption of a Shareholder Rights Plan.

On December 1, 2002, we filed a current report on Form 8-K with respect
to our acquisition of 80% of the outstanding capital stock of UHP.

39

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Centene Corporation:

In our opinion, the accompanying consolidated balance sheet as of December
31, 2002, and the related consolidated statement of earnings, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Centene Corporation and its subsidiaries (the "Company") at December
31, 2002, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated February 1, 2002.

As discussed in Note 3 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill to conform with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."

/S/ PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
February 14, 2003

40

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Centene Corporation:

We have audited the accompanying consolidated balance sheets of Centene
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centene
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

/S/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 1, 2002

41

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these balance sheets.

42

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

The accompanying notes are an integral part of these statements.

43

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

44

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

45

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. ORGANIZATION AND OPERATIONS

Centene Corporation (Centene or the Company) provides managed care programs
and related services to individuals receiving benefits under Medicaid, including
Supplemental Security Income (SSI), and State Children's Health Insurance
Program (SCHIP). Centene operates under its own state licenses in Wisconsin,
Indiana, Texas and New Jersey, and contracts with other managed care
organizations to provide risk and nonrisk management services.

Centene's managed care organization (MCO) subsidiaries include Managed
Health Services Insurance Corp. (MHSIC), a wholly owned Wisconsin corporation;
Coordinated Care Corporation Indiana, Inc. (CCCI), a wholly owned Indiana
corporation; Superior HealthPlan, Inc. (Superior), a wholly owned Texas
corporation (39% before January 1, 2001); and University Health Plans, Inc.
(UHP), an 80% owned New Jersey corporation.

Centene's other subsidiaries include Bankers Reserve Life Insurance Company
of Wisconsin (Bankers Reserve), a wholly owned Wisconsin corporation that the
Company purchased on March 14, 2002, and NurseWise, Inc., a wholly owned
Delaware corporation that was incorporated in August of 2002.

The Company is currently operated as one business segment, which includes
both its underwritten and administrative only services provided to individuals
receiving benefits under Medicaid, including SSI, and SCHIP.

2. INITIAL PUBLIC OFFERING AND FOLLOW-ON

On December 13, 2001, the Company completed an initial public offering
(IPO) of 3,250,000 shares of its common stock at $14.00 per share. The net
proceeds, after paying the underwriting discount and expenses associated with
the offering, were $41,000. In conjunction with the IPO all outstanding shares
of preferred stock were converted into shares of common stock in accordance with
their terms.

On May 22, 2002, the Company closed a follow-on public offering of
5,000,000 shares of common stock at $24.75 per share. Of the 5,000,000 shares,
4,600,000 shares were offered by selling stockholders and 400,000 by the
Company. On June 5, 2002, the underwriters of the follow-on public offering
exercised their over-allotment option to purchase 679,505 additional shares from
selling stockholders and 70,495 additional shares from the Company. Centene
received net proceeds of $10,300 from the two closings of the follow-on
offering.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of
Centene Corporation and all majority owned subsidiaries. All material
intercompany balances and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Investments with original maturities of three months or less at the date of
acquisition are considered to be cash equivalents. Cash equivalents consist of
commercial paper, money market funds and bank savings accounts.

INVESTMENTS

Short-term investments include securities with original maturities between
three months and one year. Long-term investments include securities with
original maturities greater than one year.

46

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Short-term and long-term investments are classified as available for sale
and are carried at fair value based on quoted market prices. Unrealized gains
and losses on investments available for sale are excluded from earnings and
reported as a separate component of stockholders' equity, net of income tax
effects. Premiums and discounts are amortized or accreted over the life of the
related security using the effective interest method. The Company monitors the
difference between the cost and fair value of investments. Investments that
experience a decline in value that is judged to be other than temporary are
written down to fair value and a realized loss is recorded in investment and
other income. To calculate realized gains and losses on the sale of investments,
the Company uses the specific amortized cost of each investment sold. Realized
gains and losses are recorded in investment and other income.

As part of the Company's acquisition of UHP, certain call and put option
rights were received and granted (See Note 21). The Company is in the process of
obtaining third party valuations related to the fair value of the call and put
options, which may result in an increase or decrease in the portion of the
purchase price allocated to goodwill. The fair value of the call option, once
determined, will be evaluated for impairment. To the extent that impairment
would be determined, adjustments would be recorded as a charge to investment
income. The fair value of the put option, once determined, will be evaluated on
a quarterly basis, with adjustments in the fair values being recorded as a
charge or credit to investment income.

The Company did not own any unaffiliated equity investments as of December
31, 2002. During 2002 and 2001, the Company maintained an equity investment in
an unaffiliated reinsurance company. The estimated fair value of this
investment, which approximated the original cost, was not significant and was
included within other long-term investments as of December 31, 2001. This
investment was sold in July 2002.

RESTRICTED DEPOSITS

Restricted deposits consist of investments required by various state
statutes to be deposited or pledged to state agencies. These investments are
classified as long-term, regardless of the contractual maturity date due to the
nature of the states' requirements.

Under the State of New Jersey Department of Banking and Insurance (DOBI)
regulations, UHP is required to maintain certain insolvency deposits in a
custodial account for the protection of enrollees. UHP is entitled to receive
interest income on these deposits; however, the principal may not be withdrawn
without the written consent of the Commissioner of the DOBI. The minimum deposit
requirement is calculated on December 31 of each year and must be funded by June
30 of the following year. The restricted amounts are invested in money market
funds. The minimum deposit requirement based on the December 31, 2002
calculation is $15,422. The total unfunded balance at December 31, 2002 is
$3,237. The Company intends to fund the minimum deposit requirement from
unrestricted cash and cash equivalents.

All other restricted deposit requirements were fully funded on December 31,
2002.

PROPERTY AND EQUIPMENT

Furniture, equipment and leasehold improvements are carried at cost less
accumulated depreciation. Depreciation for furniture and equipment, other than
computer equipment, is calculated based on the estimated useful lives of the
assets ranging between five and seven years. Depreciation for computer equipment
is calculated using the straight-line method based on a three-year life.
Software is stated at cost and is amortized over its estimated useful life of
three years using the straight-line method. Depreciation for leasehold
improvements is calculated using the straight-line method based on the shorter
of the estimated useful lives of the asset or the term of the respective leases,
ranging between three and ten years.

47

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

Intangible assets represent the excess of cost over the fair market value
of net assets acquired in purchase transactions and consist of purchased
contract rights, provider contracts and goodwill. Purchased contract rights are
amortized using the straight-line method over periods ranging from 60 to 120
months. Provider contracts are amortized using the straight-line method over 120
months.

Effective January 1, 2002, the Company ceased to amortize goodwill in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill
is reviewed at least annually for impairment. In addition, the Company will
perform an impairment analysis of intangible assets more frequently based on
other factors. Such factors would include, but are not limited to, significant
changes in membership, state funding, medical contracts and provider networks
and contracts. An impairment loss is recognized if the carrying value of
goodwill exceeds the implied fair value. The Company did not recognize any
impairment losses for the periods presented.

MEDICAL CLAIMS LIABILITIES

Medical services costs include claims paid, claims adjudicated but not yet
paid, estimates for claims received but not yet adjudicated, estimates for
claims incurred but not yet received and estimates for the costs necessary to
process unpaid claims.

The estimates of medical claims liabilities are developed using standard
actuarial methods based upon historical data for payment patterns, cost trends,
product mix, seasonality, utilization of healthcare services and other relevant
factors including product changes. These estimates are continually reviewed and
adjustments, if necessary, are reflected in the period known.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include accrued wages and related
payroll taxes, federal and state tax payables and payments owed to vendors for
services performed in the normal course of business.

OTHER ASSETS AND LIABILITIES

Other assets and liabilities consist principally of Separate Account assets
of $4,298 and related Separate Account liabilities of $4,298 as of December 31,
2002 (See Note 24). In addition, other liabilities include certain payments due
to various states related to minimum performance guarantees.

PREMIUM REVENUE AND RELATED RECEIVABLES

The majority of the Company's premium revenue is received monthly based on
fixed rates per member as determined by the state contracts. Some contracts
allow for additional premium related to certain supplemental services provided
such as maternity deliveries. The revenue is recognized as earned over the
covered period of services. Premiums collected in advance are recorded as
unearned premiums. Premiums due to the Company are recorded as premium and
related receivables and are recorded net of an allowance based on historical
trends and management's judgement on the collectibility of these accounts.

As the Company generally receives premiums during the month in which
services are provided, the allowance is typically not significant in comparison
to total premium revenue. From 1998 to 2000, however, Centene provided Medicaid
services in certain regions of Indiana as a subcontractor with Maxicare Indiana,
Inc. In June 2001, the Insurance Commissioner of the Indiana Department of
Insurance declared Maxicare insolvent and ordered Maxicare into liquidation. As
a result, Centene recorded an allowance for uncollectible receivables in the
amount of $2,700 to fully reserve for all receivables from Maxicare as of
December 31, 2001. In 2002, subsequent to a release and settlement agreement
with Maxicare and the Indiana Insurance

48

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Commissioner which requires no payment by either Maxicare or Centene, Centene
wrote off the entire balance of the receivable from Maxicare as uncollectible
and reduced the related allowance for doubtful accounts. There are no
contractual allowances related to Centene's premium revenue.

SIGNIFICANT CUSTOMERS

Centene receives the majority of its revenues under contracts or
subcontracts with state Medicaid managed care programs. The contracts, which
expire on various dates between June 30, 2003 and December 31, 2003, are
expected to be renewed. Our contracts with the states of Wisconsin, Indiana and
Texas accounted for 44%, 30% and 24%, respectively, of the Company's revenues
for the year ended December 31, 2002.

REINSURANCE

Centene's MCO subsidiaries have purchased reinsurance from third parties to
cover eligible healthcare services. The current reinsurance agreements generally
cover 90% of inpatient healthcare expenses in excess of annual deductibles of
$75 to $150 per member, up to a lifetime maximum of $2,000. The subsidiaries are
responsible for inpatient charges in excess of an average daily per diem.

Reinsurance recoveries were approximately $1,542, $3,958 and $1,454 in
2002, 2001 and 2000, respectively. Reinsurance expenses were approximately
$3,981, $10,252 and $3,391 in 2002, 2001 and 2000, respectively. Reinsurance
recoveries, net of expenses, are included in medical services costs.

OTHER INCOME (EXPENSE)

Other income (expense) consists principally of investment and other income
and interest expense. Investment income is derived from the Company's cash, cash
equivalents and investments. For the year ended December 31, 2002, investment
income included a $5,100 one-time dividend from a captive insurance company in
which the Company maintained an investment. For the year ended December 31,
2000, other income included equity in losses from a joint venture. Interest
expense for the year ended December 31, 2002, included commitment fees paid to a
bank in conjunction with the Company's revolving line of credit. Interest
expense for the years ended December 31, 2001 and 2000, reflected interest paid
on the Company's subordinated notes, which were paid in full in December 2001.

INCOME TAXES

Centene recognizes deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the tax rate change.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

49

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

Certain 2001 amounts in the consolidated financial statements have been
reclassified to conform to the 2002 presentation. These reclassifications have
no effect on net earnings or shareholders' equity as previously reported.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," was issued which requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested at least annually for impairment. The Company has adopted SFAS
No. 142 effective January 1, 2002 and goodwill amortization was discontinued.
Goodwill is reviewed at least annually for impairment. In addition, the Company
will perform an impairment analysis of intangible assets more frequently based
on other factors. Such factors would include, but are not limited to,
significant changes in membership, state funding, medical contracts and provider
networks and contracts. The Company did not recognize any impairment losses for
the periods presented.

The effect of this adjustment on net earnings as well as basic and diluted
earnings per share for the years ended December 31, 2001 and 2000, follows:

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued. SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets. It also expands the scope of a discontinued
operation to include a component of an entity. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those years. The adoption of the provisions of SFAS
No. 144 did not have a material impact on the Company's results of operations,
financial position or cash flows.

In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections as of April
2002," was issued. As a result of the rescission of SFAS No. 4, gains and losses
related to the extinguishment of debt should be classified as extraordinary only
if they meet the criteria outlined under APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently

50

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Occurring Events and Transactions." SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements," was an amendment to SFAS No. 4 and is no
longer necessary. SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," defined accounting requirements for the effects of the transition to
the Motor Carrier Act of 1980. The transitions are complete and SFAS No. 44 is
no longer necessary. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases,"
requiring that any capital lease that is modified resulting in an operating
lease should be accounted for under the sale-leaseback provisions of SFAS No. 98
or SFAS No. 28, as applicable. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. The adoption of the provisions of SFAS No. 145 is
not expected to have a material impact on the Company's results of operations,
financial position or cash flows.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. It requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.

In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," was issued. This Statement amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 and
APB Opinion No. 28, "Interim Financial Reporting," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years ending
after December 15, 2002 and for interim periods beginning after December 15,
2002. The adoption of the provisions of SFAS No. 148 did not have a material
impact on the Company's results of operations, financial position or cash flows.

In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of SFAS No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34," was issued. FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees.

Centene has adopted the disclosure requirements of FIN 45 as required for
fiscal years ending after December 15, 2002 and will adopt the provisions for
initial recognition and measurement for all guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 related to initial recognition and
measurement of guarantees is not expected have a significant impact on the net
income or equity of the Company. The Company has completed an inventory of
potential contingencies and noted one potential guarantee that would require the
following disclosure per FIN 45:

"Within the Company's Medicaid contract with the state of Wisconsin, the
Company is required to pay a fee if its contracted physicians do not
provide an adequate number of healthy examinations to certain member
groups. This agreement constitutes a performance guarantee. At the end of
each fiscal year, the Company performs an analysis to estimate the amount
owed to the state of Wisconsin, if any, under the performance guarantees.
The state of Wisconsin, however, does not calculate or request payment for
the amount owed until at least thirteen months subsequent to each year end.
As such, the Company has recorded a current payable for any portions owed
within one year and a long-term liability for portions owed for a period
greater than one year from the balance sheet date. As of December 31, 2002
and 2001, the Company recorded $2,004 and $829, respectively, of accounts
payable and other accrued
51

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expenses for the current portions of the fees owed and $1,036 and $1,000,
respectively, of other long-term liabilities for the long-term portions."

On January 17, 2003, FIN 46, "Consolidation of Variable Interest Entities,
an interpretation of ARB 51," was issued. The primary objectives of FIN 46 are
to provide guidance on the identification and consolidation of variable interest
entities, or VIE's, which are entities for which control is achieved through
means other than through voting rights. The Company has completed an analysis of
FIN 46 and has determined that it does not have any VIEs.

4. SHORT-TERM AND LONG-TERM INVESTMENTS AND RESTRICTED DEPOSITS

Short-term and long-term investments and restricted deposits available for
sale by investment type consist of the following:

The contractual maturity of short-term and long-term investments and
restricted deposits as of December 31, 2002, are as follows:

Actual maturities may differ from contractual maturities due to call or
prepayment options.

52

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company recorded realized gains and losses on the sale of investments
for the years ended December 31 as follows:

Various state statutes require MCOs to deposit or pledge minimum amounts of
investments to state agencies. Securities with an amortized cost of $15,561 and
$1,204 were deposited or pledged to state agencies by Centene's MCO subsidiaries
at December 31, 2002 and 2001, respectively. These investments are classified as
long-term restricted deposits in the consolidated financial statements due to
the nature of the states' requirements.

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31:

Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $1,887, $1,199, and $810, respectively.

6. INTANGIBLE ASSETS

Intangible assets at December 31 consist of the following:

53

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization expense was $367, $648 and $224 for the years ended December
31, 2002, 2001 and 2000, respectively. The estimated amortization expense for
each of the next five years, assuming no further acquisitions, is approximately
$800.

7. INCOME TAXES

Centene files a consolidated federal income tax return while Centene and
each subsidiary file separate state income tax returns.

The consolidated income tax expense (benefit) consists of the following for
the years ended December 31:

The following is a reconciliation of the expected income tax expense
(benefit) as calculated by multiplying pretax income by federal statutory rates
and Centene's actual income tax benefit for the years ended December 31:

Federal statutory rates for the years ended December 31, 2002, 2001 and
2000 were 35%, 35% and 34%, respectively.

54

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Temporary differences that give rise to deferred tax assets and liabilities
are presented below for the years ended December 31:

The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management determined that a valuation allowance was no longer
necessary for its federal net operating loss carryforward as of December 31,
2000. As a result, the income tax benefit recorded for 2000 includes the
reversal of $3,764 of deferred tax valuation allowance.

55

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. MEDICAL CLAIMS LIABILITIES

The change in medical claims liabilities is summarized as follows:

Acquisitions in 2002 include reserves acquired in connection with the
Company's acquisition of 80% of the outstanding capital stock of UHP.

Changes in estimates of incurred claims for prior years recognized during
2002 were attributable to favorable development in all of our markets, including
lower than anticipated utilization of medical services.

The Company had reinsurance recoverables related to paid and unpaid medical
claims liabilities of $2,738 and $1,202 at December 31, 2002 and 2001,
respectively, included in premiums and other receivables.

9. REVOLVING LINE OF CREDIT

In May 2002, the Company entered into a $25,000 revolving line of credit
facility with LaSalle Bank N.A. The line of credit has a term of one year and
has interest rates based on prime, floating and LIBOR rates. The Company granted
a security interest in the common stock of its subsidiaries. The facility
includes financial covenants, including requirements of minimum EBITDA and
minimum tangible net worth. The Company is required to obtain LaSalle's consent
of any proposed acquisition that would result in a violation of any of the
covenants contained in the line of credit. As of December 31, 2002, no funds had
been drawn on the facility.

10. NOTES PAYABLE AND SUBORDINATED DEBT

As of December 31, 2002 and 2001, the Company has no outstanding debt.

During 2001 and 2000, the Company had subordinate promissory notes with
principal balances due ranging from $0 to $4,000. Interest was due and payable
annually in September at a rate of 8.5%. In the event that the Company did not
comply with the terms of the subordinated promissory notes, the Company would be
considered to be in default on its debt and the interest rate would be 10.5%.

During 2000, the Company was in default on its promissory notes due to late
interest payments. In December 2001, all of the promissory notes and related
accrued interest were paid in full. Interest expense for the years ended
December 31, 2001 and 2000 was $362 and $611, respectively.

56

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. REDEEMABLE PREFERRED STOCK

Upon completion of the Company's IPO in December 2001, all outstanding
shares of Series D redeemable preferred stock were converted into 3,716,000
shares of common stock.

Series D preferred stock was convertible, at the option of the holder, into
common stock at an initial conversion rate of one common share for each
preferred share and was automatically converted at an initial public offering.
Series D preferred stock was redeemable for cash at the option of the holder for
up to 50% of that holder's Series D preferred stock outstanding on each of
September 1, 2003, and September 1, 2004, at a price equal to the sum of (1)
$5.50 per share plus (2) an amount equal to any dividends declared or accrued
but unpaid on such shares. Series D preferred stock was entitled to an initial
liquidation preference in the amount of $5.00 per share.

Redeemable preferred stock is summarized as follows:

12. STOCKHOLDERS' EQUITY

Upon completion of the Company's IPO in December 2001, each outstanding
share of each class of common stock and preferred stock was converted into one
share of a single class of $.001 par value common stock. Prior to the IPO, the
Company had three classes of preferred stock outstanding and included in equity.
They were Series A, Series B and Series C preferred stock.

Holders of common stock are entitled to one vote for each share of common
stock held.

Effective November 2001, the Company changed its state of incorporation
from Wisconsin to Delaware. Under the Delaware Certificate of Incorporation, the
Company has 10,000,000 authorized shares of preferred stock at $.001 par value
and 40,000,000 authorized shares of common stock at $.001 par value. At December
31, 2002, there were no preferred shares outstanding.

During 2001, Centene had warrants outstanding to purchase 60,000 shares of
the Company's Series D preferred stock at an exercise price of $5.00 per share.
In addition, there were warrants outstanding to purchase 7,432 of the Company's
common stock at an exercise price of $2.40 per share. Prior to the completion of
the Company's IPO, all outstanding warrants were exercised.

13. STATUTORY CAPITAL REQUIREMENTS

Various state laws require Centene's subsidiaries to maintain minimum
capital requirements. At December 31, 2002 and 2001, Centene's subsidiaries had
aggregate statutory capital and surplus of $36,900

57

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and $16,300, respectively, compared with the required minimum aggregate
statutory capital and surplus of $22,000 and $9,100, respectively.

14. DIVIDEND RESTRICTIONS

Under the laws of the states of which the Company operates, the Company's
regulated subsidiaries are required to obtain approval for dividends from the
appropriate state regulatory body. The Company received dividends of $4,000 from
its managed care subsidiaries during 2002. No dividends were declared in 2001 or
2000.

15. STOCK OPTION PLANS

As of December 31, 2002, Centene had five stock option plans (the Plans)
for issuance of common stock. The Plans allow for the granting of options to
purchase common stock at the market price at the date of grant for key
employees, consultants, and other individual contributors of or to Centene. Both
incentive options and nonqualified stock options can be awarded under the Plans.
Each option awarded under the Plans is exercisable as determined by the Board of
Directors upon grant. Further, depending on the type of grant, no option will be
exercisable for longer than ten years after date of grant. The Plans have
reserved 2,200,000 shares for option grants. Options granted generally vest over
a five-year period. Vesting generally begins on the anniversary of the date of
grant and annually thereafter.

Option activity for the years ended December 31 is summarized below:

58

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about options outstanding as of
December 31, 2002:

The Company accounts for the Plans in accordance with the intrinsic value
based method of Accounting Principles Board Opinion No. 25 as permitted by SFAS
No. 123. Accordingly, compensation cost related to stock options issued to
employees is calculated on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. Compensation expense is then
recognized on a straight-line basis over the years the employees' services are
received (over the vesting period), generally five years. No compensation cost
related to the Plans was charged against income during 2000. During 2002 and
2001, the Company recognized $270 and $6, respectively, in noncash compensation
expense related to the issuance of stock options. Had compensation cost for the
Plans been determined based on the fair value method at the grant dates as
specified in SFAS No. 123, Centene's net earnings would have been reduced to the
following pro forma amounts:

59

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant is estimated on the date of the grant
using an option pricing model with the following assumptions: no dividend yield;
expected volatility of 1% through the date of the IPO; 50% through the end of
2001; and 54% for 2002, risk-free interest rate of 3.6%, 4.9% and 5.3% and
expected lives of 7.4, 7.6 and 7.7 for the years ended December 31, 2002, 2001
and 2000, respectively.

During 2002, Centene implemented an employee stock purchase plan. Under
this plan, eligible employees are permitted to purchase shares of the Company's
common stock at a discounted price through payroll withholdings. At the end of
each plan period, the Company issues stock to participating employees at a price
equal to 85% of the lesser of the closing stock price on either the first
business day of the plan period or the exercise date. The Company has reserved
300,000 shares of common stock and issued 1,792 shares in 2002.

16. RETIREMENT PLAN

Centene has a defined contribution plan (Retirement Plan) which covers
substantially all employees who work at least 1,000 hours in a twelve
consecutive month period and are at least twenty-one years of age. Under the
Retirement Plan, eligible employees may contribute a percentage of their base
salary, subject to certain limitations. Centene may elect to match a portion of
the employee's contribution. In addition, Centene may make a profit sharing
contribution to the Retirement Plan covering all eligible employees. Expenses
under the Retirement Plan were $312, $306 and $203 during the years ended
December 31, 2002, 2001 and 2000, respectively.

During 2002, Centene implemented an executive retirement savings plan
(Executive Plan). This Plan is a voluntary, nonqualified deferred compensation
plan designed to provide executive employees with tax-deferred savings
opportunities. Under the Executive Plan, eligible employees may contribute a
percentage of their base salary, subject to certain limitations.

17. RELATED-PARTY TRANSACTIONS

No related party transactions occurred in 2002. Certain members of
Centene's Board of Directors performed consulting services for the Company
totaling $3 in 2001 and $36 in 2000. Legal fees of $94 and $48 were paid in 2001
and 2000, respectively, to a law firm affiliated through a stockholder of the
Company.

18. COMMITMENTS

Centene and its subsidiaries lease office facilities and various equipment
under noncancelable operating leases. In addition to base rental costs, Centene
and its subsidiaries are responsible for property taxes and maintenance for both
facility and equipment leases. Rental expense was $2,109, $1,704 and $1,383 for
the years ended December 31, 2002, 2001 and 2000, respectively. The significant
annual noncancelable lease payments over the next five years and thereafter are
as follows:

2003........................................................ $ 3,241
2004........................................................ 3,124
2005........................................................ 3,026
2006........................................................ 2,661
2007........................................................ 2,396
Thereafter.................................................. 7,624
-------
$22,072
=======

60

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. RISKS AND UNCERTAINTIES

The Company is a party to various legal actions normally associated with
the managed care industry, the aggregate effect of which is presently unknown.

The Company's profitability depends in large part on accurately predicting
and effectively managing medical services costs. The Company continually reviews
its premium and benefit structure to reflect its underlying claims experience
and revised actuarial data; however, several factors could adversely affect the
medical services costs. Certain of these factors, which include changes in
healthcare practices, inflation, new technologies, major epidemics, natural
disasters and malpractice litigation, are beyond any health plan's control and
could adversely affect the Company's ability to accurately predict and
effectively control healthcare costs. Costs in excess of those anticipated could
have a material adverse effect on the Company's results of operations.

Financial instruments that potentially subject the Company to
concentrations of credit and interest rate risks consist primarily of cash and
cash equivalents, investments in marketable securities and accounts receivable.
The Company invests its excess cash in interest bearing deposits with major
banks, commercial paper, government and agency securities, and money market
funds. Investments in marketable securities are managed within guidelines
established by the Company's Board of Directors. The Company carries these
investments at fair value.

Concentrations of credit risk with respect to accounts receivable are
limited due to significant customers paying as services are rendered.
Significant customers include the federal government and the states in which
Centene operates. The Company has a risk of incurring loss if its allowance for
doubtful accounts is not adequate.

As discussed in Note 3 to the consolidated financial statements, the
Company has reinsurance agreements with insurance companies. The Company
monitors the insurance companies' financial ratings to determine compliance with
standards set by state law. The Company has a credit risk associated with these
reinsurance agreements to the extent the reinsurers are unable to pay valid
reinsurance claims of the Company.

61

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. EARNINGS PER SHARE

The following table sets forth the calculation of basic and diluted net
earnings per share for the years ended December 31:

21. JOINT VENTURES -- UNIVERSITY HEALTH PLANS, INC.

On December 1, 2002, Centene purchased 80% of the outstanding capital stock
of University Health Plans, Inc. UHP is a managed health plan serving
approximately 53,000 Medicaid members in 15 counties throughout New Jersey.
Centene paid approximately $10,630 in cash and expenses. In accordance with
terms in the agreement, the purchase price may be adjusted based on certain
conditions up to one year after the acquisition date. The results of operation
for UHP are included in the consolidated financial statements since December 1,
2002. Centene will operate UHP as a joint venture with the third-party owner,
and Centene will manage UHP's operations in a manner consistent with its other
Medicaid health plans. The joint venture investment is consistent with Centene's
strategy to enter new markets where it sees an opportunity for organic growth in
Medicaid managed care.

The stock purchase agreement provides terms for Centene's future purchase
of the remaining 20% of UHP's outstanding capital stock. This future purchase is
in the form of a call and put option. The call option allows Centene to purchase
the additional 20% of outstanding shares for cash within nine months after the
original acquisition date at an aggregate purchase price of $2,600. The put
option requires the third party owner to transfer, convey, assign and deliver
the additional 20% of outstanding common stock to Centene on the third
anniversary following the original acquisition date. The put option allows
Centene to acquire the additional shares based on its "deemed value" at such
point in time. The "deemed value" is defined as an amount equal to the greater
of (i) $2,600 or (ii) the enterprise value, as established by mutual agreement
of the parties, of UHP as of the date of exchange multiplied by the percentage
of the outstanding common stock.

The condensed balance sheet below includes the purchase price allocation at
the acquisition date. Goodwill is not amortized and is not deductible for tax
purposes. The state contract and provider network will be amortized over a
ten-year period. The value of the common stock acquired is being determined
based on the fair value of tangible assets and liabilities acquired as well as
external valuations of identifiable intangible assets.

62

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Centene is in the process of obtaining third party valuations related to
certain intangible assets, including the value associated with the options to
purchase the remaining 20% of UHP's outstanding common stock; thus, the
allocation of the purchase price is subject to refinement.

ASSETS
Cash and cash equivalents................................... $ 3,324
Premium and related receivables............................. 6,604
Other current assets........................................ 215
Property and equipment, net................................. 468
Restricted deposits......................................... 12,173
Intangible assets:
Goodwill.................................................. 3,791
Purchased contract rights................................. 1,400
Provider network.......................................... 2,400
-------
Total assets.............................................. $30,375
=======

LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued medical claims...................................... $16,230
Accounts payable and accrued liabilities.................... 2,518
Minority interest........................................... 997
Stockholders' equity........................................ 10,630
-------
Total liabilities and stockholders' equity.................. $30,375
=======

The following unaudited pro forma information presents the results of
operations of Centene and subsidiaries as if the acquisition described above had
occurred as of January 1, 2001. Effective July 1, 2002, the state of New Jersey
excluded the General Assistance population from managed care programs. In
addition, effective November 22, 2002, in contemplation of its Stock Purchase
Agreement with Centene, UHP entered into an agreement with a third party related
to its commercial membership. Any members not enrolling with the third party
will not be renewed by UHP. As a result, pro forma adjustments include UHP
earnings before taxes excluding the financial results of the General Assistance
population and the commercial membership. In addition, the pro forma adjustments
include the amortization of intangibles, excluding goodwill, before taxes of
$348 in 2002 and $380 in 2001. The pro forma adjustments to earnings are net of
taxes at Centene's effective tax rates and have been adjusted for the 20%
minority interest in UHP by a third party. These pro forma results may not
necessarily reflect the actual results of operations that would have been
achieved, nor are they necessarily indicative of future results of operations.

63

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22. JOINT VENTURES -- SUPERIOR HEALTHPLAN, INC.

From 1998 through 2000, Centene owned 39% of Superior and, therefore,
accounted for the investment under the equity method of accounting. Superior
participates in the state of Texas medical assistance program. Superior had no
enrolled membership during 1998, but became fully operational on December 1,
1999. Under the terms of a management agreement, a wholly owned subsidiary of
Centene performs third-party administrative services for Superior. This
agreement generated $4,936 of administrative service fees during 2000.

Summary financial information for Superior as of and for the year ended
December 31 follows:

Effective January 1, 2001, Centene purchased an additional 51% of Superior
for $290 in cash, increasing Centene's ownership to 90%. Centene began
consolidating Superior's operations from that point forward. When the change in
ownership occurred, goodwill of $1,200 was recorded as part of the transaction.
In December 2001, Centene purchased the remaining shares of Superior for $100 in
stock, increasing Centene's ownership to 100%. At December 31, 2001, all
intercompany transactions between Centene and Superior have been eliminated in
consolidation.

The following unaudited pro forma summary information presents the
consolidated statement of earnings information as if the aforementioned
transaction had been consummated on January 1, 2000, and does not purport to be
indicative of what would have occurred had the acquisition been made at that
date or of the results which may occur in the future.

23. CONTRACT ACQUISITIONS

In June 2002, Superior HealthPlan entered into an agreement with Texas
Universities Health Plan Inc. to purchase the SCHIP contracts in three Texas
service areas. Effective September 1, October 1 and November 1, 2002, the state
of Texas approved the contract sales between Superior and Texas Universities
Health Plan. As a result of this transaction, $595 was recorded as an intangible
asset, purchased contract rights. Centene is amortizing the contract rights on a
straight-line basis over five years, the period expected to be benefited.

In December 2000, MHSIC and Superior entered into agreements with Humana
Inc. to transfer Humana's Medicaid contract with the state of Wisconsin to MHSIC
and Humana's Medicaid contract with the state of Texas to Superior. Effective
February 1, 2001, the state of Wisconsin approved the agreement, thereby
allowing MHSIC to serve approximately 35,000 additional members in the state.
Effective February 1, 2001, the state of Texas approved a management agreement
between Superior and Humana Inc., thereby allowing Superior to manage
approximately 30,000 additional members in Texas. As a result of these

64

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transactions, $1,250 was recorded as an intangible asset purchased contract
rights. Centene is amortizing the contract rights on a straight-line basis over
five years, the period expected to be benefited.

24. BANKERS RESERVE ACQUISITION

On March 14, 2002, the Company completed an acquisition of Bankers Reserve
Life Insurance Company of Wisconsin (Bankers Reserve) for a cash purchase price
of $3,527. The Company allocated the purchase price to net tangible and
identifiable intangible assets based on their fair value. Centene allocated $479
to identifiable intangible assets, representing the value assigned to acquired
licenses, which are being amortized on a straight-line basis over a period of
ten years. The Company accounted for this acquisition under the purchase method
of accounting and accordingly, the consolidated results of operations include
the results of the acquired Bankers Reserve business from the date of
acquisition. The Company has excluded pro forma disclosures related to the
impact of Bankers Reserve on the results of operations for the twelve-month
period ended December 31, 2002, as well as the comparable period in the
preceding year. Such disclosures have been excluded as there are no significant
continuing operations as of the date of acquisition, outside of the run-off of
Separate Account activity.

As part of the acquisition, the Company acquired $5,200 of Separate Account
assets and $5,200 of Separate Account liabilities. The acquired Separate Account
assets and liabilities represent fixed rate annuity contracts with various
maturity dates. Concurrent with the acquisition of Bankers Reserve, the Company
entered into a 100% coinsurance reinsurance agreement with an unaffiliated party
to reinsure the guaranteed cash value, annuity benefit, surrender benefit and
death benefits associated with these contracts. The reinsurance premiums paid
for this coverage equal the net administrative fee earned and received by the
Company on the annuity contracts. Accordingly, there is no income statement
impact to the Company as a result of acquiring the Separate Account assets and
liabilities. The Separate Account balances, which are being liquidated and paid
to insureds as annuities mature, do not have a minimum guarantee benefit beyond
the cash surrender value of the policy.

Centene acquired Bankers Reserve for the purpose of providing reinsurance
coverage to its existing managed care Medicaid entities. It is not currently
anticipated that Bankers Reserve would be used to offer reinsurance to
unaffiliated entities.

The intercompany reinsurance activity is eliminated on a consolidated
basis.

65

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of Centene Corporation:

Our audit of the consolidated financial statements of Centene Corporation
referred to in our report dated February 14, 2003 included in this Form 10-K
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

St. Louis, Missouri
February 14, 2003

66

SCHEDULE II

CENTENE CORPORATION

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

67

EXHIBIT INDEX

- -------------------------

+ Confidential treatment has been granted for a portion of this exhibit pursuant
to Rule 406 promulgated under the Securities Act.

70

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, as of February 24,
2003.

CENTENE CORPORATION

By: /s/ MICHAEL F. NEIDORFF
------------------------------------
Michael F. Neidorff
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and indicated, as of February 24, 2003.

71

CERTIFICATIONS

I, Michael F. Neidorff, certify that:

1. I have reviewed this annual report on Form 10-K of Centene Corporation;

2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Centene Corporation as of, and for, the periods presented in this annual report;

4. Karey L. Witty, the Senior Vice President, Chief Financial Officer and
Treasurer of Centene Corporation, and I:

- are responsible for establishing and maintaining disclosure controls and
procedures (as defined for purposes of Rule 13a-14 under the Securities
and Exchange Act of 1934, as amended) for Centene Corporation;

- have designed such disclosure controls and procedures to ensure that
material information relating to Centene Corporation, including its
consolidated subsidiaries, is made known to us by others within those
entitling, particularly during the period in which this annual report was
prepared;

- have evaluated the effectiveness of the disclosure controls and
procedures of Centene Corporation as of a date within 90 days prior to
the filing date of this annual report; and

- have presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on the
required evaluation as of that date;

5. Mr. Witty and I have disclosed, based on our most recent evaluation, to
the auditors of Centene Corporation and to the audit committee of the board of
directors of Centene Corporation:

- all significant deficiencies in the design or operation of internal
controls that could adversely affect the ability of Centene Corporation
to record, process, summarize and report financial data and have
identified for such auditors any material weaknesses in internal
controls; and

- any fraud, whether or not material, that involves management or other
employees who have a significant role in the internal controls of Centene
Corporation; and

6. Mr. Witty and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ MICHAEL F. NEIDORFF
--------------------------------------
Michael F. Neidorff
President and Chief Executive Officer
(principal executive officer)

Date: February 24, 2003

72

CERTIFICATIONS

I, Karey L. Witty, certify that:

1. I have reviewed this annual report on Form 10-K of Centene Corporation;

2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Centene Corporation as of, and for, the periods presented in this annual report;

4. Mr. Michael F. Neidorff, the President and Chief Executive Officer of
Centene Corporation, and I:

- are responsible for establishing and maintaining disclosure controls and
procedures (as defined for purposes of Rule 13a-14 under the Securities
and Exchange Act of 1934, as amended) for Centene Corporation;

- have designed such disclosure controls and procedures to ensure that
material information relating to Centene Corporation, including its
consolidated subsidiaries, is made known to us by others within those
entitling, particularly during the period in which this annual report was
prepared;

- have evaluated the effectiveness of the disclosure controls and
procedures of Centene Corporation as of a date within 90 days prior to
the filing date of this quarterly report; and

- have presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on the
required evaluation as of that date;

5. Mr. Neidorff and I have disclosed, based on our most recent evaluation,
to the auditors of Centene Corporation and to the audit committee of the board
of directors of Centene Corporation:

- all significant deficiencies in the design or operation of internal
controls that could adversely affect the ability of Centene Corporation
to record, process, summarize and report financial data and have
identified for such auditors any material weaknesses in internal
controls; and

- any fraud, whether or not material, that involves management or other
employees who have a significant role in the internal controls of Centene
Corporation; and

6. Mr. Neidorff and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ KAREY L. WITTY
--------------------------------------
Karey L. Witty
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and
accounting officer)

Date: February 24, 2003

73