WELLPOINT HEALTH NETWORKS INC /DE/ - 10-Q Quarterly Report

WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

Title of each class		Outstanding at November 6, 2002
Common Stock, $0.01 par value		148,758,828 shares

WellPoint Health Networks Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)

WellPoint Health Networks Inc.
Consolidated Statements of Cash Flows
(Unaudited)

WellPoint Health Networks, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

WellPoint Health Networks Inc. (the "Company" or "WellPoint") is one of the nation's largest publicly traded managed health care companies. As of September 30, 2002, WellPoint had approximately 13.1 million medical members and approximately 46.6 million specialty members. The Company offers a broad spectrum of network-based managed care plans. WellPoint provides these plans to the large and small employer, individual and senior markets. The Company's managed care plans include preferred provider organizations ("PPOs"), health maintenance organizations ("HMOs"), point-of-service ("POS") plans, other hybrid medical plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial service, network access, medical cost management and claims processing. The Company also provides a broad array of specialty and other products and services including pharmacy, dental, utilization management, vision, life insurance, preventive care, disability, behavioral health, medicare supplements, COBRA and flexible benefits account administration. The Company markets its products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia, in various parts of Missouri (including the greater St. Louis area) under the name Blue Cross Blue Shield of Missouri and in various parts of the country under the name UNICARE or HealthLink. The Company holds the exclusive right in California to market its products under the Blue Cross name and mark and in Georgia and in 85 counties in Missouri (including the greater St. Louis area) to market its products under the Blue Cross Blue Shield names and marks. The Company's customer base is diversified, with extensive membership among large and small employer groups and individuals and a growing presence in the Medicare and Medicaid markets.

The accompanying unaudited consolidated financial statements of WellPoint, in the opinion of management, reflect all material adjustments (which are of a normal recurring nature) necessary for a fair statement of its financial position as of September 30, 2002, the results of its operations for the quarter and nine months ended September 30, 2002 and 2001, cash flows for the nine months ended September 30, 2002 and 2001 and its changes in stockholders' equity for the nine months ended September 30, 2002. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year.

On March 15, 2002, WellPoint effected a two-for-one split of the Company's Common Stock. The stock split was in the form of a stock dividend of one additional share of WellPoint stock for each share held. Share and per share data for all periods presented herein have been adjusted to give effect to the stock split.

In 1996, the Company began pursuing a nationwide expansion strategy through selective acquisitions and start-up activities in key geographic areas. More recently, the Company has focused on acquiring businesses that provide significant concentrations of members in strategic locations outside of California. In connection with this strategy, the Company completed its acquisitions of MethodistCare, Inc. ("MethodistCare") and RightCHOICE Managed Care, Inc. ("RightCHOICE") in 2002 and Cerulean Companies, Inc. ("Cerulean") in 2001.

On April 30, 2002, the Company completed the acquisition of MethodistCare serving over 70,000 members in the Houston, Texas area. This acquisition is intended to enable UNICARE, WellPoint's national operating unit, to expand its product line by offering HMO products along with other open-access products in MethodistCare's service area. As a result of the acquisition, the Company recognized extraordinary gains of $4.9 million and $8.9 million, or $0.03 and $0.06 per share assuming full dilution, for the quarter and nine months ended September 30, 2002, respectively, due to an excess of the fair value of net assets over acquisition costs.

On January 31, 2002, WellPoint completed its merger, through its wholly owned subsidiary, RWP Acquisition Corp., with RightCHOICE, the parent company of Blue Cross and Blue Shield of Missouri, which served approximately 2.2 million medical members as of January 31, 2002. Under the terms of the transaction, total consideration paid to all holders of RightCHOICE common stock and holders of employee stock options in the merger was approximately $379.1 million in cash and 16.5 million shares of WellPoint Common Stock. The Company issued approximately 11.1 million shares from treasury stock and the remaining 5.4 million shares from newly issued shares of WellPoint Common Stock. The total purchase price of approximately $1,442.1 million was used to purchase net assets with a fair value of approximately $304.9 million. This acquisition was accounted for under the purchase method of accounting and, accordingly, the consolidated results of operations of the Company include the results of RightCHOICE from the date of acquisition. As a result of the acquisition of RightCHOICE, the Company estimates that it will incur $114.8 million in expenses primarily related to change-in-control payments to RightCHOICE management and transaction costs. Generally accepted accounting principles require that these expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. Goodwill and other intangibles totaling $1,341.1 million includes $108.4 million of deferred and current tax liabilities relating to identified intangibles. With the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and other intangible assets with indefinite useful lives are no longer amortized, but instead subject to impairment tests. Identified intangibles with definite useful lives are being amortized on a straight-line basis or the timing of related cash flows depending upon the expected amortization pattern over 15 to 20 years. The valuation process is not yet complete and, as a result, the useful lives and method of amortization are only preliminary estimates. The current estimated purchase price allocation between goodwill and identifiable intangible assets is $1,075.0 million and $266.1 million, respectively.

On March 15, 2001, the Company completed its acquisition of Cerulean, the parent company of Blue Cross Blue Shield of Georgia, Inc., which served approximately 1.9 million medical members in the state of Georgia as of March 31, 2001. This acquisition was accounted for under the purchase method of accounting and, accordingly, the consolidated results of operations of the Company include the results of Cerulean from the date of acquisition. The cash purchase price was $700.0 million. As a result of the acquisition of Cerulean, the Company incurred $134.5 million in expenses primarily related to change in control payments to Cerulean management and transaction costs. Generally accepted accounting principles require that these expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. Cash of $200.0 million and debt of $500.0 million were used to purchase net assets with a fair value of approximately $334.8 million. Goodwill and other intangibles totaling $602.9 million includes $149.1 million of deferred and current tax liabilities relating to identified intangibles. Other intangibles with definite useful lives are being amortized using a straight-line basis or the timing of related cash flows depending upon the expected amortization pattern over five to 25 years. The purchase price allocation between goodwill and identifiable intangible assets is $235.3 million and $367.6 million, respectively.

In accordance with the requirements of Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), the following unaudited pro forma summary presents revenues, net income and per share data of WellPoint as if the acquisitions of Cerulean, RightCHOICE and MethodistCare had occurred on January 1, 2001. The pro forma information includes the results of operations for each acquired entity for the period prior to its acquisition, adjusted for interest expense on long-term debt incurred to fund the acquisitions, amortization of goodwill and intangible assets and the related income tax effects. The pro forma financial information for the quarter and nine months ended September 30, 2001 is presented under the requirements of APB Opinion No. 16, "Business Combinations," which allows for amortization of goodwill and other intangible assets with indefinite useful lives. The pro forma financial information for the quarter and nine months ended September 30, 2002 is presented under the requirements of SFAS No. 141, which eliminates the amortization of goodwill and other intangible assets with indefinite useful lives. For comparability purposes, the pro forma financial information for the quarter and nine months ended September 30, 2001 have also been presented under the requirements of SFAS No. 141.

The pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations had the Company been a single entity during the quarter and nine months ended September 30, 2002 and 2001, nor is it necessarily indicative of future results of operations. Pro forma earnings per share is based on 145.5 million and 143.7 million weighted average shares outstanding for the quarter ended September 30, 2002 and 2001, respectively. Pro forma earnings per share assuming full dilution is based on 152.8 million and 150.6 million weighted average shares outstanding for the quarter ended September 30, 2002 and 2001, respectively. Pro forma earnings per share is based on 145.0 million and 143.1 million weighted average shares outstanding for the nine months ended September 30, 2002 and 2001, respectively. Pro forma earnings per share assuming full dilution is based on 152.4 million and 149.7 million weighted average shares outstanding for the nine months ended September 30, 2002 and 2001, respectively.

For the nine months ended September 30, 2001, the adjusted pro forma income before extraordinary items and adjusted pro forma net income includes a $13.1 million after-tax gain resulting from MethodistCare's sale of its investment in a limited liability partnership operating in a large multi-practice medical group.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The provisions of SFAS No. 141 also apply to all business combinations consummated after June 30, 2001. SFAS No. 142, effective for fiscal years beginning after December 15, 2001, eliminates amortization of goodwill and other intangible assets with indefinite useful lives. Rather, these assets are subject to the impairment tests at least annually.

The Company adopted SFAS No. 142 on January 1, 2002 and no longer amortizes goodwill and other intangible assets with indefinite useful lives. The Company also completed the evaluation of its goodwill and other intangible assets and determined that there was no impairment loss. The following table shows net income and earnings per share adjusted to reflect the adoption of the non-amortization provisions of SFAS No. 142 as of the beginning of the respective periods:

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2002 are as follows:

Upon adoption of SFAS No. 141, the Company reclassified $3.5 million of other intangible assets to goodwill since they did not meet the criteria for recognition apart from goodwill. The reclassification is for the assembled workforce intangible assets acquired from previous acquisitions.

On January 31, 2002, WellPoint completed its merger with RightCHOICE as discussed in Note 3—Acquisitions. As a result of the acquisition of RightCHOICE, the Company recorded $1,075.0 million of goodwill and $266.1 million of identifiable intangible assets. The valuation process is not yet complete and, therefore, the allocation between goodwill and other intangible assets recorded as of September 30, 2002 represents an estimate. The Company assumes no residual value for its amortizable intangible assets. Based on the preliminary valuation, the following table presents details of the acquired amortized and non-amortized intangible assets of RightCHOICE at cost as of September 30, 2002:

On March 15, 2001, WellPoint completed its merger with Cerulean as discussed in Note 3—Acquisitions. As a result of the acquisition of Cerulean, the Company recorded $235.3 million of goodwill and $367.6 million of identifiable intangible assets. The Company assumes no residual value for its amortizable intangible assets. The following table presents details of the acquired amortized and non-amortized intangible assets of Cerulean at cost as of September 30, 2002:

The gross carrying value, accumulated amortization and net carrying value of other intangible assets as of September 30, 2002 and December 31, 2001 are as follows (amounts in thousands):

For the three months and nine months ended September 30, 2002, amortization expense relating to intangible assets was $9.8 million and $28.2 million, respectively. For the three months and nine months ended September 30, 2001, amortization expense relating to goodwill and intangible assets was $17.3 million and $45.9 million, respectively. The following table presents the Company's estimated annual amortization expense for amortized intangible assets for each of the years ending December 31, 2002, 2003, 2004, 2005 and 2006 (amounts in thousands).

These estimates were calculated based on the gross carrying value of amortized intangible assets as of September 30, 2002 using the applicable amortization period.

For year ending December 31, 2002	$	37,952
For year ending December 31, 2003		36,258
For year ending December 31, 2004		33,839
For year ending December 31, 2005		31,657
For year ending December 31, 2006		27,318

On January 16, 2002, the Company issued $350.0 million aggregate principal amount at maturity of 6³/8% Notes due January 15, 2012 (the "2002 Notes"). The net proceeds of this offering totaled approximately $348.9 million. The net proceeds from the sale of the 2002 Notes were used to finance the RightCHOICE merger discussed in Note 3—Acquisitions. The 2002 Notes bear interest at a rate of 6³/8% per annum, payable semi-annually in arrears on January 15 and July 15 of each year commencing July 15, 2002. Interest is computed on the basis of a 360-day year of twelve 30-day months. At September 30, 2002, the Company had $349.0 million (based upon the principal amount of $350.0 million less discount) of 2002 Notes outstanding. The related interest expense and amortization of discount for the quarter and nine months ended September 30, 2002 totaled $5.9 million and $16.4 million, respectively.

The 2002 Notes may be redeemed, in whole or in part, at the Company's option at any time. The redemption price for any 2002 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2002 Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2002 Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semiannual basis at the Treasury rate as determined by the Reference Treasury Dealer (J.P. Morgan Securities Inc. or Deutsche Banc Alex Brown or their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the 2002 Notes to the redemption date.

On June 15, 2001, the Company issued $450.0 million aggregate principal amount at maturity of 6³/8% Notes due June 15, 2006 (the "2001 Notes"). The net proceeds of this offering totaled approximately $449.0 million. The net proceeds from the sale of the 2001 Notes were used for repayment of indebtedness under the Company's revolving credit facilities. The 2001 Notes bear interest at a rate of 6³/8% per annum, payable semi-annually in arrears on June 15 and December 15 of each year commencing December 15, 2001. Interest is computed on the basis of a 360-day year of twelve 30-day months. At September 30, 2002, the Company had $449.2 million (based upon the principal amount of $450.0 million less discount) of 2001 Notes outstanding. The related interest expense and amortization of discount for the quarter and nine months ended September 30, 2002 totaled $7.6 million and $22.5 million, respectively.

The 2001 Notes may be redeemed, in whole or in part, at the Company's option at any time. The redemption price for any 2001 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2001 Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2001 Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semi-annual basis at the Treasury rate as determined by the designated Reference Treasury Dealer (Salomon Smith Barney Inc. or UBS Warburg LLC or their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the 2001 Notes to the redemption date.

In order to mitigate interest rate fluctuations associated with its 2001 Notes, the Company, on January 15, 2002, entered into a $200 million notional amount interest rate swap agreement. The swap agreement is a contract to exchange a fixed 6³/8% rate for a LIBOR-based floating rate. The swap agreement expires June 15, 2006. As of September 30, 2002, the Company recognized a fair value liability adjustment of $15.0 million to the 2001 Notes. The Company recognized settlement income of

$1.7 million and $4.5 million for the quarter and nine months ended September 30, 2002, respectively, related to this interest rate swap which offset the interest expense above. (See Note 10 to the Consolidated Financial Statements).

The 2002 and 2001 Notes are unsecured obligations and rank equally with all of the Company's existing and future senior unsecured indebtedness. All existing and future liabilities of the Company's subsidiaries are and will be effectively senior to the 2002 and 2001 Notes. The indenture governing the 2002 and 2001 Notes contains a covenant that limits the Company's ability and that of the Company's subsidiaries to create liens on Company property or assets to secure certain indebtedness without also securing the 2002 and 2001 Notes.

Borrowings under the facilities are made on a committed basis or, in the case of the $750.0 million facility, pursuant to an auction bid process. The $750.0 million facility also contains sublimits for letters of credit and "swingline" loans. Each credit agreement requires the Company to maintain certain financial ratios and contains restrictive convenants, including restrictions on the occurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in control. During the nine months ended September 30, 2002, the Company repaid its entire indebtedness under the revolving credit facility of $235.0 million at December 31, 2001, which had an effective interest rate at the time of 2.76%. This repayment was funded in part by the Company's incurrence of indebtedness described below under the heading "Commercial Paper Program."

The agreement provides for interest on committed advances at rates determined by reference to the bank's base rate or to the London InterBank Offered Rate ("LIBOR") plus a margin determined by reference to the Company's senior unsecured long-term debt rating by specified rating agencies. Interest is determined using whichever of these methods is the most favorable to the Company.

Borrowings under the credit facility are made on a committed basis or pursuant to an auction-bid process. A facility fee based on the facility amount, regardless of utilization, is payable quarterly. The facility fee rate is also determined by the senior unsecured debt ratings or the leverage ratio of the Company.

On July 2, 1999, the Company issued $299.0 million aggregate principal amount at maturity of zero coupon convertible subordinated debentures due 2019 (the "Debentures"). The proceeds totaled approximately $200.8 million. The Debentures accrue interest at a yield to maturity of 2.0% per year compounded semi-annually. Holders have the option to convert the Debentures into the Company's common stock at any time prior to maturity at a rate of 13.594 shares per $1,000 principal amount at maturity. In lieu of delivering shares of common stock upon conversion of any Debentures, the

Company may elect to pay cash for the Debentures in an amount equal to the last reported sales price of its common stock on the trading day preceding the conversion date. The Debentures are subordinate in right of payment to all existing and future senior indebtedness.

On October 6, 1999, the Board of Directors authorized the repurchase of some or all of the Company's Debentures for cash. The Company did not repurchase any Debentures during the nine months ended September 30, 2002 and year ended December 31, 2001.

As of September 30, 2002 and December 31, 2001, the Company had $143.3 million and $153.9 million (based upon the original issue price plus accrued interest), respectively, of Debentures outstanding. The reduction in the balance from December 31, 2001 to September 30, 2002 resulted from holders exercising their option to convert the Debentures into the Company's common stock. In lieu of delivering shares of common stock upon conversion of these Debentures, the Company elected to pay cash.

During the quarter ended September 30, 2002, Debentureholders converted $12.9 million in aggregate principal amount at maturity of the Company's Debentures with a carrying value (including accrued interest) of $9.0 million. The total purchase price paid by the Company of $13.2 million resulted in an extraordinary after-tax loss of $2.5 million, as shown on the Company's Consolidated Income Statements. During the nine months ended September 30, 2002, Debenture holders converted $18.0 million in aggregate principal amount at maturity of the Company's Debentures with a carrying value (including accrued interest) of $12.6 million. The total purchase price paid by the Company of $18.9 million resulted in an extraordinary after-tax loss of $3.8 million, as shown on the Company's Consolidated Income Statements.

Accrued interest related to the Debentures was $9.8 million and $7.5 million, as of September 30, 2002 and December 31, 2001, respectively.

On October 2, 2002, the Company announced that it had elected to redeem the Debentures as of October 28, 2002. Substantially all of the Debentures outstanding as of September 30, 2002 were tendered for conversion into the Company's Common Stock prior to the redemption date. Approximately $50,000 principal amount at maturity of the Debentures were settled in cash. This conversion will not have an extraordinary income statement impact in the fourth quarter of 2002. (See Note 15 to the Consolidated Financial Statements).

In April 2002, the Company commenced a commercial paper program providing for the issuance of up to $1.0 billion in aggregate maturity value of short-term indebtedness (known generally as "commercial paper"). The commercial paper is being issued by the Company without registration under the Securities Act of 1933 (the "1933 Act") in reliance upon the exemption from registration contained in Section 4(2) of the 1933 Act. The commercial paper is issued in denominations of $100,000 or integral multiples of $1,000 in excess thereof, will bear such interest rates, if interest-bearing, or will be sold at such discount from their face amounts, as agreed upon by the Company and the dealer or dealers acting in connection with the commercial paper program. The commercial paper may be issued with varying maturities up to a maximum of 270 days from the date of issuance. As of September 30, 2002, outstanding commercial paper totaled approximately $199.8 million, with an average maturity of 30 days. The weighted average yield on the outstanding commercial paper as of September 30, 2002 was 1.95%. At the time that the Company entered into the revolving credit facility in March 2001, the Company contemplated that the proceeds of any borrowings under the revolving credit facility could be used to repay commercial paper borrowings. The Company has the intent to maintain commercial paper borrowings of at least the amount outstanding at September 30, 2002 for more than one year. For financial reporting purposes, the commercial paper has been classified under non-current liabilities in the accompanying Consolidated Balance Sheets based on the terms of the revolving credit facility.

The following is an illustration of the dilutive effect of the Company's potential common stock on earnings per share ("EPS"). There were no antidilutive securities in any of the periods presented.

The following summarizes comprehensive income (loss) reclassification adjustments for the nine months ended September 30, 2002 and 2001:

From time to time, the Company and certain of its subsidiaries are parties to various legal proceedings, many of which involve claims for coverage encountered in the ordinary course of business. The Company, like HMOs and health insurers generally, excludes certain health care services from coverage under its HMO, PPO and other plans. The Company is, in its ordinary course of business, subject to the claims of its enrollees arising out of decisions to restrict treatment or reimbursement for certain services. The loss of even one such claim, if it results in a significant punitive damage award, could have a material adverse effect on the Company. In addition, the risk of potential liability under punitive damage theories may increase significantly the difficulty of obtaining reasonable settlements of coverage claims.

In June 2000, the California Medical Association filed a lawsuit in U.S. district court in San Francisco against BCC. The lawsuit alleges that BCC violated the RICO Act through various misrepresentations to and inappropriate actions against health care providers. In late 1999, a number of class-action lawsuits were brought against several of the Company's competitors alleging, among other things, various misrepresentations regarding their health plans and breaches of fiduciary obligations to health plan members. In August 2000, the Company was added as a party to Shane v. Humana, et al., a class-action lawsuit brought on behalf of health care providers nationwide. In addition to the RICO claims brought in the California Medical Association lawsuit, this lawsuit also alleges violations of ERISA, federal and state "prompt pay" regulations and certain common law claims. In October 2000, the federal Judicial Panel on Multidistrict Litigation issued an order consolidating the California Medical Association lawsuit, the Shane lawsuit and various other pending managed care class-action lawsuits against other companies before District Court Judge Federico Moreno in the Southern District of Florida for purposes of the pretrial proceedings. In March 2001, Judge Moreno dismissed the plaintiffs' claims based on violation of the RICO Act, although the dismissal was made without prejudice to the plaintiffs' ability to subsequently refile their claims. Judge Moreno also dismissed, with prejudice, the plaintiffs' federal prompt pay law claims. On March 26, 2001, the California Medical Association filed an amended complaint in its lawsuit, alleging, among other things, revised RICO claims and violations of California law. A hearing on the plaintiffs' motion to certify a class was held in early May 2001. On May 9, 2001, Judge Moreno issued an order requiring that all discovery in the litigation be completed by December 2001, with the exception of discovery related to expert witnesses, which was to be completed by March 15, 2002. In June 2001, the federal Court of Appeals for the 11th Circuit issued a stay of Judge Moreno's discovery order, pending a hearing before the Court of Appeals on the Company's appeal of its motion to compel arbitration (which had earlier been granted in part and denied in part by Judge Moreno). The hearing was held in January 2002 and, in March 2002, the Court of Appeals panel issued an opinion affirming Judge Moreno's earlier action with respect to the motion to compel arbitration. The Company filed a motion requesting a rehearing of the matter before the entire 11^th Circuit Court of Appeals, which motion was denied by the 11^th Circuit Court of Appeals in June 2002. On July 29, 2002, Judge Moreno issued an order providing that discovery in the case would be allowed to re-commence on September 30, 2002. On September 26, 2002, Judge Moreno issued an additional order certifying a nationwide class of physicians in the Shane matter, setting a trial date in May 2003 and ordering the parties to participate in non-binding mediation. In October 2002, the Company filed a motion with the 11^th Circuit Court of Appeals seeking to appeal Judge Moreno's class-certification order.

In March 2002, the American Dental Association and three individual dentists filed a lawsuit in U.S. district court in Chicago against the Company and BCC. This lawsuit alleges that WellPoint and BCC engaged in conduct that constituted a breach of contract under ERISA, trade libel and tortious interference with contractual relations and existing and prospective business expectancies. The lawsuit seeks class-action status. The Company filed a motion (which was granted in July 2002) with the federal Judicial Panel on Multidistrict Litigation requesting that the proceedings in this case be consolidated

with a similar action brought against other managed care companies that has previously been consolidated with the Shane lawsuit.

In July 2001, two individual physicians seeking to represent a class of physicians, hospitals and other providers brought suit in the Circuit Court of Madison County, Illinois against HealthLink, Inc., which is now a subsidiary of the Company as a result of the RightCHOICE transaction. The physicians allege that HealthLink breached the contracts with these physicians by engaging in the practices of "bundling" and "down-coding" in its processing and payment of provider claims. The relief sought includes an injunction against these practices and damages in an unspecified amount. Discovery in the matter is currently being conducted and a hearing regarding class certification has been scheduled for June 5, 2003. A similar lawsuit was brought by physicians (including one of the physicians in the case described above) in the same court in Madison County, Illinois, on behalf of a nationwide class of providers who contract with Blue Cross and Blue Shield plans against the Blue Cross and Blue Shield Association and another Blue Cross Blue Shield plan. The complaint recites that it is brought against those entities and their "unnamed subsidiaries, licensees, and affiliates," listing a large number of Blue Cross and Blue Shield plans, including "Alliance Blue Cross Blue Shield of Missouri." The plaintiffs also allege that the plans have systematically engaged in practices known as "short paying," "bundling," and "down-coding" in their processing and payment of subscriber claims. Blue Cross Blue Shield of Missouri has not been formally named or served as a defendant in this suit.

Prior to the Company's acquisition of the GBO, John Hancock Mutual Life Insurance Company ("John Hancock") entered into a number of reinsurance arrangements with respect to personal accident insurance and the occupational accident component of workers' compensation insurance, a portion of which was originated through a pool managed by Unicover Managers, Inc. Under these arrangements, John Hancock assumed risks as a reinsurer and transferred certain of such risks to other companies. These arrangements have become the subject of disputes, including a number of legal proceedings to which John Hancock is a party. The Company believes that it has a number of defenses to avoid any ultimate liability with respect to these matters and believes that such liabilities were not transferred to the Company as part of the GBO acquisition. However, if the Company were to become subject to such liabilities, the Company could suffer losses that might have a material adverse effect on its financial condition, results of operations or cash flows.

The financial and operational impact that these and other evolving theories of recovery will have on the managed care industry generally, or the Company in particular, is at present unknown. Certain of such legal proceedings are or may be covered under insurance policies or indemnification agreements. Based upon information presently available, management of the Company believes that the final outcome of all such proceedings should not have a material adverse effect on the Company's results of operations, cash flows or financial condition.

As of December 31, 2001, the Company's primary internal business divisions were focused on large employer group business, individual and small employer group business, and senior and specialty business. As a result of the January 31, 2002 acquisition of RightCHOICE, the organizational structure of the Company has changed effective February 1, 2002. As a result of these changes, the Company now has the following two reportable segments: Health Care business and Specialty business. The Health Care segment is managed geographically and continues to provide a broad spectrum of network-based health plans, including HMOs, PPOs, POS plans, other hybrid plans and traditional indemnity products to large and small employers and individuals. The Specialty business is maintained as a separate segment providing an array of other products, including pharmacy, dental, workers' compensation managed care services, life insurance, preventive care, disability insurance and behavioral health. Corporate includes net investment income, general and administrative expense and interest expense not allocable to the reportable segments.

The following tables present segment information for the Health Care and Specialty segments for the quarter and nine months ended September 30, 2002 and 2001, respectively, as if the Company's new organizational structure had been effective on January 1, 2001.

The Company maintains an interest rate risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility. The Company's goal is to maintain a balance between fixed and floating interest rates on its long-term debt.

By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, the Company exposes itself to credit risk and market risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in currency exchange rates or interest rates. The Company manages exposure to market risk associated with interest rate and foreign exchange contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company uses interest rate swap agreements to manage interest rate exposures. The principal objective of such contracts is to minimize the risks and/or costs associated with financial and investing activities. The Company does not use derivative financial instruments for speculative purposes. The counterparties to these contractual arrangements are major financial institutions with which the Company also has other financial relationships. These counterparties expose the Company to credit loss in the event of non-performance. However, the Company does not anticipate non-performance by the other parties. As of September 30, 2002, the Company reported a derivative asset of $15.0 million related to the fair value hedge. The cash flow hedges were terminated and settled in September 2002 and are discussed in further detail below.

In order to mitigate interest rate fluctuations associated with the 2001 Notes, the Company, on January 15, 2002, entered into a $200 million notional amount interest rate swap agreement. The swap agreement is a contract to exchange a fixed 6³/8% rate for a LIBOR-based floating rate. The swap agreement expires June 15, 2006. For the quarter and nine months ended September 30, 2002, the Company recognized $1.7 million and $4.5 million, respectively, of income from this swap which was recorded as a reduction to interest expense. As of September 30, 2002, the Company recognized a derivative asset of $15.0 million related to this swap agreement.

During 2001, the Company entered into foreign currency forward exchange contracts for each of the fixed maturity securities on hand denominated in foreign currencies in order to hedge asset positions with respect to currency fluctuations related to these securities. As of December 31, 2001, however, the Company had liquidated its non-dollar foreign bond holdings and as a result entered into a hedge to offset the remaining currency hedge. Both hedges expired during the quarter ended June 30, 2002. Subsequent to the implementation of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), all gains and losses from both effective and ineffective forward exchange contracts have been reported in investment income offset by the related gains and losses on the Company's available-for-sale foreign securities.

The Company uses interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt under its revolving credit facility. The swap agreements are contracts to exchange variable-rate for fixed-rate interest payments without the exchange of the underlying notional amounts. During the nine months ended September 30, 2002, the Company recognized a net gain of approximately $137,000 in interest expense in the Consolidated Income Statements, which represents the total ineffectiveness of all cash flow hedges.

In September 2002, the Company terminated and settled its $150.0 million and $50.0 million notional amount interest rate swap agreements with original expiration dates of October 17, 2003 and

October 17, 2006, respectively. At termination, the Company paid $17.6 million, which included $1.8 million of accrued interest with the remaining $15.8 million representing the fair value of the swap agreements at the time of termination. The fair value of the swap agreements was reflected in accumulated other comprehensive income and will be amortized as a reduction to investment income on a straight line basis over the remaining terms of the swap agreements. An after-tax amount of $5.5 million is expected to be amortized within the next twelve months. The fair value of the $150.0 million and $50.0 million notional amount swap agreements, at termination, were $8.0 million and $7.8 million, respectively.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." The new rules change the accounting methodology for goodwill from a model that amortizes goodwill to one which evaluates it for impairment. Amortization of goodwill, including previously recorded goodwill, ended upon adoption of the new rules. The new rules also eliminate amortization of other intangibles with indefinite useful lives, but these assets are also subject to the impairment tests. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Upon adoption of SFAS No. 142 on January 1, 2002, the Company's evaluation of its goodwill and other intangible assets resulted in no impairment loss. Amortization of goodwill and other intangibles for the quarter ended September 30, 2002 and 2001, totaled $9.8 million and $17.3 million, respectively. Amortization of goodwill and other intangibles for the nine months ended September 30, 2002 and 2001, totaled $28.2 million and $45.9 million, respectively. SFAS No. 142 accounted for $11.5 million of the amortization decrease for the quarter ended September 30, 2002, partially offset by a net increase in amortization of intangible assets with definite useful lives of $4.0 million, primarily due to recent acquisitions. SFAS No. 142 accounted for $29.8 million of the amortization decrease for the nine months ended September 30, 2002, partially offset by a net increase in amortization of intangible assets with definite useful lives of $12.1 million, primarily due to recent acquisitions.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will adopt SFAS No. 143 on January 1, 2003. The provisions of SFAS No. 143 require companies to record an asset and related liability for the costs associated with the retirement of a long-lived tangible asset if a legal liability to retire the asset exists. The Company is in the process of analyzing the provisions of SFAS No. 143; however, the effect of adoption is not expected to have a significant impact on the Company's financial condition and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of 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," for the disposal of a segment of business (as previously defined in that opinion). SFAS No. 144 retains the basic principles of SFAS No. 121 for long-lived assets to be disposed of by sale or held and used and broadens discontinued operations presentation to include a component of an entity that is held for sale or that has been disposed. Components must have operations and cash flows that can be clearly distinguished from the rest of the entity. The adoption of this standard did not have any impact on the Company's financial results.

In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002," ("SFAS No. 145"). With the rescission of SFAS No. 4, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria in 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 ("APB Opinion No. 30"). Applying the provisions of APB Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 shall be applied for fiscal years beginning after May 15, 2002. The Company has determined that the extinguishment of debt under its Zero Coupon Convertible Subordinated Debentures does not meet the requirements of unusual or infrequent and therefore would not be included as an extraordinary item with the rescission of SFAS No. 4. The Company does not believe the other provisions within SFAS No. 145 will have a material effect on the Company's financial statements.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not believe the adoption of SFAS No. 146 will have a material effect on the Company's financial statements.

On November 20, 2001, WellPoint entered into a definitive agreement to acquire CareFirst, Inc. ("CareFirst"). CareFirst is a not-for-profit health care company which, along with its affiliates and subsidiaries, offers a comprehensive portfolio of health insurance products, direct health care and administrative services to approximately 3.1 million people in Maryland, Delaware, the District of Columbia and Northern Virginia. CareFirst operates through three wholly owned affiliates: CareFirst of Maryland, Inc., Group Hospitalization and Medical Services, Inc., doing business under the name CareFirst BlueCross BlueShield, and Blue Cross Blue Shield of Delaware. Under the terms of the acquisition agreement, a wholly owned subsidiary of the Company will merge with and into CareFirst. As a result of the merger, the outstanding shares of common stock of CareFirst will be converted into the right to receive an aggregate purchase price of $1.3 billion. Before the CareFirst acquisition is completed, CareFirst and its subsidiaries will convert from their current status as not-for-profit corporations into for-profit, stock corporations. As part of this conversion, CareFirst will issue 100% of its outstanding common stock to charitable foundations established according to applicable law. The conversion will require the approval of insurance regulators and the transaction is subject to the receipt of a private letter ruling from the IRS that the conversion of CareFirst will constitute a tax-free reorganization and that the gain or loss recognized by the holders of CareFirst stock in the merger will not be subject to unrelated business income tax. The conversion and regulatory approval process is currently expected to take 18 to 24 months from the date of signing of the definitive agreement. The acquisition is expected to close in 2003.

In April 2002, the Maryland legislature adopted legislation that would, among other things, require that the consideration paid by the Company in the CareFirst transaction consist entirely of cash, prohibit certain change-in-control payments to CareFirst management previously approved by the CareFirst's Board of Directors and delay for 90 days the effectiveness of any decision by the Maryland Insurance Administration regarding CareFirst's for-profit conversion and consummation of the CareFirst transaction in order to allow the Maryland legislature to review the decision. The Company is currently assessing the effects of this legislation on the proposed transaction. The Maryland Insurance

Administration has engaged an independent consultant to provide a preliminary valuation analysis regarding CareFirst, which was completed during the third quarter of 2002. On September 27, 2002, WellPoint and CareFirst announced that they have agreed to review the existing Agreement and Plan of Merger and related agreements in light of the issues that have been raised in the transaction review process and have decided to consider the issues during the subsequent approximately 60 days. The parties also announced that, if any changes to the existing agreements are made, they will file amended applications for approval with regulators in Maryland, Washington D.C. and Delaware.

In December 2000, the Company formed The WellPoint Foundation ("Foundation"), a non-profit organization exempt from federal taxation under Section 501(c)(3) of the Internal Revenue Code. The purpose of the Foundation is to improve the health and well-being of individuals in the communities served by the Company. The Foundation's Board of Directors is comprised solely of persons who are also officers of the Company. For the quarter and nine months ended September 30, 2002, the Company contributed or committed to contribute $15.0 million and $45.0 million, respectively, to the Foundation. For the quarter and nine months ended September 30, 2001, the Company contributed or committed to contribute $5.0 million to the Foundation. The Company had an outstanding commitment payable to the Foundation of $15.0 million as of September 30, 2002 and December 31, 2001. These commitments were subsequently paid. The Company has no current legal obligations for any future commitments to the Foundation.

During the quarter ended September 30, 2002, the Company recorded two extraordinary items, a gain related to the acquisition of MethodistCare and a loss related to the early redemption of certain of the Debentures. During the third quarter of 2002, the Company updated the valuation of its acquisition on April 30, 2002 of MethodistCare, yielding an extraordinary gain of $4.9 million, or $0.03 per share assuming full dilution reflecting the additional excess of the fair value of net assets acquired over acquisition costs. For the nine months ended September 30, 2002, the Company recognized $8.9 million, or $0.06 per share assuming full dilution, from its acquisition of MethodistCare. During the quarter ended September 30, 2002, Debentureholders converted $12.9 million in aggregate principal amount at maturity of the Company's Debentures with a carrying value (including accrued interest) of $9.0 million. The total purchase price paid by the Company of $13.2 million resulted in an extraordinary after-tax loss of $2.5 million or $0.02 per share assuming full dilution, as shown on the Company's Consolidated Income Statements. During the nine months ended September 30, 2002, Debentureholders converted $18.0 million in aggregate principal amount at maturity of the Company's Debentures with a carrying value (including accrued interest) of $12.6 million. The total purchase price paid by the Company of $18.9 million resulted in an extraordinary after-tax loss of $3.8 million or $0.03 per share assuming full dilution, as shown as shown on the Company's Consolidated Income Statements.

On October 2, 2002, the Company announced that it had elected to redeem the Debentures as of October 28, 2002. Substantially all of the Debentures outstanding, $200.0 million principal amount at maturity, as of September 30, 2002 were tendered for conversion into 2.7 million shares of the Company's Common Stock prior to the redemption date of October 28, 2002. The market value of the Common Stock valued upon conversion totaled approximately $230 million (based upon the fair market value of the Common Stock at the time of conversion). Approximately $50,000 principal amount at maturity of the Debentures were settled in cash. This conversion will not have an extraordinary income statement impact in the fourth quarter of 2002.

We have reviewed the accompanying consolidated balance sheet of WellPoint Health Networks Inc. and its subsidiaries ("the Company") as of September 30, 2002, and the related consolidated income statements for each of the three-month and nine-month periods ended September 30, 2002 and 2001, and the related consolidated statement of changes in stockholders' equity for the nine month period ended September 30, 2002 and the consolidated statements of cash flows for the nine month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated income statement and consolidated change in stockholders' equity and cash flows for the year then ended (not presented herein), and in our report dated January 31, 2002 except for Note 3 as to which the date is March 15, 2002, and Note 22 as to which the date is March 18, 2002, we expressed an unqualified opinion on those consolidated financial statements. Our report included an explanatory paragraph, that effective January 1, 1999, the Company changed its method of accounting for start-up costs. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2001, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

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

This discussion contains forward-looking statements, which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth under "Factors That May Affect Future Results of Operations."

The Company is one of the nation's largest publicly traded managed health care companies. As of September 30, 2002, WellPoint had approximately 13.1 million medical members and approximately 46.6 million specialty members. As a result of the January 31, 2002 closing of the RightCHOICE transaction, the Company's medical membership increased by approximately 2.2 million members. The Company offers a broad spectrum of network-based managed care plans. WellPoint provides these plans to the large and small employer, individual and senior markets. The Company's managed care plans include HMOs, PPOs, POS plans, other hybrid medical plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The Company also provides a broad array of specialty and other products, including pharmacy, dental, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. The Company markets its products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia, in various parts of Missouri (including the greater St. Louis area) under the name Blue Cross Blue Shield of Missouri and in other states primarily under the name UNICARE or HealthLink. The Company holds the exclusive right in California to market its products under the Blue Cross name and mark and in Georgia and in 85 counties in Missouri (including the greater St. Louis area) to market its products under the Blue Cross Blue Shield names and marks.

On April 30, 2002, the Company completed the acquisition of MethodistCare (See Note 3 to the Consolidated Financial Statements), serving over 70,000 members in the Houston, Texas area.

On October 17, 2001, the Company entered into an Agreement and Plan of Merger with RightCHOICE, through its wholly owned subsidiary, RWP Acquisition Corp. (See Note 3 to the Consolidated Financial Statements). On January 31, 2002, the Company completed this transaction, pursuant to which RightCHOICE became a wholly owned subsidiary of the Company. The acquisition was valued at approximately $1.4 billion on the closing date, which was paid with $379.1 million in cash and approximately 16.5 million shares of WellPoint common stock. RightCHOICE, through its exclusive license to use the Blue Cross and Blue Shield names and service marks, is the largest provider of managed health care benefits in the state of Missouri based on number of members. RightCHOICE, through its HealthLink subsidiary, also provides network rental, administrative services, workers' compensation managed care services and other non-underwritten health benefit programs. As of January 31, 2002, RightCHOICE served approximately 2.2 million medical members in Missouri, Arkansas, Illinois, Indiana, Iowa, Kentucky and West Virginia. RightCHOICE has historically

experienced a higher administrative expense ratio than the Company's core businesses due to its higher concentration of administrative services business. For the quarter and nine months ended September 30, 2002, the RightCHOICE business experienced a higher administrative expense ratio than the Company's core businesses.

On March 15, 2001, the Company completed its acquisition of Cerulean Companies, Inc. ("Cerulean"), the parent company of Blue Cross Blue Shield of Georgia, Inc. (See Note 3 to the Consolidated Financial Statements). Cerulean, principally through its Blue Cross and Blue Shield of Georgia subsidiary, offers insured and administrative services products primarily in the State of Georgia. Cerulean has historically experienced a higher administrative expense ratio than the Company's core businesses due to its higher concentration of administrative services business. Cerulean has also historically experienced a higher medical loss ratio than the Company's core businesses due to its higher percentage of Large Employer Group business and fewer managed care offerings. Accordingly, Cerulean's higher loss and administrative expense ratios have contributed to an increase in those ratios for the Company. The acquisition increased the Company's Georgia medical membership by approximately 1.9 million members as of March 31, 2001. The cash purchase price was $700.0 million. As a result of the acquisition of Cerulean, the Company also incurred $134.5 million in expenses, primarily related to change in control payments to Cerulean management and transaction costs. This acquisition was accounted for under the purchase method of accounting.

In April 2002, the Maryland legislature adopted legislation that would, among other things, require that the consideration paid by the Company in the CareFirst transaction consist entirely of cash, prohibit certain change-in-control payments to CareFirst management previously approved by CareFirst's Board of Directors and delay for 90 days the effectiveness of any decision by the Maryland Insurance Administration regarding CareFirst's for-profit conversion and consummation of the CareFirst transaction in order to allow the Maryland legislature to review the decision. The Company is currently assessing the effects of this legislation on the proposed transaction. The Maryland Insurance Administration has engaged an independent consultant to provide a preliminary valuation analysis

regarding CareFirst, which was completed during the third quarter of 2002. On September 27, 2002, WellPoint and CareFirst announced that they have agreed to review the existing Agreement and Plan of Merger and related agreements in light of the issues that have been raised in the transaction review process and have decided to consider the issues during the subsequent approximately 60 days. The parties also announced that, if any changes to the existing agreements are made, they will file amended applications for approval with regulators in Maryland, Washington D.C. and Delaware.

In an effort to pursue the expansion of the Company's business outside the state of California, the Company acquired two businesses in 1996 and 1997, the Life and Health Benefits Management Division ("MMHD") of Massachusetts Mutual Life Insurance Company and the Group Benefits Operations (the "GBO") of John Hancock Mutual Life Insurance Company. The acquisitions of Rush Prudential Health Plans and a mail-order pharmacy which now does business as PrecisionRx in 2000 and the acquisition of Cerulean in 2001 were also components of this expansion strategy. In 2001, the Company entered into definitive agreements to expand into the Midwest with its acquisition of RightCHOICE, which closed on January 31, 2002, and into the Mid-Atlantic region with the pending acquisition of CareFirst, which is expected to close in 2003. On April 30, 2002, the Company completed its acquisition of MethodistCare.

As a result of these various acquisitions, the Company has significantly expanded its operations outside of California. In order to integrate its acquired businesses and implement the Company's regional expansion strategy, the Company will need to develop satisfactory networks of hospitals, physicians and other health care service providers, develop distribution channels for its products and successfully convert acquired books of business to the Company's existing information systems, which will require continued investments by the Company.

In response to rising medical and pharmacy costs, the Company has from time to time implemented premium increases with respect to certain of its products. The Company will continue to evaluate the need for further premium increases, plan design changes and other appropriate actions in the future in order to maintain or restore profit margins. There can be no assurances, however, that the Company will be able to take subsequent pricing or other actions or that any actions previously taken or implemented in the future will be successful in addressing any concerns that may arise with respect to the performance of certain businesses.

Federal legislation enacted during the last several years seeks, among other things, to insure the portability of health coverage and mandates minimum maternity hospital stays. California legislation enacted since 1999, among other things, establishes an explicit duty on managed care entities to exercise ordinary care in arranging for the provision of medically necessary health care services and establishes a system of independent medical review. In 1997, Texas adopted legislation purporting to make managed care organizations such as the Company liable for their failure to exercise ordinary care when making health care treatment decisions. Similar legislation has also been enacted in Georgia. These and other proposed measures may have the effect of dramatically altering the regulation of health care and of increasing the Company's loss ratio and administrative costs or decreasing the affordability of the Company's products.

The Company's revenues are primarily generated from premiums earned for risk-based health care and specialty services provided to its members, fees for administrative services, including claims processing and access to provider networks for self-insured employers, and investment income.

Operating expenses include health care services and other benefits expenses, consisting primarily of payments for physicians, hospitals and other providers for health care and specialty products claims; selling expenses for broker and agent commissions; general and administrative expenses; interest expense; depreciation and amortization expense; and income taxes.

The Company's results of operations for the quarter ended September 30, 2002 include its acquired operations of Cerulean, RightCHOICE and MethodistCare for the full quarter. The Company's consolidated results of operations for the nine months ended September 30, 2002 include nine months of earnings for Cerulean, eight months of earnings for RightCHOICE and five months of earnings for MethodistCare. The results of operations for the quarter ended September 30, 2001 include a full quarter of earnings for Cerulean and the results of operations for the nine months ended September 30, 2001 include the results of Cerulean for the period from March 15, 2001, its date of acquisition.

The following table sets forth selected operating ratios. The loss ratio for health care services and other benefits is shown as a percentage of premium revenue. All other ratios are shown as a percentage of premium revenue and management services revenue combined.

		Quarter Ended September 30,		Nine Months Ended September 30,
		2002		2001		2002		2001
Operating Revenues:
	Premium revenue		95.1	%	95.1	%	95.2	%	95.0	%
	Management services revenue		4.9	%	4.9	%	4.8	%	5.0	%

		100.0	%	100.0	%	100.0	%	100.0	%
Operating Expenses:
	Health care services and other benefits (loss ratio)		81.7	%	81.7	%	81.3	%	81.4	%
	Selling expense		4.0	%	4.0	%	4.0	%	4.1	%
	General and administrative expense		12.3	%	13.5	%	13.0	%	13.8	%

The following table sets forth membership data and the percent change in membership:

	September 30,
	September 30,		Percent Change
	2002	2001	Percent Change
Pharmacy	33,591,088	31,925,513	5.2	%
Dental	2,704,041	2,642,554	2.3	%
Life	2,488,062	2,299,043	8.2	%
Disability	515,865	545,625	-5.5	%
Behavioral Health	7,310,429	5,094,286	43.5	%

Comparison of Results for the Quarter Ended September 30, 2002 to the Quarter Ended September 30, 2001

On March 15, 2002, WellPoint effected a two-for-one split of the Company's Common Stock. The stock split was in the form of a stock dividend of one additional share of WellPoint Common Stock for each share held. Share and per share data for all periods presented below have been adjusted to give effect to the stock split.

The operating results for the quarter ended September 30, 2002 compared to the quarter ended September 30, 2001 were significantly affected by the RightCHOICE acquisition, which was consummated on January 31, 2002.

As discussed in Note 9 to the Consolidated Financial Statements, effective February 1, 2002 the Company effected a change in its organizational structure and now has two reportable segments—Health Care and Specialty. The Health Care segment includes all managed care plans and managed care services. The Specialty segment includes specialty managed health care and other services. The following table depicts premium revenue by reportable segment:

	Quarter Ended September 30,
	2002		2001
	(In thousands)
Health Care	$	4,059,121	$	2,904,433
Specialty		124,828		120,751

Consolidated	$	4,183,949	$	3,025,184

Premium revenue increased 38.3%, or $1,158.7 million, to $4,183.9 million for the quarter ended September 30, 2002 from $3,025.2 million for the quarter ended September 30, 2001. The RightCHOICE acquisition accounted for $318.7 million or 27.5% of the increase. Of the $318.7 million increase related to the RightCHOICE acquisition, $317.5 million was attributable to the Health Care segment and $1.2 million to the Specialty segment. Excluding the RightCHOICE acquisition, premium revenue would have increased 27.8% for the quarter ended September 30, 2002. The increase, excluding the RightCHOICE acquisition, was primarily due to an increase of insured member months and the implementation of premium increases overall.

	Quarter Ended September 30,
	2002		2001
	(In thousands)
Health Care	$	179,582	$	125,830
Specialty		33,825		30,361

Consolidated	$	213,407	$	156,191

Management services revenue increased 36.6%, or $57.2 million, to $213.4 million for the quarter ended September 30, 2002 from $156.2 million for the quarter ended September 30, 2001. The increase was due to $38.4 million of management services revenue from the RightCHOICE acquisition. Of the $38.4 million increase related to the RightCHOICE acquisition, $37.8 million was attributable to the Health Care segment and $0.6 million to the Specialty segment. Excluding the RightCHOICE acquisition, management services revenue would have increased 12.0% for the quarter ended September 30, 2002. The increase was primarily due to the implementation of price increases overall.

ended September 30, 2001, an increase of $53.7 million or 83.7%. This $53.7 million increase includes an increase in net realized investment gains of $47.0 million. This increase is primarily due to a pre-tax investment gain of $64.9 million realized from WellPoint's investment in Trigon Healthcare, Inc., which was acquired by Anthem, Inc. in the third quarter of 2002. In accordance with generally accepted accounting principles, WellPoint realized the gain related to its investment upon completion of the Trigon transaction. Excluding this gain on the Trigon transaction, net realized investment losses for the quarter ended September 30, 2002 would have been $14.3 million compared to net realized investment gains of $3.7 million for the quarter ended September 30, 2001. The $14.3 million net realized investment losses for the quarter ended September 30, 2002 resulted primarily from the Company's restructuring of its investment portfolio mix. Gross investment income increased by $7.0 million or 11.4% in 2002 over 2001 as a result of higher average investment balances for the quarter ended September 30, 2002 versus the quarter ended September 30, 2001. As a partial offset to this increase, net investment expenses increased by $1.1 million for the quarter ended September 30, 2002, due primarily to higher investment manager fees.

The loss ratio was 81.7% for both quarters ended September 30, 2002 and 2001. The loss ratio attributable to the Health Care segment was 82.1% for the quarter ended September 30, 2002 compared to 82.2% for the same quarter in 2001. The loss ratio attributable to the Specialty segment was 69.4% for the quarter ended September 30, 2002 compared to 69.5% for the same quarter in 2001. The RightCHOICE business has a lower loss ratio than the Company's core businesses. Excluding RightCHOICE, the loss ratio for both segments combined was 81.9% for the quarter ended September 30, 2002 compared to 81.7% for the same quarter in 2001. The health care services and other benefits expense include an estimate of claims incurred during the period but which have not been reported to the Company. This estimate is actuarially determined based on a variety of factors and is inherently subject to a number of higher variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements.

Selling expense consists of commissions paid to outside brokers and agents representing the Company. The selling expense ratio remained constant at 4.0% for the quarters ended September 30, 2002 and 2001. The RightCHOICE business has a slightly higher selling expense ratio of 4.1% than the Company's core businesses. The exclusion of RightCHOICE had no impact on the Company's selling expense ratio for the quarter ended September 30, 2002.

The administrative expense ratio decreased to 12.3% for the quarter ended September 30, 2002 from 13.5% for the quarter ended September 30, 2001. The acquired RightCHOICE business experienced a higher administrative expense ratio than the Company's core businesses for the quarter ended September 30, 2002, due to integration expenses, its higher concentration of administrative services business along with certain other transaction-related expenses. Excluding RightCHOICE, the administrative expense ratio decreased to 12.0% in the third quarter of 2002 compared to 13.5% in the third quarter of 2001, due to merger synergies, administrative efficiencies from technology investments and systems convergence efforts, and fixed administrative costs spread over a larger membership base.

Interest expense increased $1.4 million to $16.0 million for the quarter ended September 30, 2002, compared to $14.6 million for the quarter ended September 30, 2001. The increase in interest expense was related to the higher average debt balance for the quarter ended September 30, 2002 in comparison to the quarter ended September 30, 2001, primarily due to the RightCHOICE acquisition. The weighted average interest rate for all debt for the quarter ended September 30, 2002, including the fees associated with the Company's borrowings and interest rate swap agreements, was 6.1%.

Other expense, net decreased $4.3 million to $15.1 million for the quarter ended September 30, 2002, compared to $19.4 million for the quarter ended September 30, 2001. The decrease resulted from the following items: i) lower amortization of goodwill and other intangible assets due to the implementation of SFAS No. 142, which accounted for $11.5 million of the amortization decrease,

ii) an increase in income of $1.7 million from the Company's share of its investments in joint ventures and iii) a decrease in minority interest charges of $1.9 million. These decreases were partially offset by the following items: i) an increase in amortization of intangible assets with definite useful lives of $4.0 million, primarily due to recent acquisitions, ii) an increase in losses on the disposition of fixed assets of $5.1 million and iii) an increase in operating expenses of $2.1 million from an insurance general agency subsidiary owned by the Company.

The Company's net income for the quarter ended September 30, 2002 was $211.3 million, compared to $108.4 million for the quarter ended September 30, 2001. Net income for the quarter ended September 30, 2002 included a net gain for two extraordinary items, a gain related to the acquisition of MethodistCare, partially offset by a loss on early redemption of debt. The extraordinary gain amounted to $4.9 million, or $0.03 per diluted share, and was due to an excess of the fair value of net assets over acquisition costs. The extraordinary loss was $2.5 million, net of tax, or $0.02 per diluted share, which resulted from the early redemption of the Company's Zero Coupon Convertible Subordinated Debentures (the "Debentures").

Earnings per share including the extraordinary items totaled $1.45 for the quarter ended September 30, 2002 and $0.85 for the quarter ended September 30, 2001. Earnings per share assuming full dilution including the extraordinary items totaled $1.38 for the quarter ended September 30, 2002 and $0.82 for the quarter ended September 30, 2001.

Earnings per share for the quarter ended September 30, 2002 is based upon weighted average shares outstanding of 145.5 million shares, excluding potential common stock, and 152.8 million shares, assuming full dilution. Earnings per share for the quarter ended September 30, 2001 is based on 127.2 million shares, excluding potential common stock, and 132.9 million shares, assuming full dilution. The increase in weighted average shares outstanding primarily resulted from the issuance of shares related to the RightCHOICE acquisition and Company's employee stock option and purchase plans.

Comparison of Results for the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001

	Nine Months Ended September 30,
	2002		2001
	(In thousands)
Health Care	$	11,532,859	$	8,039,243
Specialty		374,843		345,136

Consolidated	$	11,907,702	$	8,384,379

Premium revenue increased 42.0%, or $3,523.3 million, to $11,907.7 million for the nine months ended September 30, 2002 from $8,384.4 million for the nine months ended September 30, 2001. The RightCHOICE and Cerulean acquisitions accounted for $1,677.0 million or 47.6% of the increase. Of the $1,677.0 million increase related to the RightCHOICE and Cerulean acquisitions, $1,651.2 million was attributable to the Health Care segment and $25.8 million to the Specialty segment. Excluding acquisitions, premium revenue would have increased 25.8% for the nine months ended September 30, 2002. The increase, excluding acquisitions, was primarily due to an increase of insured member months and the implementation of premium increases overall.

	Nine Months Ended September 30,
	2002		2001
	(In thousands)
Health Care	$	503,538	$	359,191
Specialty		102,137		85,015

Consolidated	$	605,675	$	444,206

Management services revenue increased 36.4%, or $161.5 million, to $605.7 million for the nine months ended September 30, 2002 from $444.2 million for the nine months ended September 30, 2001. The increase was primarily due to a net increase $147.2 million of management services revenue from the RightCHOICE and Cerulean acquisitions. Of the $147.2 million increase related to the RightCHOICE and Cerulean acquisitions, $142.8 million was attributable to the Health Care segment and $4.4 million to the Specialty segment. Excluding acquisitions, management services revenue would have increased 4.0% for the nine months ended September 30, 2002.

Investment income as reported in the Consolidated Income Statements includes gross investment income net of investment expenses and net realized investment gains or losses. Investment income was $243.8 million for the nine months ended September 30, 2002 compared to $177.7 million for the nine months ended September 30, 2001, an increase of $66.1 million or 37.2%. This $66.1 million increase was a result of a net realized investment gain of $49.5 million for the nine months ended September 30, 2002 as compared to a net investment loss of $5.2 million for the same period in 2001. The realized investment gains in 2002 was primarily due to a pre-tax investment gain of $64.9 million realized from WellPoint's investment in Trigon Healthcare, Inc., which was acquired by Anthem, Inc. in the third quarter of 2002. In accordance with generally accepted accounting principles, WellPoint realized the gain related to its investment upon completion of the Trigon transaction. Excluding this gain on the Trigon transaction, net realized investment losses for the nine months ended September 30, 2002 and September 30, 2001 would have been $15.4 million and $5.2 million, respectively. This increase in net realized investment losses of $10.2 million resulted primarily from the Company's

restructuring of its investment portfolio mix. Gross investment income increased $16.0 million or 8.8% in 2002 over 2001 as a result of higher average investment balances during the nine months ended September 30, 2002 versus the nine months ended September 30, 2001. As a partial offset to this increase, net investment expenses increased by $3.4 million for the nine months ended September 30, 2002, due primarily to higher investment manager fees.

The loss ratio for the nine months ended September 30, 2002 was 81.3% compared to 81.4% for the same period in 2001. The loss ratio attributable to the Health Care segment was 81.7% for the nine months ended September 30, 2002 compared to 81.9% for the same period in 2001. The loss ratio attributable to the Specialty segment was 70.7% for the nine months ended September 30, 2002 compared to 70.8% for the same period in 2001. The RightCHOICE business has a lower loss ratio than the Company's core businesses while the acquired Cerulean business has experienced a higher loss ratio than the Company's core businesses due to its higher percentage of large employer group business and fewer managed care offerings. Excluding the RightCHOICE and Cerulean acquisitions, the loss ratio for both segments combined would have been 80.6% for the nine months ended September 30, 2002 and 80.7% for the same period in 2001. The health care services and other benefits expense include an estimate of claims incurred during the period but which have not been reported to the Company. This estimate is actuarially determined based on a variety of factors and is inherently subject to a number of higher variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements.

The selling expense ratio for the nine months ended September 30, 2002 decreased to 4.0% compared to 4.1% for the nine months ended September 30, 2001. The acquired Cerulean business has experienced a lower selling expense ratio due primarily to its lower percentage of individual and small employer group business. The acquired RightCHOICE business also experienced a slightly lower selling expense ratio than the Company's core businesses. Excluding acquisitions, the selling expense ratio would have decreased slightly to 4.3% for the nine months ended September 30, 2002 from 4.4% for the same period in 2001.

The administrative expense ratio decreased to 13.0% for the nine months ended September 30, 2002 from 13.8% for the nine months ended September 30, 2001. The acquired RightCHOICE business experienced a higher administrative expense ratio than the Company's core businesses for the nine months ended September 30, 2002 due to integration expenses, its higher concentration of administrative services business along with certain other transaction-related expenses. Excluding acquisitions, the administrative expense ratio decreased to 12.7% for the nine months ended September 30, 2002 compared to 13.8% a year ago, due to merger synergies, administrative efficiencies from technology investments and systems convergence efforts, and fixed administrative costs spread over a larger membership base.

Interest expense increased $13.1 million to $49.4 million for the nine months ended September 30, 2002, compared to $36.3 million for the nine months ended September 30, 2001. The increase in interest expense was related to the higher average debt balance for the nine months ended September 30, 2002 in comparison to the nine months ended September 30, 2001, primarily due to the RightCHOICE acquisition. The weighted average interest rate for all debt for the nine months ended September 30, 2002, including the fees associated with the Company's borrowings and interest rate swap agreements, was 6.1%.

Other expense, net decreased $11.3 million to $40.0 million for the nine months ended September 30, 2002, compared to $51.3 million for the nine months ended September 30, 2001. The decrease resulted from lower amortization of goodwill and other intangible assets due to the implementation of SFAS No. 142, which accounted for $29.8 million of the amortization decrease, plus an increase in income from the Company's share of its investments in joint ventures of $4.2 million. This decrease was partially offset by the following items: i) an increase in amortization of intangible assets with definite useful lives of $12.1 million, primarily due to recent acquisitions, ii) an increase in

losses on the disposition of fixed assets of $7.1 million and iii) an increase in net operating expenses of $5.1 million from an insurance general agency subsidiary owned by the Company.

The Company's net income for the nine months ended September 30, 2002 was $523.1 million, compared to $304.9 million for the nine months ended September 30, 2001. Net income for the nine months ended September 30, 2002 includes a net gain for two extraordinary items, a gain related to the acquisition of MethodistCare, partially offset by a loss on early redemption of debt. The extraordinary gain amounted to $8.9 million, or $0.06 per diluted share, and was due to an excess of the fair value of net assets over acquisition costs. The extraordinary loss was $3.8 million, net of tax, or $0.03 per diluted share, which resulted from the early redemption of certain of the Debentures.

Earnings per share including the extraordinary items totaled $3.65 for the nine months ended September 30, 2002 and $2.41 for the nine months ended September 30, 2001. Earnings per share assuming full dilution including the extraordinary items totaled $3.48 for the nine months ended September 30, 2002 and $2.32 for the nine months ended September 30, 2001.

Earnings per share for the nine months ended September 30, 2002 is based upon weighted average shares outstanding of 143.2 million shares, excluding potential common stock, and 150.4 million shares, assuming full dilution. Earnings per share for the nine months ended September 30, 2001 is based on 126.6 million shares, excluding potential common stock, and 132.0 million shares, assuming full dilution. The increase in weighted average shares outstanding primarily resulted from the issuance of shares related to the RightCHOICE acquisition and Company's employee stock option and purchase plans.

The Company's consolidated assets increased by $3,108.4 million, or 41.6%, to $10,580.5 million as of September 30, 2002 from $7,472.1 million as of December 31, 2001. The increase in total assets was primarily due to the acquisition of RightCHOICE, which accounted for $2,018.3 million or 64.9% of the increase. Excluding RightCHOICE, the increase in total assets was primarily due to growth in cash and investments of $821.8 million and an increase in receivables of $163.8 million. Cash and investments totaled $6.2 billion as of September 30, 2002, or 58.3% of total assets.

Overall claims liabilities increased $410.9 million, or 18.5%, to $2,630.7 million as of September 30, 2002 from $2,219.8 million as of December 31, 2001. This increase is due to claims liabilities associated with the RightCHOICE acquisition of $156.5 million and an increase in the claims liabilities associated with the Company's core businesses of $254.4 million.

As of September 30, 2002, the Company's long-term indebtedness was $1,156.3 million, of which $143.3 million was related to the Debentures, $464.2 million was related to the Company's 6³/8% Notes due 2006, which includes a fair value adjustment of $15.0 million, $349.0 million was related to the Company's 6³/8% Notes due 2012 and $199.8 million was related to commercial paper. The 6³/8% Notes due 2012, with an aggregate principal amount at maturity of $350.0 million, were issued to finance the RightCHOICE acquisition. The Company's revolving credit facility indebtedness of $235.0 million at December 31, 2001 was repaid during the nine months ended September 30, 2002, with $200.0 million obtained through the commercial paper program and operating cash of $35.0 million. (See Note 5 to the Consolidated Financial Statements).

Stockholders' equity totaled $3,772.8 million as of September 30, 2002, an increase of $1,640.2 million from $2,132.6 million as of December 31, 2001. The increase was primarily due to the issuance of the Company's Common Stock of $1,109.1 million in connection with the RightCHOICE acquisition, net income of $523.1 million for the nine months ended September 30, 2002 and a $184.9 million net increase from the reissuance of treasury stock related to the Company's employee 401(k) Plan, stock option and stock purchase plans. Partially offsetting these increases were the repurchase of 2.6 million shares of its common stock for $165.5 million and a decrease in net unrealized gains of $13.0 million, net of taxes, due primarily to investment securities.

The Company's primary sources of cash are premium and management services revenues received and investment income. The primary uses of cash include health care claims and other benefits, capitation payments, income taxes, repayment and repurchases of long-term debt, interest expense, broker and agent commissions, administrative expenses, Common Stock repurchases and capital expenditures. In addition to the foregoing, other uses of cash include costs of provider networks and systems development, and costs associated with the integration of acquired businesses.

The Company generally receives premium revenue in advance of anticipated claims for related health care services and other benefits. The Company's investment policies are designed to provide safety and preservation of capital, sufficient liquidity to meet cash flow needs, the integration of investment strategy with the business operations and objectives of the Company, and attainment of a competitive after-tax total return.

The Company's strategy for achieving its investment goals is broad diversification of its investments, both across and within asset classes. As of September 30, 2002, the Company's investment portfolio consisted primarily of investment grade fixed-maturity securities. The Company's portfolio also included large capitalization and small capitalization domestic equities, foreign equities, tax-exempt municipal bonds and a small amount of non-investment grade debt securities. The fixed-income assets include both short and long-duration securities with an attempt to match the Company's funding needs. The investment policy contains limitations regarding concentration in individual securities and industries and generally prohibits speculative and leveraged investments. Cash and investment balances maintained by the Company are sufficient to meet applicable regulatory financial stability and net worth requirements, including license requirements of the Blue Cross Blue Shield Association.

Cash flow provided by operating activities was $954.1 million for the nine months ended September 30, 2002, compared with $445.7 million for the nine months ended September 30, 2001. Cash flow from operations for the nine months ended September 30, 2002 was due primarily to net income before extraordinary items of $518.0 million, an increase in medical claims payable of $223.0 million due to membership growth and higher provider contract rates and an increase in accounts payable and accrued expenses of $181.3 million resulting from the timing of liability payments. Partially offsetting these increases was an increase in receivables of $82.1 million due to revenue growth and timing of cash receipts.

Net cash used in investing activities for the nine months ended September 30, 2002 totaled $1,220.6 million, compared with $1,023.2 million for the nine months ended September 30, 2001. The cash used in the nine months ended September 30, 2002 was attributable primarily to the purchase of investments of $4.7 billion, and of property and equipment, net of sales proceeds, of $70.0 million and the purchases of RightCHOICE and MethodistCare, net of acquired cash, of $349.2 million. Proceeds from investments sold and matured totaled $3.9 billion, partially offsetting the aforementioned purchases.

Net cash provided by financing activities totaled $258.1 million for the nine months ended September 30, 2002 compared with $541.0 million for the nine months ended September 30, 2001. The net cash provided in the nine months ended September 30, 2002 was primarily related to additional debt of $350.0 million incurred to finance the RightCHOICE acquisition, in addition to the receipt of proceeds of $127.1 million from the issuance of stock related to the Company's employee stock option and purchase programs less $165.5 million in Company stock repurchases. During the nine months ended September 30, 2002, the Company repaid its entire indebtedness under the revolving credit facility of $235.0 million at December 31, 2001. The net borrowings of commercial paper totaled $199.8 million for the nine months ended September 30, 2002. The net proceeds of this commercial paper program and operating cash were used to repay the revolving credit facility.

Effective as of March 30, 2001, the Company entered into two new unsecured revolving credit facilities allowing aggregate indebtedness of $1.0 billion. Upon execution of these facilities, the Company terminated its prior $1.0 billion unsecured revolving facility. Borrowings under these facilities (which are generally referred to collectively in this Quarterly Report on Form 10-Q as the Company's "revolving credit facility") bear interest at rates determined by reference to the bank's base rate or to the London InterBank Offered Rate ("LIBOR") plus a margin determined by reference to the then-current rating of the Company's senior unsecured long-term debt by specified rating agencies. One facility, which provides for borrowings of up to $750.0 million, expires as of March 30, 2006, although it may be extended for up to two additional one-year periods under certain circumstances. The other facility, which provides for borrowings of up to $250.0 million, originally expired as of March 30, 2002. In March 2002, the Company amended this facility to provide for an expiration date of March 28, 2003. Any amount outstanding under this facility as of March 28, 2003 may be converted into a one-year term loan at the option of the Company. Borrowings under the facilities are made on a committed basis or, in the case of the $750.0 million facility, pursuant to an auction bid process. The $750.0 million facility also contains sublimits for letters of credit and "swingline" loans. Each credit agreement requires the Company to maintain certain financial ratios and contains restrictive convenants, including restrictions on the occurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in control (See Note 5 to the Consolidated Financial Statements). As mentioned above, during the nine months ended September 30, 2002, the Company repaid its entire outstanding revolving credit facility balance at December 31, 2001 of $235.0 million.

In April 2002, the Company commenced a commercial paper program providing for the issuance of up to $1.0 billion in aggregate maturity value of short-term indebtedness (known generally as "commercial paper"). The commercial paper is being issued by the Company without registration under the 1933 Act in reliance upon the exemption from registration contained in Section 4(2) of the 1933 Act. The commercial paper is issued in denominations of $100,000 or integral multiples of $1,000 in excess thereof, will bear such interest rates, if interest-bearing, or will be sold at such discount from their face amounts, as agreed upon by the Company and the dealer or dealers acting in connection with the commercial paper program. The commercial paper may be issued with varying maturities up to a maximum of 270 days from the date of issuance. The commercial paper ranks equally with all other unsecured and unsubordinated indebtedness of the Company. As of September 30, 2002, the outstanding commercial paper borrowings totaled $199.8 million with various maturity dates and had interest rates ranging from 1.90% to 1.97%. The weighted average yield on the outstanding commercial paper as of September 30, 2002 was 1.95%.

As a part of a hedging strategy to limit its exposure to variable interest rate increases, the Company entered into interest rate swap agreements in order to reduce the volatility of interest expense resulting from changes in interest rates. The swap agreements are contracts to exchange variable-rate interest payments (weighted average rate for the nine months ended September 30, 2002 of 2.25%) for fixed-rate interest payments (weighted average rate for the nine months ended September 30, 2002 of 7.16%) without the exchange of the underlying notional amounts. The Company had entered into $200.0 million of fixed rate swap agreements, which consisted of a $150.0 million notional amount swap agreement at 6.99% maturing on October 17, 2003 and a $50.0 million notional amount swap agreement at 7.06% maturing on October 17, 2006. In September 2002, the Company terminated these two fixed rate swap agreements with an aggregate cash settlement of $17.6 million, which included $1.8 million of accrued interest with the remaining $15.8 million representing the fair value of the swap agreements at the time of termination (See Note 10 to the Consolidated Financial Statements).

In order to mitigate interest rate fluctuations associated with its $450 million aggregate principal amount at maturity of 6³/8% Notes due June 15, 2006 (the "2001 Notes"), the Company, on January 15,

2002 entered into a $200 million notional amount interest rate swap agreement which matures on June 15, 2006. The swap agreement is a contract to exchange a fixed 6³/8% rate for a LIBOR-based floating rate (weighted average variable rate of 5.74% for the nine months ended September 30, 2002).

During 2001, the Company entered into foreign currency forward exchange contracts for each of the fixed maturity securities on hand denominated in foreign currencies in order to hedge asset positions with respect to currency fluctuations related to these securities. As of December 31, 2001, however, the Company had liquidated its non-dollar foreign bond holdings and as result entered into a hedge to offset the remaining currency hedge. Subsequent to the implementation of SFAS No. 133, all gains and losses from both effective and ineffective forward exchange contracts have been reported in investment income offset by the related gains and losses on the Company's available-for-sale foreign securities.

Certain of the Company's subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory agencies, including the California Department of Managed Health Care and the Departments of Insurance in various states. As of September 30, 2002 (or the most recent date with respect to which compliance is required), those subsidiaries of the Company were in compliance with all minimum capital requirements.

On June 15, 2001, the Company issued the 2001 Notes. The net proceeds of this offering totaled approximately $449.0 million. The net proceeds from the sale of the 2001 Notes were used for repayment of indebtedness under the Company's revolving credit facilities, which indirectly financed a portion of the Cerulean acquisition. The 2001 Notes bear interest at a rate of 6³/8% per annum, payable semi-annually in arrears on June 15 and December 15 of each year commencing December 15, 2001. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

The 2001 Notes may be redeemed, in whole or in part, at the Company's option at any time. The redemption price for any 2001 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2001 Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2001 Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semiannual basis at the Treasury rate as determined by the Reference Treasury Dealer (Salomon Smith Barney Inc. or UBS Warburg LLC or their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the 2001 Notes to the redemption date.

With the anticipated acquisition of RightCHOICE on January 31, 2002, the Company on January 16, 2002 issued $350.0 million aggregate principal amount at maturity of 6³/8% Notes due January 15, 2012 (the "2002 Notes"). The net proceeds of this offering totaled approximately $348.9 million. The 2002 Notes bear interest at a rate of 6³/8% per annum, payable semi-annually in arrears on January 15 and July 15 of each year commencing July 15, 2002. Interest is computed on the basis of a 360-day year of twelve 30-day months.

The 2001 and 2002 Notes are unsecured obligations and rank equally with all of the Company's existing and future senior unsecured indebtedness. All existing and future liabilities of the Company's subsidiaries are and will be effectively senior to the 2001 and 2002 Notes. The indenture governing the 2001 and 2002 Notes contains a covenant that limits the Company's ability and that of the Company's subsidiaries to create liens on Company property or assets to secure certain indebtedness without also securing the 2001 and 2002 Notes.

The Company believes that cash flow generated by operations and its cash and investment balances, supplemented by the Company's ability to borrow under its existing revolving credit facility, commercial paper program or through public or private financing sources, will be sufficient to fund continuing operations and expected capital requirements for the foreseeable future.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results can differ from the amounts previously estimated, which were based on the information available at the time the estimates were made.

The critical accounting policies described below are those that the Company believes are important to the portrayal of the Company's financial condition and results, and which require management to make difficult, subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes that critical accounting policies include medical claims payable, reserves for future policy benefits and intangible assets and goodwill.

Medical claims payable includes claims in process and a provision for the Company's estimate of incurred but not reported claims. Such estimates are developed using actuarial principles and assumptions which consider, among other things, contractual requirements, historical utilization trends and payment patterns, medical inflation, product mix, seasonality, membership and other relevant factors. Claim processing expenses are also accrued based on an estimate of expenses necessary to process such claims. Such reserves are continually monitored and reviewed with any adjustments reflected in current operations. Capitation costs represent monthly fees paid one month in advance to physicians, certain other medical service providers and hospitals in the Company's HMO networks as retainers for providing continuing medical care. The Company maintains various programs that provide incentives to physicians, certain other medical service providers and hospitals participating in its HMO networks through the use of risk-sharing agreements and other programs. Payments under such agreements are made based on the providers' performance in controlling health care costs while providing quality health care. Expenses related to these programs, which are based in part on estimates, are recorded in the period in which the related services are rendered. Management believes that its reserves for medical claims payable are adequate to satisfy its ultimate claim liability. However, these

estimates are inherently subject to a number of highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements.

Health care services and other benefits expense includes the costs of health care services, capitation expenses and expenses related to risk sharing agreements with participating physicians, medical groups and hospitals and incurred losses on the disability and life products. The costs of health care services are accrued as services are rendered, including an estimate for claims incurred but not yet reported.

For many of the Company's HMO plans (including substantially all of its California HMO plans), the Company contracts with physicians, hospitals and other health care providers through capitation fee arrangements as a means to manage health care costs. The Company has two general types of capitation arrangements. The predominant type is the so-called "professional" capitation arrangement. Under professional capitation arrangements, the Company pays the health care provider, such as a participating medical group, a fixed amount per member per month, and the health care provider assumes the risk of the member's utilization of certain specified health care services. Typically, under professional capitation arrangements, the health care provider does not assume the risk of the member's utilization of hospital-based services. The second type is the so-called "global" capitation arrangement. Under global capitation arrangements, the Company also pays the health care provider, such as a participating medical group, a fixed amount per member per month. However, under global capitation arrangements, the health care provider generally assumes the risk of the member's utilization of all health care services (subject to certain limited exceptions and state regulatory requirements). As of September 30, 2002, the Company had approximately 10 global capitation arrangements, covering approximately 1.5 million members. In addition, one of the Company's subsidiaries owns a 51% equity interest in a community health partnership network ("CHPN") operating in the greater Atlanta area. The CHPN is a locally based equity venture between the Company's subsidiary and local physician and hospital groups. The Company's subsidiary has entered into a global capitation arrangement with the CHPN. As of September 30, 2002, approximately 530,000 members were covered by this arrangement.

For the nine months ended September 30, 2002 and 2001, the percentage of capitation expenses to total health care services and other benefits expense was 11.5% and 12.9%, respectively. As of September 30, 2002 and December 31, 2001, the percentage of capitation payable to total medical claims payable was 5.3% and 5.2%, respectively.

The Company's future results of operations will depend in part on its ability to predict and control health care costs through underwriting criteria, utilization management, product design and negotiation of favorable provider and hospital contracts. WellPoint's ability to contain such costs may be adversely affected by changes in utilization rates, demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups, acts of terrorism and bioterrorism or other catastrophes, including war, and numerous other factors. The inability to mitigate any or all of the above-listed or other factors may adversely affect the Company's future profitability.

The estimated reserves for future policy benefits relate to life and disability insurance policies written in connection with health care contracts. Reserves for future life benefit coverage are based on projections of past experience. Reserves for future policy and contract benefits for certain long-term disability products and group paid-up life products are based upon interest, mortality and morbidity assumptions from published actuarial tables, modified based upon the Company's experience. Reserves are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are reflected in current operations. The current portion of reserves for future policy benefits relates to the portion of such reserves which management expects to pay within one year. Management believes

that its reserves for future policy benefits are adequate to satisfy its ultimate benefit liability. However, these estimates are inherently subject to a number of highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements.

The Company has made several acquisitions in the past several years that included a significant amount of intangible assets and goodwill. Under generally accepted accounting principles in effect through December 31, 2001, these assets were amortized over their useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives.

The Company 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, such 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.

Effective January 1, 2002, intangible assets and goodwill are accounted for under SFAS No. 142, "Goodwill and Other Intangible Assets." The new rules eliminate amortization of goodwill and other intangibles with indefinite lives, but these assets are subject to the impairment tests. (See Notes 4 and 11 to the Consolidated Financial Statements for a more complete discussion of the Company's intangible assets and goodwill). Management is required to make assumptions and estimates, such as the discount factor, in determining estimated fair value. Such estimated fair values might produce significantly different results if other reasonable assumptions and estimates were to be used.

Certain statements contained herein, such as statements concerning potential or future loss ratios, pending acquisitions and other statements regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934). Such statements involve a number of risks and uncertainties that may cause actual results to differ from those projected. Factors that can cause actual results to differ materially include, but are not limited to, those discussed below and those discussed from time to time in the Company's various filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K.

The Company's operations are subject to substantial regulation by federal, state and local agencies in all jurisdictions in which the Company operates. Many of these agencies have increased their scrutiny of managed health care companies in recent periods or are expected to increase their scrutiny, as newly passed legislation becomes effective. From time to time, the Company and its subsidiaries receive requests for information from regulatory agencies or are notified that such agencies are conducting reviews, investigations or other proceedings with respect to certain of the Company's activities. The Company also provides insurance products to Medi-Cal beneficiaries in various California counties under contracts with the California Department of Health Services (or delegated local agencies) and provides administrative services to the Centers for Medicare and Medicaid Services ("CMS") in various capacities. There can be no assurance that acting as a government contractor in these circumstances will not increase the risk of heightened scrutiny by such government agencies or that such scrutiny will not have a material adverse effect on the Company, either through negative publicity about the Company or through an adverse impact on the Company's results of operations. In addition, profitability from this business may be adversely affected through inadequate premium rate increases due to governmental budgetary issues. Future actions by any regulatory agencies may have a material adverse effect on the Company's business.

In connection with the RightCHOICE and Cerulean transactions, the Company incurred significant additional indebtedness to fund the cash payments made to the acquired companies' stockholders. In addition, the Company currently expects to incur additional indebtedness to fund some or all of the cash payments to be made in connection with the pending CareFirst transaction. This existing or new indebtedness may result in a significant percentage of the Company's cash flow being applied to the payment of interest, and there can be no assurance that the Company's operations will generate sufficient future cash flow to service this indebtedness. The Company's current indebtedness, as well as any indebtedness that the Company may incur in the future (such as indebtedness incurred to fund repurchases of its Common Stock or to fund the CareFirst or other transactions), may adversely affect the Company's ability to finance its operations and could limit the Company's ability to pursue business opportunities that may be in the best interests of the Company and its stockholders.

Completion of the Company's pending transaction with CareFirst is subject to the satisfaction of a number of conditions, including approval of the insurance regulators in each of Maryland, Delaware and the District of Columbia. In addition, one of CareFirst's operating affiliates must have its federal charter amended or repealed by the United States Congress (subject to presidential approval) and must obtain approval from the Washington D.C. Corporation Counsel. There can be no assurances that the required approvals will be obtained. If all conditions to closing are not met on or before November 20, 2004, each of WellPoint and CareFirst will have the right to terminate the CareFirst Merger Agreement. As a result, there can be no assurances that the transaction will be consummated.

As a condition to approval of the CareFirst transaction, regulatory agencies may seek to impose requirements or limitations on the way that the combined company conducts it business. Although neither WellPoint nor CareFirst is obligated to agree to any material requirements or limitations in order to obtain approval, if either or both companies were to agree to any such conditions, such requirements or limitations or additional costs associated therewith could adversely affect WellPoint's ability to integrate the operations of CareFirst with those of WellPoint. Accordingly, a material adverse effect on WellPoint's revenue, results of operations and cash flows following the CareFirst transaction could result.

As part of the Company's business strategy, the Company has acquired substantial operations in new geographic markets over the last six years. These businesses, some of which include substantial indemnity-based insurance operations, have experienced varying profitability or losses in recent periods. Since the relevant dates of acquisition of Cerulean and RightCHOICE, the Company has continued to work extensively on the integration of these businesses. However, there can be no assurances regarding the ultimate success of the Company's integration efforts or regarding the ability of the Company to maintain or improve the results of operations of the businesses of completed or pending transactions. The Company has incurred and will, among other things, need to continue to incur considerable expenditures for provider networks, distribution channels and information systems in addition to the costs associated with the integration of these acquisitions. The integration of these complex businesses may result in, among other things, temporary increases in claims inventory or other service-related issues that may negatively affect the Company's relationship with its customers and contribute to increased attrition of such customers. The Company's results of operations could be adversely affected in the event that the Company experiences such problems or is otherwise unable to implement fully its expansion strategy.

The Company and certain of its subsidiaries are subject to capital surplus requirements by the California Department of Managed Health Care, the Georgia Department of Insurance, the Missouri Department of Insurance, various other state Departments of Insurance and the Blue Cross Blue Shield Association. Although the Company believes that it is currently in compliance with all applicable requirements, there can be no assurances that such requirements will not be increased in the future.

The Company's future results will depend in large part on accurately predicting health care costs incurred on existing business and upon the Company's ability to control future health care costs through product and benefit design, underwriting criteria, utilization management and negotiation of favorable provider contracts. Changes in mandated benefits, utilization rates, demographic characteristics, health care practices, provider consolidation, inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the regulatory environment and numerous other factors are beyond the control of any health plan provider and may adversely affect the Company's ability to predict and control health care costs and claims, as well as the Company's financial condition, results of operations or cash flows. Periodic renegotiations of hospital and other provider contracts coupled with continued consolidation of physician, hospital and other provider groups may result in increased health care costs and limit the Company's ability to negotiate favorable rates. In recent years, large physician practice management companies have experienced extreme financial difficulties, including bankruptcy, which may subject the Company to increased credit risk related to provider groups and cause the Company to incur duplicative claims expense. Additionally, the Company faces competitive pressure to contain premium prices. Fiscal concerns regarding the continued viability of government-sponsored programs such as Medicare and Medicaid may cause decreasing reimbursement rates for these programs. Any limitation on the Company's ability to increase or maintain its premium levels, design products, implement underwriting criteria or negotiate competitive provider contracts may adversely affect the Company's financial condition or results of operations.

Managed care organizations, both inside and outside California, operate in a highly competitive environment that has undergone significant change in recent years as a result of business consolidations, new strategic alliances, aggressive marketing practices by competitors and other market pressures. Additional increases in competition (including competition from market entrants offering Internet-based products and services), could adversely affect the Company's financial condition, cash flows or results of operations.

As a result of the Company's acquisitions, the Company operates on a select geographic basis nationally and offers a spectrum of health care and specialty products through various risk-sharing arrangements. The Company's health care products include a variety of managed care offerings as well as traditional fee-for-service coverage. With respect to product type, fee-for-service products are generally less profitable than managed care products. A component of the Company's expansion strategy is to transition over time the traditional insurance members of the Company's acquired businesses to more managed care products.

With respect to the risk-sharing nature of products, managed care products that involve greater potential risk to the Company generally tend to be more profitable than management services products and those managed care products where the Company is able to shift risks to employer groups. Individuals and small employer groups are more likely to purchase the Company's higher-risk managed care products because such purchasers are generally unable or unwilling to bear greater liability for health care expenditures. Typically, government-sponsored programs involve the Company's higher-risk managed care products. Over the past few years, the Company has experienced a slight decline in margins in its higher-risk managed care products and to a lesser extent on its lower-risk managed care and management services products. This decline is primarily attributable to product mix change, product design, competitive pressure and greater regulatory restrictions applicable to the small employer group market. From time to time, the Company has implemented price increases in certain of its managed care businesses. While these price increases are intended to improve profitability, there can be no assurance that this will occur. Subsequent unfavorable changes in the relative profitability between the Company's various products could have a material adverse effect on the Company's results of operations and on the continued merits of the Company's geographic expansion strategy.

One of the Company's wholly owned subsidiaries operates as a pharmacy benefit manager ("PBM") under the trade name WellPoint Pharmacy Management. The PBM industry faces a number of risks and uncertainties in addition to those facing the Company's core health plan business. Such risks and uncertainties include the application of federal and state anti-remuneration laws (generally known as "anti-kickback" laws), whether PBMs operate as fiduciaries under the Employee Retirement Income Security Act of 1974 ("ERISA") and are in compliance with their fiduciary obligations under ERISA in connection with the development and implementation of items such as formularies, preferred drug listings and therapeutic intervention programs, and potential liability regarding the use of patient identifiable medical information. In addition, a number of federal and state legislative proposals are being considered that could affect a variety of PBM industry practices, such as the receipt of rebates from pharmaceutical manufacturers. The Company believes that its PBM business is currently being conducted in compliance in all material respects with applicable legal requirements. However, there can be no assurance that the Company's PBM business will not be subject to challenge under various laws and regulations, or that any such challenge will not have a material adverse effect upon the Company's results of operations or financial condition. In addition, future legislative enactments affecting the PBM industry could have a material adverse effect upon the Company's results of operations and financial condition.

Substantially all of the Company's investment assets are in interest-yielding debt securities of varying maturities or equity securities. The value of fixed income securities is highly sensitive to fluctuations in short- and long-term interest rates, with the value decreasing as such rates increase and increasing as such rates decrease. In addition, the value of equity securities can fluctuate significantly with changes in market conditions. Changes in the value of the Company's investment assets, as a result of interest rate fluctuations, can affect the Company's results of operations and stockholders' equity. There can be no assurances that interest rate fluctuations will not have a material adverse effect on the results of operations or financial condition of the Company.

The Company's operations are dependent on retaining existing employees, attracting additional qualified employees and achieving productivity gains from the Company's investment in technology. The Company faces intense competition for qualified information technology personnel and other skilled professionals. There can be no assurances that an inability to retain existing employees or attract additional employees will not have a material adverse effect on the Company's results of operations.

arrangements, John Hancock assumed risks as a reinsurer and transferred certain of such risks to other companies. These arrangements have become the subject of disputes, including a number of legal proceedings to which John Hancock is a party. The Company believes that it has a number of defenses to avoid any ultimate liability with respect to these matters and believes that such liabilities were not transferred to the Company as part of the GBO acquisition. However, if the Company were to become subject to such liabilities, the Company could suffer losses that might have a material adverse effect on its financial condition, results of operations or cash flows.

In December 2000, a wholly owned subsidiary of the Company completed its acquisition of certain mail order pharmaceutical service assets and now conducts business as a mail order pharmacy. The pharmacy business is subject to extensive federal, state and local regulations which are in many instances different from those under which the Company's core health plan business currently operates. The failure to properly adhere to these and other applicable regulations could result in the imposition of civil and criminal penalties, which could adversely affect the Company's results of operations or financial condition. In addition, pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other health care products. Although the Company intends to maintain professional liability and errors and omissions liability insurance, there can be no assurances that the coverage limits under such insurance programs will be adequate to protect against future claims or that the Company will be able to maintain insurance on acceptable terms in the future.

Following the terrorist attacks of September 11, 2001, there have been various incidents of suspected bioterrorist activity in the United States. To date, these incidents have resulted in related isolated incidents of illness and death. However, federal and state law enforcement officials have issued public warnings about additional potential terrorist activity involving biological weapons. If the United States were to experience more widespread bioterrorist attacks, the Company's covered medical expenses could rise and the Company could experience a material adverse effect on its results of operations, financial condition and cash flow.

In April and May 2002, one of the Company's wholly owned subsidiaries acting as a pharmacy benefit management business under the tradename WellPoint Pharmacy Management received two administrative subpoenas duces tecum issued by the U.S. Attorney's Office in Boston Massachusetts. The Company does not believe that its pharmacy benefit management business is presently a target of investigation by the U.S. Attorney. The subpoenas appear to focus primarily on WellPoint Pharmacy Management's relationship with TAP Pharmaceuticals, including TAP's drugs Lupron and Prevacid. The Company has responded to the subpoenas by producing certain requested documents. The Company believes that it is in compliance in all material respects with all laws and regulations applicable to the pharmacy benefit management business.

As a result of the general nationwide economic downturn, many states are currently experiencing budget deficits. State legislators are exploring a variety of alternatives to address this situation. In order to address the budget shortfalls, various states may propose reductions in payments received by Medicaid managed care providers such as the Company. Alternatively, state legislators may seek to impose greater state taxes. Any significant reduction in payments received by the Company in connection with its Medicare managed care business could have a material adverse effect on the Company's results of operations or financial condition. Additionally, any increase in state taxes could prolong or exacerbate the current economic downturn, which could in turn have a material adverse effect on the Company's results of operations or financial condition.

With respect to the unaudited consolidated financial information of WellPoint Health Networks Inc. for the three-month and nine-month periods ended September 30, 2002 and 2001, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 28, 2002 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited consolidated financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

The Company is exposed to market rate risks associated with its investments and borrowings. Market risk represents the risk of loss in value of a financial instrument resulting from changes in interest rates and equity prices. The Company regularly evaluates its assets and liabilities as well as the appropriateness of investments relative to its internal investment guidelines.

As of September 30, 2002, the Company's investment securities at market value totaled $5.0 billion, of which 91.9% was invested in fixed income securities with intermediate durations and the remaining 8.1% in equity securities. The Company has evaluated the net impact to the fair value of its fixed income investments from a hypothetical change in all interest rates of 100, 200 and 300 basis points ("bps"). In doing so, optionality was addressed through Monte Carlo simulation of the price behavior of securities with embedded options. In addressing prepayments on mortgage-backed securities, the model follows the normal market practice of estimating a non-interest rate sensitive component (primarily related to relocations) and an interest-sensitive component (primarily related to refinancings) separately. The model is based on statistical techniques applied to historical prepayment and market data, and then incorporates forward-looking mortgage market research and judgments about future prepayment behavior. Changes in the fair value of the investment portfolio, net of tax, are reflected in the balance sheet through stockholders' equity. Assuming increases of 100, 200 and 300 bps in market interest rates, the fair value of the Company's investment in fixed maturities as of September 30, 2002 would have decreased by $165.6 million, $340.5 million and $518.0 million, respectively.

As of September 30, 2002, the Company's equity securities were comprised primarily of domestic stocks. Assuming an immediate decrease of 10% in market value, as of September 30, 2002, the hypothetical loss in fair value of stockholders' equity is estimated to be approximately $40.4 million, before tax.

On January 15, 2002, the Company entered into an interest rate swap agreement which exchanges the fixed payments due under the 2001 Notes for a LIBOR-based floating rate. The Company believes that this allows it to better anticipate its interest payments while helping to manage the asset-liability relationship. As of September 30, 2002, assuming increases of 100, 200 and 300 bps in market interest rates, the fair value of this interest rate swap agreement would have decreased by $6.7 million, $13.2 million, and $19.4 million, respectively.

The Company maintains "disclosure controls and procedures", as such term is defined under Rule 13a-14(c) of the rules and regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC"), and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The Company has carried out an evaluation, within the 90 days prior to the date of filing of this Form 10-Q, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in ensuring that material information relating to the Company is made known to the Chief Executive Officer and Chief Financial Officer by others within the Company during the period in which this Form 10-Q was being prepared.

There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date the Company completed its evaluation.

See "Factors That May Affect Future Results of Operations" for a discussion of various pending legal matters involving the Company. The Company's Annual Report on Form 10-K/A for the year ended December 31, 2001 also contains a discussion of various pending legal matters.

On August 13, 2002, the Company filed a Current Report on Form 8-K attaching a revised schedule disclosing the medical membership of the Company as of December 31, 1999 and 2000, as of each calendar quarter end during the year ended December 31, 2001 and as of March 31, 2002.

On August 14, 2002, the Company filed a Current Report on Form 8-K furnishing the Statements under Oath of its Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings. The Statements were furnished pursuant to Order No. 4-460 of the Securities and Exchange Commission issued on June 27, 2002.

On October 10, 2002, the Company filed a Current Report on Form 8-K which reported that Blue Cross of California ("BCC"), a wholly owned subsidiary of the Company, is introducing a pilot program, designated the PPO Physician Quality and Incentive Program, which will provide financial and non-financial incentives to selected physicians serving BCC's preferred provider organization members to improve the quality of care and services delivered to members.

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

I, Leonard D. Schaeffer, Chairman of the Board and Chief Executive Officer, certify that:

I, David C. Colby, Executive Vice President and Chief Financial Officer, certify that:

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware (State or other jurisdiction of incorporation or organization)		95-4635504 (IRS Employer Identification No.)
1 WellPoint Way, Thousand Oaks, California (Address of principal executive offices)		91362 (Zip Code)

			PAGE
PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	1
		Consolidated Income Statements for the Quarter and Nine Months Ended September 30, 2002 and 2001	2
		Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2002	3
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	4
		Notes to Consolidated Financial Statements	5
		Report of Independent Accountants	23
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	48
	ITEM 4.	Controls and Procedures	48
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	49
	ITEM 6.	Exhibits and Reports on Form 8-K	49
	SIGNATURES		51
	CERTIFICATIONS		52

				September 30, 2002			December 31, 2001
				(In thousands, except share data)
				(Unaudited)
*ASSETS*
Current Assets:
	Cash and cash equivalents			$	1,020,111		$	1,028,476
	Investment securities, at market value				5,012,072			3,832,982
	Receivables, net				1,156,957			841,722
	Deferred tax assets, net				165,555			79,063
	Other current assets				121,184			90,398

		Total Current Assets			7,475,879			5,872,641
Property and equipment, net					342,706			222,080
Intangible assets, net					747,249			430,488
Goodwill, net					1,694,490			661,346
Long-term investments, at market value					131,994			124,611
Deferred tax assets, net					—			54,486
Other non-current assets					188,149			106,481

			Total Assets	$	10,580,467		$	7,472,133

*LIABILITIES AND STOCKHOLDERS' EQUITY*
Current Liabilities:
	Medical claims payable			$	2,333,787		$	1,934,620
	Reserves for future policy benefits				78,752			62,739
	Unearned premiums				435,088			332,813
	Accounts payable and accrued expenses				1,069,842			783,026
	Experience rated and other refunds				244,556			255,570
	Income taxes payable				66,752			64,654
	Other current liabilities				880,968			632,383

		Total Current Liabilities			5,109,745			4,065,805
Accrued postretirement benefits					125,693			94,124
Reserves for future policy benefits, non-current					218,130			222,406
Long-term debt					1,156,271			837,957
Deferred tax liabilities					52,988			—
Other non-current liabilities					144,832			119,262

			Total Liabilities		6,807,659			5,339,554
Stockholders' Equity:
	Preferred Stock—$0.01 par value, 50,000,000 shares authorized, none issued and outstanding				—			—
	Common Stock—$0.01 par value, 300,000,000 shares authorized, 147,030,129 and 135,307,637 issued at September 30, 2002 and December 31, 2001, respectively				1,470			714
	Treasury stock, at cost, 1,279,465 and 7,474,305 shares at September 30, 2002 and December 31, 2001, respectively				(73,149	)		(465,805	)
	Additional paid-in capital				1,675,653			1,002,193
	Retained earnings				2,135,277			1,548,941
	Accumulated other comprehensive income				33,557			46,536

		Total Stockholders' Equity			3,772,808			2,132,579

			Total Liabilities and Stockholders' Equity	$	10,580,467		$	7,472,133

		Quarter Ended September 30,					Nine Months Ended September 30,
		2002			2001		2002			2001
		(In thousands, except earnings per share)
Revenues:
	Premium revenue	$	4,183,949		$	3,025,184	$	11,907,702		$	8,384,379
	Management services and other revenue		213,407			156,191		605,675			444,206
	Investment income		117,769			64,097		243,831			177,746

			4,515,125			3,245,472		12,757,208			9,006,331
Operating Expenses:
	Health care services and other benefits		3,420,328			2,471,152		9,684,935			6,824,849
	Selling expense		175,612			127,277		498,802			363,777
	General and administrative expense		539,950			429,234		1,620,625			1,217,690

			4,135,890			3,027,663		11,804,362			8,406,316

Operating Income			379,235			217,809		952,846			600,015
	Interest expense		15,992			14,590		49,450			36,332
	Other expense, net		15,072			19,399		39,973			51,331

Income before Provision for Income Taxes and Extraordinary Items			348,171			183,820		863,423			512,352
	Provision for income taxes		139,279			75,374		345,468			207,474

Income before Extraordinary Items			208,892			108,446		517,955			304,878
Extraordinary Items:
	Gain from negative goodwill on acquisition		4,908			—		8,950			—
	Loss on early extinguishment of debt, net of tax benefit of $1,696 and $2,534 for the quarter and nine months ended September 30, 2002, respectively		(2,544	)		—		(3,802	)		—

			2,364			—		5,148			—

Net Income		$	211,256		$	108,446	$	523,103		$	304,878

Earnings Per Share:
	Income before Extraordinary Items	$	1.44		$	0.85	$	3.62		$	2.41
	Extraordinary gain from negative goodwill on acquisition		0.03			—		0.06			—
	Extraordinary loss on early extinguishment of debt, net of tax benefit		(0.02	)		—		(0.03	)		—

	Net Income	$	1.45		$	0.85	$	3.65		$	2.41

Earnings Per Share Assuming Full Dilution:
	Income before Extraordinary Items	$	1.37		$	0.82	$	3.45		$	2.32
	Extraordinary gain from negative goodwill on acquisition		0.03			—		0.06			—
	Extraordinary loss on early extinguishment of debt, net of tax benefit		(0.02	)		—		(0.03	)		—

	Net Income	$	1.38		$	0.82	$	3.48		$	2.32

Weighted Average Shares Outstanding			145,523			127,211		143,178			126,638

Fully Diluted Weighted Average Shares Outstanding			152,764			132,911		150,421			131,992

					Common Stock
					Issued			In Treasury										Accumulated Other Comprehensive Income
			Preferred Stock		Issued			In Treasury					Additional Paid-in Capital			Retained Earnings
			Preferred Stock		Shares	Amount		Shares		Amount			Additional Paid-in Capital			Retained Earnings					Total
			(In thousands)
Balance as of December 31, 2001			$	—	71,391	$	714	7,474		$	(465,805	)	$	1,002,193		$	1,548,941	$	46,536		$	2,132,579
Stock grants to employees and directors								(70	)		4,396											4,396
Stock issued for employee stock option and stock purchase plans								(3,214	)		194,736			57,731								252,467
Stock repurchased, at cost								2,625			(165,453	)										(165,453	)
Proceeds from sale of put options														1,603								1,603
Stock issued in connection with acquisition of RightCHOICE Managed Care, Inc.					2,718		27	(5,536	)		358,977			687,105			62,979					1,109,088
100% Stock Dividend on March 15, 2002					72,921		729							(729	)							—
Net losses from treasury stock reissued														(72,250	)		254					(71,996	)
Comprehensive income (loss)
	Net income																523,103					523,103
	Other comprehensive income, net of tax
		Change in unrealized valuation adjustment on investment securities, net of reclassification adjustment																	(12,979	)		(12,979	)

Total comprehensive income (loss)																	523,103		(12,979	)		510,124

Balance as of September 30, 2002			$	—	147,030	$	1,470	1,279		$	(73,149	)	$	1,675,653		$	2,135,277	$	33,557		$	3,772,808

		Quarter Ended September 30,						Nine Months Ended September 30,
		2002 (SFAS 142)		2001 (APB 16)		2001 (SFAS 142)		2002 (SFAS 142)		2001 (APB 16)		2001 (SFAS 142)
		(In thousands, except per share data)
Revenues		$	4,515,125	$	3,595,372	$	3,595,372	$	12,918,683	$	10,505,303	$	10,505,303
Adjusted Pro forma
	Income before Extraordinary Items	$	208,892	$	107,694	$	131,201	$	509,797	$	308,883	$	378,762
Adjusted Pro forma
	Net Income	$	202,306	$	107,694	$	140,151	$	505,995	$	308,883	$	387,712
Earnings Per Share:
Adjusted Pro forma
	Income before Extraordinary Items	$	1.44	$	0.75	$	0.91	$	3.52	$	2.16	$	2.65
Adjusted Pro forma
	Net Income	$	1.39	$	0.75	$	0.97	$	3.49	$	2.16	$	2.17
Diluted Earnings Per Share:
Adjusted Pro forma
	Income before Extraordinary Items	$	1.37	$	0.72	$	0.87	$	3.36	$	2.07	$	2.54
Adjusted Pro forma
	Net Income	$	1.32	$	0.72	$	0.93	$	3.33	$	2.07	$	2.60

	Health Care			Specialty		Consolidated
	(In thousands)
Balance as of January 1, 2002	$	646,375		$	14,971	$	661,346
Goodwill acquired during 2002		1,077,041			—		1,077,041
Final allocation of Cerulean goodwill and acquired intangibles		(47,361	)		—		(47,361	)
Reclassification from other intangible assets		3,464			—		3,464

Balance as of September 30, 2002	$	1,679,519		$	14,971	$	1,694,490

			Estimated Value		Useful Life (in years)	Weighted Average Useful Life (in years)
			(In thousands)
Amortized intangible assets:
	Provider Relationships with physicians		$	4,377	20	20.0
	Customer Contracts and Related Customer Relationships			90,613	15	15.0

Total amortized intangible assets				94,990		15.2
Non-amortized intangible assets:
	Provider Relationships with hospitals and ancillary facilities		$	5,072	Indefinite	Indefinite
	Trade Name and Service Marks			166,000	Indefinite	Indefinite

Total non-amortized intangible assets				171,072

		Total other intangible assets	$	266,062

			Estimated Value		Useful Life (in years)	Weighted Average Useful Life (in years)
			(In thousands)
Amortized intangible assets:
	Software		$	7,510	5	5.0
	Provider Relationships			12,050	20 to 25	23.0
	Customer Contracts and Relationships			98,000	15	15.0

Total amortized intangible assets				117,560		15.2
Non-amortized intangible assets:
	Provider Relationships		$	12,050	Indefinite	Indefinite
	Trade Name and Service Marks			238,000	Indefinite	Indefinite

Total non-amortized intangible assets				250,050

		Total other intangible assets	$	367,610

	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Amortization Period (in years)
As of September 30, 2002
Amortized intangible assets:
Provider Relationships	$	29,974	$	3,541	$	26,433	10 to 25 years
Customer Contracts and Related Customer Relationships		352,699		64,807		287,892	18 months to 20 years
Other		21,967		7,425		14,542	5 to 20 years

Total amortized intangible assets		404,640		75,773		328,867
Non-amortized intangible assets:
Provider Relationships		17,122		98		17,024	Indefinite
Trade Name and Service Marks		404,000		2,642		401,358	Indefinite

Total non-amortized intangible assets		421,122		2,740		418,382

Total other intangible assets	$	825,762	$	78,513	$	747,249

	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Amortization Period (in years)
As of December 31, 2001
Amortized intangible assets:
Provider Contracts	$	23,547	$	2,509	$	21,038	10 to 40 years
Customer Contracts and Related Customer Relationships		285,819		39,285		246,534	18 months to 20 years
Trade Name and Service Marks		135,000		2,642		132,358	40 years
Other		38,477		7,919		30,558	5 to 20 years

Total amortized intangible assets	$	482,843	$	52,355	$	430,488

	Quarter Ended September 30, 2002
	Health Care		Specialty		Corporate		Consolidated
	(In thousands)
Premium revenue	$	4,059,121	$	124,828	$	—	$	4,183,949
Management services revenue		179,582		33,825		—		213,407

Total revenue from external customers		4,238,703		158,653		—		4,397,356
Segment net income	$	171,235	$	6,788	$	33,233	$	211,256

Segment assets	$	7,819,980	$	615,554	$	2,144,933	$	10,580,467

	Quarter Ended September 30, 2001
	Health Care		Specialty		Corporate		Consolidated
	(In thousands)
Premium revenue	$	2,904,433	$	120,751	$	—	$	3,025,184
Management services revenue		125,830		30,361		—		156,191

Total revenue from external customers		3,030,263		151,112		—		3,181,375
Segment net income	$	86,199	$	8,842	$	13,405	$	108,446

Segment assets	$	4,880,803	$	620,667	$	1,721,468	$	7,222,938

				September 30,
				September 30,		Percent Change
				2002 (e)	2001 (e)	Percent Change
California
		Large Group		4,597,670	4,044,484	13.7	%
		Individual and Small Group		1,597,480	1,577,292	1.3	%
		Senior		241,420	214,351	12.6	%

			Total California	6,436,570	5,836,127	10.3	%

Central Region(f)
	Missouri
		Large Group		1,139,496	27,750	N/A
		Individual and Small Group		228,245	639	N/A
		Senior		42,634	121	N/A

			Total Missouri	1,410,375	28,510	N/A

	Illinois
		Large Group		601,340	437,740	37.4	%
		Individual and Small Group		122,337	83,449	46.6	%
		Senior		12,584	11,827	6.4	%

			Total Illinois	736,261	533,016	38.1	%

	Texas
		Large Group		369,914	312,132	18.5	%
		Individual and Small Group		192,124	170,933	12.4	%
		Senior		519	321	61.7	%

			Total Texas	562,557	483,386	16.4	%

	Other States
		Large Group		1,703,655	1,404,080	21.3	%
		Individual and Small Group		95,543	82,506	15.8	%
		Senior		23,189	17,030	36.2	%

			Total Other States	1,822,387	1,503,616	21.2	%

Georgia
		Large Group		1,604,242	1,521,570	5.4	%
		Individual and Small Group		409,580	333,069	23.0	%
		Senior		69,819	74,882	-6.8	%

			Total Georgia	2,083,641	1,929,521	8.0	%

Total Medical Membership				13,051,791	10,314,176	26.5	%

ASO Membership(g)
		California		1,466,738	1,377,145	6.5	%
		Central Region		2,676,709	1,493,236	79.3	%
		Georgia		868,792	889,969	-2.4	%

Total ASO Membership				5,012,239	3,760,350	33.3	%
Risk Membership
		California		4,969,832	4,458,982	11.5	%
		Central Region		1,854,871	1,055,292	75.8	%
		Georgia		1,214,849	1,039,552	16.9	%

Total Risk Membership				8,039,552	6,553,826	22.7	%

Total Medical Membership				13,051,791	10,314,176	26.5	%

	WELLPOINT HEALTH NETWORKS INC. Registrant
Date: November 13, 2002	By:	/s/ LEONARD D. SCHAEFFER Leonard D. Schaeffer Chairman of the Board of Directors and Chief Executive Officer
Date: November 13, 2002	By:	/s/ DAVID C. COLBY David C. Colby Executive Vice President and Chief Financial Officer
Date: November 13, 2002	By:	/s/ KENNETH C. ZUREK Kenneth C. Zurek Senior Vice President, Controller and Taxation

(a)	Exhibits
	2.01	Amended and Restated Recapitalization Agreement dated as of March 31, 1995 by and among the Registrant, Blue Cross of California, Western Health Partnership and Western Foundation for Health Improvement, incorporated by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 dated April 8, 1996
	2.02	Amended and Restated Agreement and Plan of Merger dated as of November 29, 2000, by and among Cerulean Companies, Inc., the Registrant and Water Polo Acquisition Corp., incorporated by reference to Exhibit 2.01 of the Registrant's Current Report on Form 8-K dated March 15, 2001
	2.03	Agreement and Plan of Merger dated as of October 17, 2001 by and among the Registrant, RightCHOICE Managed Care, Inc. and RWP Acquisition Corp., incorporated by reference to Exhibit 2.01 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-73382)
	2.04	Agreement and Plan of Merger dated as of November 20, 2001 by and among the Registrant, CareFirst, Inc. and Congress Acquisition Corp., incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated November 20, 2001
	3.01	Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on August 5, 1997.
	3.02	Bylaws of the Registrant, incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, Registration No. 333-90791
	4.01	Specimen of common stock certificate of WellPoint Health Networks Inc., incorporated by reference to Exhibit 4.4 of Registrant's Registration Statement on Form 8-B, Registration No. 001-13083
	4.02	Restated Certificate of Incorporation of the Registrant (included in Exhibit 3.01)
	4.03	Bylaws of the Registrant (included in Exhibit 3.02)
	4.04	Indenture dated as of July 2, 1999 by and between the Registrant and The Bank of New York, as trustee (including the form of Debenture attached as Exhibit A thereto), incorporated by reference to Exhibit 4.04 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.

	4.05	Amended and Restated Indenture dated as of June 8, 2001 by and between the Registrant and The Bank of New York, as trustee, incorporated by reference to Exhibit 4.05 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
	4.06	Form of 6³/8% Note due 2006, incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated June 12, 2001.
	4.07	Form of 6³/8% Note due 2012, incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 12, 2002.
	10.01	WellPoint Health Networks Inc. Comprehensive Executive Non-qualified Retirement Plan (as amended through September 1, 2002)
	10.02	Amendment to the WellPoint 401(k) Retirement Savings Plan effective as of September 1, 2002
	10.03	Amendment to the WellPoint 401(k) Retirement Savings Plan effective as of November 17, 2002
	15.01	Letter regarding unaudited interim financial information
	99.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
	99.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
(b)	Reports on Form 8-K