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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-13083

WELLPOINT HEALTH NETWORKS INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4635504
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

1 WellPoint Way, Thousand Oaks, California		91362
(Address of principal executive offices)		(Zip Code)

(818) 234-4000
(Registrant’s telephone number, including area code)

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý No o

As of November 2, 2004, there were approximately 156,362,415 shares of Common Stock, $0.01 par value of the registrant outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

WellPoint Health Networks Inc.

Consolidated Balance Sheets

	September 30,			December 31,
(In thousands, except share data)	2004			2003
	(Unaudited)
*ASSETS*
Current Assets:
Cash and cash equivalents	$	1,118,086		$	1,030,327
Investments - available-for-sale, at fair value	7,127,942			6,726,802
Securities lending collateral	900,526			914,173
Receivables, net	1,629,523			1,356,107
Deferred tax assets, net	322,437			355,110
Other current assets	363,176			258,588
Total Current Assets	11,461,690			10,641,107
Property and equipment, net	476,561			441,936
Intangible assets, net	915,683			950,954
Goodwill, net	2,305,251			2,321,208
Long-term investments, at market value	199,736			161,784
Other non-current assets	286,496			271,689
Total Assets	$	15,645,417		$	14,788,678

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current Liabilities:
Medical claims payable	$	2,656,742		$	2,747,074
Reserves for future policy benefits	110,604			129,135
Unearned premiums	686,505			629,831
Accounts payable and accrued expenses	1,492,483			1,411,391
Experience rated and other refunds	235,618			267,382
Income taxes payable	201,764			241,979
Security trades pending payable	149,224			27,456
Securities lending payable	900,526			914,173
Other current liabilities	703,118			712,273
Total Current Liabilities	7,136,584			7,080,694
Accrued postretirement benefits	156,733			152,738
Reserves for future policy benefits, non-current	318,665			288,197
Long-term debt	1,002,276			1,238,267
Deferred tax liabilities	331,532			370,737
Other non-current liabilities	239,221			228,096
Total Liabilities	9,185,011			9,358,729
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, 159,598,310 and 157,006,322 issued at September 30, 2004 and December 31, 2003, respectively	1,596			1,570
Treasury stock, at cost, 3,316,582 and 4,248,172 shares at September 30, 2004 and December 31, 2003, respectively	(276,775		)	(298,049		)
Additional paid-in capital	2,452,270			2,348,506
Retained earnings	4,160,697			3,250,483
Accumulated other comprehensive income	122,618			127,439
Total Stockholders’ Equity	6,460,406			5,429,949
Total Liabilities and Stockholders’ Equity	$	15,645,417		$	14,788,678

See the accompanying notes to the Consolidated Financial Statements.

WellPoint Health Networks Inc.

Consolidated Income Statements

(Unaudited)

	Quarter Ended September 30,				Nine Months Ended September 30,
(In thousands, except earnings per share)	2004		2003		2004		2003
Revenues:
Premium revenue	$	5,463,223	$	4,763,859	$	16,127,510	$	13,967,018
Management services and other revenue	308,180		219,695		918,257		667,332
Investment income	76,669		65,455		228,862		195,807
	5,848,072		5,049,009		17,274,629		14,830,157
Operating Expenses:
Health care services and other benefits	4,412,655		3,792,105		12,964,376		11,279,272
Selling expense	227,926		200,562		668,448		593,796
General and administrative expense	655,038		624,258		2,050,771		1,791,927
	5,295,619		4,616,925		15,683,595		13,664,995
Operating Income	552,453		432,084		1,591,034		1,165,162
Interest expense	12,169		12,645		37,379		38,108
Other expense, net	15,188		9,074		36,632		20,724
Income before Provision for Income Taxes	525,096		410,365		1,517,023		1,106,330
Provision for income taxes	210,038		164,146		606,809		442,589
Net Income	$	315,058	$	246,219	$	910,214	$	663,741

Earnings Per Share	$	2.02	$	1.68	$	5.86	$	4.55

Earnings Per Share Assuming Full Dilution	$	1.97	$	1.63	$	5.68	$	4.42

Weighted Average Shares Outstanding	156,012		146,626		155,261		145,987

Fully Diluted Weighted Average Shares Outstanding	160,211		150,845		160,257		150,084

See the accompanying notes to the Consolidated Financial Statements.

WellPoint Health Networks Inc.

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

																				Accumulated
				Common Stock										Additional						Other
	Preferred			Issued				In Treasury						Paid-in				Retained		Comprehensive
(In thousands)	Stock			Shares	Amount			Shares		Amount				Capital				Earnings		Income			Total
Balance as of December 31, 2003	$	—		157,006	$	1,570		4,248		$	(298,049		)	$	2,348,506			$	3,250,483	$	127,439		$	5,429,949
Stock grants to employees and directors				738	7			(519	)	33,578				22,348									55,933
Stock issued for employee stock option plans and stock purchase plans				1,854	19			(1,799	)	123,393				133,660									257,072
Stock repurchased, at cost								1,387		(135,697			)										(135,697		)
Net losses from treasury stock reissued														(52,244			)						(52,244		)
Comprehensive income
Net income																		910,214					910,214
Other comprehensive income, net of tax
Change in unrealized valuation adjustment on investment securities, net of reclassification adjustment																				(4,821		)	(4,821		)
Total comprehensive income																		910,214		(4,821		)	905,393

Balance as of September 30, 2004	$		—	159,598	$		1,596	3,317		$		(276,775	)	$		2,452,270		$	4,160,697	$	122,618		$	6,460,406

See the accompanying notes to the Consolidated Financial Statements.

WellPoint Health Networks Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
(In thousands)	2004			2003
Cash flows from operating activities:
Net income	$	910,214		$	663,741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net of accretion	151,199			123,132
Gain on sales of assets, net	(23,030		)	(12,452		)
Provision (benefit) for deferred income taxes	15,271			(32,464		)
Amortization of deferred gain on sale of building	(392		)	—
Accretion of interest on 6 3/8% Notes due 2012 and 6 3/8% Notes due 2006	226			212
Amortization of deferred gain on termination of 2002 interest rate swap on 6 3/8% Notes due 2006	(561		)	—
(Increase) decrease in certain assets, net of effect of businesses acquired and sold:
Receivables, net	(154,420		)	(232,086		)
Other current assets	(82,559		)	(57,186		)
Other non-current assets	(25,091		)	(6,194		)
Increase (decrease) in certain liabilities, net of effect of businesses acquired and sold:
Medical claims payable	(90,346		)	86,973
Reserves for future policy benefits	11,937			10,931
Unearned premiums	56,674			220
Accounts payable and accrued expenses	108,008			77,747
Experience rated and other refunds	(31,764		)	10,475
Income taxes payable	102,723			35,391
Other current liabilities	8,966			100,640
Accrued postretirement benefits	3,995			5,106
Other non-current liabilities	11,517			16,097
Net cash provided by operating activities	972,567			790,283
Cash flows from investing activities:
Investments purchased	(5,151,375		)	(7,890,081		)
Proceeds from investments sold and matured	4,707,925			6,803,090
Property and equipment purchased	(123,081		)	(101,645		)
Proceeds from property and equipment sold	8,015			5,561
Acquisition of new businesses, net of cash acquired	—			(405,420		)
Additional cash used for prior period acquisitions	(14,205		)	—
Proceeds from sale of business, net of cash transferred	1,262			—
Net cash used in investing activities	(571,459		)	(1,588,495		)
Cash flows from financing activities:
Net (repayment) borrowing of commercial paper	(230,471		)	274,620
Proceeds from termination of 2002 interest rate swap on 6 3/8% Notes due 2006	4,633			—
Change in advances on securities lending payable	(13,647		)	417,137
Proceeds from issuance of Common Stock	61,833			105,467
Common Stock repurchased	(135,697		)	(268,565		)
Net cash (used) provided by financing activities	(313,349		)	528,659
Net increase (decrease) in cash and cash equivalents	87,759			(269,553		)
Cash and cash equivalents at beginning of period	1,030,327			1,355,616
Cash and cash equivalents at end of period	$	1,118,086		$	1,086,063

See the accompanying notes to the Consolidated Financial Statements.

WellPoint Health Networks Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization

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, 2004, WellPoint had approximately 15.6 million medical members (including approximately 1.3 million BlueCard “host” members) and approximately 46.8 million specialty members. Host members are members who reside in a state in which a WellPoint subsidiary is the Blue Cross and/or Blue Shield licensee and who are covered under an employer-sponsored health plan issued by a non-WellPoint controlled Blue Cross and/or Blue Shield licensee. Through its subsidiaries, the Company offers a broad spectrum of network-based managed care plans to the large and small employer, individual, Medicaid 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 plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical management and claims processing. The Company also provides a broad array of specialty and other products and services including pharmacy benefits management, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. With its acquisition of Cobalt Corporation, the Company also offers workers’ compensation insurance products and is currently the largest Medicare Part A fiscal intermediary in the nation, processing claims for providers in all 50 states. 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 most parts of Missouri (except Kansas City and surrounding counties) primarily under the name Blue Cross Blue Shield of Missouri, in Wisconsin primarily under the names Blue Cross Blue Shield of Wisconsin and CompcareBlue and in various parts of the country under the names UniCare and HealthLink. These products are marketed by the Company’s various operating subsidiaries throughout the United States. The Company’s customer base is diversified, with extensive membership among large and small employer groups and individuals and in the Medicare and Medicaid markets.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements of WellPoint have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. In accordance with the rules and regulations of the SEC, certain footnotes or other financial information have been condensed or omitted if they substantially duplicate the disclosures contained in the Company’s annual audited financial statements. In the opinion of management, the interim financial statements reflect all material adjustments (which are of a normal recurring nature) necessary for a fair statement of its financial position as of September 30, 2004, the results of its operations for the quarters and nine months ended September 30, 2004 and 2003, its changes in stockholders’ equity for the nine months ended September 30, 2004 and its cash flows for the nine months ended September 30, 2004 and 2003. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year. These unaudited

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions, except per share amounts)	2004			2003			2004			2003

Net income—as reported	$	315.1		$	246.2		$	910.2		$	663.7
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	2.6			—			8.1			0.5
Less: Total stock—based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(19.2		)	(18.0		)	(80.7		)	(53.4		)
Net income—pro forma	$	298.5		$	228.2		$	837.6		$	610.8

Earnings per share—as reported	$	2.02		$	1.68		$	5.86		$	4.55
Earnings per share—pro forma	$	1.91		$	1.56		$	5.39		$	4.18
Earnings per share assuming full dilution—as reported	$	1.97		$	1.63		$	5.68		$	4.42
Earnings per share assuming full dilution—pro forma	$	1.86		$	1.51		$	5.23		$	4.07

The above pro forma disclosures may not be representative of the effects on reported pro forma net income for future years.

4. Supplemental Significant Accounting Policies

Principles of Consolidation

All of the Company’s majority owned subsidiaries, including the Company’s 51% interest in a community health partnership network (“CHPN”), are accounted for under the consolidation method of accounting as required under Statement of Financial Accounting Standards No. 94, “Consolidation of All Majority-Owned Subsidiaries” (“SFAS No. 94”). As of September 30, 2004, an agreement to dissolve the CHPN has been reached. Joint ventures in which the Company owns a 50% interest are recorded under the equity method of accounting as required by SFAS No. 94. Other investments in which the Company owns less than 50% of the voting stock are recorded in accordance with Accounting Principles Board No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). The Company maintains certain investments in enterprises in which the Company owns less than 20% of the voting stock that are accounted for under the equity method of accounting as a result of the Company’s ability to exert significant influence over the operating and financial policies of the enterprise, as defined in APB No. 18.

Investments

The Company and certain of its subsidiaries participate in securities lending programs whereby the loaned marketable securities in the Company’s portfolio are transferred to borrowers (generally independent brokers or dealers) approved by the Company based on, among other things, their creditworthiness in exchange for collateral initially equal to at least 102% of the value of the securities on loan and is thereafter maintained at a minimum of 100% of the market value of the securities loaned. The market value of the securities on loan to each borrower is monitored daily and the borrower is required to deliver additional collateral if the market value of the collateral falls below 100% of the market value of the securities on loan. Under the guidance provided in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” the Company recognizes the collateral as an asset under “securities lending collateral” on its balance sheet and the Company records a corresponding liability for the obligation to return the collateral to the borrower under “securities lending payable.”

Receivables, net

A Company subsidiary (the “PBM”) operates as a pharmacy benefit manager under the trade name WellPoint Pharmacy Management. The PBM contracts with pharmaceutical manufacturers, some of whom provide rebates based on use of the manufacturers’ products by the PBM’s affiliated and non-affiliated clients. The Company accrues rebates receivable on a monthly basis based on the terms of the applicable contracts, historical data and current estimates. The PBM bills these rebates to the manufacturers on a quarterly basis. The Company records rebates attributable to affiliated clients as a reduction to “health care services and other benefits.” Rebates attributable to non-affiliated clients are accrued as rebates receivable and a corresponding payable for the amounts of the rebates to be remitted to non-affiliated clients in accordance with their contracts is also recorded. The Company generally receives rebates between two to five months after billing.

5. New Accounting Pronouncements

In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132R”). SFAS No. 132R retains the disclosure requirements contained in FASB Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”), and also requires additional disclosures to those in the original SFAS No. 132 that a company is required to make in its annual and interim financial statements. Except as noted, disclosures required by SFAS No. 132R are effective for financial statements with fiscal years ending after December 15, 2003. The disclosure of estimated future benefit payments required by SFAS No. 132R is effective for fiscal years ending after June 15, 2004. The adoption of SFAS No. 132R did not have a material effect on the consolidated financial statements of the Company.

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) was signed into law. MMA introduced a voluntary Medicare Part D prescription drug benefit and created a new 28% federal subsidy for the sponsors of postretirement prescription drug benefits that are at least actuarially equivalent to the new Medicare Part D benefit. The Company has determined that it qualifies for the subsidy under MMA. In May 2004, the FASB issued FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-2”). Under FSP FAS 106-2, sponsors must consider the two new features of MMA in measuring the accumulated postretirement benefit obligation (“APBO”) and net periodic postretirement benefit cost. In accordance with FSP FAS 106-2, the Company made a one-time election to recognize the impact of MMA as of December 31, 2003. Accordingly, any measures of the APBO and net periodic postretirement benefit cost in the Company’s Consolidated Financial Statements and the related footnotes for the year ended December 31, 2003 included the effects of MMA. The impact of the adoption of the FSP FAS 106-2 on the Company’s Consolidated Financial Statements as of December 31, 2003 resulted in a reduction in the APBO of $7.9 million. The reduction in the 2004 net periodic postretirement benefit cost for the quarter and nine months ended September 30, 2004 was $0.3 million and $0.9 million, respectively.

6. Acquisitions

On October 31, 2003, the Company completed its acquisition of Health Core, Inc. (“Health Core”). Health Core currently provides outcomes research services to health plans and pharmaceutical organizations. The purchase price and related acquisition costs of approximately $4.1 million plus an additional $3.5 million in scheduled future payments over the next three years exceeded the estimated fair value of net assets acquired by $6.4 million. Under the purchase method of accounting, the Company assigned this amount to goodwill. In addition, the terms of the transaction include a provision for additional contingent payments of up to $5.5 million based on Health Core achieving certain financial performance targets during 2005, 2006 and 2007. The final amount of goodwill may increase as a result of these contingent payments. The operating results for Health Core are included in WellPoint’s consolidated income statements for periods following the completion of the acquisition.

On September 24, 2003, the Company completed its acquisition of Cobalt, the parent company of Blue Cross Blue Shield of Wisconsin. Cobalt served approximately 675,000 medical members (excluding BlueCard “host” members) as of September 30, 2003. The transaction was effective as of September 30, 2003 for accounting purposes. The operating results for Cobalt are included in WellPoint’s consolidated income statement for periods following September 30, 2003. Under the terms of the transaction, total consideration paid to all holders of Cobalt common stock in the merger was approximately $427.5 million in cash and approximately 7.3 million newly issued shares of WellPoint Common Stock (which included approximately 2.1 million shares issued to affiliates). The total purchase price of approximately $884.9 million valued as of September 24, 2003 was used to purchase net assets with a fair value of approximately $251.0 million. Included in the total purchase price was $12.1 million used to retire Cobalt’s existing long-term debt at the time of acquisition. As a

result of the acquisition of Cobalt, the Company incurred $38.2 million in expenses, primarily related to 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 $829.6 million includes $96.5 million of deferred tax liabilities relating to identified intangibles. 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 three to 23 years. Except for the valuation of deferred taxes, the valuation of certain assets and liabilities and the implementation of the integration plan are now complete and the allocation between goodwill and intangible assets recorded as of September 30, 2004 is final. The purchase price allocation between goodwill and identifiable intangible assets is $588.3 million and $241.3 million, respectively. The entire goodwill amount of $588.3 million is not deductible for tax purposes.

On June 30, 2003, the Company completed its acquisition of Golden West Health Plan, Inc. (“Golden West”) for a purchase price of approximately $30.4 million. Upon completion of the acquisition, Golden West had net assets with a fair value of approximately $0.4 million and served more than 275,000 dental and vision members. As a result of the acquisition of Golden West, the Company incurred $0.4 million in expenses primarily related to transaction costs. The estimated purchase price allocation between goodwill and identifiable intangible assets was $17.3 million and $13.0 million, respectively. The operating results for Golden West are included in WellPoint’s consolidated income statements for periods following the completion of the acquisition.

7. Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, the Company completed the annual evaluation of its goodwill and other intangible assets at December 31, 2003, and determined that there was no impairment loss.

The changes in the carrying amount of goodwill by reportable segment are as follows:

(In thousands)	Health Care				Specialty			Corporate and Other			Consolidated
Balance as of January 1, 2003	$	1,676,800			$	14,971		$	—		$	1,691,771
Goodwill acquired during 2003	607,826				17,248			2,892			627,966
Final purchase accounting adjustments for RightCHOICE goodwill	1,471				—			—			1,471
Balance as of December 31, 2003	2,286,097				32,219			2,892			2,321,208
Final purchase accounting adjustments for Cobalt goodwill	(19,518			)	—			—			(19,518		)
Other goodwill adjustments	—				46			3,515			3,561
Balance as of September 30, 2004	$		2,266,579		$		32,265	$		6,407	$	2,305,251

On October 31, 2003, WellPoint completed its acquisition of Health Core, as discussed in Note 6. As a result of the acquisition of Health Core, the Company recorded $6.4 million of goodwill as of September 30, 2004.

On September 24, 2003, WellPoint completed its acquisition of Cobalt, as discussed in Note 6. As a result of the acquisition of Cobalt, the Company recorded $588.3 million of goodwill and $241.3 million of identifiable intangible assets as of September 30, 2004. 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 Cobalt at cost as of September 30, 2004.

(In thousands)	Gross Carrying Value			Useful Life (in years)	Weighted Average Useful Life (in years)
Amortized intangible assets:
Provider relationships	$		3,450	11 to 23	16.7
Customer contracts and related customer relationships	70,000			3 to 16	9.0
Total amortized intangible assets	73,450				9.4

Non-amortized intangible assets:
Provider relationships	552			Indefinite	Indefinite
Trade names and service marks	167,300			Indefinite	Indefinite
Total non-amortized intangible assets	167,852

Total other intangible assets	$	241,302

The gross carrying value, accumulated amortization and net carrying value of other intangible assets of the Company as of September 30, 2004 and December 31, 2003 were as follows:

(In thousands)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value			Amortizat- ion Period (in years)
As of September 30, 2004
Amortized intangible assets:
Provider relationships	$	33,424	$		6,606	$	26,818		10 to 25
Customer contracts and related customer relationships	427,974		143,853			284,121			1.5 to 20
Other	21,968		11,458			10,510			5 to 20
Total amortized intangible assets	483,366		161,917			321,449

Non-amortized intangible assets:
Provider relationships	17,674		98			17,576			Indefinite
Trade names and service marks	579,300		2,642			576,658			Indefinite
Total non-amortized intangible assets	596,974		2,740			594,234

Total other intangible assets	$	1,080,340	$	164,657		$		915,683

(In thousands)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value			Amortizat- ion Period (in years)
As of December 31, 2003
Amortized intangible assets:
Provider relationships	$	33,424	$		5,349	$	28,075		10 to 25
Customer contracts and related customer relationships	427,974		111,351			316,623			1.5 to 20
Other	21,968		9,946			12,022			5 to 20
Total amortized intangible assets	483,366		126,646			356,720

Non-amortized intangible assets:
Provider relationships	17,674		98			17,576			Indefinite
Trade names and service marks	579,300		2,642			576,658			Indefinite
Total non-amortized intangible assets	596,974		2,740			594,234

Total other intangible assets	$	1,080,340	$	129,386		$		950,954

For the quarters ended September 30, 2004 and 2003, amortization expense relating to intangible assets was $11.8 million and $9.3 million, respectively. For the nine months ended September 30, 2004 and 2003, amortization expense relating to intangible assets was $35.3 million and $27.4 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, 2004, 2005, 2006, 2007 and 2008 (amounts in thousands). These estimates were

calculated based on the gross carrying value of amortized intangible assets as of September 30, 2004 using the applicable amortization period.

For year ending December 31, 2004	$	47,028
For year ending December 31, 2005	43,648
For year ending December 31, 2006	37,102
For year ending December 31, 2007	32,412
For year ending December 31, 2008	28,945

8. Pension Benefits

The Company maintains three non-contributory defined benefit pension plans. The Restated Employees’ Retirement Plan of Blue Cross of California (the “BCC Plan”) covers employees of a collective bargaining unit. The WellPoint Health Networks Inc. Pension Accumulation Plan (the “WellPoint Pension Plan”), which was established on January 1, 1987, covers all eligible employees (employees covered under a collective bargaining agreement participate if the terms of the collective bargaining agreement provides for such participation) meeting certain age and service requirements. In addition, with the completion of the acquisition of Cobalt, WellPoint became the sponsor of Cobalt’s UGS Pension Plan (“UGS Plan”). The UGS Plan provides retirement benefits to covered employees based primarily on compensation and years of service. Plan assets are invested primarily in pooled income funds. The Company’s policy is to fund its plans according to the requirements of the Employee Retirement Income Security Act of 1974, as amended, and applicable income tax regulations. The Company uses the projected unit credit method of cost determination. In October 2003, the Company amended the WellPoint Pension Plan effective January 1, 2004. Beginning January 1, 2004, employees who are of age 50 and over, with combined age and service totaling 65 or higher as of December 31, 2003, will continue to earn future contributions under the WellPoint Pension Plan based on eligible compensation. For other employees, the funds in their pension account earned through December 31, 2003 will continue to accrue interest. However, there will be no additional contributions based on the employee’s earnings after December 31, 2003. Once the employee becomes vested (after five years of service), the employee will be eligible to receive a benefit from the WellPoint Pension Plan at retirement or termination based on his or her account balance as of December 31, 2003 plus accrued interest. Employees hired after December 31, 2003 will not be eligible to participate in the WellPoint Pension Plan.

Estimated net periodic pension expense for the Company’s defined benefit pension plans included the following components:

	Quarter Ended September 30,
(In thousands)	2004			2003

Service cost—benefits earned	$	2,428		$	4,888
Interest cost on projected benefits obligations	4,693			4,910
Expected return on plan assets	(9,626		)	(4,902		)
Amortization of prior service cost	11			24
Recognized net actuarial (gain) loss	(1,055		)	2,206
Curtailment charge	—			310
Net periodic pension (benefit) expense	$	(3,549	)	$	7,436

	Nine Months Ended September 30,
(In thousands)	2004				2003

Service cost—benefits earned	$	6,130			$		14,664
Interest cost on projected benefits obligations	18,107				14,730
Expected return on plan assets	(24,999			)	(14,706			)
Amortization of prior service cost	59				72
Recognized net actuarial loss	2,950				6,618
Curtailment charge	—				930
Net periodic pension expense	$		2,247		$	22,308

Based on the funded status of all of WellPoint’s pension plans, during the nine months ended September 30, 2004, the Company contributed $21.3 million and $1.4 million to the WellPoint Pension Plan and BCC Plan, respectively. No contributions were made for the UGS Plan during 2004. No additional contributions are expected to be made to any of the plans during the fourth quarter of 2004.

9. Long-Term Debt

The carrying amount of the Company’s long-term indebtedness consisted of the following:

(In thousands)	September 30, 2004		December 31, 2003

6 ³/₈% Notes due 2006	$	453,778	$		459,366
6 ³/₈% Notes due 2012	349,136		349,068
Commercial paper program	199,362		429,833
Total long-term debt	$	1,002,276	$	1,238,267

6 ³/₈% Notes due 2012

On January 16, 2002, the Company issued $350.0 million aggregate principal amount at maturity of 6 3/8% Notes due January 15, 2012 (the “2012 Notes”). The net proceeds of this offering totaled approximately $348.9 million. The 2012 Notes bear interest at a rate of 6 3/8% 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, 2004 and December 31, 2003, the Company had $349.1 million, (based upon the principal amount of $350.0 million less unamortized discount) of 2012 Notes outstanding. The related interest expense and amortization of discount and issue costs for each of the quarters ended September 30, 2004 and 2003 totaled $5.7 million and $5.8 million, respectively. The related interest expense and amortization of discount and issue costs for each of the nine months ended September 30, 2004 and 2003 totaled $17.2 million.

The 2012 Notes may be redeemed, in whole or in part, at the Company’s option at any time. The redemption price for any 2012 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2012 Notes being redeemed on the redemption date; or 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2012 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 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 2012 Notes to the redemption date.

6 ³/₈% Notes due 2006

On June 15, 2001, the Company issued $450.0 million aggregate principal amount at maturity of 6 3/8% Notes due June 15, 2006 (the “2006 Notes”). The net proceeds of this offering totaled approximately $449.0 million. The net proceeds from the sale of the 2006 Notes were used for repayment of indebtedness under the Company’s revolving credit facilities. The 2006 Notes bear interest at a rate of 6 3/8% 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, 2004 and December 31, 2003, the Company had $449.6 million and $449.5 million, respectively, (based upon the principal amount of $450.0 million less unamortized discount) of 2006 Notes outstanding. The related interest expense and amortization of discount and issue costs for each of the quarters ended September 30, 2004 and 2003 was $7.4 million. The related interest expense and amortization of discount and issue costs for each of the nine months ended September 30, 2004 and 2003 was $22.3 million.

The 2006 Notes may be redeemed, in whole or in part, at the Company’s option at any time. The redemption price for any 2006 Notes redeemed will be equal to the greater of the following amounts: 1) 100% of the principal amount of the 2006 Notes being redeemed on the redemption date; or 2) the sum of the present values of the remaining scheduled payments of

Revolving Credit Facility

Effective as of March 30, 2001, the Company entered into two unsecured revolving credit facilities allowing aggregate indebtedness of $1.0 billion in principal amount. Borrowings under these facilities (which are generally referred to collectively as the Company’s “revolving credit facility”) bear interest at rates determined by reference to the bank’s base rate or LIBOR plus a margin determined by reference to the then-current rating of the Company’s unsecured long-term debt by specified rating agencies. 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 long-term debt ratings by specified rating agencies. One facility, which provides for borrowings not to exceed $750.0 million at any time outstanding, expires on 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 not to exceed $250.0 million at any time outstanding, expires on March 25, 2005. Any amount outstanding under this facility as of March 25, 2005 may be converted into a one-year term loan at the option of the Company and will bear interest at rates determined by reference to the bank’s base rate or LIBOR plus a margin determined by reference to the then-current rating of the Company’s unsecured long-term debt by specified rating agencies, plus 0.125% until paid in full.

Loans under the $250.0 million facility are made on a committed basis. Loans under the $750.0 million facility are made on a committed basis or 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 covenants, including restrictions on the incurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in control. As of September 30, 2004 and December 31, 2003, the Company had no amounts outstanding under the revolving credit facility.

Commercial Paper Program

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, as amended (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 and 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 Company is currently subject to a pending merger with Anthem, Inc. (“Anthem”). Under the merger agreement with Anthem, the Company is obligated to repurchase or otherwise retire any

outstanding commercial paper prior to the closing of the merger. In June 2004, in anticipation of the merger closing, the Company repaid the entire outstanding balance under the commercial paper program. On July 23, 2004, the California Department of Insurance (the “DOI”) announced that it was disapproving Anthem’s application (known as a “Form A”) to acquire control of the Company’s subsidiary, BC Life & Health Insurance Company, in connection with Anthem’s merger with the Company. In August 2004, the Company recommenced its issuance of commercial paper, which was primarily used to fund Common Stock repurchases during the quarter. On November 8, 2004, the DOI, in response to an amended Form A application, issued an order approving the Form A. On November 9, 2004, the DOI and Anthem announced settlement of the lawsuit challenging the DOI’s original disapproval order (see Note 16).

As of September 30, 2004 and December 31, 2003, outstanding commercial paper totaled approximately $199.4 million and $429.8 million, respectively. The average maturity for the commercial paper was 25 days as of September 30, 2004 and 43 days as of December 31, 2003. The weighted average yield on the outstanding commercial paper as of September 30, 2004 and December 31, 2003 was 1.93% and 1.25%, respectively. The Company intends to maintain an outstanding commercial paper balance equal to or greater than the amount outstanding at September 30, 2004 for more than one year. Statement of Financial Accounting Standards No. 6, “Classification of Short-Term Obligations Expected to Be Refinanced” (“SFAS No. 6”) provides that a company may classify a short-term obligation as a long-term liability if the company intends to refinance the short-term obligation on a long-term basis and if the company has the ability to consummate such refinancing on a long-term basis. SFAS No. 6 states that refinancing a short-term obligation on a long-term basis means either replacing it with a long-term obligation or replacing it with short-term obligations for an uninterrupted period extending beyond one year from the date of a company’s balance sheet. SFAS No. 6 further states that the company’s ability to consummate a refinancing is demonstrated where (i) the company has entered into a financing agreement that does not expire within the year following the applicable balance sheet date, (ii) the financing agreement is not cancelable (and the obligations incurred thereunder are not callable) during such period except as a result of noncompliance, (iii) there is no violation of the financing agreement on the applicable balance sheet date or prior to issuance of such balance sheet, and (iv) the company expects the financing parties to be financially capable of honoring the agreement.

Management believes that the Company has met the SFAS No. 6 requirements for its outstanding commercial paper balance as of September 30, 2004 to be classified as a long-term liability because the Company’s practice and intent since the inception of the commercial paper program in April 2002 has been to replace the short-term commercial paper outstanding at expiration with additional short-term commercial paper for an uninterrupted period extending for more than one year or with borrowings under the Company’s credit facilities. Regarding the Company’s ability to consummate the refinancing, (i) the commercial paper and credit facility agreements will not expire prior to September 30, 2005, (ii) the commercial paper and credit facility agreements are not cancelable (and the obligations incurred thereunder are not callable) prior to September 30, 2005 unless the Company has defaulted, (iii) there was no violation under the commercial paper and credit facility agreements during the relevant period, and (iv) the financing entities under the commercial paper and credit facility agreements are institutions that must meet certain criteria selected by the Company and the

Fair Value Hedges

With the intention of reducing the interest expense associated with the 2006 Notes, the Company, on January 15, 2002, entered into a $200.0 million notional amount interest rate swap agreement (the “2002 Swap”). The swap agreement for the 2002 Swap was a contract to exchange a fixed 6 3/8% rate for a LIBOR-based floating rate. Under its original terms, the 2002 Swap was scheduled to expire on June 15, 2006. In anticipation of the completion of the pending merger with Anthem, the Company terminated the 2002 Swap in June 2004 and received proceeds of $4.6 million. No gain was recognized under this transaction since the accounting adjustment to the carrying amount of the 2006 Notes of $4.6 million is treated as a premium and will be amortized as a reduction to interest expense over the remaining life of the 2006 Notes (through June 15, 2006). The Company amortized $0.6 million of this premium as a reduction to interest expense for each of the quarter and nine months ended September 30, 2004.

On August 13, 2004, the Company entered into a new $200.0 million notional amount interest rate swap agreement (the “2004 Swap”) with terms substantially similar to the 2002 Swap. The 2004 Swap will expire on June 15, 2006. As noted above, as of September 30, 2004, the Company reported a derivative asset of $0.1 million related to the 2004 Swap.

The Company recognized combined settlement income from both the 2002 Swap and 2004 Swap of $0.2 million and $2.1 million for the quarters ended September 30, 2004 and 2003, respectively, which offset the Company’s interest expense for these periods. For the nine months ended September 30, 2004 and 2003, the Company recognized combined settlement income of $3.1 million and $6.0 million, respectively, from both the 2002 Swap and the 2004 Swap (see Note 9).

Cash Flow Hedges

The Company has entered into 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 were contracts to exchange variable-rate for fixed-rate interest payments without the exchange of the underlying notional amounts.

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, of which $1.8 million was accrued interest and the remaining $15.8 million represented 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 shorter of the original expiration dates of the interest rate swap agreements or the expected cash flows of the commercial paper program. 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. Amortization of other comprehensive income related to the terminated swaps on a pre-tax basis for the quarters ended September 30, 2004 and 2003 totaled $0.4 million and $2.3 million, respectively, and $0.2 million and $1.3 million on an after-tax basis for the same

periods, respectively. Amortization of other comprehensive income related to the terminated swaps on a pre-tax basis for the nine months ended September 30, 2004 and 2003 totaled $1.4 million and $7.0 million, respectively, and $0.8 million and $4.1 million on an after-tax basis for the same periods, respectively.

For the year ended December 31, 2003, the fair value of the $150.0 million notional amount swap agreement in other comprehensive income was fully amortized. The unamortized pre-tax amount in other comprehensive income related to the $50.0 million notional amount swap agreement as of September 30, 2004 and December 31, 2003 totaled $4.0 million and $5.4 million, respectively.

11. Earnings Per Share

The following is an illustration of the dilutive effect of the Company’s potential Common Stock on earnings per share. Outstanding stock options for which the exercise price was greater than the average market per share price of Common Stock were 1,932,000 and 634,000, for the quarters ended September 30, 2004 and 2003, respectively, and 1,927,000 and 1,097,000, for the nine months ended September 30, 2004 and 2003, respectively. Since the effect of these options was antidilutive, they have been excluded from the computation of the diluted earnings per share below.

(In thousands, except per share data)	Quarter Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004		2003
Numerator
Net Income	$	315,058		$	246,219		$	910,214	$	663,741

Denominator
Weighted average shares outstanding	156,012			146,626			155,261		145,987
Net effect of dilutive stock options and restricted stock	4,199			4,219			4,996		4,097
Fully-diluted weighted average shares outstanding	160,211			150,845			160,257		150,084

Earnings Per Share	$		2.02	$		1.68	$	5.86	$	4.55
Earnings Per Share Assuming Full Dilution	$		1.97	$		1.63	$	5.68	$	4.42

On October 25, 2004, the Company announced that its Board of Directors amended the Company’s stock repurchase program to authorize the future repurchase of an additional 2.7 million shares of its outstanding Common Stock. Taking into account the amendment, an aggregate of 7.5 million shares were available for repurchase under the Company’s stock repurchase program as of October 25, 2004.

12. Comprehensive Income

The following summarizes comprehensive (loss) income reclassification adjustments for the nine months ended September 30, 2004 and 2003:

(In thousands)	Nine Months Ended September 30,
	2004			2003

Investment Securities:
Net holding (loss) gain on investment securities arising during the period, net of tax benefit (expense) of $10,234 and $(45,840)	$	(19,847	)	$	66,153
Reclassification adjustment for realized gain on investment securities, net of tax expense of $10,017 and $3,430	15,026			5,146
Net (loss) gain recognized in other comprehensive income, net of tax benefit (expense) of $217 and $(49,270)	$	(4,821	)	$	71,299

13. Business Segment Information

The Company maintains the following two reportable segments: Health Care and Specialty. The Health Care segment, prior to the acquisition of Cobalt, was an aggregation of four operating segments: California, Central, Georgia and Senior/State-Sponsored Programs. With the acquisition of Cobalt on September 24, 2003, the Health Care segment increased to five operating segments with the addition of the Wisconsin region. These Health Care operating segments all have similar characteristics and meet the following five aggregation criteria as defined under paragraph 17 of Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”):

(1) All operating segments provide similar health care products to similar customer types. WellPoint generally markets the same health care products across the country for each of its customer groups.

(2) The production processes are substantially similar for all operating segments as they support similar customer groups and products.

(3) Each operating segment has the same class of customers, primarily large employer groups and individual and small employer groups.

(4) Each operating segment has similar distribution channels that are used for each of the customer types. Large employer group products are distributed primarily through health care consultants and brokers, while individual and small group products are

Quarter Ended September 30, 2004

(In thousands)	Health Care		Specialty		Corporate and Other			Consolidated

Premium revenue	$	5,272,387	$	190,836	$	—		$	5,463,223
Management services and other revenue	252,822		52,649		2,709			308,180
Total revenue from external customers	5,525,209		243,485		2,709			5,771,403
Intersegment revenues	—		144,990		(144,990		)	—

Segment net income	$	262,850	$	44,635	$	7,573		$	315,058

Quarter Ended September 30, 2003

(In thousands)	Health Care		Specialty		Corporate and Other			Consolidated

Premium revenue	$	4,622,614	$	141,245	$	—		$	4,763,859
Management services and other revenue	187,363		31,376		956			219,695
Total revenue from external customers	4,809,977		172,621		956			4,983,554
Intersegment revenues	—		126,255		(126,255		)	—

Segment net income (loss)	$	224,031	$	27,129	$	(4,941	)	$	246,219

Nine Months Ended September 30, 2004

(In thousands)	Health Care		Specialty		Corporate and Other			Consolidated

Premium revenue	$	15,567,523	$	559,987	$	—		$	16,127,510
Management services and other revenue	758,796		151,345		8,116			918,257
Total revenue from external customers	16,326,319		711,332		8,116			17,045,767
Intersegment revenues	—		424,038		(424,038		)	—

Segment net income	$	773,667	$	123,518	$	13,029		$	910,214

Nine Months Ended September 30, 2003

(In thousands)	Health Care			Specialty			Corporate and Other				Consolidated

Premium revenue	$	13,559,205		$	407,813		$	—			$	13,967,018
Management services and other revenue	562,448			102,596			2,288				667,332
Total revenue from external customers	14,121,653			510,409			2,288				14,634,350
Intersegment revenues	—			367,780			(367,780			)	—

Segment net income (loss)	$		595,145	$		92,149	$		(23,553	)	$		663,741

14. Related Party Transactions

In December 2000, the Company formed the WellPoint Foundation (the “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 and its subsidiaries. The Foundation’s Board of Directors is composed solely of persons who are also officers of the Company. No commitments and contributions were made to the Foundation during the quarter ended September 30, 2004. For the nine months ended September 30, 2004, the Company committed and contributed $15.0 million to the Foundation. For the quarter and nine months ended September 30, 2003, the Company committed and contributed $10.0 million and $30.0 million, respectively, to the Foundation. As of September 30, 2004 and December 31, 2003, the Company did not have any outstanding commitments payable to the Foundation. The Company currently has no legal obligations for any future commitments to the Foundation.

15. Contingencies

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 May 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 Racketeer Influenced and Corrupt Organizations Act (“RICO”) 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 RICO, 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 plaintiffs filed an amended complaint in its lawsuit, alleging, among other things, revised RICO claims and violations of California law. On May 3, 2001, the defendants filed a motion to dismiss this amended complaint. 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 11th Circuit Court of Appeals, which motion was denied by the 11th 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 defendants, among other things, moved to compel arbitration of most claims (which motion was granted in part in September 2003 and the defendants have appealed the portions of the motion to compel arbitration that were denied). In October 2002, the Company also filed a motion with the 11th Circuit Court of Appeals seeking to appeal Judge Moreno’s class-certification order. The motion was granted and the 11th Circuit heard oral argument on September 11, 2003 on the Company’s appeal. On September 1, 2004, the 11^th Circuit upheld the class-certification order. On September 20, 2004, the 11^th Circuit stayed the case pending the outcome of the defendants’ appeal of the denied portions of the defendants’ motion to compel arbitration filed in October 2002. A mediator has been appointed by Judge Moreno and the parties are currently conducting court-ordered mediation. On April 30, 2004, Judge Moreno set a new trial date in March 2005 and extended the deadline for expert discovery to September 29, 2004, which has been extended to November 23, 2004 and which may be further extended.

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 been consolidated with the Shane lawsuit. The case is currently stayed.

In May 2003, a lawsuit entitled Thomas, et al. v. Blue Cross and Blue Shield Association, et al. was filed in the U.S. District Court in the Southern District of Florida. The attorneys representing the plaintiffs in the lawsuit are primarily the attorneys representing the plaintiffs in the Shane litigation described above. The defendants in Thomas are the Company’s Blue Cross and Blue Shield-licensed subsidiaries, the BCBSA and all of the other current Blue Cross and Blue Shield licensees. The lawsuit alleges that each of the defendants engaged in similar activities and conduct as that alleged in the Shane litigation. The case has been assigned to Judge Moreno. The defendants have moved to compel arbitration and to dismiss the complaint. Class-certification discovery has been initiated and is on-going. The deadline for class-certification discovery is December 31, 2004.

On March 26, 2003, a lawsuit entitled Irwin v. AdvancePCS, et al. was filed in the California Superior Court in Alameda County, California. WellPoint and certain of its wholly owned subsidiaries are named as defendants in the lawsuit. The complaint alleges that the defendants violated California Business and Professions Code Section 17200 by engaging in unfair, fraudulent and unlawful business practices. The complaint alleges, among other things, that pharmacy benefit management companies (such as the Company’s subsidiary that does business under the tradename WellPoint Pharmacy Management) engage in unfair practices such as negotiating discounts in prices of drugs from pharmacies and negotiating rebates from drug manufacturers and retaining such discounts and rebates for their own benefit. The complaint also alleges that drugs are included in formularies in exchange for rebates and that the defendants charge patient co-payments that exceed the actual cost of generic drugs. On July 9, 2004, the court ordered that the case against the WellPoint entities named as defendants in the Irwin lawsuit be resolved in arbitration.

In early 2003, a lawsuit entitled Knecht v. Cigna, et al. was filed in U.S. District Court in Oregon. This litigation has subsequently been transferred to Judge Moreno of the U.S. District Court for the Southern District of Florida. This litigation is a putative class action lawsuit on behalf of chiropractors in the western United States. The Company is a named defendant in the lawsuit. The lawsuit alleges that each of the defendants engaged in similar activities and conduct as that alleged in the Shane litigation. The case is currently stayed.

consolidated with the Knecht lawsuit for pre-trial purposes. Both of these cases are currently stayed. In December 2003, the plaintiffs in Solomon, et al. v. Cigna, et al. filed a similar lawsuit against the Company, the Company’s Blue Cross and Blue Shield-licensed subsidiaries, the BCBSA and all of the other current Blue Cross and Blue Shield licensees. The lawsuit is entitled Solomon, et al. v. Blue Cross and Blue Shield Association, et al. and was filed in the U.S. District Court in the Southern District in Florida. On January 7, 2004, this lawsuit was transferred to Judge Moreno. On March 9, 2004, Judge Moreno issued an order restoring this case to the active docket and placing it on a coordinated track with the Thomas lawsuit. Class-certification discovery has been initiated and is on-going. The deadline for class-certification discovery is December 31, 2004.

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.

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 is currently in arbitration with John Hancock regarding these arrangements. 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.

A stockholder class action lawsuit was filed in the Superior Court of Ventura County, California on October 28, 2003 against the Company and its board of directors. The lawsuit, which is entitled Abrams v. WellPoint Health Networks Inc., et al., alleges that the Company’s directors breached their fiduciary duties to stockholders by approving an Agreement and Plan of Merger with Anthem while in possession of non-public information regarding the Company’s financial results for the third quarter of 2003. The lawsuit seeks to enjoin the Company from consummating the merger with Anthem, unless the Company adopts and implements a process for obtaining the highest possible price for stockholders, and to rescind any terms of the Agreement and Plan of Merger that have already been implemented. On May 7, 2004, WellPoint and the plaintiff signed a memorandum of understanding regarding a potential settlement of the action. The potential settlement contemplated by the memorandum of understanding involves WellPoint agreeing to provide certain additional disclosures on several matters in the joint proxy statement/prospectus sent to WellPoint’s stockholders beyond those contained in the preliminary proxy statement/prospectus. The settlement would also provide for the payment by WellPoint of $2.25 million to the plaintiff’s counsel for fees and costs (subject to court approval). No part of the settlement costs will be paid by the WellPoint

directors individually. The settlement would not involve any admissions of breaches of fiduciary duty or other wrongdoing by WellPoint or any of its directors. The settlement and payment of the plaintiff’s counsel fees would be conditioned upon, among other things, completion of the merger. Any final settlement agreement signed by the parties must be approved by the Superior Court judge assigned to the matter. While WellPoint expects to diligently negotiate the terms of a final settlement agreement, there can be no assurances that a settlement agreement will be signed.

Certain of such legal proceedings are or may be covered under insurance policies or indemnification agreements. Based upon information presently available, 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.

In connection with the formation in 2000 of a joint venture providing Medicaid services in Puerto Rico, the Company agreed under certain circumstances to provide additional funds to the joint-venture entity. The Company agreed that it would make a capital contribution to the joint venture of up to 80% of any amount necessary to increase the entity’s capital to meet minimum regulatory capital requirements if (i) applicable law or regulation requires an increase in the entity’s capital and the entity does not then have capital sufficient to meet the increased requirement or (ii) the entity’s medical care ratio is 100% or greater during any 180-day period and the entity does not then meet statutory capital requirements under the Puerto Rico Insurance Code. The amount of this guarantee will not exceed 80% of the amount necessary to provide the entity with a 12 to 1 premium-to-capital ratio. As of September 30, 2004, the Company’s maximum potential liability pursuant to this guarantee was $27.7 million. Since the formation of the joint venture in 2000, the Company has not been required to make any payments under this guarantee and the Company does not currently expect that any such payments will be made.

As partial consideration for the Company’s acquisition of Health Core (see Note 6), the Company agreed to make contingent payments up to $5.5 million based on Health Core achieving certain financial performance targets during 2005, 2006 and 2007.

On June 9, 2004, the Company agreed to pay up to $2 million per year for up to four years to a laboratory service provider if certain of the Company’s subsidiaries enter into contracts to obtain services from such provider and the volume of laboratory service expenditures under those contracts for the years 2005, 2006, 2007 and 2008 do not exceed specified targets.

In connection with an investment in July 2004 in a joint venture to develop and operate a well-being center in California, the Company may be required to make an additional capital contribution of up to $18 million during the first three years that the well-being center is in operation if cash flows and room rights generated by the Company do not exceed specified targets. It is currently anticipated that construction of the California well-being center will be completed during the first quarter of 2006.

On July 15, 2004, the Company agreed to guarantee up to $37 million of debt incurred by an unaffiliated entity to partially finance the purchase of a hospital. The maximum amount of the guaranty may be reduced after September 30, 2006 as determined by reference to the leverage ratio (as defined in the guaranty) of the unaffiliated entity. The guaranty also provides for full payment of all obligations under the guaranty to become immediately due and payable under specified circumstances, including (i) upon the failure by the unaffiliated entity or the Company to cure any payment default under the subject loan to the unaffiliated entity within 10 days after written notice to the unaffiliated entity and the Company and (ii) upon 10 days after written notice to the Company that the unaffiliated entity has become subject to a bankruptcy or insolvency proceeding. In connection with the guaranty, the unaffiliated entity and the Company entered into a reimbursement agreement pursuant to which the unaffiliated entity agreed to reimburse the Company upon demand for any amounts paid by the Company under the guaranty. The obligations of the unaffiliated entity under the reimbursement agreement are secured by a second lien on certain real estate collateral. In addition, the parent company of the unaffiliated entity has provided a guaranty in favor of the Company guaranteeing the obligations of the unaffiliated entity under the reimbursement agreement.

On September 29, 2004, Assembly Bill 263 was signed into California law. The bill provides for a California state income tax deduction for dividends received from insurance company subsidiaries that are not included in a California combined income tax return. The bill also provides for retroactive application of the deduction for all taxable years ending on or after December 1, 1997. The amount of the deduction is equal to 80 percent of dividends received from eligible insurance subsidiaries during the period covered by the tax return. The amount of the deduction is scheduled to increase to 85 percent for taxable years beginning on or after January 1, 2008. The Company is analyzing the effect of this bill. Management anticipates that the financial impact of the bill will be favorable to the Company.

16. Pending Merger With Anthem

On October 26, 2003, WellPoint entered into a merger agreement with Anthem, Inc. (“Anthem”). The consideration to be received by the stockholders of WellPoint will be composed of $23.80 in cash and one share of Anthem common stock per share of WellPoint Common Stock. Based on the closing price of Anthem’s common stock on October 24, 2003, the transaction was valued at approximately $16.4 billion. Upon completion of this transaction, WellPoint will merge into a wholly owned subsidiary of Anthem and Anthem will change its name to WellPoint, Inc. Anthem, a publicly traded company, is an independent licensee of the Blue Cross and Blue Shield Association and holds the exclusive right to use the Blue Cross and Blue Shield names and marks in the states of Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia, excluding the immediate suburbs of Washington D.C. As of September 30, 2004, Anthem provided health care benefits to more than 12.7 million medical members, which includes BlueCard “host” members. Headquartered in Indianapolis, Indiana, Anthem, along with its subsidiaries, offers a diverse portfolio of complementary health and group life insurance, managed care products, pharmacy benefit management and government health program administration. The transaction is subject to customary closing conditions, including, among other things, approval of WellPoint’s and Anthem’s shareholders and various regulatory agencies. At separate meetings held on June 28, 2004, the Company’s and Anthem’s stockholders approved the transaction. On July 23, 2004, the California Department of Insurance (the “DOI”) announced that it was disapproving Anthem’s application (known as a “Form A”) to acquire control of the Company’s subsidiary, BC Life & Health Insurance Company, in connection with the transaction. On August 3, 2004, Anthem filed a petition for writ of mandate in the Superior Court of Los Angeles County, California, challenging the DOI’s denial and asking the court to overturn the DOI’s decision. The DOI filed a motion to dismiss the lawsuit on August 25, 2004. A hearing date on the DOI’s motion and the trial date have both been set for February 25, 2005. On November 8, 2004, the DOI, in response to an amended Form A application, issued an order approving the Form A. In connection therewith, the Company and Anthem executed certain Undertakings regarding the deal. On November 9, 2004, the DOI and Anthem announced settlement of the lawsuit challenging the DOI’s original disapproval order. The Undertakings provide for a number of commitments by the Company, BC Life and Anthem effective upon completion of the merger, including the following: (i) implementation of the Investment in a Healthy California Program whereby BC Life and BCC will make available $200 million from their combined investment portfolio for high-quality investments providing capital funding to make health care resources more accessible for low-income and urban and rural underserved communities; (ii) grants totaling $50 million will be made to California community clinics and to a new program designed to support the training of nurses in California; (iii) various commitments to improve the quality of health care for BC Life customers, including increased financial resources supporting quality improvement programs, the provision of periodic reports regarding BC Life’s expenditures on health care costs and quality improvement programs and a representation that by reason of focused efforts on quality improvement programs the “CDI Medical Care Ratio” (as defined below) will increase; (iv) commitments that premiums will not increase a result of the merger and that BC Life will not pay any change-in-control severance or other payments made as a result of the merger; and (v) restrictions on dividend payments from BC Life consistent with the Company’s historical practices prior to the merger. The “CDI Medical Care Ratio” will be determined by dividing (1) the total of all medical care claims incurred for BC Life’s insured and self-insured customers, plus the amount expended on quality improvement programs in California, by (2) the total of premiums earned from its insured customers and the premium equivalents attributable to its self-insured customers. Most of the commitments made in the Undertakings will apply during the longer of three years or when Anthem has repaid the amount of debt equal to the debt incurred to finance the merger.

WellPoint and Anthem intend to work closely with other regulatory agencies in order to complete the transaction as promptly as possible. However, no assurances can be given that the parties will be able to obtain all necessary approvals and satisfy the other conditions necessary to consummate the merger.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

WellPoint Health Networks Inc.

We have reviewed the accompanying consolidated balance sheet of WellPoint Health Networks Inc. and its subsidiaries as of September 30, 2004, and the related consolidated income statements for each of the three-month and nine-month periods ended September 30, 2004 and 2003, and the related consolidated statement of changes in stockholders’ equity for the nine-month period ended September 30, 2004 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated income statement and changes in stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated January 27, 2004 we expressed an unqualified opinion on those consolidated financial statements. Our report included an explanatory paragraph, that effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company ceased amortizing goodwill and indefinite-lived intangible assets as of January 1, 2002. Additionally, effective January 1, 2003, the Company adopted 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. Accordingly, the Company reclassified an extraordinary loss related to the extinguishment of debt to interest expense for the year ended December 31, 2002. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Los Angeles, California
October 22, 2004, except Notes 9 and 16 as to which the date is November 9, 2004

Acquisition of Golden West

On June 30, 2003, the Company completed its acquisition of Golden West (see Note 6 to the Consolidated Financial Statements), which served over 275,000 dental and vision members, primarily in California, at the time of acquisition.

Pending Merger With Anthem

The transaction is subject to customary closing conditions, including, among other things, approval of WellPoint’s and Anthem’s shareholders, various regulatory agencies and the Blue Cross and Blue Shield Association.

In connection with obtaining the approval of WellPoint’s and Anthem’s stockholders for the proposed merger, Anthem filed a final registration statement, including a definitive joint proxy statement/prospectus constituting a part thereof on May 11, 2004. At separate meetings held on June 28, 2004, the Company’s and Anthem’s stockholders approved the transaction.

WellPoint and Anthem have made appropriate filings and applications with insurance and HMO regulators in California, Delaware, Georgia, Illinois, Missouri, Oklahoma, Puerto Rico, Texas, Virginia, West Virginia and Wisconsin. Pursuant to applicable insurance and HMO laws and regulations, and before the merger may be consummated, the insurance commissioner and, where applicable, HMO regulator, must review and approve the acquisition of control of the insurance company or HMO subsidiary domiciled in its respective jurisdiction. In addition to the filings with and approvals from the domiciliary insurance and HMO regulators, pre-acquisition notifications of the merger under state insurance antitrust laws and regulations will be required in certain states in which insurance company or HMO subsidiaries of both WellPoint and Anthem operate. On July 23, 2004, the California Department of Insurance (the “DOI”) announced that it was disapproving Anthem’s application (known as a “Form A”) to acquire control of the Company’s subsidiary, BC Life & Health Insurance Company, in connection with the transaction. On August 3, 2004, Anthem filed a petition for writ of mandate in the Superior Court of Los Angeles County, California, challenging the

DOI’s denial and asking the court to overturn the DOI’s decision. The DOI filed a motion to dismiss the lawsuit on August 25, 2004. A hearing date on the DOI’s motion and the trial date have both been set for February 25, 2005. On November 8, 2004, the DOI, in response to an amended Form A application, issued an order approving the Form A. In connection therewith, the Company and Anthem executed certain Undertakings regarding the deal. On November 9, 2004, the DOI and Anthem announced settlement of the lawsuit challenging the DOI’s original disapproval order. The Undertakings provide for a number of commitments by the Company, BC Life and Anthem effective upon completion of the merger, including the following: (i) implementation of the Investment in a Healthy California Program whereby BC Life and BCC will make available $200 million from their combined investment portfolio for high-quality investments providing capital funding to make health care resources more accessible for low-income and urban and rural underserved communities; (ii) grants totaling $50 million will be made to California community clinics and to a new program designed to support the training of nurses in California; (iii) various commitments to improve the quality of health care for BC Life customers, including increased financial resources supporting quality improvement programs, the provision of periodic reports regarding BC Life’s expenditures on health care costs and quality improvement programs and a representation that by reason of focused efforts on quality improvement programs the “CDI Medical Care Ratio” (as defined below) will increase; (iv) commitments that premiums will not increase a result of the merger and that BC Life will not pay any change-in-control severance or other payments made as a result of the merger; and (v) restrictions on dividend payments from BC Life consistent with the Company’s historical practices prior to the merger. The “CDI Medical Care Ratio” will be determined by dividing (1) the total of all medical care claims incurred for BC Life’s insured and self-insured customers, plus the amount expended on quality improvement programs in California, by (2) the total of premiums earned from its insured customers and the premium equivalents attributable to its self-insured customers. Most of the commitments made in the Undertakings will apply during the longer of three years or when Anthem has repaid the amount of debt equal to the debt incurred to finance the merger.

The Blue Cross and Blue Shield Association must approve the transfer to Anthem of WellPoint’s licenses to use the Blue Cross and Blue Shield names and marks in WellPoint’s geographical territories. Anthem and WellPoint have submitted a joint application requesting that, in connection with the completion of the merger, the Blue Cross and Blue Shield Association grant to Anthem the licenses for the WellPoint service area. The Blue Cross and Blue Shield Association unanimously approved this application on March 18, 2004.

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder provide that the merger may not be completed until pre-merger notification filings have been made with the Federal Trade Commission, and the Antitrust Division of the U.S. Department of Justice, and the specified waiting period thereunder has expired or is terminated. Even after the waiting period expires or is terminated, the Department of Justice and the Federal Trade Commission will have the authority to challenge the merger on antitrust grounds before or after the merger is completed. Each of Anthem and WellPoint filed a notification and report form for the merger with the Federal Trade Commission and the Department of Justice in January 2004 and the waiting period expired on February 26, 2004.

Following the merger, WellPoint stockholders will become shareholders of Anthem. In addition, in the merger agreement, among other things, WellPoint has agreed that Anthem will have its corporate headquarters and principal executive offices in Indianapolis, Indiana and that Anthem’s name will be changed to WellPoint, Inc. WellPoint and Anthem have also agreed to file an application to have the common stock of Anthem listed on the New York Stock Exchange under the ticker symbol “WLP.”

After the merger, the board of directors of Anthem will have 19 members, consisting of 11 current members of Anthem’s board of directors designated by Anthem (including Larry C. Glasscock) and eight current members of WellPoint’s board of directors designated by WellPoint (including Leonard D. Schaeffer). Also after the merger, Leonard D. Schaeffer of WellPoint will be Chairman of the Board of Directors of Anthem and Larry C. Glasscock of Anthem will be the President and Chief Executive Officer and a director of Anthem. By the second anniversary of the completion of the merger, Leonard D. Schaeffer will retire as Chairman and as a director of Anthem and Larry C. Glasscock will succeed him as Chairman.

Either WellPoint or Anthem may terminate the merger agreement, even after the requisite shareholder approvals have been received, if the merger has not been completed by November 30, 2004, and either of them may also terminate the merger agreement in certain other circumstances specified in the merger agreement.

CareFirst Merger Agreement

In November 2001, WellPoint entered into a merger agreement with CareFirst, Inc. (“CareFirst”), which agreement was amended in January 2003. CareFirst has the exclusive right to use the Blue Cross and Blue Shield names and marks in Maryland, Delaware, the District of Columbia and certain counties in Northern Virginia. Under the amended merger agreement, CareFirst would have become a subsidiary of WellPoint. The consummation of the CareFirst transaction was subject to a number of conditions, including the approval of the insurance regulators in Maryland, Delaware and the District of Columbia for the conversion of CareFirst from a non-profit corporation to a for-profit entity. On March 5, 2003, the Maryland insurance commissioner issued an order disapproving this conversion. In August 2003, the Company received a notice from CareFirst electing to terminate the amended merger agreement in accordance with its terms.

In August 2003, the Company received a Grand Jury subpoena from the United States Attorney’s office in the District of Maryland requesting various documents relating to the CareFirst transaction. The Company has responded to the request and intends to cooperate fully with the United States Attorney’s office. The Company has no reason to believe it is a target of the proceedings.

National Expansion and Other Recent Developments

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 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, the acquisition of Cerulean Companies, Inc. in 2001, the acquisitions of RightCHOICE and MethodistCare in 2002 and the acquisition of Cobalt in 2003 were also components of this expansion strategy.

As a result of these acquisitions, the Company has significantly expanded its operations outside of California. In order to integrate its acquired businesses and implement its 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.

Legislation

Federal legislation enacted during the last several years seeks, among other things, to ensure 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 medical care ratio and administrative costs or decreasing the affordability of the Company’s products.

Consolidated Results of Operations

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 consolidated results of operations for the quarter ended September 30, 2004 include its acquired operations of Cobalt for the entire three months, while operating results for the quarter ended September 30, 2003 do not include any acquired operations of Cobalt. On September 24, 2003, the Company completed its acquisition of Cobalt. The Cobalt merger was effective as of September 30, 2003 for accounting purposes.

The following table sets forth selected operating ratios. The medical care 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 and other revenue combined.

	Quarter Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Operating Revenues:
Premium revenue	94.7	%	95.6	%	94.6	%	95.4	%
Management services and other revenue	5.3	%	4.4	%	5.4	%	4.6	%
	100.0	%	100.0	%	100.0	%	100.0	%
Operating Expenses:
Health care services and other benefits (medical care ratio)	80.8	%	79.6	%	80.4	%	80.8	%
Selling expense	3.9	%	4.0	%	3.9	%	4.1	%
General and administrative expense	11.4	%	12.5	%	12.0	%	12.2	%

Membership

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

	September 30,		Percent
Medical Membership (a)(b)(c)(d)	2004	2003	Change
California
Large Group	4,830,576	4,782,677	1.0	%
Individual and Small Group	1,666,093	1,613,065	3.3	%
Senior	246,065	250,760	-1.9	%
Total California	6,742,734	6,646,502	1.4	%
Georgia
Large Group	1,625,924	1,620,886	0.3	%
Individual and Small Group	534,373	480,572	11.2	%
Senior	54,951	69,205	-20.6	%
Total Georgia	2,215,248	2,170,663	2.1	%

Central Region (e)
Missouri
Large Group	1,174,158	1,244,375	-5.6	%
Individual and Small Group	248,719	242,888	2.4	%
Senior	40,312	41,080	-1.9	%
Total Missouri	1,463,189	1,528,343	-4.3	%
Illinois
Large Group	590,608	608,459	-2.9	%
Individual and Small Group	142,642	119,298	19.6	%
Senior	13,059	12,936	1.0	%
Total Illinois	746,309	740,693	0.8	%
Texas
Large Group	277,719	288,259	-3.7	%
Individual and Small Group	223,714	199,994	11.9	%
Senior	10,400	4,733	N/A
Total Texas	511,833	492,986	3.8	%
Other States
Large Group	1,943,823	1,729,667	12.4	%
Individual and Small Group	110,769	103,226	7.3	%
Senior	37,781	29,536	27.9	%
Total Other States	2,092,373	1,862,429	12.3	%
Wisconsin
Large Group	398,678	429,806	-7.2	%
Individual and Small Group	107,701	108,194	-0.5	%
Senior	54,238	53,048	2.2	%
Total Wisconsin	560,617	591,048	-5.1	%

Total Medical Members Excluding BlueCard Host Members	14,332,303	14,032,664	2.1	%
Total BlueCard Host Members (f)	1,294,000	1,009,900	28.1	%
Total Medical Members	15,626,303	15,042,564	3.9	%

	September 30,		Percent
ASO Membership (g)	2004	2003	Change
California	1,656,338	1,614,235	2.6	%
Georgia	819,420	831,464	-1.4	%
Central Region (e)	2,821,131	2,705,333	4.3	%
Wisconsin	178,195	165,249	7.8	%
BlueCard Host Members (f)	1,294,000	1,009,900	28.1	%
Total ASO Membership	6,769,084	6,326,181	7.0	%

*Risk Membership*
California	5,086,396	5,032,267	1.1	%
Georgia	1,395,828	1,339,199	4.2	%
Central Region	1,992,573	1,919,118	3.8	%
Wisconsin	382,422	425,799	-10.2	%
Total Risk Membership	8,857,219	8,716,383	1.6	%
Total Medical Membership	15,626,303	15,042,564	3.9	%

	September 30,		Percent
State-Sponsored Programs (h)	2004	2003	Change
Medi-Cal/Medicaid
California	812,726	839,674	-3.2	%
Virginia	53,078	46,336	14.6	%
Puerto Rico	251,745	265,614	-5.2	%
Other	73,788	101,567	-27.4	%
Total	1,191,337	1,253,191	-4.9	%

Healthy Families	263,624	271,095	-2.8	%
MRMIP / AIM / IHRP	15,261	12,094	26.2	%
California Kids	11,733	16,373	-28.3	%
Total	1,481,955	1,552,753	-4.6	%

(a) Membership numbers are approximate and include some estimates based upon the number of contracts at the relevant date and an actuarial estimate of the number of members represented by the contract.

(b) Classification between states for employer groups is determined by the zip code of the subscriber.

(c) Medical membership includes management services and network services members, which are primarily included in Large Group for each state.

(d) Senior membership includes members covered under both Medicare risk and Medicare supplement products.

(e) Central Region - Large Group membership includes network access services members, primarily from HealthLink, of 1,306,328 and 1,395,231 as of September 30, 2004 and 2003, respectively. As of December 31, 2003, the Company revised its methodology of calculating the number of medical members represented by each subscriber contract within the Company’s rental networks and a Missouri joint venture. The weighted average factor changed from approximately 2.4 members to 2.1 members per subscriber. The impact of this change as of each quarter end during the year ended December 31, 2003 was to reduce membership as follows:

As of	Illinois	Missouri	Other States	Total

March 31, 2003	35,999	111,008	15,314	162,321
June 30, 2003	35,083	108,097	14,925	158,105
September 30, 2003	34,990	104,614	14,885	154,489
December 31, 2003	34,377	103,013	14,624	152,014

Membership data as of September 30, 2003 shown in the Medical Membership table have not been revised to reflect this change in methodology.

(f) The Company has revised its medical membership counting methodology to include estimated “host” members using the national BlueCard program. Host members are members who reside in a state in which a WellPoint subsidiary is the Blue Cross and/or Blue Shield licensee and who are covered under an employer-sponsored health plan issued by a non-WellPoint controlled Blue Cross and/or Blue Shield licensee. Host members are computed using, among other things, an estimate of the average number of BlueCard claims received per member per month. Total BlueCard host members as of each quarter end during the year ended December 31, 2003 were as follows:

As of		BlueCard Host Members

March 31, 2003		748,490
June 30, 2003		743,897
September 30, 2003		1,009,900
December 31, 2003		1,002,113

Membership data shown in the Medical Membership table reflect this change in methodology.

(g) ASO Membership represents members for which the Company provides administrative services only and does not assume full insurance risk.

(h) Medi-Cal (the California Medicaid program) membership is included in California - Large Group. Medicaid membership for Virginia, Puerto Rico and Other are included in Other States - Large Group. Healthy Families, MRMIP (Major Risk Medical Insurance Program) / AIM (Access for Infants and Mothers) / IHRP (Interim High Risk Program) and California Kids membership are included in California Large Group.

Specialty Membership

	September 30,		Percent
	2004	2003	Change
Pharmacy Benefits Management	31,955,689	30,634,905	4.3	%
Dental	3,125,393	3,249,312	-3.8	%
Life	2,984,678	3,039,852	-1.8	%
Disability	566,515	609,587	-7.1	%
Behavioral Health (A)	8,127,093	7,206,763	12.8	%
Total	46,759,368	44,740,419	4.5	%

(A) Effective as of January 1, 2004, the Company began including HealthLink members who receive certain behavioral health services in its behavioral health membership. As of September 30, 2004, the Company had approximately 535,000 such members.

Comparison of Results of Operations for the Quarter Ended September 30, 2004 to the Quarter Ended September 30, 2003

The Company maintains the following two reportable segments: Health Care and Specialty. (See Note 13 to the Consolidated Financial Statements for further discussion.) The Health Care segment provides a broad spectrum of network-based health plans, including PPOs, HMOs, POS plans, other hybrid plans and traditional indemnity plans, to large and small employers and individuals as well as other health care-related products, such as vision, preventive care, COBRA and flexible benefits account administration. The Specialty business is maintained as a separate segment providing an array of specialty products, including pharmacy benefits management, dental, life insurance, disability insurance, behavioral health, workers’ compensation insurance products and workers’ compensation managed care services.

The operating results for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003 were affected by the Cobalt acquisition, which was effective as of September 30, 2003 for accounting purposes. Specifically, the Company’s operating results for the quarter ended September 30, 2004 included three months of operating results from the Cobalt acquisition whereas the Company’s operating results for the quarter ended September 30, 2003 did not include any operating results from the acquired Cobalt business. In order to provide a more meaningful comparison of the Company’s results of operations for the quarter ended September 30, 2004 versus the quarter ended September 30, 2003, the following discussion presents financial measures that exclude operating results attributable to the acquired Cobalt business for the quarter ended September 30, 2004, which we refer to as “Same-Store.” The Company also uses Same-Store measures for purposes of reporting comparative financial results to its Board of Directors.

The following table depicts premium revenue by reportable segment:

(In thousands)	Quarter Ended September 30, 2004		Less: Acquired Cobalt Business for the Quarter Ended September 30, 2004		Quarter Ended September 30, 2004 (Same-Store)		Quarter Ended September 30, 2003
Health Care	$	5,272,387	$	287,112	$	4,985,275	$	4,622,614
Specialty	190,836		39,770		151,066		141,245
Consolidated	$	5,463,223	$	326,882	$	5,136,341	$	4,763,859

Premium revenue increased 14.7%, or $699.3 million, to $5,463.2 million for the quarter ended September 30, 2004 from $4,763.9 million for the quarter ended September 30, 2003. Excluding premium revenue attributable to the acquired Cobalt business of $326.9 million for the quarter ended September 30, 2004, premium revenue increased $372.4 million or 7.8% on a Same-Store basis from the quarter ended September 30, 2003. Insured member months increased 6.1% for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. Excluding insured member months attributable to the acquired Cobalt business for the quarter ended September 30, 2004, insured member months increased by approximately 1.4% for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. The growth in premium revenue for the quarter ended September 30, 2004 occurred across all regions of the

Health Care segment, and was mainly attributable to increases in the per member per month rate of 8.7% in the California region and 8.0% in the Georgia region.

The following table depicts management services and other revenue by reportable segment:

(In thousands)	Quarter Ended September 30, 2004		Less: Acquired Cobalt Business for the Quarter Ended September 30, 2004		Quarter Ended September 30, 2004 (Same-Store)		Quarter Ended September 30, 2003
Health Care	$	252,822	$	50,687	$	202,135	$	187,363
Specialty	52,649		689		51,960		31,376
Corporate and Other	2,709		—		2,709		956
Consolidated	$	308,180	$	51,376	$	256,804	$	219,695

Management services and other revenue increased 40.3%, or $88.5 million, to $308.2 million for the quarter ended September 30, 2004 from $219.7 million for the quarter September 30, 2003. Excluding management services and other revenue attributable to the acquired Cobalt business of $51.4 million for the quarter ended September 30, 2004, management services and other revenue increased $37.1 million, or 16.9%, from the quarter ended September 30, 2003. The increase was primarily due to an increase in management services revenue from the Georgia region of the Health Care segment of $9.5 million, the California region of the Health Care segment of $3.9 million and in the Specialty segment of $20.6 million. The increase in the Georgia region resulted primarily from an increase in administrative services member months of 14.8% and an increase of 1.6% in the administrative services per member per month rate. The increase in the California region resulted from an increase of 7.4% in administrative services member months despite a decrease of 1.3% in the administrative services per member per month rate. The increase in the Specialty segment’s management services revenue was primarily attributable to an increase in pharmacy benefit management services revenues from non-affiliated clients.

Investment income was $76.7 million for the quarter ended September 30, 2004, compared to $65.5 million for the quarter ended September 30, 2003, an increase of $11.2 million or 17.1%. The increase was primarily due to net realized gains of $8.3 million for the quarter ended September 30, 2004 (as compared to net realized gains for the quarter ended September 30, 2003 of $1.6 million) and an increase in gross investment income of $5.4 million as a result of higher average investment balances, which were due partially to the Cobalt acquisition. The increase was partially offset by an increase in investment expense of $0.9 million.

The following table depicts health care services and other benefits expense by reportable segment:

(In thousands)	Quarter Ended September 30, 2004			Less: Acquired Cobalt Business for the Quarter Ended September 30, 2004		Quarter Ended September 30, 2004 (Same-Store)		Quarter Ended September 30, 2003
Health Care	$	4,287,554		$	235,055	$	4,052,499	$	3,701,709
Specialty	125,101			27,120		97,981		90,396
Consolidated	$		4,412,655	$	262,175	$	4,150,480	$	3,792,105

Health care services and other benefits expense increased 16.4%, or $620.6 million, to $4,412.7 million for the quarter ended September 30, 2004 from $3,792.1 million for the quarter ended September 30, 2003. Excluding health care services and other benefits expense attributable to the acquired Cobalt business of $262.2 million for the quarter ended September 30, 2004, health care services and other benefits expense increased $358.4 million, or 9.5%, which is higher than the increase in premium revenue.

The Company’s medical care ratio was 80.8% for the quarter ended September 30, 2004, compared to 79.6% for the quarter ended September 30, 2003. The Company’s medical care ratio attributable to the Health Care segment increased from 80.1% for the quarter ended September 30, 2003 to 81.3% for the quarter ended September 30, 2004, which was reflected in all regions of the Health Care segment other than California. The Company’s claims trends during the quarter ended September 30, 2003, were lower than those ordinarily experienced, so the Company believes that the increase in the Health Care medical care ratio primarily reflects a return to the Company’s historical levels. The medical care ratio for the Specialty segment increased to 65.6% for the quarter ended September 30, 2004 from 64.0% for the same quarter in 2003. The increase in the Specialty medical care ratio was primarily attributable to higher claims trends for dental products. Health care services and other benefits expense and medical care ratio information is provided for each segment so investors can compare the performance of each segment to the other segment and to the Company as a whole. Excluding premium revenue of $287.1 million and health care services and other benefits expense of $235.1 million attributable to the acquired Cobalt business with respect to the Health Care segment for the quarter ended September 30, 2004, the Company’s medical care ratio attributable to the Health Care segment for the quarter ended September 30, 2004 increased to 81.3%, compared to 80.1% for the quarter ended September 30, 2003. This increase occurred across all regions in the Health Care segment other than California. The health care services and other benefits expense included an estimate of claims incurred during the period that 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 highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the Consolidated Financial Statements. See “Critical Accounting Policies” for a discussion of this item and its potential effect on the Company’s reported results of operations.

Selling expense consists of commissions paid to outside brokers and agents representing the Company. The selling expense ratio decreased slightly from 4.0% for the quarter ended September 30, 2003 to 3.9% for the quarter ended September 30, 2004. The acquired Cobalt business experienced a lower selling expense ratio due primarily to its higher percentage of large employer group business, which maintained a selling expense ratio of less than 2%. Excluding selling expense of $7.3 million and combined premium revenue and management services and other revenue of $378.3 million attributable to the acquired Cobalt business for the quarter ended September 30, 2004, the selling expense ratio would have been 4.1% for the quarter ended September 30, 2004 compared to 4.0% for the quarter ended September 30, 2003.

The general and administrative expense ratio decreased to 11.4% for the quarter ended September 30, 2004 from 12.5% for the quarter ended September 30, 2003. The decrease in the general and administrative expense ratio resulted from administrative efficiencies from technology investments and systems convergence efforts and fixed administrative costs spread over a larger membership base. The acquired Cobalt business had a higher general and administrative expense ratio of 22.3% during the quarter ended September 30, 2004. The acquired Cobalt business has historically had a higher administrative expense ratio due to its Medicare processing business, which has a general and administrative expense ratio of approximately 98%. Excluding general and administrative expense of $84.2 million and combined premium revenue and management services and other revenue of $378.3 million attributable to the acquired Cobalt business for the quarter ended September 30, 2004, general and administrative expense decreased from 12.5% for the quarter ended September 30, 2003 to 10.6% for the quarter ended September 30, 2004.

Interest expense decreased $0.4 million to $12.2 million for the quarter ended September 30, 2004, compared to $12.6 million for the quarter ended September 30, 2003. The decrease in interest expense was primarily due to a decrease in interest expense on commercial paper due to lower average balances in the third quarter of 2004.

Other expense, net increased $6.1 million to $15.2 million for the quarter ended September 30, 2004, compared to $9.1 million for the quarter ended September 30, 2003. The increase was primarily due to additional amortization of intangibles attributable to the Cobalt acquisition of $3.1 million during the quarter ended September 30, 2004 and expenses associated with the Company’s interest in a community health partnership network of $3.0 million.

The Company’s net income for the quarter ended September 30, 2004 was $315.1 million, compared to $246.2 million for the quarter ended September 30, 2003. Earnings per share totaled $2.02 and $1.68 for the quarters ended September 30, 2004 and 2003, respectively. Earnings per share assuming full dilution totaled $1.97 and $1.63 for the quarters ended September 30, 2004 and 2003, respectively.

Earnings per share for the quarter ended September 30, 2004 is based upon weighted average shares outstanding of 156.0 million shares, excluding potential Common Stock, and 160.2 million

Comparison of Results of Operations for the Nine Months Ended September 30, 2004 to the Nine Months Ended September 30, 2003

The operating results for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 were affected by the Cobalt acquisition, which was effective as of September 30, 2003 for accounting purposes. Specifically, the Company’s operating results for the nine months ended September 30, 2004 included nine months of operating results from the Cobalt acquisition, whereas the Company’s operating results for the nine months ended September 30, 2003 did not include any operating results from the acquired Cobalt business. In order to provide a more meaningful comparison of the Company’s results of operations for the nine months ended September 30, 2004 versus the nine months ended September 30, 2003, the following discussion presents financial measures that exclude operating results attributable to the acquired Cobalt business for the nine months ended September 30, 2004, which we refer to as “Same-Store.” The Company also uses Same-Store measures for purposes of reporting comparative financial results to its Board of Directors.

The following table depicts premium revenue by reportable segment:

(In thousands)	Nine Months Ended September 30, 2004		Less: Acquired Cobalt Business for the Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2004 (Same-Store)		Nine Months Ended September 30, 2003
Health Care	$	15,567,523	$	886,056	$	14,681,467	$	13,559,205
Specialty	559,987		117,747		442,240		407,813
Consolidated	$	16,127,510	$	1,003,803	$	15,123,707	$	13,967,018

Premium revenue increased 15.5%, or $2,160.5 million, to $16,127.5 million for the nine months ended September 30, 2004 from $13,967.0 million for the nine months ended September 30, 2003. Excluding premium revenue attributable to the acquired Cobalt business of $1,003.8 million for the nine months ended September 30, 2004, premium revenue increased $1,156.7 million, or 8.3%. Including membership attributable to the acquired Cobalt business, insured member months increased by 5.2% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Excluding insured membership attributable to the acquired Cobalt business for the first nine months of 2004, insured member months increased by approximately 0.4% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. The growth in premium revenue for the nine months ended September 30, 2004 occurred across nearly all regions of the Health Care segment, but was more pronounced in the California and Georgia regions. In the California region, the increase was due primarily to average premium rate increases of 11.1%. In the Georgia region, the increase was due to both an increase in insured member months of 5.3% and average premium rate increases of 8.1%. The increase in premium revenue was partially offset by a decrease in premium revenues from the Senior/State Sponsored Programs division of the Health Care segment, which was caused by a decrease in insured member months of 1.7% and a decrease in per member per month revenues of 1.1%.

The following table depicts management services and other revenue by reportable segment:

(In thousands)	Nine Months Ended September 30, 2004		Less: Acquired Cobalt Business for the Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2004 (Same-Store)		Nine Months Ended September 30, 2003
Health Care	$	758,796	$	149,012	$	609,784	$	562,448
Specialty	151,345		3,681		147,664		102,596
Corporate and Other	8,116		29		8,087		2,288
Consolidated	$	918,257	$	152,722	$	765,535	$	667,332

Management services and other revenue increased 37.6%, or $251.0 million, to $918.3 million for the nine months ended September 30, 2004 from $667.3 million for the nine months ended September 30, 2003. Excluding management services and other revenue attributable to the acquired Cobalt business of $152.7 million for the nine months ended September 30, 2004, management services and other revenue increased $98.3 million, or 14.7%. The increase in management services and other revenue on a Same-Store basis in the Health Care segment was primarily due to an increase in management services revenue from the Georgia and California regions of $36.7 million and $14.2 million, respectively. The increase in the Georgia region resulted from a 15.6% increase in administrative services member months and a 5.8% increase in the administrative services per member per month rate. The increase in the California region resulted from an increase in administrative services member months of 6.3% and a 1.1% increase in the administrative services per member per month rate. These increases were partially offset by a decrease in management services revenue in the Central Region of $3.4 million. The decrease in the Central Region resulted from a decrease of 9.0% in administrative services member months, which was partially offset by an increase of 8.0% in administrative services per member per month rates. Additionally, the Specialty segment experienced a $45.1 million increase in management services revenue, which was primarily attributable to an increase in pharmacy benefit management services revenues from non-affiliated clients.

Investment income was $228.9 million for the nine months ended September 30, 2004, compared to $195.8 million for the nine months ended September 30, 2003, an increase of $33.1 million or 16.9%. The increase was primarily due to a $19.6 million increase in gross investment income and net realized gains for the nine months ended September 30, 2004 of $25.0 million, as compared to net realized gains for the nine months ended September 30, 2003 of $8.6 million. Excluding net realized gains and losses, investment income for the nine months ended September 30, 2004 and 2003 was $203.9 million and $187.2 million, respectively. The increase in gross investment income was due to higher average fixed maturity investment balances, which were partially due to the Cobalt acquisition. The Company believes the disclosure of investment income excluding realized gains or losses is useful to investors because this measurement allows management and investors to analyze the performance of the fixed-income portion of the Company’s investment portfolio.

The following table depicts health care services and other benefits expense by reportable segment:

(In thousands)	Nine Months Ended September 30, 2004		Less: Acquired Cobalt Business for the Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2004 (Same-Store)		Nine Months Ended September 30, 2003
Health Care	$	12,594,722	$	740,510	$	11,854,212	$	11,024,310
Specialty	369,654		83,097		286,557		254,962
Consolidated	$	12,964,376	$	823,607	$	12,140,769	$	11,279,272

Health care services and other benefits expense increased 14.9%, or $1,685.1 million, to $12,964.4 million for the nine months ended September 30, 2004 from $11,279.3 million for the nine months ended September 30, 2003. Excluding health care services and other benefits expense attributable to the acquired Cobalt business of $823.6 million for the nine months ended September 30, 2004, health care services and other benefits expense increased $861.5 million or 7.6%.

The Company’s medical care ratio was 80.4% for the nine months ended September 30, 2004 compared to 80.8% for the nine months ended September 30, 2003. The medical care ratio attributable to the Health Care segment was 80.9% for the nine months ended September 30, 2004, compared to 81.3% for the nine months ended September 30, 2003. The medical care ratio attributable to the Specialty segment was 66.0% for the nine months ended September 30, 2004 compared to 62.5% for the nine months ended September 30, 2003. The increase in the Specialty medical care ratio was attributable to higher claims trends for dental products. Health care services and other benefits expense and medical care ratio information is provided for each segment so investors can compare the performance of each segment to the other segment and to the Company as a whole. Excluding premium revenue of $886.1 million and health care services and other benefits expense of $740.5 million attributable to the acquired Cobalt business with respect to the Health Care segment for the nine months ended September 30, 2004, the Company’s medical care ratio attributable to the Health Care segment for the nine months ended September 30, 2004 decreased to 80.7% compared to 81.3% for the nine months ended September 30, 2003, primarily due to premium rate increases in all regions and lapses in accounts with higher-than-average medical care ratios. The health care services and other benefits expense includes an estimate of claims incurred during the period that 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 highly variable circumstances. Consequently, the actual results could differ materially from the amount recorded in the consolidated financial statements. See “Critical Accounting Policies” for a discussion of this item and its potential effect on the Company’s reported results of operations.

The selling expense ratio decreased slightly from 4.1% for the nine months ended September 30, 2003 to 3.9% for the nine months ended September 30, 2004. Excluding selling expense of $20.2 million and combined premium revenue and management services and other revenue of $1,156.5

Financial Condition

The Company’s consolidated assets increased by $856.7 million, or 5.8%, to $15,645.4 million as of September 30, 2004 from $14,788.7 million as of December 31, 2003. The increase in total assets was primarily due to growth in cash and investments of $526.9 million as a result of operating cash flows attributable to net income, net of commercial paper repayments and stock repurchases. Also contributing to the increase in consolidated assets was an increase in “receivables, net” of $273.4 million. Cash and investments totaled $8.4 billion as of September 30, 2004, or 54.0% of total assets.

Overall claims liabilities, which is composed of medical claims payable and reserves for future policy benefits, decreased $78.4 million, or 2.5%, to $3,086.0 million as of September 30, 2004 from $3,164.4 million as of December 31, 2003. The decrease was due primarily to faster average claims payments and provider incentive payments that were accrued as of December 31, 2003 and paid during the nine months ended September 30, 2004. See “Critical Accounting Policies” for a discussion of medical claims payable and reserves for future policy benefits. As of September 30, 2004, the Company’s long-term indebtedness was $1,002.3 million, of which $453.8 million was related to the Company’s 6 ³/₈% Notes due 2006 (which includes a fair value adjustment of $4.2 million) and $349.1 million was related to the Company’s 6 ³/₈% Notes due 2012. The 6 ³/₈% Notes due 2012, with an aggregate principal amount at maturity of $350.0 million, were issued to partially finance the RightCHOICE acquisition. During the year ended December 31, 2003, the Company issued an additional $104.7 million in commercial paper (net of repayments made during the year) to repurchase Common Stock of the Company. In the third quarter of 2003, the Company also issued an additional $125.1 million in commercial paper primarily to partially finance the acquisition of Cobalt. In anticipation of the completion of its pending merger with Anthem, Inc., the Company repurchased its entire balance of commercial paper outstanding during the quarter ended June 30, 2004 (see “Liquidity and Capital Resources” below. As of September 30, 2004, the outstanding balance of the commercial paper program was $199.4 million.

Stockholders’ equity totaled $6,460.4 million as of September 30, 2004, an increase of $1,030.5 million from $5,429.9 million as of December 31, 2003. The increase was primarily due to net income of $910.2 million for the nine months ended September 30, 2004 and a net increase of $313.0 million from the issuance of new Common Stock and the reissuance of treasury stock related to stock grants under the Company’s employee 401(k) plan, stock option and stock purchase plans. Partially offsetting these increases were 1.4 million shares of treasury stock repurchased at a cost of $135.7 million, a decrease in net unrealized gains from investment securities of $4.8 million and net losses from the reissuance of treasury stock of $52.2 million. During the nine months ended September 30, 2004, the Company granted 563,000 restricted shares, net of forfeitures, of Company Common Stock, which are subject to vesting. As of September 30, 2004, total unearned compensation from all unvested stock awards totaled $45.2 million, which has no impact to stockholders’ equity since the Company recorded an increase to additional paid-in-capital of the same amount.

Liquidity and Capital Resources

As of September 30, 2004, consolidated cash and investments were $8.4 billion, of which $1.1 billion were in cash and cash equivalents. The Company’s primary sources of cash are premium and management services revenues and investment income. The Company’s primary uses of cash include health care claims and other benefits, capitation payments, income taxes, repayment 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 provider network and systems development costs 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, 2004, the Company’s investment portfolio consisted primarily of investment grade fixed-income 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 Company’s 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 and Blue Shield Association.

Net cash provided by operating activities was $972.6 million for the nine months ended September 30, 2004, compared with $790.3 million for the nine months ended September 30, 2003. Net cash provided by operations for the nine months ended September 30, 2004 was due primarily to net income of $910.2 million, an adjustment for non-cash depreciation and amortization of $151.2 million, an increase in accounts payable and accrued expenses of $108.0 million and an increase of $102.7 million in income taxes payable. Partially offsetting these increases were a decrease in medical claims payable of $90.3 million, primarily due to faster average claims payments and provider incentive payments that were accrued as of December 31, 2003, and an increase in “receivables, net” of $154.4 million due to the timing of cash receipts of certain receivables.

Net cash used in investing activities for the nine months ended September 30, 2004 totaled $571.5 million, compared with $1,588.5 million for the nine months ended September 30, 2003. The cash used in the first nine months of 2004 was primarily attributable to the purchase of investments of $5,151.4 million and the purchase of property and equipment, net of sales proceeds, of $115.1 million, which were partially offset by proceeds from investments sold of $4,707.9 million.

Net cash used in financing activities totaled $313.3 million for the nine months ended September 30, 2004, compared with $528.7 million provided for the nine months ended September 30, 2003. The net cash used in the nine months ended September 30, 2004 was primarily attributable to a net decrease in the Company’s commercial paper balance of $230.5 million, primarily due to repayment of commercial paper balances in anticipation of the completion of its pending merger with Anthem, Inc. in the second quarter of 2004, Common Stock repurchased of $135.7 million and a decrease in securities lending payable of $13.6 million, partially offset by the receipt of proceeds from the issuance of Common Stock related to the Company’s stock option plans of $61.8 million.

Effective March 30, 2001, the Company entered into two unsecured revolving credit facilities allowing aggregate indebtedness of $1.0 billion in principal amount. Borrowings under these facilities (which are generally referred to collectively 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 not to exceed $750.0 million at any time outstanding, 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 not to exceed $250.0 million at any time outstanding, expires on March 25, 2005. Any amount outstanding under this facility as of March 25, 2005 may be converted into a one-year term loan at the option of the Company and will bear interest at rates determined by reference to the bank’s base rate or LIBOR plus a margin determined by reference to the then-current rating of the Company’s unsecured long-term debt by specified rating agencies, plus 0.125% until paid in full. Loans under the $250.0 million facility are made on a committed basis. Loans under the $750.0 million facility are made on a committed basis or 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 covenants, including restrictions on the incurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in control (see Note 9 to the Consolidated Financial Statements). As of September 30, 2004 and December 31, 2003, there were no amounts outstanding under the revolving credit facility.

the Company. As of December 31, 2003, the outstanding commercial paper balance was $429.8 million, and had various maturity dates and interest rates ranging from 1.10% to 1.27%. The weighted average yield on the outstanding commercial paper as of December 31, 2003 was 1.25%.

The Company is currently subject to a pending merger with Anthem, Inc. Under the merger agreement with Anthem, the Company is obligated to repurchase or otherwise retire any outstanding commercial paper prior to the closing of the merger. In June 2004, in anticipation of the merger closing, the Company repaid the entire outstanding balance under the commercial paper program. (See Note 9 to the Consolidated Financial Statements.) On July 23, 2004, the California Department of Insurance (the “DOI”) announced that it was disapproving Anthem’s application (known as a “Form A”) to acquire control of the Company’s subsidiary, BC Life & Health Insurance Company, in connection with Anthem’s merger with the Company. In August 2004, the Company recommenced its issuance of commercial paper. On November 8, 2004, the DOI, in response to an amended Form A application, issued an order approving the Form A. On November 9, 2004, the DOI and Anthem announced settlement of the lawsuit challenging the DOI’s original disapproval order (see Note 16 to the Consolidated Financial Statements). The outstanding commercial paper balance as of September 30, 2004 was $199.4 million, and had various maturity dates and interest rates ranging from 1.91% to 1.93%. The weighted average yield on the outstanding commercial paper as of September 30, 2004 was 1.93%.

In anticipation of the completion of the RightCHOICE acquisition on January 31, 2002, the Company on January 16, 2002 issued $350.0 million aggregate principal amount at maturity of 6 ³/₈% Notes due January 15, 2012 (the “2012 Notes”). The net proceeds of this offering totaled approximately $348.9 million. The 2012 Notes bear interest at a rate of 6 ³/₈% 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.

On June 15, 2001, the Company issued $450.0 million aggregate principal amount at maturity of 6 ³/₈% Notes due June 15, 2006 (the “2006 Notes”). The net proceeds of this offering totaled approximately $449.0 million. The net proceeds from the sale of the 2006 Notes were used to repay indebtedness under the Company’s revolving credit facilities. The 2006 Notes bear interest at a rate of 6 ³/₈% 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.

The 2006 Notes may be redeemed, in whole or in part, at the Company’s option at any time. The redemption price for any 2006 Notes redeemed will be equal to the greater of the

following amounts: 1) 100% of the principal amount of the 2006 Notes being redeemed on the redemption date; or 2) the sum of the present values of the remaining scheduled payments of principal and interest on the 2006 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 2006 Notes to the redemption date.

The 2006 and 2012 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 2006 and 2012 Notes. The indenture governing the 2006 and 2012 Notes contains a covenant that limits the ability of the Company and its subsidiaries to create liens on any of their property or assets to secure certain indebtedness without also securing the indebtedness under the 2006 and 2012 Notes.

As a part of a hedging strategy to limit its exposure to variable interest rate increases, the Company has from time to time entered into interest rate swap agreements in order to reduce the volatility of interest expense resulting from changes in interest rates on its variable rate debt. The swap agreements were contracts to exchange variable-rate interest payments for fixed-rate interest payments 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, of which $1.8 million was accrued interest and the remaining $15.8 million represented the fair value of the swap agreements at the time of termination and is being amortized over the term of the original swap agreements. As of September 30, 2004, the remaining balance to be amortized was $4.0 million. (See Note 10 to the Consolidated Financial Statements.)

With the intention of reducing the interest expense associated with the 2006 Notes, the Company, on January 15, 2002, entered into a $200.0 million notional amount interest rate swap agreement (the “2002 Swap”), which was scheduled to expire on June 15, 2006. The swap agreement for the 2002 Swap was a contract to exchange a fixed 6 ³/₈% rate for a LIBOR-based floating rate (weighted average variable rate for the 2002 Swap and 2004 Swap of 3.81% for the nine months ended September 30, 2004 and weighted average variable rate of 2.51% for the nine months ended September 30, 2003). In anticipation of the completion of the Company’s pending merger with Anthem, the Company terminated the 2002 Swap in June 2004 with an aggregate cash settlement of $4.6 million, which is being amortized over the remaining term of the 2006 Notes. As of September 30, 2004, the remaining balance to be amortized was $4.0 million. (See Note 10 to the Consolidated Financial Statements.)

On August 13, 2004, the Company entered into a new $200.0 million notional amount interest rate swap agreement (the “2004 Swap”) with terms substantially similar to the 2002 Swap. The

Completion Factor (a):					Claims Trend Factor (b):
(Decrease) Increase in Factor		Increase (Decrease) in Medical Claims Payable			(Decrease) Increase in Factor		Increase (Decrease) in Medical Claims Payable

(3	)%	$	311,000,000		(3	)%	$	(12,000,000	)
(2	)%	202,000,000			(2	)%	(8,000,000		)
(1	)%	98,000,000			(1	)%	(4,000,000		)
1	%	(94,000,000		)	1	%	4,000,000
2	%	(183,000,000		)	2	%	8,000,000
3	%	(269,000,000		)	3	%	12,000,000

(a) Reflects estimated potential changes in medical claims payable caused by changes in completion factors in each of the most recent four months.

(b) Reflects estimated potential changes in medical claims payable caused by changes in annualized claims trend used for the estimation of per member per month claims for the most recent four months.

In addition, assuming a hypothetical 1% difference between the Company’s September 30, 2004 estimated claims liability and the actual claims incurred, net income for the quarter ended September 30, 2004 would increase or decrease by $15.9 million, while diluted net income per share would increase or decrease by $0.10 per share.

Other relevant factors include exceptional situations that might require judgmental adjustments in setting the outstanding reserves, such as system conversions, processing interruptions, environmental changes or other factors. None of these factors had a material impact on the development of the Company’s claims payable estimates during any of the periods presented in this quarterly report on Form 10-Q. All of these factors are used in estimating IBNR and are important to the Company’s reserve methodology in trending the claims per member per month for purposes of estimating the reserves for the most recent four months.

In developing its best estimate of medical claims payable, the Company consistently applies the principles and assumptions listed above from year to year, while also giving due consideration to the potential variability of these factors. Because medical claims payable includes various actuarially developed estimates, the Company’s actual health care services expense may be more or less than the Company’s previously developed estimates. 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.

The table below provides a reconciliation of changes in medical claims payable as of December 31, 2003, 2002 and 2001 during the immediately following nine-month period:

	Nine Months Ended September 30,
(In thousands)	2004			2003			2002

Medical claims payable as of January 1	$	2,747,074		$	2,422,331		$	1,934,620

Medical claims reserves from businesses acquired during the period	—			244,414			176,177

Health care claim expenses incurred during period:
Related to current year	12,982,173			11,454,547			9,855,058
Related to prior years	(284,711		)	(398,507		)	(391,380		)
Total Incurred	12,697,462			11,056,040			9,463,678

Health care services payments during period:
Related to current year	10,825,214			9,394,778			8,096,931
Related to prior years	1,962,580			1,574,289			1,143,757
Total Payments	12,787,794			10,969,067			9,240,688

Medical claims payable as of September 30	$	2,656,742		$	2,753,718		$	2,333,787

As shown in the table above, for each of the nine-month periods ended September 30, 2004, 2003 and 2002, the amount shown on the line labeled “Health care services expenses incurred during period: Related to prior years” is negative, meaning that the Company’s actual health care services experience related to prior years was less than the estimates previously made by the Company. This favorable development was primarily due to prior-years’ claims being settled for amounts less than the original estimate for IBNR. The magnitude of favorable development for the nine months ended September 30, 2004 is less than that experienced in the first nine months of September 30, 2003 and 2002 due to negative development in certain identifiable reserves established as of December 31, 2003. Based on claim payments through the first nine months of 2004, the Company experienced actual flu-related claims in 2003 that were $32 million more than the amount accrued as of December 31, 2003. During the nine months ended September 30, 2004, an existing litigation reserve as of December 31, 2003 was also increased by $13 million based on new information. Additionally, the accrual as of December 31, 2003 for a Company program to provide desktop computers and handheld devices to selected network physicians was increased by $2 million to include physicians primarily serving the Medicaid market. Finally, the Company believes that the favorable development was negatively affected by new transaction code sets under HIPAA becoming effective in October 2003, which may have contributed to a slowdown in the submission of claims during the remainder of 2003. Actuarial standards of practice, which the Company consistently follows in developing its best point estimate as reflected in the Consolidated Financial Statements, generally require that the actuarially developed health care claims estimates cover obligations under an assumption of moderately adverse conditions. Adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims at the time of the estimate. Therefore, in many situations, the claims amount actually experienced will be less than the estimate that satisfies

the actuarial standards of practice. Adjustments of prior-year estimates may result in additional health care claim expenses or, as the Company experienced during each of the last three years, a reduction in health care claim expenses in the period an adjustment is made.

Health care claims are usually described as having a “short tail,” which means that they are generally paid within a few months of the member receiving service from the physician or other health care provider. Based on the Company’s historical claim payment patterns, less than 5% of the medical claims payable as of the end of any given year is outstanding at the end of the following year. Management expects that substantially all of the development of the estimate of medical claims payable as of December 31, 2003 will be known by the end of 2004.

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 managing 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. The Company 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 Company’s 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 any 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). The Company had nine and eight global capitation arrangements as of

September 30, 2004 and December 31, 2003, respectively, covering approximately 163,000 and 161,000 members, respectively. In addition, one of the Company’s subsidiaries owns a 51% equity interest in a community health partnership network (the “CHPN”) operating in the greater Atlanta area. As of September 30, 2004, an agreement to dissolve the CHPN has been reached. The CHPN was a locally based equity venture between the Company’s subsidiary and a local physician group. The Company’s subsidiary had entered into a global capitation arrangement with the CHPN. The global capitation arrangement was terminated during the quarter ended September 30, 2004. As of December 31, 2003, approximately 560,000 members were covered by this arrangement. The Company’s investment in the CHPN was accounted for using the consolidation method of accounting as required under Statement of Financial Accounting Standards No. 94, “Consolidation of All Majority-Owned Subsidiaries.”

For the quarters ended September 30, 2004 and 2003, the Company’s capitation expenses of $435.7 million and $389.9 million represented 9.9% and 10.3%, respectively, of the Company’s total health care services and other benefits expense. For the nine months ended September 30, 2004 and 2003, the Company’s capitation expenses of $1,287.0 million and $1,164.1 million, represented 9.9% and 10.3%, respectively, of the Company’s total health care services and other benefits expense. As of September 30, 2004 and December 31, 2003, the Company’s capitation expenses payable of $106.2 million and $145.9 million represented 4.0% and 5.3%, respectively, of the Company’s total medical claims payable.

The Company’s future results of operations will depend in part on its ability to predict and manage health care costs through underwriting criteria, medical management, product design and negotiation of favorable provider and hospital contracts. The Company’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 Company’s inability to mitigate any or all of the above-listed or other factors may adversely affect the Company’s future profitability.

Reserves for Future Policy Benefits

The estimate of reserves for future policy benefits relates 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 that the Company expects to pay within one year. The Company 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. As of September 30, 2004 and December 31, 2003, the reserves for future policy benefits were $429.3 million and $417.3 million, respectively.

Intangible Assets and Goodwill

The Company has made several acquisitions in the past several years that included a significant amount of goodwill and other intangible assets. 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.

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 completed after June 30, 2001. SFAS No. 142, which became effective for fiscal years beginning after December 15, 2001, eliminates amortization of goodwill and other intangible assets with definite useful lives. Rather, these assets are subject to impairment tests at least annually. The Company is required to make estimates of fair value and apply certain assumptions, such as a discount factor in applying these annual impairment tests. Such estimates could produce significantly different results if other assumptions, which could also be considered reasonable, were to be used. Intangible assets with definite useful lives are being amortized using a straight-line basis or the timing of related cash flows over periods ranging from 1.5 to 25 years. An intangible asset subject to amortization must be reviewed for impairment pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The Company adopted SFAS No. 142 on January 1, 2002 and, accordingly, no longer amortizes goodwill and other intangible assets with indefinite useful lives. In accordance with SFAS No. 142, the Company completed the annual evaluation of its goodwill and other intangible assets at December 31, 2003, and determined that there was no impairment loss. As of September 30, 2004 and December 31, 2003, total goodwill and other intangible assets were $3.2 billion and $3.3 billion, respectively. The Company uses an independent valuation company to determine the allocation of the intangible assets associated with certain acquisitions. (See Note 7 to the Consolidated Financial Statements for further discussion of the Company’s goodwill and other intangible assets.)

Investments

As of September 30, 2004, the Company’s current investment securities at fair value, totaled $7.1 billion, of which 87.7% was invested in fixed-income securities and the remaining 12.3% was invested in equity securities. As of December 31, 2003, the Company’s current investment securities at fair value totaled $6.7 billion, of which 87.6% was invested in fixed-income securities and the remaining 12.4% was invested in equity securities. These investment securities are generally used to support current operations and, accordingly, have been

classified as current assets. The Company’s long-term investments as of September 30, 2004 and December 31, 2003 were $199.7 million and $161.8 million, respectively, and consisted primarily of restricted assets, certain equities and other investments. Total current and long-term investments at fair value, comprised 46.8% and 46.6% of total assets as of September 30, 2004 and December 31, 2003, respectively.

With the majority of investments in fixed-income securities, the Company maintains an investment portfolio that is primarily structured to maximize total return while preserving the principal asset base and provide a source of liquidity for operating needs. The Company records investment income when earned, and realized gains or losses when sold, as determined using the first-in-first-out method.

The Company regularly evaluates the appropriateness of investments relative to its internal investment guidelines. The Company operates within these guidelines by maintaining a well-diversified portfolio, both across and within asset classes. The Company has from time to time retained an independent consultant to advise the Company on the appropriateness of its investment policy. The Company performs a quarterly evaluation of its investment securities, using both quantitative and qualitative factors to determine whether a decline in investment value is other-than-temporary. When a decline in an investment’s fair value is determined to be other-than-temporary, a loss is recorded against investment income. When determining whether a decline in an investment’s fair value is other-than-temporary, the Company considers the extent and duration to which a security’s market value has been less than its cost, the financial condition and future earnings potential of the issuer, recommendations and opinions from outside investment managers and the current economic environment. For the quarter ended September 30, 2004, the Company recorded investment losses that the Company believed to be other-than-temporary of $0.4 million. The Company did not record any investment losses that the Company believed to be other-than-temporary for the quarter ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, the Company recorded investment losses that the Company believes to be other-than-temporary of $0.6 million and $29.3 million, respectively. The Company believes that it has performed an adequate review for impairment of the investment portfolio and that investments are carried at fair value. Changing economic and market conditions in the future, however, may cause the Company to reassess its judgment regarding impairment, which could result in realized losses relating to other-than-temporary declines being charged against future income.

As of September 30, 2004 and December 31, 2003, net unrealized gains from the Company’s fixed-income securities totaled $109.1 million and $131.6 million, respectively. The decrease in market value during the first nine months of 2004 is due to the general increase in interest rates over that period. The Company had net unrealized gains in its equity securities portfolio as of September 30, 2004 and December 31, 2003 of $174.4 million and $157.2 million, respectively. The Company believes that these fluctuations in market value are temporary, as a result of current market conditions.

The following table illustrates the gross unrealized losses included in the Company’s investment portfolio aggregated by investment category. The table also illustrates the length of time the securities have been in an unrealized loss position as of September 30, 2004.

	September 30, 2004 Gross Unrealized Losses
	Months in Unrealized Loss Position
	Less than 12 months		12 months or more		Total
			(In thousands)

U.S. Treasury and agency securities	$	1,599	$	482	$	2,081
Municipal securities	2,496		380		2,876
Mortgage-backed securities	3,833		1,159		4,992
Corporate and other securities	5,707		719		6,426
Total debt securities	13,635		2,740		16,375
Equity and other investments	5,105		171		5,276
Total investment securities	$	18,740	$	2,911	$	21,651

Under the guidance provided in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” the Company recognizes the collateral as an asset under “securities lending collateral” on its balance sheet and the Company records a corresponding liability for the obligation to return the collateral to the borrower under “securities lending payable.”

Factors That May Affect Future Results of Operations

Certain statements contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” such as statements concerning the Company’s geographic expansion and other business strategies, the effect of recent health care reform legislation, changes in the competitive environment and small group membership growth and other statements contained herein regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Securities Exchange Act of 1934, as amended). Such statements involve a number of risks and uncertainties that may cause actual results to differ from those projected. Factors that could cause actual results to differ materially include, but are not limited to, those discussed below. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Completion of the Company’s pending merger with Anthem is contingent upon, among other things, receipt of applicable regulatory approvals. On July 23, 2004, the California Department of Insurance (the “DOI”) announced that it was approving Anthem’s application (known as a “Form A”) to acquire control of the Company’s subsidiary, BC Life & Health Insurance Company, in connection with the transaction. On August 3, 2004, Anthem filed a petition for writ of mandate in the Superior Court of Los Angeles County, California, challenging the DOI’s denial and asking the court to overturn the DOI’s decision. The DOI filed a motion to dismiss the lawsuit on August 25, 2004. A hearing date on the DOI’s motion and the trial date have both been set for February 25, 2005. On November 8, 2004, the DOI, in response to an amended Form A application, issued an order approving the Form A. On November 9, 2004, the DOI and Anthem announced settlement of the lawsuit challenging the DOI’s original disapproval order (see Note 16 to the Consolidated Financial Statements). WellPoint and Anthem intend to work closely with other regulatory agencies in order to complete the transaction as promptly as possible. However, no assurances can be given that the parties will be able to obtain all necessary approvals and satisfy the other conditions necessary to consummate the merger. If the merger is not completed by November 30, 2004, either WellPoint or Anthem may terminate the merger agreement.

Broad latitude in administering the applicable regulations is given to the federal and state agencies from which WellPoint and Anthem must seek approvals. There can be no assurance that the companies will obtain these approvals or be able to successfully challenge the California Department of Insurance disapproval. As a condition to approval of the transaction, regulatory agencies may seek to impose requirements or limitations or costs on the way that the combined company conducts business after consummation of the transaction. If the Company or Anthem were to agree to any material requirements or limitations in order to obtain any necessary approvals, such requirements or limitations or additional costs could adversely affect the combined company’s ability to integrate the operations of the Company with those of Anthem, and could result in a material adverse effect on the combined company’s revenues or results of operations. In addition, achieving the anticipated benefits of the merger will depend in part upon whether the two companies integrate their businesses in an efficient and effective manner. Because of the complex nature of the integration process, WellPoint cannot provide any assurances regarding the ultimate success of these integration activities.

Company’s financial results for the third quarter of 2003. The lawsuit seeks to enjoin the Company from consummating the merger with Anthem, unless the Company adopts and implements a process for obtaining the highest possible price for stockholders, and to rescind any terms of the Agreement and Plan of Merger that have already been implemented. On May 7, 2004, WellPoint and the plaintiff signed a memorandum of understanding regarding a potential settlement of the action. The potential settlement contemplated by the memorandum of understanding involves WellPoint agreeing to provide certain additional disclosures on several matters in the joint proxy statement/prospectus sent to WellPoint’s stockholders beyond those contained in the preliminary proxy statement/prospectus. The settlement would also provide for the payment by WellPoint of $2.25 million to the plaintiff’s counsel for fees and costs (subject to court approval). No part of the settlement costs will be paid by the WellPoint directors individually. The settlement would not involve any admissions of breaches of fiduciary duty or other wrongdoing by WellPoint or any of its directors. The settlement and payment of the plaintiff’s counsel fees would be conditioned upon, among other things, completion of the merger. Any final settlement agreement signed by the parties must be approved by the Superior Court judge assigned to the matter. While WellPoint expects to diligently negotiate the terms of a final settlement agreement, there can be no assurances that a settlement agreement will be signed.

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 Medicare and Medicaid beneficiaries in various states, including 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 in various capacities (including serving as the largest Medicare Part A fiscal intermediary). 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 by 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, Cerulean and Cobalt transactions, the Company incurred significant additional indebtedness to fund the cash payments made to the acquired companies’ stockholders. In addition, the Company may incur additional indebtedness to fund potential future acquisitions. 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 potential future acquisitions), 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.

As part of the Company’s business strategy, the Company has acquired substantial operations in new geographic markets over the last seven 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, RightCHOICE, MethodistCare and Cobalt, 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 acquired businesses. 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 California, Delaware, Georgia, Missouri and Wisconsin Departments of Insurance, various other state Departments of Insurance and the Blue Cross and Blue Shield Association. Although the Company believes that it is currently in compliance in all material respects with all applicable requirements, there can be no assurances that applicable requirements will not be increased in the future.

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 RICO, 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 plaintiffs filed an amended complaint in its lawsuit, alleging, among other things, revised RICO claims and violations of California law. On May 3, 2001, the defendants filed a motion to dismiss this amended complaint. 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 11th Circuit Court of Appeals, which motion was denied by the 11th 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 defendants, among other things, moved to compel arbitration of most claims (which motion was granted in part in September 2003 and the defendants have appealed the portions of the motion to compel arbitration that were denied). In October 2002, the Company also filed a motion with the 11th Circuit Court of Appeals seeking to appeal Judge Moreno’s class-certification order. The motion was granted and the 11th Circuit heard oral argument on September 11, 2003 on the Company’s appeal. On September 1, 2004, the 11^th Circuit upheld the class-certification order. On September 20, 2004, the 11^th Circuit stayed the case pending the outcome of the defendants’ appeal of the denied portions of the defendants’ motion to compel arbitration filed in October 2002. A mediator has been appointed by Judge Moreno and the parties are currently conducting court-ordered mediation. On April 30, 2004, Judge Moreno set a new trial date in March 2005 and extended the deadline for expert discovery to September 29, 2004, which has been extended to November 23, 2004 and which may be further extended.

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 been consolidated with the Shane lawsuit. The case is currently stayed.

In May 2003, a lawsuit entitled Thomas, et al. v. Blue Cross and Blue Shield Association, et al. was filed in the U.S. District Court in the Southern District of Florida. The attorneys representing the plaintiffs in the lawsuit are primarily the attorneys representing the plaintiffs in the Shane litigation described above. The defendants in Thomas are the Company’s Blue Cross and Blue Shield-licensed subsidiaries, the BCBSA and all of the other current Blue Cross and Blue Shield licensees. The lawsuit alleges that each of the defendants engaged in similar activities and conduct as that alleged in the Shane litigation. The case has been assigned to Judge Moreno. The defendants have moved to compel arbitration and to dismiss the complaint. Class-certification discovery has been initiated and is on-going. The deadline for class-certification discovery is December 31, 2004.

On March 26, 2003, a lawsuit entitled Irwin v. AdvancePCS, et al. was filed in the California Superior Court in Alameda County, California. WellPoint and certain of its wholly owned subsidiaries are named as defendants in the lawsuit. The complaint alleges that the defendants violated California Business and Professions Code Section 17200 by engaging in unfair, fraudulent and unlawful business practices. The complaint alleges, among other things, that pharmacy benefit management companies (such as the Company’s subsidiary that does business under the tradename WellPoint Pharmacy Management) engage in unfair practices such as negotiating discounts in prices of drugs from pharmacies and negotiating rebates from drug manufacturers and retaining such discounts and rebates for their own benefit. The complaint also alleges that drugs are included in formularies in exchange for rebates and that the defendants charge patient co-payments that exceed the actual cost of generic drugs. On July 9, 2004, the court ordered that the case against the WellPoint entities named as defendants in the Irwin lawsuit be resolved in arbitration.

In October 2003, a lawsuit entitled Solomon, et al. v. Cigna, et al. was filed in the U.S. District Court in the Southern District in Florida. The Company is a named defendant in this lawsuit. This lawsuit is also a putative class action brought on behalf of chiropractors, podiatrists and certain other types of health care practitioners nationwide. This lawsuit also alleges that the defendants engaged in similar activities and conduct as that alleged in the Shane litigation. On December 15, 2003, this lawsuit was transferred to Judge Moreno, and the case was consolidated with the Knecht lawsuit for pre-trial purposes. Both of these cases are currently stayed. In December 2003, the plaintiffs in Solomon, et al. v. Cigna, et al. filed a similar lawsuit against the Company, the Company’s Blue Cross and Blue Shield-licensed

subsidiaries, the BCBSA and all of the other current Blue Cross and Blue Shield licensees. The lawsuit is entitled Solomon, et al. v. Blue Cross and Blue Shield Association, et al. and was filed in the U.S. District Court in the Southern District in Florida. On January 7, 2004, this lawsuit was transferred to Judge Moreno. On March 9, 2004, Judge Moreno issued an order restoring this case to the active docket and placing it on a coordinated track with the Thomas lawsuit. Class-certification discovery has been initiated and is on-going. The deadline for class-certification discovery is December 31, 2004.

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.

The Company’s future results will depend in part on its ability to accurately predict health care costs and to manage future health care costs through product and benefit design, underwriting criteria, medical management and negotiation of favorable provider contracts. Changes in utilization rates, demographic characteristics, the regulatory environment and health care practices, inflation, new pharmaceuticals/technologies, clusters of high-cost cases 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 health care services 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.

The Company is dependent on the services of independent agents and brokers in the marketing of its health care plans, particularly with respect to individuals, seniors and small employer group members. Such independent agents and brokers are typically not exclusively dedicated to the Company and may frequently also market health care plans of the Company’s competitors. The Company faces intense competition for the services and allegiance of independent agents and brokers.

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 obligations under ERISA or other laws 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.

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 that 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 currently maintains and intends to continue 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 and other weapons. If the United States were to experience more widespread bioterrorist or other 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 trade name 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. For instance, the California Legislature in 2003 enacted legislation reducing rates paid for Medi-Cal (California’s Medicaid program) coverage. Alternatively, state legislators may seek to impose greater state taxes. Any significant reduction in payments received by the Company in connection with its Medicaid 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. Budget cutbacks could also result in reduced employment levels in public sector accounts for which the Company provides insured or administrative services products or could result in public sector accounts switching from insured products to administrative services products.

In October 2004, New York State Attorney General Elliot Spitzer commenced legal action against a property and casualty insurance company and an insurance brokerage firm, alleging illegal conduct such as bid-rigging in the placement of insurance coverage. Attorney General Spitzer had earlier announced industrywide investigations into insurance brokerage compensation practices, including so-called “contingent commissions” under which brokerage firms receive bonus payments from insurance companies for business placed with the insurance companies. Regulators in various other states have also announced similar investigations into compensation practices in the insurance brokerage industry. The price of the Company’s Common Stock has been, and may continue to be, adversely affected by negative publicity surrounding these investigations. Certain of the Company’s operating subsidiaries have received requests for information from the North Carolina Department of Insurance with respect to an industrywide investigation into certain insurance brokerage practices. The Company may receive requests for information or subpoenas from other regulatory agencies, and the Company intends to cooperate fully with any inquiries. The Company does maintain customary written arrangements with certain insurance brokers providing for additional compensation to a broker based upon the broker’s aggregate growth in business placed with the Company during a specified period and on the Company’s retention of accounts originally placed by the broker. During the year ended December 31, 2003, the Company’s total payments under all of such written arrangements amounted to less than two percent (2%) of the Company’s total selling expense.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company regularly evaluates its asset and liability interest rate risks, as well as the appropriateness of investments, relative to its internal investment guidelines. The Company operates within these guidelines by maintaining a well-diversified portfolio, both across and within asset classes. The Company has from time to time retained an independent consultant to advise the Company on the appropriateness of its investment policy.

Asset interest rate risk is managed within a duration band tied to the Company’s liability interest rate risk. Credit risk is managed by maintaining high average quality ratings and a well-diversified portfolio.

The Company’s use of derivative instruments is generally limited to hedging purposes and has principally consisted of forward exchange contracts and interest rate swaps. The Company’s investment policy prohibits the use of derivatives for leveraging purposes as well as the creation of risk exposures not otherwise allowed within the policy.

From time to time, the Company has entered into interest rate swap agreements primarily 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. The Company believes that this allows it to better anticipate its interest payments while helping to manage the asset-liability relationship.

Interest Rate Risk

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.

As of September 30, 2004, the Company’s current investment securities at fair value, totaled $7.1 billion, of which 87.7% was invested in fixed-income securities and the remaining 12.3% was invested in equity securities. The Company has evaluated the pre-tax net impact to the fair value of its fixed-income investments over a 12-month period from a hypothetical change in all interest rates of 100, 200 and 300 basis points (“bp”). 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. The results of this analysis as of September 30, 2004 are shown in the table below.

	Decrease in fair value given an interest rate increase of:
	100 bp			200 bp			300 bp
				(In millions)

Fixed Income Portfolio	$	(198.6	)	$	(401.9	)	$	(604.3	)
Valuation of Interest Rate Swap Agreement	(2.9		)	(5.8		)	(8.5		)
	$	(201.5	)	$	(407.7	)	$	(612.8	)

The Company believes that an interest rate shift in a 12-month period of 100 bp represents a moderately adverse outcome, while a 200 bp shift is significantly adverse and a 300 bp shift is unlikely given historical precedents. Although the Company holds its bonds as “available for sale” for purposes of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the Company’s cash flows and the short duration of its investment portfolio should allow it to hold securities to maturity, thereby avoiding the recognition of losses should interest rates rise significantly.

Interest Rate Swap Agreements

On January 15, 2002, the Company entered into a $200.0 million notional amount interest rate swap agreement with respect to its 2006 Notes (the “2002 Swap”). The swap agreement for the 2002 Swap was a contract to exchange a fixed 6 ³/₈% rate for a LIBOR-based floating rate. Under its original terms, the 2002 Swap was scheduled to expire on June 15, 2006. In anticipation of the completion of the pending merger with Anthem, the Company terminated the 2002 Swap in June 2004 and received proceeds of $4.6 million. No gain was recognized under this transaction since the accounting adjustment to the carrying amount of the 2006 Notes of $4.6 million is treated as a premium and will be amortized as a reduction to interest expense over the remaining life of the 2006 Notes (through June 15, 2006). (See Note 10 to the Consolidated Financial Statements.)

The Company has from time to time entered into additional interest rate swap agreements in order to reduce the volatility of interest expense resulting from changes in interest rates. As of December 31, 2001, the Company had entered into $200.0 million of floating to fixed-rate swap agreements, which consisted of a $150.0 million notional amount swap agreement at 6.99% and a $50.0 million notional amount swap agreement at 7.06%. As of December 31, 2001, the Company also had $235.0 million of LIBOR-based floating rate debt outstanding. In September 2002, the Company terminated these two fixed-rate swap agreements with an aggregate cash settlement of $17.6 million, of which $1.8 million was accrued interest and the remaining $15.8 million represented the fair value of the swap agreements at the time of termination and is being amortized over the term of the original swap agreements. As of September 30, 2004, the remaining balance to be amortized was $4.0 million. (See Note 10 to the Consolidated Financial Statements for further discussion.)

ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The Company maintains a deferred compensation plan (named the WellPoint Health Networks Inc. Comprehensive Executive Non-Qualified Retirement Plan (the “Deferred Compensation Plan”)), pursuant to which a select group of key employees make, among other things, voluntary or mandatory deferrals of their compensation from the Company. Participant accounts in the Deferred Compensation Plan are credited with earnings based on the performance of one or more investment fund alternatives that each participant may select from a list of mutual fund options provided under the Deferred Compensation Plan. Participants may also elect to have the investment return on their accounts measured in terms of a Company Common Stock fund. All of these investment alternatives, including the Company Common Stock fund, serve as the current investment options available to participants in the Company’s 401(k) Retirement Savings Plan (the “401(k) Plan”), a broad-based employee retirement savings plan.

In connection with the Deferred Compensation Plan, the Company maintains a so-called “rabbi” trust with assets generally equivalent in value to the amount of deferred compensation held in the Deferred Compensation Plan (including compensation in the form of restricted shares) and composed of the mutual fund shares and Company Common Stock in amounts that mirror the investment alternatives selected by the participants for measuring the investment return on their account balances. A third-party service provider administers both the Deferred Compensation Plan and the 401(k) Plan. In administering the Deferred Compensation Plan, from time to time this third-party service provider historically made open-market sales of Company Common Stock to reflect participant directives to move all or part of their account balances out of the Company Common Stock and into one or more of the mutual fund investment options available under the Deferred Compensation Plan.

In September 2004, the Company was advised that such sales from the rabbi trust may be deemed to constitute sales by the Company. Immediately upon being so advised, the Company instructed its third-party service provider to discontinue such sales. During the quarter ended September 30, 2004, the third-party service provider sold approximately 2,500 shares of Company Common Stock at a price of approximately $114.19 per share. During the period from January 1, 2001 to September 30, 2004, approximately 315,400 shares were sold at prices per share ranging from approximately $46.51 to $117.85 (adjusted to reflect the Company’s two-for-one stock split in the form of a 100% stock dividend, which was effective as of March 15, 2002).

Issuer Purchases of Equity Securities

During the quarter ended September 30, 2004, the Company had one outstanding stock repurchase program. The stock repurchase program is primarily intended to reduce the dilutive effect of the Company’s stock option and stock purchase plans. The number of shares repurchased varies depending on a variety of factors, including the number of stock awards granted or outstanding and the stock price.

A summary of the Company’s repurchase activity for the quarter ended September 30, 2004 is as follows:

	Total Number of Shares Purchased (1) (2)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (3)	Maximum Number of Shares that May Yet Be Purchased Under the Program (4)
July 1 – July 31	1,433	$	107.55	—	6,198,400
August 1 – August 31	1,029,982	$	97.81	1,025,000	5,173,400
September 1 – September 30	562,206	$	97.95	362,200	4,811,200
Total	1,593,621	$	97.87	1,387,200

(1) 200,221 shares purchased during the quarter ended September 30, 2004 were due to shares delivered to or withheld by the Company in connection with stock-for-stock stock option exercises and employee payroll tax withholding upon exercise of stock options and vesting of restricted stock. Stock grants to employees and directors and stock issued for stock option plans and stock purchase plans in the Consolidated Statement of Changes in Stockholders’ Equity are shown net of these shares purchased.

(2) 6,200 shares purchased during the quarter through the Company’s Comprehensive Executive Non-Qualified Retirement Plan on behalf of plan participants who elected to have the investment return on their accounts measured in terms of a Company Common Stock fund.

(3) The board of directors of the Company has previously authorized the Company to repurchase up to 35.5 million shares of the Company’s Common Stock. The stock repurchase program has no expiration date.

(4) On October 25, 2004, the Company announced that its Board of Directors amended the Company’s stock repurchase program to authorize the future repurchase of an additional 2.7 million shares of its outstanding Common Stock. Taking into account the amendment, an aggregate of 7.5 million shares were available for repurchase under the Company’s stock repurchase program as of October 25, 2004.

ITEM 5. Other Information

2005 Annual Meeting of Stockholders

The Company currently expects to hold its 2005 Annual Meeting of Stockholders on May 10, 2005 (assuming that the Company’s pending merger with Anthem, Inc. has not been completed by such date). Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act must be received by the Company at its principal executive office at 1 WellPoint Way, Thousand Oaks, California 91362 a reasonable time before the Company begins to print and mail its proxy materials to be considered for inclusion in the Proxy Statement for 2005 Annual Meeting of Stockholders. The Company’s management may exercise discretionary voting authority with respect to any stockholder proposal that is not submitted pursuant to Rule 14a-8 for inclusion in the Proxy Statement for the 2005 Annual Meeting of Stockholders if such proposal is not received by the Company a reasonable time before the Company begins to print and mail its proxy materials.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See Exhibit Index.

(b) Reports on Form 8-K

On July 23, 2004, the Company filed a current report on Form 8-K dated July 23, 2004, which attached a copy of the Company’s press release dated July 23, 2004 announcing the approval of the Company’s proposed merger transaction with Anthem, Inc. by the California Department of Managed Health Care (the “DMHC”) and the expected disapproval of the transaction by the California Department of Insurance.

On July 28, 2004, the Company furnished a current report on Form 8-K dated July 27, 2004, which attached a copy of the Company’s press release dated July 27, 2004 regarding the Company’s earnings for the quarter ended June 30, 2004.

On July 30, 2004, the Company filed a current report on Form 8-K dated July 23, 2004 regarding agreements entered into by the Company with the DMHC in connection with the DMHC’s approval of the Company’s proposed merger transaction with Anthem, Inc. These agreements included, among other things, commitments by the Company effective upon the completion of the merger to maintain its efforts in various government-sponsored programs and to implement the Investment in a Healthy California Program, whereby the Company’s subsidiary, Blue Cross of California, would commit $100 million to increase the level of capital in investments providing fair returns to investors and social benefits to underserved communities.

On September 3, 2004, the Company filed a current report on Form 8-K dated September 1, 2004 in which the Company reported “reload” option grants made to the following

EXHIBIT INDEX

Exhibit Number		Exhibit

2.01		Amended and Restated Recapitalization Agreement dated as of March 31, 1995 by and among the Registrant, Blue Cross of California, Western Health Partnerships and Western Foundation for Health Improvement, incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-4 dated April 8, 1996.

2.02		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 2.1 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-73382).

2.03		Amended and Restated Agreement and Plan of Merger effective as of October 26, 2003 among Anthem, Inc., Anthem Holding Corp. and the Registrant, incorporated by reference to Appendix A to the Registration Statement on Form S-4 (Registration No. 333-110830) filed by Anthem, Inc.

3.01		Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated August 4, 1997 (File No. 001-13083).

3.02		Bylaws of the Registrant, incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-112933).

4.01		Specimen of Common Stock certificate of the Registrant, incorporated by reference to Exhibit 4.01 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.

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		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 4.3 to the Registrant’s Current Report on Form 8-K dated June 7, 2001.

4.05		Form of Note evidencing the Registrant’s 6 ³/ 8% Notes due 2006, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated June 12, 2001.

4.06		Form of Note evidencing the Registrant’s 6 ³/ 8% Notes due 2012, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated January 11, 2002.

10.01*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement revised December 2001.

10.02*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement revised September 2003.

10.03*		Form of WellPoint Health Networks Inc. 2000 Employee Stock Option Plan Notice of Grant of Stock Option and Stock Option Agreement revised December 2001.

10.04*		Form of WellPoint Health Networks Inc. 2000 Employee Stock Option Plan Notice of Grant of Stock Option and Stock Option Agreement revised September 2003.

10.05*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Restricted Share Right Grant Agreement (Non-Officers) as of January 26, 2004.

10.06*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Restricted Share Right Grant Agreement (Officers) as of January 26, 2004.

10.07*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement with Leonard D. Schaeffer revised December 2001.

10.08*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Grant of Stock Option and Stock Option Agreement with Leonard D. Schaeffer revised September 2003.

10.09*		Form of WellPoint Health Networks Inc. 1999 Stock Incentive Plan Notice of Automatic Grant of Stock Option, Notice of Annual Automatic Grant of Stock Option, Notice of Grant of Stock Option and Automatic Stock Option Agreement for Non-Employee Directors.

15.01		Letter on unaudited interim financial information.

31.01		Certifications.

32.01		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.02		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

* Management contract or compensatory plan or arrangement

PART I. FINANCIAL INFORMATION			1

	ITEM 1.Financial Statements		1

		Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	1

		Consolidated Income Statements for the Quarters and Nine Months Ended September 30, 2004 and 2003	2

		Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2004	3

		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003	4

		Notes to Consolidated Financial Statements	5

		Report of Independent Registered Public Accounting Firm	31

	WELLPOINT HEALTH NETWORKS INC.
	Registrant


Date: November 9, 2004	By:		/s/ LEONARD D. SCHAEFFER
	Leonard D. Schaeffer
	Chairman of the Board of Directors and Chief Executive Officer


Date: November 9, 2004	By:	/s/ DAVID C. COLBY
	David C. Colby
	Executive Vice President and Chief Financial Officer


Date: November 9, 2004	By:	/s/ KENNETH C. ZUREK
	Kenneth C. Zurek
	Senior Vice President, Controller and Taxation

		ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

		ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	73

		ITEM 4.	Controls and Procedures	75

PART II. OTHER INFORMATION				76

	ITEM 1.		Legal Proceedings	76

	ITEM 2.		Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	77

	ITEM 5.		Other Information	79

	ITEM 6.		Exhibits and Reports on Form 8-K	79

SIGNATURES				81

EXHIBIT INDEX				82

PricewaterhouseCoopers LLP

Legislation

Reserves for Future Policy Benefits

Investments