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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from                to               

Commission file number 001-31513

WELLCHOICE, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (212) 476-7800

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 84,061,328 shares of common stock, $0.01 par value, and one share of Class B common stock, $0.01 par value per share, as of March 31, 2005.

Confidential draft dated 04-19-05

WellChoice, Inc and Subsidiaries

INDEX TO FORM 10-Q

2

WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets

See notes to consolidated financial statements.

3

WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets

See notes to consolidated financial statements.

4

WellChoice, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

See notes to consolidated financial statements.

5

WellChoice, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

See notes to consolidated financial statements.

6

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

1. For-Profit Conversion and Initial Public Offering

WellChoice, Inc. (“WellChoice” or the “Company”) was formed in August 2002 as a Delaware corporation to be the parent holding company for Empire HealthChoice, Inc. (“EHC”) following its conversion to a for-profit company. WellChoice owns a health maintenance organization (“HMO”) and two health insurance companies through its investment in WellChoice Holdings of New York, Inc. (“WellChoice Holdings”).

On November 7, 2002, EHC converted from a not-for-profit health service corporation to a for-profit accident and health insurer under the New York State insurance laws and the converted EHC issued all its authorized capital stock to The New York Public Asset Fund (the “Fund”) and The New York Charitable Asset Foundation (the “Foundation”). The Fund and the Foundation then received their respective shares of WellChoice common stock in exchange for the transfer of all the outstanding shares of EHC to WellChoice Holdings. Pursuant to the plan of conversion, WellChoice issued 82,300,000 shares to the Fund and the Foundation and completed an initial public offering of 19,199,000 shares of common stock, consisting of 18,008,523 shares that were sold by the Fund and Foundation and 1,190,477 newly issued shares of common stock sold by WellChoice. After deducting the underwriting discount, net proceeds to WellChoice were approximately $27,990.

On June 21, 2004, the Fund sold 9,075,000 shares of common stock in a secondary public offering. The Company did not receive any proceeds from the offering. At March 31, 2005, the Fund owned 52,001,903, or 61.9%, of the shares of common stock issued and outstanding.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005.

For further information, refer to the consolidated financial statements and footnotes thereto included in the WellChoice’s Annual Report on Form 10-K (File No. 001-31513), filed with the SEC for the fiscal year ended December 31, 2004.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

2. Basis of Presentation

Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

Total comprehensive income for the three months ended March 31, 2005 and 2004 is $60,946 and $64,671, respectively.

3. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. In April 2005, the SEC adopted a new rule amending the compliance dates to phase-in the implementation of SFAS 123R. The SEC requires the fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company is required to adopt SFAS 123R in the first quarter 2006, beginning January 1, 2006. The Company anticipates adopting the prospective method and expects that the adoption of SFAS 123R will have an impact similar to the current pro forma disclosure for existing options under SFAS 123. In addition, the Company does not expect that the expense associated with the future grants derived from the fair value model selected, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

4. Capital Stock

Stock Incentive Plan

The Company’s incentive plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and cash awards. On March 26, 2003, the Company’s Board of Directors adopted the 2003 Omnibus Incentive Plan (the “2003 Incentive Plan”). In accordance with the 2003 Incentive Plan, the maximum of 6,250,000 shares of common stock may be issued, of which, no more than 1,875,000 shares may be issued under grants of restricted stock awards and restricted stock unit awards. A maximum of 500,000 shares may be issued to non-employee directors. Awards are granted by the Compensation Committee of the Board of Directors. Options vest and expire over terms set by the Committee at the time of grant.

8

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

4. Capital Stock (continued)

The Company grants shares of the Company’s stock as restricted stock awards to certain eligible executives valued at the fair value of the stock on the grant date with no cost to the employee. The restricted stock awards generally vest over a three-year period. The fair value of these awards is amortized to compensation expense over the vesting period. Administrative expense for the three months ended March 31, 2005 and 2004 includes $2,096 and $927, respectively, of compensation expense related to these awards. Unearned restricted stock compensation as of March 31, 2005 and 2004 includes $7,483 and $4,223, respectively, related to the restricted stock awards.

The Company grants shares of common stock as restricted stock unit awards to non-employee members of the Board of Directors. These restricted stock unit awards will vest over one year subject to the Director’s continued service other than termination due to retirement, death or disability prior to the vesting date. Stock units are settled in shares of WellChoice common stock. The fair value of restricted stock unit awards is being amortized to compensation expense over the vesting period. Administrative expense for the three months ended March 31, 2005 and 2004 included $168 and $215, respectively, of compensation expense related to restricted stock unit awards. Unearned restricted stock compensation as of March 31, 2005 and 2004 included $76 and $538, respectively, related to restricted stock units.

Employee Stock Purchase Plan

The Company has authorized 3,000,000 shares of common stock for issuance under the Employee Stock Purchase Plan (“Stock Purchase Plan”), which is intended to provide employees of the Company and certain related companies or corporations with an opportunity to share in the ownership of WellChoice, Inc, and to provide a stronger incentive to work for the continued success of the Company. Any employee that meets the eligibility requirements, defined in the Stock Purchase Plan, may participate. No employee will be permitted to purchase more than $25 worth of stock in any calendar year, based on the fair market value of the stock at the beginning of each offering period. The purchase price per share is 85% of the lower of the fair market value of a share of common stock on the first day or the last day of the offering period. Employees become participants by electing payroll deductions from 1% to 10% of their base compensation and all or part of any incentive compensation, after-tax. The Company has two offering periods beginning on January 1 and July 1 of each calendar year. Payroll deductions of $1,333 have been accumulated as of March 31, 2005 and will be applied towards the purchase of stock on June 30, 2005 (or the first business day thereafter). Once purchased, the stock is accumulated in the employee’s investment account.

9

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

4. Capital Stock (continued)

Net Income Per Share

For the three months ended March 31, 2005 and 2004, net income per share amounts, on a basic and diluted basis, have been calculated based upon the weighted-average common shares outstanding for the year.

Basic net income per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share includes the dilutive effect of all stock options, restricted stock awards and restricted stock unit awards, using the treasury stock method. Under the treasury stock method, the exercise of stock options is assumed, with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares.

Pro Forma Disclosure

The Company accounts for stock-based compensation using the intrinsic method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, if the exercise price is equal to the fair market value of the shares at the date of the grant, the Company recognizes no compensation expense related to stock options. For grants of restricted stock awards and restricted stock unit awards, unearned compensation, equivalent to the fair value of the shares at the date of grant, is recorded as a separate component of shareholders’ equity and subsequently amortized to compensation expense over the vesting period.

The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended. For purposes of pro forma disclosures, compensation expense is increased for the estimated fair value of the stock options amortized over the options’ vesting periods.

10

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

4. Capital Stock (continued)

The Company’s pro forma information is as follows:

The denominators for basic and diluted net income per share for the three months ended March 31, 2005 and 2004 are as follows:

11

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

5. Income Taxes

WellChoice and its subsidiaries file a consolidated federal income tax return. WellChoice currently has a tax sharing agreement in place with all of its subsidiaries. In accordance with the Company’s tax sharing agreement, the Company’s subsidiaries pay federal income taxes to WellChoice based on a separate company calculation.

The significant components of the provision for income tax expense are as follows:

A reconciliation of income tax computed at the federal statutory tax rate of 35% to total income tax is as follows:

The Company has no regular tax loss carryforwards. The Company’s alternative minimum tax credit carryforward for income tax purposes of $202,046 has no expiration date.

12

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

6. Investments

The Company participates in a securities lending program, whereby certain securities from its portfolio are loaned to qualified brokers in exchange for cash collateral, at least equal to 102% of the market value of the securities loaned. The securities lending agent indemnifies the Company against loss in the event of default by the borrower. Income generated by the securities lending program is reported as a component of net investment income. As of March 31, 2005 $277,539 of fixed maturity securities were loaned under the program.

7. Pension Benefits and Other Postretirement Employee Benefits

Net pension income for the Company’s defined benefit plans included the following components:

Other postretirement employee benefits expense included the following components:

13

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

7. Pension Benefits and Other Postretirement Employee Benefits (continued)

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Modernization Act”) was signed into law. The Modernization Act introduced a voluntary Medicare Part D prescription drug benefit and created a new 28% federal subsidy for the sponsors of the postretirement prescription drug benefits that are at least actuarially equivalent to the new Medicare Part D benefit. The Company sponsors a postretirement prescription drug benefits that is at least actuarially equivalent to the new Medicare Part D benefit. We estimate the subsidy will reduce the accumulated postretirement benefit obligation by approximately $11,400 for the year ended December 31, 2005, which will be amortized to administrative expenses over the expected future working lifetime (14 years). The measurement of net periodic postretirement benefit cost for the three months ended March 31, 2005 was reduced by $366 for the estimated effect of the subsidy, a $164 reduction to the interest costs on projected benefit obligations and an increase of $202 in the amortization of actuarial gain.

8. Restructuring

During the third quarter of 2003, Management determined that based on current and projected occupancy requirements, the Company would not receive economic benefit from certain unoccupied leased office space. As a result, the Company recognized an administrative expense of $13,367. Based on additional information obtained during the first quarter of 2004, the Company further reduced the fair market value of estimated sublease rentals and recognized an additional administrative expense of $1,110 for the three months ended March 31, 2004.

9. Contingencies

Consumers Union of the U.S., Inc. et. al. On August 20, 2002, Consumers Union of U.S., Inc., the New York Statewide Senior Action Council and several other groups and individuals filed a lawsuit in New York Supreme Court challenging Chapter One of the New York Laws of 2002, which the Company refers to as the Conversion Legislation, on several constitutional grounds, including that it impairs the plaintiffs’ contractual rights, impairs the plaintiffs’ property rights without due process of law, and constitutes an unreasonable taking of property. In addition, the lawsuit alleges that EHC, has violated Section 510 of the New York Not-For-Profit Corporation Law and that the directors of EHC breached their fiduciary duties, among other things, in approving the plan of conversion. On September 20, 2002, the Company responded to this complaint by moving to dismiss the plaintiffs’ complaint in its entirety on several grounds. On November 6, 2002, pursuant to a motion filed by plaintiffs, the New York Supreme Court issued a temporary restraining order temporarily enjoining and restraining the transfer of the proceeds of the sale of common stock issued in the name of, or on behalf of, the Fund or the Foundation to the State or any of its agencies or instrumentalities. The court also ordered that such proceeds be

14

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

9. Contingencies (continued)

deposited in escrow with The Comptroller of the State of New York pending the hearing of the application for a preliminary injunction. The court did not enjoin WellChoice, EHC or the other defendants from completing the conversion or the initial public offering. On March 6, 2003, the court delivered its decision dated February 28, 2003, in which it dismissed all of the plaintiffs’ claims in the complaint.

However, the February 28, 2003 decision granted two of the plaintiffs, Consumers Union and one other group, leave to replead the complaint to allege that the Conversion Legislation violates the State Constitution on the ground that it is a local law granting an exclusive privilege, immunity and/or franchise to EHC. On April 1, 2003, the remaining plaintiffs filed an amended complaint, asserting the State constitutional claim as suggested in the court’s decision. The amended complaint seeks to invalidate the Conversion Legislation and, for the first time, to rescind the initial public offering. On May 28, 2003, the defendants filed motions to dismiss the amended complaint in its entirety, for failure to state a claim. On October 1, 2003, the court dismissed all claims against the individual members of the board of directors of EHC, but denied defendants’ motions to dismiss the amended complaint. In its decision, the court stated that the plaintiffs’ decision to limit their request for preliminary relief in their original complaint to restraining the disposition of the selling stockholders’ proceeds of the initial public offering, but not to block the offering, may affect such ultimate relief as may be granted in the action, but was not a reason to dismiss the amended complaint.

The parties appealed the February 28, 2003 and the October 1, 2003 decisions and on May 20, 2004, the New York State Appellate Division, First Department, unanimously upheld the lower court’s decisions on (a) February 28, 2003 to dismiss all of the plaintiffs’ claims in the initial complaint and (b) October 1, 2003 to deny defendants’ motion to dismiss the amended complaint. In addressing the plaintiffs’ allegation that the Conversion Legislation is prohibited by the State Constitution and therefore invalid, the court rejected the defendants’ position that the Conversion Legislation does not fall within the constitutional prohibition. The court stated that the language of the constitutional prohibition, at least facially, provides no support for an exception for the Conversion Legislation. On June 24, 2004, all parties filed motions before the Appellate Division requesting that the cases be certified for immediate review by the New York State Court of Appeals to determine whether the Appellate Division’s May 20, 2004 decision was proper. On October 12, 2004, the Appellate Division granted these motions. Per a briefing schedule set by the Court of Appeals, opening briefs and the record on appeal were filed on January 4, 2005, opposition briefs for all parties were served on or before March 9, 2005 and reply briefs for all parties were served on or before March 21, 2005. Oral argument before the Court of Appeals was held on April 26, 2005.

15

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

9. Contingencies (continued)

The parties have agreed to stay the lower court proceedings, pending resolution of all appeals of both motions. Pursuant to a stipulation, pending the final disposition of the appeals, the proceeds of any sale of any of the Company’s stock issued in the name of, or on behalf of, the Fund or the Foundation, shall be transferred to The Comptroller of the State of New York, to be held in escrow in a separate interest bearing account.

Thomas, et al. v. Empire, et al. In May 2003, this putative class action was commenced in the United States District Court for the Southern District of Florida, Miami Division against the Blue Cross Blue Shield Association, EHC and substantially all of the other Blue plans in the country. The named plaintiffs have brought this case on their own behalf and also purport to bring it on behalf of similarly situated physicians and seek damages and injunctive relief to redress their claim of economic losses which they allege is the result of defendants, on their own and as part of a common scheme, systemically denying, delaying and diminishing claim payments. More specifically, plaintiffs allege that the defendants deny payment based upon cost or actuarial criteria rather than medical necessity or coverage, improperly downcode and bundle claims, refuse to recognize modifiers, intentionally delay payment by pending otherwise payable claims and through calculated understaffing, use explanation of benefits, or EOBs, that fraudulently conceal the true nature of what was processed and paid and, finally, by use of capitation agreements which they allege are structured to frustrate a provider’s ability to maximize reimbursement under the capitated agreement. The plaintiffs allege that the co-conspirators include not only the named defendants but also other insurance companies, trade associations and related entities such as Milliman and Robertson (actuarial firm), McKesson (claims processing software company), National Committee for Quality Assurance, Health Insurance Association of America, the American Association of Health Plans and the Coalition for Quality Healthcare. In addition to asserting a claim for declaratory and injunctive relief to prevent future damages, plaintiffs assert several causes of action based upon civil RICO and mail fraud.

16

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

9. Contingencies (continued)

The plaintiffs have subsequently amended their complaint, adding several medical societies as additional plaintiffs a cause of action based upon an assignment of benefits, adding several additional defendants including WellChoice and two of its other subsidiaries, WellChoice Insurance of New Jersey, Inc. and Empire HealthChoice HMO, Inc. and dropping their direct RICO claim, but instead base their RICO claim solely on a conspiracy theory.

In October 2003, the action was transferred to District Court Judge Federico Moreno, who also presides over Shane v. Humana, et al., a class-action lawsuit brought against other insurers and HMOs on behalf of health care providers nationwide. The Thomas case involves allegations similar to those made in the Shane action. In the Shane case, the 11^th Circuit Court of Appeals, on September 1, 2004, upheld class certification as to RICO related claims but decertified a class as to state law claims. On October 15, 2004, the Shane defendants filed a petition for a writ of certiorari, seeking U.S. Supreme Court review of the 11^th Circuit decision.

On June 14, 2004, the court ordered the commencement of discovery. The defendants filed motions to dismiss on October 4, 2004, which are still pending before the court. Meanwhile, class certification discovery is winding down. Plaintiffs’ motion for class certification was served on December 31, 2004 and the Company’s response was served on March 15, 2005.

Solomon, et al. v. Empire, et al. In November 2003, this putative class action was commenced in the United States District Court for the Southern District of Florida, Miami Division against the Blue Cross Blue Shield Association, EHC and substantially all other Blue plans in the country. This case is similar to Thomas, et al. v. Empire, et al, except that this case is brought on behalf of certain ancillary providers, such as podiatrists, psychologists, chiropractors and physical therapists. Like the Thomas plaintiffs, the Solomon plaintiffs allege that the defendants, on their own and as part of a common scheme, systematically deny, delay and diminish payments to these providers. The plaintiffs’ allegations are similar to those set forth in Thomas but also include an allegation that defendants have subjected plaintiffs claims for reimbursement to stricter scrutiny than claims submitted by medical doctors and doctors of osteopathy. Plaintiffs are seeking compensatory and monetary damages and injunctive relief. The complaint was subsequently amended to add several new parties, including WellChoice and two of its other subsidiaries, WellChoice Insurance of New Jersey, Inc. and Empire HealthChoice HMO, Inc.

By an Order dated January 7, 2004, the case was transferred to Judge Moreno, but not consolidated with the other pending actions. The Court, on its own initiative, deemed this action a “tag along” action to the Shane litigation.

17

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

9. Contingencies (continued)

On June 14, 2004, the court ordered the commencement of discovery. The defendants filed motions to dismiss on August 27, 2004 which are pending before the court. Meanwhile, class certification discovery is winding down. Plaintiffs’ motion for class certification was served on January 17, 2005 and the Company’s response was served on April 5, 2005.

The Company intends to vigorously defend all these proceedings; however, their ultimate outcomes cannot presently be determined.

Other. The Company is also involved in numerous claims, contractual disputes and uncertainties, including disputes with healthcare providers involving payment arrangements and contract terms, in the ordinary course of business. The Company believes it has meritorious defenses in all of these matters and intends to vigorously defend its respective position. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

10. Market Stabilization Pools

In March 2005, the Company received notification from the New York State Department of Insurance (the “Department”) of estimated contributions and distributions related to its participation in the New York State Market Stabilization Pools (the “Pools”) under New York Regulation 146. The notice specifically addressed the 1999 through 2004 Pools established for direct pay and small group contracts excluding Medicare Supplemental contracts. The notice reflected distributions to the Company of $69,200 for Pool years 1999 through 2003 and contributions from the Company of $3,400 for Pool year 2003. Subsequent to the receipt of the initial notice, the Company was instructed by the Department not to take any action concerning Pool year 2004 pending further review of 2004 data submissions by Pool participants, and therefore an estimate for 2004 cannot be made. The Department stated that it would provide further direction relative to the application of Pool distributions to particular product lines. Information regarding the application of Pool distributions to product lines is required in order to determine amounts, if any, which may be refunded to our customers. The Department also indicated the final distribution amounts from the Pool will be contingent upon contributions received from Pool participants

As of March 31, 2005, the Company has not established a receivable or payable for Pool years 1999 through the current period based on the estimates provided by the Department due to the general uncertainty surrounding the ultimate disposition of payments to or receipts from the Pools that still exists. Management believes the length of time that has elapsed in addressing

18

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

10. Market Stabilization Pools (continued)

administration of the Regulation and concerns over the reliability and consistency of data submitted by Pool participants casts significant doubt over the final disposition of Pool contributions and distributions. The Company’s ultimate payment to or receipts from these Pools may have a material impact to our financial statements.

11. Segment Information

WellChoice has two reportable segments: commercial managed care and other insurance products and services. The commercial managed care segment includes group preferred provider organization, or PPO, health maintenance organization, or HMO (including Medicare+Choice), exclusive provider organization, or EPO, point of service products, or POS, and other products (principally dental-only coverage). The Company’s New York City and New York State PPO business accounted for approximately 32.6% of the Company’s earned premium for the three months ended March 31, 2005.

The other insurance products and services segment consists of the Company’s traditional indemnity products, Medicare supplemental, individual hospital-only and hospital and medical products, state sponsored individual plans, government mandated individual plans and government contracts with Center for Medicare and Medicaid Services (CMS) to act as a fiscal intermediary for Medicare Part A program beneficiaries and as a carrier for Medicare Part B program beneficiaries.

19

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

11. Segment Information (continued)

The reportable segments follow the Company’s method of internal reporting by products and services. Administrative expenses, investment income and other income, but not assets, are allocated to the segments. There are no intersegment sales or expenses.

20

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

11. Segment Information (continued)

The following table presents the revenue from external customers by products and services:

21

Report of Independent Registered Public Accounting Firm

The Board of Directors of

WellChoice, Inc.

We have reviewed the consolidated balance sheet of WellChoice, Inc. and subsidiaries (the “Company”) as of March 31, 2005, and the related consolidated statements of income for the three-month periods ended March 31, 2005 and 2004, and the consolidated cash flows for the three-month periods ended March 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted the 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 to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with 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 the review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in the report dated February 14, 2005, we expressed an unqualified opinion on those consolidated financial statements. In the opinion the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

22

The following discussion and analysis presents a review of WellChoice, Inc. and its subsidiaries (collectively, the “Company”) for the three months ended March 31, 2005 and 2004. This review should be read in conjunction with the consolidated financial statements and other data presented herein as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 on file with the Securities and Exchange Commission.

The statements contained in this Quarterly Report on Form 10-Q, including those set forth below, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, or the PSLRA. When used in this report, the words or phrases “believes,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions are intended to identify such forward-looking statements. Any of these forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements.

The discussion of risks described below and in “Item 1. – Business” and “Item 7 – Management’s Discussion and Analysis on Form 10-K for the year ended December 31, 2004 contain certain cautionary statements regarding our business that investors and others should consider. These discussions are intended to take advantage of the “safe harbor” provisions of the PSLRA. Except to the extent otherwise required by federal securities laws, in making these cautionary statements, we are not undertaking to address or update this discussion in future filings or communications regarding our business or operating results, and are not undertaking to address how any of these risks may have caused results to differ from discussions or information contained in previous filings or communications. In addition, any of the matters discussed below may have affected our past, as well as current, forward-looking statements about future results. Any or all forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors discussed below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed in our communications.

Overview

We are the largest health insurance company in the State of New York based on total preferred provider organization, or PPO, and health maintenance organization, or HMO, membership, which includes members under our insured and administrative services only, or ASO, plans. We service approximately five million members through our managed care and traditional indemnity products. We have licenses with the Blue Cross Blue Shield Association, a national trade association of Blue Cross Blue Shield licensees whose primary function is to promote and preserve the integrity of the Blue Cross Blue Shield names and marks, as well as to provide certain coordination among “Blue” plans relating to the provision of health care services to Blue plan members nationwide. Our licenses entitle us to the exclusive use of the Blue Cross and Blue Shield names and marks in ten counties in the New York City metropolitan area and in six counties in upstate New York, the non-exclusive right to use the Blue Cross and Blue Shield

23

names and marks in one upstate New York county, the exclusive right to only the Blue Cross name and mark in seven upstate New York counties and the non-exclusive right to only the Blue Cross name in four upstate New York counties. We market our products and services using these names and marks in our New York service areas. We also market our managed care products in 16 counties in New Jersey under the WellChoice brand.

We offer our products and services to a broad range of customers, including large groups of more than 500 employees; middle market groups, ranging from 51 to 500 employees; small groups, ranging from two to 50 employees; and individuals. Over one million of our members are covered through our national accounts, generally large, multi-state companies, including many Fortune 500 companies. Our principal health products are offered both on an insured and self-funded, or ASO basis and, in some instances, a combination of insured and self-funded, which includes minimum premium arrangements. Minimum premium arrangements provide coverage under separate self-funded and insured group contracts. Benefit payments made under the self-funded contract, up to a pre-established limit, are the responsibility of the group, and accordingly, no premium is recorded by us for these payments. Benefit payments under the insured contract and charges for risk, profit and administration of the group’s benefit plan are recorded as premium. Groups enrolled under a combination of insured and self-funded arrangements are reported as insured members.

Our revenue primarily consists of premiums earned and administrative service fees derived from the sale of managed care and traditional indemnity health benefits products to employer groups and individuals. Premiums are derived from insured contracts and administrative service fees are derived from self-funded contracts, under which we provide a range of customer services, including claims administration and billing and membership services. Benefit payments made under self-funded contracts are the responsibility of the group, and accordingly no premium is recorded by us for these payments. Revenue also includes administrative service fees earned under the BlueCard program for providing members covered by other Blue Cross and Blue Shield plans with access to our network providers, reimbursements under our government contracts with the Centers for Medicare and Medicaid Services, or CMS, to act as a fiscal intermediary for Medicare Part A program beneficiaries and a carrier for Medicare Part B program beneficiaries, investment income and net realized investment gains or losses.

Our cost of benefits provided expense consists primarily of claims paid and claims in process and pending to physicians, hospitals and other healthcare providers and includes an estimate of amounts incurred but not yet reported. Administrative expenses consist primarily of compensation expenses, premium taxes, commission payments to brokers and other general business expenses.

We report our operating results as two business segments: commercial managed care and other insurance products and services. Our commercial managed care segment accounted for 88.6% of our membership as of March 31, 2005. Our commercial managed care segment includes group PPO, HMO (including Medicare+Choice), exclusive provider organization, or EPO, point of service, or POS, and other products (principally dental-only coverage) as well as our PPO business under our accounts with New York City and New York State. Our other insurance products and services segment consists of our indemnity and individual products. Our indemnity products include traditional indemnity products and government contracts with CMS to act as a fiscal intermediary and carrier. Our individual products include Medicare supplemental, state sponsored plans, government mandated individual plans and individual hospital-only and hospital and medical products. We allocate administrative expenses, investment income and other income,

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but not assets, to our segments. Except when otherwise specifically stated or where the context requires, all references in this document to our membership include both our insured and ASO membership. Our New York City and New York State PPO account members are covered under insured plans.

Our future results of operations will depend in part on our ability to predict and control health care costs through underwriting criteria, utilization management, product design and negotiation of favorable provider and hospital contracts. Our 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 including bio-terrorism or other catastrophes, including war, and numerous other factors. Our inability to mitigate any or all of the above-listed or other factors may adversely affect our future profitability.

Our business operates in a highly competitive environment, both in New York and New Jersey as well as nationally. Our largest competitors in the New York metropolitan area include national and regional health insurers, including UnitedHealth Group and its subsidiaries, Aetna Inc., Health Insurance Plan of New York and Group Health Incorporated, and our competition for national accounts includes UnitedHealth Group, Cigna Corporation and Aetna as well as other “Blue” plans.

Recent Developments

Effective January 1, 2005, as part of our PPO and HMO product offerings, we introduced a consumer directed health care product, or CDHP, to self-insured groups and large insured groups. At March 31, 2005 approximately 42,000 members were enrolled in a CDHP. The CDHP product is a high-deductible managed care health plan that is designed to lower premiums for employers and to involve consumers more directly in their health care spending. Consumer directed health plans enable an employer and/or employee to contribute to each participating employee’s health account to pay for certain medical and pharmaceutical expenses. Some or all of the dollars remaining at the end of the year can be rolled over for future health care needs.

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Selected Membership Data and Results of Operations

The following table sets forth selected membership data as of the dates set forth below:

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The following table sets forth results of operations for each of our segments for the periods set forth below:

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Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

As of March 31, 2005, total enrollment was approximately five million members, a 3.4% increase from March 31, 2004. The increase in overall enrollment was the result of a 4.1% increase in commercial managed care enrollment, offset by a 2.2% decrease in other insurance products and services enrollment. The net increase in overall enrollment was the result of:

Our self-funded enrollment increased 6.6% with the addition of 126,000 new self-funded account members (predominantly national accounts), the migration of approximately 13,000 members from insured business to self-funded plans and net growth within existing accounts, offset by the 82,000 members cancelled self-funded retirees mentioned above. At March 31, 2005,

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self-funded accounts represented approximately 39.8% of our total enrollment, 39.3% of commercial managed care enrollment, and 43.7% of other insurance product and services enrollment. We expect self-funded enrollment to continue to increase through the continued migration of insured business to self-funded arrangements and new self-funded accounts. While this trend will reduce our insured premium and claim expense, we do not expect it to have a material impact on net income.

As of December 31, 2004, our New York State account covered approximately 1,000,000 members, or 19.9% of our total membership and 22.5% of our commercial managed care membership, and our New York City account covered approximately 823,000 members, or 16.4% of our total membership and 18.5% of our commercial managed care membership. We provide hospital-only coverage under both of these accounts. The pricing of our products provided to New York State and New York City has historically been renegotiated annually. With respect to the New York State account, effective January 1, 2003, we agreed to new retention or administrative expense pricing covering a three-year period through December 31, 2005, though both parties retain the right to terminate the contract upon six months’ notice. For over three years, the New York City account has been subject to a competitive bid process in which we have participated, relating to a five-year contract. At this time, there is no official timetable for awarding the five-year contract. However, we agreed to new rates with the New York City account through June 30, 2005. The loss of one or both of the New York State and New York City accounts would result in reduced membership and revenue and require us to reduce, reallocate or absorb administrative expenses associated with these accounts.

Total revenue increased 11.6%, or $160.1 million, to $1,544.7 million for the three months ended March 31, 2005, from $1,384.6 million for the three months ended March 31, 2004 primarily due to an increase in premium and administrative service fee revenue.

Premium revenue increased $139.5 million, or 11.2%, to $1,385.1 million for the three months ended March 31, 2005, from $1,245.6 million for the three months ended March 31, 2004. The increase in premium revenue was the result of growth in our commercial managed care segment. Commercial managed care premium revenue was $1,205.4 million for the three months ended March 31, 2005, a 13.1%, or $139.2 million, increase compared to the three months ended March 31, 2004. The net increase in commercial managed care premium revenue was the result of the following:

Other insurance products premium increased slightly to $179.7 million for the three months ended March 31, 2005, from $179.4 million for the three months ended March 31, 2004. The increase in other insurance products premium was the result of premium rate increases and

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growth in the Healthy New York program, offset by enrollment losses in most major product lines.

Minimum premium arrangements differ from our standard insurance product in that they have significantly lower premiums. The lower premiums associated with these arrangements distort our premium on a PMPM basis. Therefore, we present premium, on a PMPM basis for the three months ended March 31, 2005 and 2004 excluding minimum premium arrangements:

The increase in total and commercial managed care premium, on a PMPM basis, for the three months ended March 31, 2005 was the result of premium rate increases and increased cost of benefits provided on our New York City and New York State PPO accounts. The PMPM premium increase in commercial managed care excluding the New York City and New York State PPO for the three months ended March 31, 2005 was the result of premium rate increases. Other insurance products and services PMPM premium increased for the three months ended March 31, 2005 due primarily to declining membership in lower priced products and rate increases.

Administrative service fee revenue increased 16.6%, or $20.1 million, to $141.3 million for the three months ended March 31, 2005, from $121.2 million for the three months ended March 31, 2004. The increase was primarily due to the following:

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Investment income, net of investment expenses, which consists predominantly of interest and dividend income, of $17.8 million for the three months ended March 31, 2005 increased 26.2%, or $3.7 million, from the three months ended March 31, 2004. This increase was due to an increase in interest and dividend income resulting from higher invested balances, a larger concentration of long-term securities and an increase in short-term and intermediate range interest rates. Net realized gains of $0.6 million for the three months ended March 31, 2005 was the result of net gains on the sale of marketable securities held in our non-qualified employee benefit plans. Net realized gains of $3.5 million for the three months ended March 31, 2004 were primarily the result of net gains on the sale of marketable securities held in our non-qualified employee benefit plans and increases in the market value of warrants classified on our balance sheet as other long-term equity investments.

Other expense, net for the three months ended March 31, 2005 was $0.1 million compared to other income, net of $0.2 million for the three months ended March 31, 2004.

Total cost of benefits provided increased 12.6%, or $134.4 million, to $1,197.3 million for the three months ended March 31, 2005, from $1,062.9 million for the three months ended March 31, 2004. This reflects a 11.2% increase in costs of benefits provided on a PMPM basis and a 1.3% increase in member months.

Lower claim costs associated with minimum premium arrangements distort our claim expense on a PMPM basis. Therefore, we present cost of benefits provided, on a PMPM basis for the three months ended March 31, 2005 and 2004 excluding minimum premium arrangements:

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The total medical loss ratio increased to 86.4% for the three months ended March 31, 2005, from 85.3% for the three months ended March 31, 2004. Cost of benefits provided for the three months ended March 31, 2005 and 2004 included $0.5 million and $0.3 million, respectively, of favorable prior period reserve development on prospectively rated contracts on a net basis. The increase in total and commercial managed care cost of benefits provided, on a PMPM basis, for the three months ended March 31, 2005 was the result of medical cost increases particularly in outpatient costs. Excluding the New York City and New York State PPO accounts (see note 1 to the table on page 27 of this report), the medical loss ratio in our commercial managed care segment increased to 83.4% for the three months ended March 31, 2005, from 81.6% for the three months ended March 31, 2004 due to increases in medical loss ratios for our commercial and Medicare+Choice HMO products. The increase in other insurance products and services PMPM cost of benefits provided for the three months ended March 31, 2005 was primarily due to medical cost increases in retrospectively rated business.

Administrative expenses increased 3.8%, or $8.6 million, to $233.1 million for the three months ended March 31, 2005, from $224.5 million for the three months ended March 31, 2004, due to the following: